Background of Pakistan Economy

At the time on independence there were two main things in the country:
1) Majority of population was attached with agriculture sector.
2) Non-existence of industrial sector and trade.
There was much limited industrial sector but the demand for consumer goods was very high. The
investors and traders earned high profits. According to Prof. Pepnik,

“At that time, the rate of profit on industrial investment was so high that investor was in a
position to meet the amount equal his investment in the period of one or two years”. In order to
promote the industrial sector the agriculture sector was neglected. For industrial development
there was a setup of Pakistan Industrial Development Corporation (PIDC) which develop the jute
factories in East Pakistan and cotton, woolen, paper, matches and sugar factories inn West
Pakistan.

The economic history of the country in 1950’s as,

 No clear cut strategy of economic development

 Refugee settlements problem and strong hold of feudalism in economic effect the
development efforts of the country.
 Unstable governments, vested interest of capitalist class deprive the revenue.
 High dependence on foreign aid.
 The social sector was completely ignored.

Economic policies

 Overstating of industrialization, industry engaged with import substitution which

considered key for economic growth.
 Depend on private sector for industrialization.
 Policy of indirect taxation.
 Granting tax-holidays for investors.
 Income inequality for the sake of economic development.

These policies were raises the following outcomes:

Outcomes

 Development of agriculture sector was ignored.

 The price of agriculture products remains depressed.
 Week industries produce the protection of tariff wall.
 Limited effort for education and social welfare development.

The economic development in 1960’s

General Ayub Khan takes strict steps for political and economic setup. Broadly Ayub- Shoib-
Haq model of economic development was practiced in 60’s. This model based on following
features:

 There should be increase the GNP of the country. For this purpose Dr.Haq suggested for
increasing income of rich segment of the economy.
 Provision of incentives to industries such as; tax concession, loans at reduce rate, lake of
trade union, anti-monopoly law and provision of raw material etc.
 Free enterprises system for prices, profits and imports.
 Only concerned to increase GNP even though the social sectors were neglected.

This model generated some positivity towards economic development. But in 1965 war with idia
forced the government to divert the resources toward defense. The foreign aid was suspended.
There were wide crop failures. During 1966-67 there was a severe shortage of food-grain.
Accordingly, 829000 tons of wheat and 197000 tons of rice had to be imported. All cash reserve
was spending on it. During 1967-68 along with improvement in crop and tight monetary policy
help to stable the economy.

A lot of social, religious and economic factors break down the Ayub-Shoaib-Haq model. Some
of economic factors are in below;

1. Inter-Regional Disparities: Development occurred during 50’s and 60’s in West Pakistan
only. East wing deprived from fruits development and also the foreign exchange earned
from jute etc. this amount spend on West Pakistan. There were differences in per capita
income of East and wst Pakistan.
 2. No Increase in Real wage: All efforts done which increase profits and decreases wages.
In this situation a great tension was observed between labor and industrial class.
3. Unequal Income Distribution: A severe type of income inequality resulted only 22
families owned and controlled 66% of industrial assets and 87% of banking assets.
4. Trickle Down economy: In this situation there were neither increase employment by
rising investment nor provided reasonable wages and medical care to the employed
worker.
5. Ignoring the social Development: Ignored social sector such as education, health and
water supply etc. Poverty, unemployment illiteracy was observed widely in the country.

Ayub Khan and his model of concentration of wealth in a few hands. Ultimately in 1969’ Martial
Law was imposed in the country and Yahya Khan took over the charge of Chief-Martial Law
Administrator.

The Economic Development in 1970’s

Martial Law in the country which culminated in separation of east Pakistan in 1971. The decade
of 70’s will be divided into two parts.

1. The democratic period of PPP.

2. The Martial Law period of Zia ul Haq.

PPP from December 1971-74

Z.A. Bhutto inherited the following problems;

 To reconstruct the depressed and war affected economy of Pakistan.

 The recessionary in agriculture and industry sector.
 Search of new markets especially for textile.
 Severe deficit in BOP.
 IMF force to devalue the Pakistani rupee.
 After devaluation on 11th May 1972 the new exchange rate was $=Rs. 11, while the
previous rate was $= Rs. 4.647.
Policies:

 Bringing structural change in economy

 Annual Development Plans (ADPs) were formulated.
 Land reforms, education reforms, labor reforms, industrial reforms, banking and
administrated reforms were introduced.
 All major industries were taken over by government.
 Status of labor was uplifted, they will provided with housing, medical and educational
facilities.

Outcomes

 Boost agriculture output and income by increases prices of agriculture products.

 Export increase with greater extent.
 Expansion of industrial sector
 Foreign exchange reserve increases from $171 million to $ 342 million in 1972-73.

The flood of 1973 had a negative impact on the growth of agriculture and industrial output.
Although devaluation increases the debt services charges, increses the prices of import
machinery. All these problems were responsible for inflationary tendency in the country.

The PPP from 1974-77

These years of PPP government was very disappointing and disturbing because it was socialist
party. It took the step to increase the role of public sector;

 Public investment was increase, the role of private sector was decreases.
 Nationalization boost the confidence of industrialist and businessman.
 Private investment in manufacturing decreases.

At that time, sometimes flood and some of shortage of water greatly affected the agricultural
productivity. Because of the bad effect on cotton production resulted to decrease the export as
well as foreign exchange earnings. In 1976, the economy had faced devastating flood and attack
of insects which highly affected the cultivable land and cotton crop respectively. These all
caused to deteriorating industries. At last, Martial Law impose on country in 5th July 1977.
Martial Law Government from 1977-80 (Phase One)

After coming into power Zia ul Haq started encouraging private sector, government took the
following steps:

Policies

 Incentives to private sector by providing loans to investors at reducing interest rate. The
gaining factories, flour mills and rice factories were given back to their owners.
 Atmosphere of confidence for investors and draw lines between public and private sector.
Private investors were allowing to established cement and chemical plants.
 5 to 10 years of tax exemption to those investors who will invest in backward areas of the
country. The ‘Export Processing Zones’ were set up.
 Farmers were given loans in greater quantity. There were subsidies on fertilizers, seeds
and tractors etc.
 The process of “Islamization” of the economy was accelerated. On 10th of February 1979,
the zakat system was implemented. Zakat of 2.5% will deducted from all those deposits
equal to and more than Rs. 1000 which will remain deposited for the period of one year.
The financial institutions like NIT, HBFC and ICP working on ‘Mazarbat’ rather on
interest.

Outcomes

 There was gap between saving and investment and the level of savings was very poor.
 Improvement in growth rate from 6.4% to 6.5% because of better crop and better
industrial set up.
 Budget deficit also went on mounting. It was so that government expenditures were
increases for more than government revenues.

The first half of 1970’s was brought in economic approaches and policies which give the name
of structural change in the economy. Bhutto was highly concerned with equality and equity.
Consequently, the journey from growth to redistribution becomes popular. Structural measures,
banks educational institutions, large scale manufacturing units were nationalized to reduce
inequalities. All such efforts generated positive as well as negative impacts on the economy.
 The decade of 1980’s divided into three phases;

1. Zia ul Haq government (1980-85).

2. Prime-Minister Junejo’s democratic period (1986-88).
3. Prime-Minister Benazir Bhutto’s democratic period.

Zia ul Haq government (1980-85). Phase Two

Policy: in 1982 the industrial policy was announced

 Rising level of employment.

 To raise the output of quality products.
 Provide incentives to private sector.
 Investment in large scale industries.

Achievements;

 There was a dramatic increase in remittances from the Middle East. It provided the 48%
of total foreign exchange earnings.
 The weather was an exogenous factor which highly contributed to sufficient water
supplies. This water led to improve the agriculture sector.
 Production of cotton, rice wheat and sugarcane reached recorded level. Farmer’s income
and agriculture credit increase rapidly.

Problems

Despite remarkable achievements, there were following problems in macro-economic structure

 Low saving potential was observed in the country.

 Shortage of energy sector developed. As energy supply was rising at the rate of 11%
while the demand was growing at the rate of 24% per annum.
 Agriculture incentives provided to private investors but the response of this sector was
very poor. It was badly affected to public investment and decreases the manufacturing.
 Allocations to social sectors reduce the expense of defense and debt-servicing payments.

In March 1985 election in the country were held and Junejo appointed as Prime-Minister.
Prime-Minister Junejo’s democratic period (1986-88).

Policy:

 An Islamic democratic system will be established

 Fair economic system will be set up, unemployment will be removed.
 To prepare nation for modern sufficient age, illiteracy will be improved.
 Corruption, injustice and other social evils will be put to an end.
 Strong dense and balanced foreign policy.

Outcomes:

Employment increases, improved illiteracy rate, growth rate in manufacturing increases, per
capita income was $390 which was very high.

Prime-Minister Benazir Bhutto’s democratic period.

 Uncertain political situation in the country.

 Ethnic conflicts and strife in Karachi and Hyderabad
 Excessive rain, unexpected flood during September which badly effects Punjab and Sind

Policy: In 1989 PPP announced new industrial policy

 Number of firms was reduces, permission to install the new firm was very easy.
 Those industries who wish to invest up to rRs.1 billion, they will not require to get
permission.
 Under the chairmanship of Prime-Minister an investment board was set up which will
supervise the investment decisions. The production of oil per day was increases.

Government started four years ‘‘Structural Adjustment Program” with the help of World Bank
and IMF. This program was aimed at increasing the role of private sector and reducing the role
of public sector. In 1989-90 National Credit Consultative Council(NCCC) set the target to
increase the monetary based assets from foreign exchange and domestic sources foreign
exchange. In short, at that time nationalization and privatization was started which cause to
increase the role of private sector and neglect the public sector.