FISCAL POLICY AND ECONOMIC

GROWTH
Fiscal policy is used by a government for adjusting
its level of spending in order to monitor and
influence a country’s economy.
It involves the use of government spending, taxation and borrowing to influence the pattern of economic
activity and level of aggregate demand, output and employment. Changes in fiscal policy affect aggregate
demand as well as aggregate supply. The effects of a government’s fiscal policy on economic growth
have been deliberated upon extensively.  One school of thought is in favour of cutbacks in government
spending. This may be justified by low productivity and inefficiency of government expenditures.
Another view point emphasizes that governments play a central role in economic development by
providing public goods, encouraging investment and providing some sort of direction for economic
growth.
Fiscal policy has for very long been seen as a tool for demand management. This implies that changes in
government spending and taxation can help control volatility of national output. The Keynesian school
has shown very strong effects of fiscal policy on aggregate demand, output and employment when the
economy is operating well below the full capacity and where a demand stimulus needs to be provided. It
is argued that there is a clear role of the government to make use of fiscal policy to manage the level of
aggregate demand in the economy. The Monetarist school, on the other hand, is of the view that
government spending and tax changes have a temporary effect on aggregate demand, output and
employment. They put forth monetary policy as a more useful instrument in controlling demand and
inflationary pressure.

Government spending is divided into three main components. Transfer payments, current government
spending and capital spending. Transfer payments are the welfare payments and they are primarily used
to provide minimum standard of living for the low income sections of the society. Current government
spending is related to the provision of state-provided goods and services. Capital spending includes
expenditure on infrastructural development such as highways, roads, schools, hospitals, etc. Government
spending is often justified on the basis of following  four grounds. Firstly, in order to provide efficient
level of public and merit goods. Secondly, to provide a social safety net to help the poorest of the poor
and redistributing income and wealth.  Thirdly, to raise necessary infrastructure through capital spending.
Fourthly, for managing the level and growth of aggregate demand to meet macroeconomic policy
objectives such as low, stable inflation and high levels of employment.
Fiscal policy has for very long been seen as a tool for demand management. This implies that changes in
government spending and taxation can help control volatility of national output.
Turning our attention towards the revenue that flows into the state coffers from taxation we see that there
are different kinds of taxes and the tax system of any country is very complex. Two main categories of
taxes are direct taxes and indirect taxes. Direct taxes are levied on income, wealth and profit. Some
examples are income tax, capital gains tax and corporation tax. Indirect taxes are taxes charged on
spending such as excise duties and value-added tax. It is important to mention here the concepts of
progressive, proportional and regressive taxes. When the marginal rate of tax rises as the income rises, we
call it progressive tax. This means that as people earn more income, the rate of tax on each rupee earned
goes up. In the proportional tax the marginal rate of tax is constant. For example a standard rate of tax of
15% across all income levels. With a regressive tax, the rate of tax falls as incomes rise. This implies that
the average rate of tax is lower for people with higher incomes.
Changes to fiscal policy can affect the supply side of the economy and, therefore, contribute to long-run
economic growth. Cutbacks in income tax are a useful way to improve incentives for people to actively
seek work and also as a tool to enhance labour productivity. Some economic experts argue that welfare
benefit reforms are more important than tax cuts in improving incentives. Government’s capital spending
on the infrastructural development of a country helps in propping up investment across the economy.
Lowering the rates of corporation tax and other business taxes can also be used to attract investments for
local as well as overseas investors. Government spending can also encourage entrepreneurship and new
business creation. Private business sector research and development has also strong correlation with
government spending, tax credits and other tax allowances. And lastly, higher government spending on
education, developing human capital, health and transport can also have important supply side economic
effects in the long-run. A robust transport infrastructure is seen by a large number of businesses as
absolutely necessary for a country to remain competitive in this highly integrated global economy.

Free market economists usually show skepticism against government spending in improving the supply
side of the economy. They are in favour of lower taxation and tight control of government spending and
borrowing to allow private sector to flourish. They also support smaller public sector so that the taxation
levels can be brought down and thus private sector can grow. It must be kept in mind that targeted
government spending and tax decisions have all the potential to have an overall positive impact over an
economy. Proper incentives to individuals and businesses usually help increase the employment and
investment levels.  There are multiplier effects associated with expansionary fiscal policy but these
depend how much spare productive capacity is there in an economy, and how much increase in the
disposable income is spent rather than saved.

Political Economy of Economic Reforms in

Pakistan
Although reform initiatives were taken by successive
governments seriously, many of these could not be
implemented properly because of political
imperatives and a lack of commitment by the
leadership.
Economic reforms in Pakistan were designed to address structural weaknesses of the economy and
imbalances under the structural adjustment programmes implemented within the framework of the
International Monetary Fund and the World Bank since the late 1980s. The political setting played an
important role in the reform process and on the impact of the reforms and structural adjustment measures
implemented to correct the internal and external imbalances. Some of the important reforms and their
impact on the economy of Pakistan are discussed in the following paragraphs.

Historically, the growth record of Pakistan (in its first 60 years of existence) was impressive and
comparable to any high-performing developing economy. The growth rate of gross domestic product
(GDP) averaged about 6 per cent a year until the late 1980s, and poverty was reduced from 46 per cent to
18 per cent despite high population growth. The rate of inflation remained low during the period and per
capita income almost doubled.

But this performance of the economy and high growth can best be described as borrowed growth. The
easy availability of funds from both domestic and foreign sources lured policy makers to frame
expansionary policies with large fiscal deficits. This resulted in faster growth in government expenditure
than revenue over the years. Because of the lavish spending, the budget deficit reached an unsustainable
9.4 per cent of GDP in the late 1980s. The current account deficit also rose, reaching 3.1 per cent of GDP
by 1987-88. Domestic debt doubled to 43 per cent of GDP while external debt rose from 31 to 42 per cent
of GDP over the short period from 1980-81 to 1987-88. These imbalances in the macroeconomic
indicators, mainly due to the structural rigidities and distortions in the economy, caused an economic
crisis in 1988 and compelled by the international financial institutions (IFIs), i.e. International Monetary
Fund (IMF), World Bank (WB) and Asian Development Bank (ADB) to reform its economy. A
comprehensive structural adjustment and reform programme was developed by the Pakistan with the help
of these institutions to address the structural issues and reform the economy. The IFIs extended the help
by providing necessary resources to implement SAP. The progress on the implementation of SAP was
also monitored by the IFIs to keep the country on track. Pakistani government has so far negotiated 13
stabilisation and structural adjustment programmes with international financial institutions since that
time.

Although the main objective of these programmes was to remove weaknesses and rigidities in the
economic structure and distortions in the incentive system in order to stabilise the economy and restore
macroeconomic balance, the motivation that prompted successive governments to implement these
programmes was the short-term need to secure foreign liquidity infusions from the IFIs after the
exhaustion of easily available international funding. The first reform programme was signed in 1988
which led to implementation of medium-term structural adjustment measures. Subsequent policy reforms
were a combination of short-term stabilisation measures and long-term structural adjustment measures.
The short-term stabilisation measures included tight monetary policy and fiscal discipline while the
longer-term adjustment measures included tariff rationalisation, removal of non-tariff barriers, price
decontrols and removal of exchange rate distortions.

The fiscal measures were aimed at resource mobilisation through the restructuring of the income tax
system, the removal of exemptions from customs duties on imports, introduction of a General Sales Tax,
and the removal of price subsidies on public utilities. For the revival of the industrial sector and to attract
foreign direct investment, measures were introduced to reduce state controls on foreign investment,
encourage investment through incentive schemes and promote competition. The prices of oil products,
gas and power were also rationalised to promote efficiency, resource mobilisation and energy
conservation. The agriculture sector reforms included the aligning of agricultural input and output prices
and the gradual removal of subsidies.Although reform initiatives were taken by successive governments
seriously, many of these could not be implemented properly because of political imperatives and a lack of
commitment by the leadership. The lack of political commitment arose from the frequent changes in
government, especially during the period of economic reforms. Since 1988 there have been nine
governments ‘four elected governments, four caretakers and one military government. In the early period
of reforms (1988-90) in particular, the democratically-elected government compromised on many of its
stands to keep the army at bay. General Ziaul Haq had given the presidency the constitutional power to
dismiss National Assembly and the prime minister, and this made subsequent elected governments live in
fear. They were right to do so because under this provision, three elected governments were dismissed by
the president prematurely and without completion of their tenure between 1990 and 1996. Because efforts
have been half-hearted, the expected outcomes of the economic reforms such as rapid economic
expansion, export-led growth, higher incomes for all groups, expanded health and education benefits,
better housing, and building of a ‘social safety net’ have yet to be realised.
  Historically, the growth record of Pakistan (in its first 60 years of existence) was impressive and
comparable to any high-performing developing economy. The growth rate of gross domestic
product (GDP) averaged about 6 per cent a year until the late 1980s, and poverty was reduced from
46 per cent to 18 per cent despite high population growth.
 
 Financial sector reforms were a part of the major adjustment and reform programme. Compared to other
types of reforms, however, the financial sector reforms launched in the early 1990s were a success story
that not only promoted efficiency in the sector but also set higher standards of service quality. A number
of measures were introduced, such as privatisation of state-owned banks, the setting of market-based
lending rates, and the phasing out of concessional interest and direct credit schemes. Some of the reasons
for the success of these reforms are explained below.Since independence in 1947, different policies such
as deregulation, nationalisation, privatisation and liberalisation have been used to develop the financial
sector. However, the nationalisation of the Zulfikar Ali Bhutto regime failed miserably to give the desired
results. In view of the poor service delivery and weak financial position of the sector, the government of
Nawaz Sharif in 1990 began to initiate the policies of privatisation and liberalisation to bring
improvements in financial services and to implement a number of reforms. However, the main reforms to
liberalise financial services were made during the regime of Pervez Musharraf. His reforms included the
establishment of new institutions, strengthening of old institutions and formulation of new regulations.
These reforms strengthened the base of the financial institutions and enhanced the confidence of the
public in these institutions by making the overall system quite transparent. These reforms created an
environment conducive to the growth and development of the financial sector.Prior to 1990, the financial
sector was heavily controlled. Interest rates were administratively set and were usually negative in real
terms. Monetary policy was conducted primarily through direct allocation of credit. The money market
was under-developed, and bond and equity markets were virtually non-existent.
Commercial banks often had to lend to priority sectors with little concern for the borrowing firm’s
profitability. Before the opening of the non-bank financial sector for private investment in the mid-1980s,
state-owned financial institutions held almost 94 per cent of the assets of the entire financial sector.
Moreover, financial institutions were in a precarious state because of high intermediation costs resulting
from overstaffing, large numbers of loss-incurring branches, poor governance with low quality banking
services, accumulation of non-performing loans and inadequate market capitalization. In brief, the
financial sector was weak on governance, accounting standards, market discipline, prudential regulation
and legal infrastructure.

These problems increased the exposure of financial institutions to a variety of external threats, including a
decline in asset values, market contagion, speculative attacks, exchange rate devaluation and reversal of
capital flows. Capital flight and disrupted credit allocation further worsened the efficiency of banking
sector. These inefficiencies and distortions in turn caused severe macroeconomic difficulties and distorted
economic growth.

The reforms and restructuring measures were undertaken with a view to bringing back financial discipline
and improving the operational efficiency of the financial sector. The reforms were aimed at establishing a
market-based system of financial intermediation and government financing, conducting monetary policy
more efficiently through greater reliance on indirect instruments and contributing to the rapid
development of the stock market. The reforms were also designed to correct the distortions implicit in the
administered structure of returns on various financial instruments, to abolish the directed and subsidized
credit schemes, to allow free entry of private banks in the financial sector in order to enhance the
competition and efficiency in the financial sector and to strengthen the supervisory role of State Bank of
Pakistan.These reforms of financial services are the result of the political commitment and resolve of
policy makers who wanted to implement these reforms with honesty. Credit for the successful
implementation of reforms goes to the Musharraf government, particularly to the Prime Minister Shaukat
Aziz who, as a banker, was aware of the importance of this sector and the dynamic role it plays in the
overall performance of the economy. He gathered a dedicated team of professionals who designed and
implemented reforms and corrective measures for the smooth functioning of the financial institutions.
This was all done with the full support of the President, who watched these developments with keen
interest but without interference. The outcome is a vibrant and dynamic financial sector catering to the
needs of the economy. One can draw the lesson from the reforms experience that when there is political
will, it is not difficult to implement the most difficult decisions for better outcomes.Although Pakistan has
successfully restructured its financial sector within a very short span of time, sustaining the performance
of the financial sector is now an important task. This requires the following aspects to be addressed:
‘macroeconomic stability;
a greater degree of consolidation for a strong and robust banking sector;
a better prudent regulatory and supervisory framework;
the maturation and reorientation of the financial industry;
a more diverse and competitive financial system;
stronger corporate governance, and a more effective risk management and mitigation system;
a socially inclusive financial system capable of facilitating the access to financial services;
better-developed legal infrastructure for financial supervision, especially to prevent bankruptcies and
foreclosures;
reform of the secrecy laws to ensure transparency; and
ensuring deposit insurance schemes.
Such measures are warranted to maintain stakeholders confidence in the economy. An early warning
system and prompt corrective actions are also needed. Furthermore, without improving the corporate
governance and expanding the investor base, the capital markets cannot be developed. More openness,
together with added transparency and disclosure of information, should contribute significantly to
financial restructuring of the economy.

Economic Diplomacy: Grey Area of

Pakistan’s Foreign Policy
December 5, 2012 December 2012, Pak Affairs Leave a comment

Pakistan is unable to focus on the economic

diplomacy owing to the fact that Pakistan became
part of the US-led war on terror. It has severely
affected law and order situation in major cities of
Pakistan, and eventually has worsened its position
in international arena ‘politically and economically.
Foreign policy of Pakistan has constantly been centred on military-strategic relations world over instead
of encouraging economic diplomacy. Strengthening of our defence system was always been of foremost
priority instead of regional economic integration. The long and interruptive dictatorship also pursued a
foreign policy based on militaristic objectives rather than the economic ones. Due to which, we are part of
the war on terror today, and that has further deteriorated Pakistan’s economy to its worst. Pakistan has
fallen behind countries in the region, and around the world in serving its people’s needs. The
government’s persistent failure to implement its plans or reforms damaged the economy. There is no
better example of this than the power sector. Government’s inability to collect taxes limits the
possibilities for Pakistan to operate as a democratic and independent country. Pakistan’s economy is not
growing as fast as it should, but, the population is growing too fast. Our focus on health and education is
myopic while our defence and debt services is draining the resources of the country. The resources could
have been better used to fuel the industrial growth. Inefficient government expenditure has crippled
Pakistan’s ability to provide its people with the services that matter. Government subsidies hurt the
economy, and a hurting economy hurts the poor.

Geographically, Pakistan has much importance in the region. Pakistan can become a hub of economic
activities for the Asian countries as Pakistan shares its border with very prominent countries of the Asia
like India, China and Iran. Landlocked countries do not have route for the transportation of goods by sea
therefore, Pakistan provides sea transportation to many countries of Asia. Pakistan is very important for
China as it is one of the mid-range powers of South Asia and its geographical location is helpful to create
link between China-Middle East and China-Central Asia. To maintain economic and strategic
connectivity with these regions, China requires safe passage through Pakistan and the Gwadar port is
also an emerging gateway to Central Asia and China because it will be providing opportunities for the
promotion of global shipping in the region. Despite the fact, Pakistan is strategically important and its
relationship with China, which were termed as deeper than ocean and higher than mountain, are only
limited to the military strategic cooperation. If we compare China’s trade volume with India and
Pakistan, Pakistan stands far behind India. Despite a fall in the volume of India-China bilateral trade
during first half of the current year, China remained upbeat over trade prospects with India. The
expected volume of trade between China and India is expected to be 100 billion US dollar by the year
2015, with growing investment opportunities in both the countries. While, on the other hand, with all the
efforts of the current government, China is Pakistan’s largest trading partner and Pakistan is China’s
second largest trading partner in South Asia and the volume of trade is expected to reach 15 billion US
dollar by 2015, the gap between India and Pakistan is enormous. The trade between China and Pakistan
is a one-sided affair, while China has agreed to invest more in Pakistan, our share to the gigantic
Chinese market is miniscule.
 Despite the fact, Pakistan is strategically important and its relationship with China, which were termed as
deeper than ocean and higher than mountain, are only limited to the military strategic cooperation.

 Pakistan’s economic prosperity and stability is directly dependent on its trading ties with emerging
economies, such as India and China, and access to the big markets. European Union is one of Pakistan’s
top trading partners. The EU accounts for 20% of Pakistani external trade with Pakistani exports to the
EU amounting to €3.4 billion (mainly textiles and leather products) and EU exports to Pakistan amount
to €3.8 billion (mainly mechanical and electrical equipment, and chemical and pharmaceutical
products). Pakistan and European Union has also moved forward to implement a new Five Year
Engagement Plan which attempts to strengthen vis-à-vis diversify their traditional relations of donor and
recipient and enhance their cooperation and partnership in other areas of mutual concerns. The dialogue
provided an opportunity to review EU development cooperation including the broad parameters of the
second EU Multi-annual Indicative Programme (MIP) for 2007-2013, which included projects for rural
development and natural resource management, education and human resource management, governance
and human rights, and trade development. European Union is also benefiting Pakistan by its Generalised
System of Preferences (GSP), according to which Pakistan would receive duty free treatment from 2014.

India is a strategic partner of the EU and its relations with the EU are far better than that of Pakistan.
India stands with EU on the grounds of strategic and business partnership, while, on the other hand, the
relations of Pakistan with the EU are always been referred as that of the donor and the recipient.
However, with the improving ties with India and granting of MFN status, Pakistan is been able to
strengthen and smoothen its relations with India in recent years with the efforts of the democratic
government seated in Islamabad. The efforts of seeking better and workable ties with India proved an
achievement. One of the important aspects is that India is likely to withdraw its opposition on the
controversial trade-aid package proposed by the European Union for Pakistan, at the General Council of
the World Trade Organisation (WTO). Around 75 tariff lines or products from Pakistan would get
concessional access to European markets for three years, of which 67 would have zero tariff. On the
remaining eight, tariff rate quotas (TRQ, limited imports at reduced duty) would apply. The package is
expected to be for two to three years, with about $300 million of yearly benefits to Pakistan’s exports to
the EU. The WTO’s proposal was opposed by India, Brazil, Bangladesh, Peru and Vietnam primarily
because their exports to the EU would be impacted with that move.

 Terrorist activities have adversely impacted all the sectors of the economy, which cannot be gauged in
the short-term. The security issue is seen hitting the economy at every level. Foreign businessmen and
investors are afraid to visit Pakistan, a country where they cannot move freely and where heavily guarded
hotels are also the prime target.
 However, with all those achievements, Pakistan is unable to focus on the economic diplomacy to a larger
extent, since Pakistan became part of the US-led war on terror. It has severely affected law and order
situation in major cities of Pakistan. Pakistan is facing worst terrorism on its soil which has affected its
position in international arena, not only politically but also economically. Foreign Direct Investment
(FDI) has enlisted considerable downfall, investors are moving their business abroad while the local
businessmen are feeling insecure because of the worst law and order situation witnessed in the history of
this country, with bomb blasts and target killings taking place across Pakistan, with all those problems on
one hand we cannot forget that Pakistan is also playing frontline role in the America’s war against
terrorism.

State Bank of Pakistan (SBP) has reported 50.4% decrease in FDI, including private proceeds in 2012-
13 (July) as compared to 2011-12 (July), due to the slow economic activities, worst law and order
situation and poor infrastructure. According to the economists, global economic meltdown and poor
industrial infrastructure like power shortage are the major reasons behind the decline in the FDI. While
operation against the militants and rising tension in the northern areas also played an important role in
depleting foreign investment. Investors are reluctant to invest in these circumstances when uncertainty is
prevailing in the country and the country is witnessing worst law and order situation with bomb blasts.
Although there was some improvement in portfolio investment, FDI has been constantly declining despite
several efforts are made by the government. The unabated incidents of terrorism in major cities have
been compounding the country’s woes, resulting into reduced foreign and domestic investment and lesser
trade and business activities. Terrorist activities have adversely impacted all the sectors of the economy,
which cannot be gauged in the short-term. The security issue is seen hitting the economy at every level.
Foreign businessmen and investors are afraid to visit Pakistan, a country where they cannot move freely
and where heavily guarded hotels are also the prime target. Investment is drained out. Resulting, in
aggregate demand, closure of production units and unemployment, due to slowdown of economic
activities, paving the way for terrorists to exploit the situation.

However, it is unrealistic to expect any miracles to boost the economy of Pakistan, with yawning gaps in
trade policies and diplomatic fronts, but the efforts which were made are insufficient. External debt of
Pakistan has reached to 67 billion dollar. Despite of it Pakistan is continuously printing currency notes
with an average of Rs. 1.5 to 3 billion daily, which indebted every Pakistani citizen to an amount of Rs.
61,000. The economy of Pakistan is deteriorating day by day. The value of Pakistani rupee has fast
eroded during the last four-and-a- half years, and will soon touch Rs. 100 to a dollar. It creates an
impression as if this economic condition will prevail and continue climbing until the subsequent
elections.
Economy & Governance in Pakistan

China and India are known for their manufacturing

and service Industries. The hunger to move up in the
innovation cycle is seen in both. However, the
lesson of the history is that you cannot get your
economies right if you do not get your Politics right.
Pakistan has been a serious victim of bad governance, ethnic rivalries, absence of rule of law and
continued as well as strategic campaigns, therefore, could not find the magic formula for combining
political control and economic growth, hence could not have a bright place under the sun. It’s a social
time bomb to explode pretty soon as its democracy is, in reality, a comedy of errors and anarchy where
loot and plunder remains the order of the day.

Pakistan’s Government seldom does a right yet there is so much it does wrong, it’s a strong society
bound by a weak state and the style of governance defeats the national agenda thoroughly. It is almost at
the brink of ruin because when a nation is weak from top to bottom, it becomes the hub of conspiracies
and a soft target to the vested interests and economic tigers who want to lay their hands on its natural
resources.

Pakistan today is in dire need of Economic reform. The fiscal control moves hand in hand with a greater
need for reforms and investments. In the Pakistani context, this parameter is severely faulted where fiscal
discipline, government debt and poorly executed social policies are bleeding the economic landscape.
Reforms are firstly slow to come by and secondly the implementation tremendously lacks sincerity and
earnestness.
On the other hand, there has always been a greater desire on the part of the governments to control
rather than facilitate economic activities – typical case of more government and less governance which
gets accentuated by pervasive corruption, lethargic governance, dynastic politics, lopsided economic
opportunities and a feeble middle class revolt against the above. Nations thrive when they develop
‘inclusive’ political and economic institutions, and they fail when those institutions become ‘extractive’ 
and concentrate power and opportunity in the hands of only a few.

If the political institutions are corrupt, partisan and party-centric, national goals are always mired in a
phase of loot.

The future of our economy and its reforms should not be decided by the Finance Minister alone hailing
from World Bank or some other bankers and economists but it should be decided through a dialogue
process among all the sectors and stakeholders hailing from a variety of background.

No economy can flourish unless the society is perfectly stable with strict rule of law prevailing and in this
context whatever needs to be fixed, must be fixed. When and if politics becomes an arena of investment
for monetary gains, the political parties dole out huge amounts to rally the people around by making lofty
promises to ultimately recoup their investments and no economic goals can be achieved.
By traversing through the corridors of history, it becomes abundantly evident that from the very start of
Basic Democracy formula of General Ayub Khan down to two terms each of PPP and PML (N) including
dictatorial regimes of Zia and Musharraf; favours were dished out to a handful of influential persons in
terms of route permits, development funds, ration Depot, mega contracts and allotments to soft and
defaulted bank loans and industrial licenses thus widening the gap of unfair distribution of national
wealth.

We are a resourceful people, we are the righteous people, we are a resolute lot of people, who do not
shrink from the necessary however hard and late it may be. We are a moral people who bravely enter the
precincts where idealism collides with realism and come out enhanced. In fact, we are immature people
always demanding the nourishment of myth and legend that exalts us. Realities intimidate and unsettle us.
This is indeed high time for us to pressurize all leading political parties to come up with a sound, viable
and targeted economic agenda. The people voting for a particular agenda ought to monitor the
implementation of promised goals. Its more than forty years that promise of food, shelter and clothing for
the masses could not be fulfilled yet such parties return to power time and again on the same slogan.

The author has carefully gone through the manifesto of all the political parties and can confidently  say
that PTI’s programme is the most progressive sort in intent and purpose. Imran Khan is truly a target-
oriented personality and his sincerity dedication to tasks ahead, honesty and leadership qualities are
proven in public affairs. The nation has already tested religious parties, PPP and Muslim League (N)
many a time and all have disappointed miserably. Seeing the track record it is surely expected that the
youth of Pakistan under the leadership of Mr Khan would bring about a long-awaited change in the
country for the better.

Country with Vast Resources but Poor

Economy
Pakistan is, undoubtedly, a developing country but
with a dwindling economy. We have a large country
and big population, fertile plains, rivers, abundant
minerals and natural resources, but still we lag far
behind in every field. There are multifaceted reasons
behind the poor economy of our country.
When Pakistan came into being on August 14, 1947, all the industries were located in Indian Territory
and Pakistan, in the early days, faced numerous problems. Quaid-e-Azam started to cope with the
challenges. He urged his countrymen to work for their country. He dedicated all his efforts to uplift the
economy of Pakistan that’s why he inaugurated the State Bank of Pakistan on 1st July 1948.

Sixty-seven years have passed since our independence but still we haven’t been able to get rid of the
monster of ‘corruption’. It is indeed the greatest impediment in the way of economic development and
prosperity. Every one of us is aware of the corruption, in every field may it be the military or the civilian
governments. It is only the corruption which has adversely affected our economy to the extent that we,
despite being rich in resources, are not at par with the developed nations.

The examples of Pakistan Steel Mills and PIA, once the backbone of our country’s economy, have turned
into a tale of misery. All of our institutions now present a sorry state of affairs and the major reason
behind is ‘corruption’. National Reconciliation Ordinance (NRO) is a shameful event in the history of our
country. This black ordinance was promulgated to give the legal cover to the corruption made by the
bigwigs of our political elite and, how ironic is the fact that the major beneficiaries were both civilians
and army personnel. Thanks to the ever-vigilant Supreme Court of Pakistan that NRO was never ratified
by the parliament.
The incumbent government of Nawaz Sharif has come up with tall promises to eradicate corruption and it
is quite encouraging that steps have been taken in this regard. The poor but patriot Pakistanis have
attached great hopes and expectations from Nawaz Sharif as they had given a huge mandate to PML (N)
in May 11, 2013 elections.

A peep into our past history makes it vividly evident that the ruling elite have left no stone unturned to
loot and plunder the national exchequer especially the dictators. Now it is high time for the government
to rebuild the country’s economy and that too on strong footings now. There was never such pressing
need that the elected representatives take concrete steps and utilize their energies and skills to make the
impossible possible.

Another major cause of this debacle can be attributed to the chequered history of democracy in Pakistan.
Since independence, we as a nation have been deprived of the democracy because the democratic process
was intermittently intervened by the military adventurers. Pakistan was still a nascent state when our
beloved leader and the founder of Pakistan Quaid-i-Azam went to the eternal abode. This was an
irreparable loss to the nation as it created a leadership vacuum that has not been filled till today.
Continuation of strong democracy promises the economic benefits. Political instability is also responsible
for our poor economy because the self-interested dictators made such economic policies which favoured
them and prolonged their regime. As a matter of fact, if we had been on the path of democracy since
1947, our economic conditions, and political maturity would have been absolutely different.

Recently, for the first time in our history we have witnessed a smooth transition of civilian government.
Undoubtedly, Pakistan is a developing country. Although we have abundant natural resources, we don’t
have modern technology to exploit them. Foreign companies extract our natural resources just to benefit
their own countries while giving the locals minimum royalty. If our government sincerely starts to explore
the hidden wealth then our economic condition can substantially improve. By doing so we can stand on
our own feet and be in a position to grant loans to other countries but who will dare take these steps?
Pakistan is calling as it is the time to do something, otherwise we will perish.

The security dilemma can also be termed a reason behind our economic woes. Our eastern and western
borders have always remained under threat. The security situation at present is precarious because of
extreme insurgency in FATA and Afghanistan. This has hampered our economy besides a loss of around
50,000 civilian and security personnel over the last decade. The heinous acts of terrorism have paralysed
our economy. There is no denying the fact that energy supply is indispensable in boosting the economy
but Pakistan is facing acute energy crisis mainly because during the last twenty years, no government has
paid proper heed to this sector as a result our economy has been in limbo. How unfortunate is the fact
that still we have not developed any sound mechanism to collect taxes. Our tax machinery’s lack lustre
and apathetic attitude encourages tax evasion. The attitude of tax collectors must be hard and for that
purpose, proper attention of the government is essentially required.
Another cause is the neglect of agriculture sector by almost all governments. Pakistan has a lot of
potential in agriculture and our government must properly plan to build dams and reservoirs without
playing politics to bring more and more land under cultivation to produce a lot and in turn multiply our
exports.

It is a grim reality that in our country everyone has some vested interests. Hardly any leader is sincere
with the country in the truest sense of the world. Unfortunately, personal interests are given preference
over state interests. If we start giving importance and preference to the state interest, then we will move
forward in every sphere otherwise it would all go up in smoke.

We don’t have an Aladdin’s lamp in our hands that may make our economy strong enough to compete
with the economy of developed countries immediately. However, our government can take initiatives
practically. Being an underdeveloped country, our gravest problem and the biggest obstacle in our way
to development is corruption. The government must take harsh steps to eradicate this evil. If our leaders
sincerely and dedicatedly work for Pakistan then that day is not far when we would be called a
prosperous and developed nation. Many of our political leaders have their assets out of Pakistan. The
incumbent government must strive to bring them into our own country. If the government successfully
overcomes this problem then surely economic prosperity and development will take roots.

For healthy economy, political stability and promotion of democracy are crucial. The recent transition of
democracy from one elected government to another is a good omen. A true democracy enhances trade
and investment in any country. As a matter of fact, political stability, amicable relations with
neighbouring nations, ensuring proper law and order within the boundaries, ensuring supremacy of
constitution, systematic and urgent end of energy crisis, emancipating meritocracy will certainly boost up
the economy of our country.

It is a matter of misfortune that we produce a lot of raw materials but don’t have industries to utilize
them. European and other developed nations purchase cheap raw material from us and sell the finished
good at high prices in our own country.

Our newly-elected government must plan systematically and execute them nicely and, if needed,
ruthlessly. If our leaders do not take steps today then we will remain entangled in the jaws of
International Monetary Fund (IMF) and the World Bank (WB).  We have to rely on our own resources
and must start to work from today to be in a good position to assist and donate the developing countries
within few years.

67 Years of PAKISTAN’s ECONOMY

A Mixture of Successes and Failures
Quotes
Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it
keeps moving, regulate it. And if it stops moving, subsidize it.

Ronald Reagan

Economy is the basis of society. When the economy is stable, society develops. The ideal economy
combines the spiritual and the material, and the best commodities to trade in are sincerity and love.
 Morihei Ueshiba

Economics is the study of mankind in the ordinary business of life; it examines that part of individual and
social action which is most closely connected and social action which is most closely connected with the
attainment and use of the material requests of wellbeing.

Alfred Marshall

Quaid’s Views
We must work our destiny in our own way and present to the world an economic system based on the
Islamic concepts of equality of man and social justice. We will thereby be fulfilling our mission as
Muslims and giving the humanity the message of peace which alone can save it and would secure the
welfare, happiness and prosperity of mankind.

(Speech at the opening ceremony of State Bank of Pakistan, Karachi July 1, 1948)

Iqbal’s Views
Allama Iqbal was the first economist of the Indo-Pakistan Subcontinent to raise his voice against the
exploitation of Muslims by domestic and foreign classes controlling the means of production.

“The problem of bread is becoming more and more acute. The Muslim has begun to feel that he has
been going down and down during the last 200 years. Ordinarily, he believes that his poverty is due to
Hindu money-lending or capitalism. The perception that it is equally due to foreign rule has not yet fully
come to him. But it is bound to come.”

(Excerpt from Letters of Iqbal to Jinnah)

His two historical Presidential Addresses of Allahabad and Lahore are of significant importance and
give the outlines of the strategy for his economic thinking.

Residents of the West! God’s earth is not a shop;

The gold you think to be genuine will
now prove to be debased.

Pakistan Movement and Economy

The idea behind a separate Muslim state was to adopt and implement an economic system, based on the
principles of Islamic Shariah.

  In the War of 1857, the Muslims of South Asia made gigantic efforts to wrest their political and
economic rights from the imperialists.
 By the first quarter of the twentieth century, the Islamic world of South Asia was seething with
new ideas and thoughts and finding the socioeconomic system planted on them by the colonialists, a
burden which had to be got rid of.
 Soon after the 1943 Karachi session of AIML, Jinnah made contacts with leading Muslim
businessmen, technologists and economists to chalk out a pragmatic economic policy for the future.
For this purpose, Quaid-i-Azam, in April 1944, constituted a Planning Committee consisting of Nawab
Ali Nawaz Jung (Chairman), Professor A.B.A. Haleem (Secretary), and M.L. Qureshi (Joint Secretary)
 The first meeting of the Planning Committee was held on Sunday, the 3 September 1944 in the
Library Hall of Anglo-Arabic College, Delhi.
 The Chairman, in his report, opted for planning for about 15 years, divided into three 5 year
plans.
 Besides this, , a Muslim League manifesto, drawn up by Daniyal Latifi, showed the League to be
in favour of nationalization of industries and banks, strict state control and regulation of private
industry, ceiling on land holdings and heavier taxation on large landowners.
Establishment of State Bank of Pakistan
On July 1, 1948, at the inauguration ceremony of the State Bank of Pakistan at Karachi, Quaid-i-Azam
said:

The adoption of Western economic theory and practice will not help us in achieving our goal, of a happy
and contended people. We must work out our destiny in our own way, and present to the world an
economic system based on true Islamic concept of equality of manhood and social justice.

 Quaid-i-Azam termed the State Bank of Pakistan as the Laboratory of new economic system.
Features of Pakistan’s Economy
  The economy of Pakistan is the 26th largest in the world in terms of purchasing   power parity
(PPP), and 44th largest in terms of nominal GDP.
  The economy of Pakistan is a semi-industrialised one, based heavily on textiles, agriculture and
food production.
  Agriculture accounts for more than one-fifth of output and two-fifths of employment.
  Primary export commodities include textiles, leather goods, sports goods, chemicals and carpets
and Rugs.
  Pakistan’s GDP per capita is $3,149 ranking 177th in the world.
  Growth poles of Pakistan’s economy are situated along the Indus River.
Salient Aspects
  Despite the turmoil caused by the Partition, early development of tensions with India, and
frequent regime changes, the 1950s saw rapid industrialisation.
  This decade laid down the basis of future growth by sharply increasing investment both in
physical and human capital and creating strong economic institutions, notably State Bank of Pakistan,
WAPDA, PIDC, and PICIC.
  GDP growth is the most widely used measure of economic performance. By this measure,
Pakistan’s economy grew at an average rate of over 5% over 1949 “96, a period of nearly fifty years.
  Growth was slow during the 1950s averaging 3.1% per annum but accelerated to 6.7% during the
sixties and remained generally close to 6% per annum till the early 1990s.
  By 1959-60 fixed investment in West Pakistan (now Pakistan) had risen to 11.5% of GDP from
4.1% in 1949-50.
  It may seem surprising but education was not neglected in the 1950s.
  Economic growth rate that had been a little over 3% per annum in the 1950s shot up to nearly
7% in the 1960s.
  Public investment and aid flows were specially stimulated by large expenditures under the Indus
Basin Water Treaty signed with India in 1960 with the help of the World Bank.
  During Ayub era in the mid 1960s, Pakistan’s development efforts were hailed as a rare success
story.
  Including the expenditure for Indus Basin Replacement works of about $1.2 billion, water and
power investments totalled $2.5 billion (about 3.6% of GDP) during the 1960s and accounted for more
than 50% of total public spending.
  Fixed investment reached an all time peak of 20.8% of GDP in 1964-65, more than 50%
financed by external assistance.
  The 1965 war with India had the disastrous consequences of a decline in aid flows and upsetting
the balance between defence and development.
  The near doubling of defence spending between the first half and the second half of the 1970s
was also major setback for education; additional primary school enrolments during 1965-70 was one
third less than in 1960-65.
  The fixed investment to GDP ratio came down to 14.3% by 1969-70.
  The GDP growth in Bhutto period, though a respectable 4.9% per annum suffered from the fact
floods and poor harvests adversely affected agricultural growth.
  Agricultural growth recovered to nearly 4% per annum during 1977-88 from a dismal 2% during
1972-77.
  The five-fold jump in worker remittances between 1976-77 and 1982-83 to the peak of nearly $3
billion or 10% of GDP was another strong boost to economic activity.
  External assistance for Afghan Mujahideen, estimated at $5-7 billion in the first half of the 1980s
that was channelled through Pakistan also helped the economy.
  Zia’s regime, with Ghulam Ishaque Khan as finance minister, made economic decisions and
policy choices that were to have serious long -term consequences.
  The defence budget, which had already expanded significantly during Bhutto, increased at an
average rate of 9% per annum.
  The development outlays were squeezed, rising only 3% per annum over 1977-88 in real terms:
by 1987-88 defence spending had overtaken development spending.
 The weak political governments that followed Zia found it difficult to deal with the worsening
macroeconomic balances and the build of debt.
 There were, however, major efforts, starting with the first Nawaz Sharif Government in the early
1990s, to liberalise the economy, to expand the role of private sector, and to redress the imbalances in
social services.
 However, for a number of reasons, the reforms did not succeed in avoiding an economic
slowdown and an external debt crisis by the end of 1990s.
  Growing abuses in the largely public sector controlled financial system led to siphoning off of
valuable resources.
  Per capita GDP growth slowed down to 1% per annum in the 1990s compared to the average of
over 3% per annum during 1960-90.
  The Musharraf era did deliver high growth for a few years. The return of old-style politics after
the 2002 elections led to policy mistakes.
  Pakistan’s economy found itself in 2008 in a not much better shape than it was at the end of the
1990s.
Pakistan’s Five-Year Plans
First Five-Year Plan (1955-60)
Total size: Rs. 10.8 billion
The first five-year plan (1955-60) laid emphasis mainly on achieving high national income.

Objectives
(a) To raise the national income and the standard of living of the people;

(b) To improve the balance of payments of the country by increasing exports and by production of
substitutes for imports;

(c) To increase the opportunities for useful employment in the country;

(d) To make steady progress in providing social services; housing, education, health and social welfare;
and

(e) To increase rapidly the rate of development, especially in East Pakistan and other relatively less
developed areas.

Overview
During the First Plan period, productive processes of crucial significance were set in motion and
development activity attained a certain momentum.

Second Five-Year Plan (1960-65)

Total Size: Rs 23 billion (Revised in April, 1961)
This Plan, approved by the Economic Council of the Government of Pakistan on June 21, 1960, was
largely a continuation of the first plan with more focus on the less developed areas.

Overview
Specific agriculture and industrial sub-sectors were given priorities. Investment in technical and
vocational education, and provision of housing were also featured in this plan.

The actual growth rate surpassed the projected one. The GNP registered a growth of 30% over the Plan
period compared to 24% proposed in the plan and per capita income grew at 15% instead of 12%
projected in the plan.

Third Five-Year Plans (1965-1970)

Total Size: Rs 52 billion
The formulation of Third Plan (1965-1970) was undertaken in a mood of great optimism and the annual
growth target was set at 6.5% per annum.

Overview
In this Plan, there was a great visible investment shift from consumer goods to capital goods industry.
The Plan came around at a time when Pakistan faced reduced foreign assistance and domestic savings
needed to be increased. Export promotion and import substitution were proposed. Relatively more
emphasis was placed on heavy industry and on creating infrastructure.
As regard the achievements of this Plan, the performance in industrial sector was far from satisfactory
particularly in the large-scale industrial sector which exhibited a growth rate of 10%. The small-scale
industry also performed well.

No Plan Period (1971-1976)

The fourth five-year plans were abandoned after the Fall of Dhaka. Virtually, all fourth five-year
planning was bypassed by the government of Prime Minister Zulfikar Ali Bhutto. Under him, only annual
plans were prepared.

Fifth Five-Year Plan

Total Size: 210 billion
The Draft Fifth Five Year Plan was formulated in terms of 1972-73 prices and in the context of the
economic situation obtaining in the first half of the fiscal year 1973-74.

Overview
The Fifth Five-Year Plan (1978′ 83) was an attempt to stabilise the economy and improve the standard of
living of the poorest segment of the population. Increased defence expenditures and a flood of refugees to
Pakistan after the Soviet invasion of Afghanistan in December 1979, as well as a sharp increase in
international oil prices in 1979-80, drew resources away from planned investments. Nevertheless, some
of the plan’s goals were attained. Many of the controls on industry were liberalised or abolished, the
balance of payments deficit was kept under control, and Pakistan became self-sufficient in all basic
foodstuffs with the exception of edible oil.

Sixth Five-Year Plan (1983-88)

Total Size: 495 billion
Overview
The sixth five-year plan represented a significant shift toward the private sector. It was designed to tackle
some of the major problems of the economy: low investment and savings ratios; low agricultural
productivity; heavy reliance on imported energy; and low spending on health and education. The
economy grew at the targeted average of 6.5%. This Plan also focused on the pro-poor growth concept.
Rapid development of steel-based engineering goods and modernisation of textile industry was
encouraged. The industrial sector as a whole exhibited a growth rate of 7.7% per annum against the Plan
targeted of 9.3% per annum.

Seventh Five-Year Plan (1988-93)

Total Size: 660.2 billion
The Seventh Five Year Plan was prepared within a broad-based socioeconomic framework of a fifteen
years perspective (1988-2003), emphasizing efficient growth in output on one hand and improving the
quality of life on the other.

Overview
The Plan focussed on the renewed role of the government to provide public services and manpower
training. The promotion of private sector activity through further deregulation was planned.

The tempo of growth was affected by unforeseen events on domestic and international fronts including
economic contraction of Eastern Europe and the former Soviet Union, recession in Pakistan’s export
markets, the Gulf War, delay in the settlement of the Afghan issue, the political uncertainties on the
domestic front, frequent changes of government, civil disturbances in 1989-90 and floods of 1988-89 and
1992-93. However, the overall performance remained satisfactory.

Eighth Five-year Plan (1993-98)

Total Size: 1700.5 billion
Overview
The eighth five-year plan (1993-98) recognised the role of government as a catalyst and manager rather
than the main vehicle of economic growth. The overall focus had been on strengthening individual
initiative and private enterprise.

Resource Mobilization & The Economy of Pakistan

Pakistan is a country having vast natural resources but, unfortunately, it is unable to manage the
scattered and divided network of national assets. All mismanagement and encroachment upon our
internal affairs is due to intellectual vacuum and political dilemmas. Ironically, we are not
independent enough to introduce some healthy economic reforms.
Introduction
Our motherland has been gifted with fertile land, abounding natural resources along with enriched, genius
minds to make best use of them. But due to sheer incompetence and ineptness on part of those at the
helm, these invaluable resources remain unutilized. Resultantly, most of our youth, their minds and
talents are not directed towards a path which may lead them to a brighter and enviable future. How ironic
is the fact that we don’t have a consolidated system of governance to give a clear purpose of life to our
youngsters. Our ‘visionary’ tilt, literally, is just for aid; not for trade and investment rather it is said
euphemistically that Pakistanis want ‘Tr-aid’. What we direly need is to invest in technology for
betterment of floundering and staggering economy. Economic growth rate for previous three years has
been approximately 3% which is pathetic and heart-wrenching to say the least.
Presently, unemployment is the biggest hurdle in the way of development. Due to unemployment, events
of street crime and robbery have been gaining ground and surging too. Many young graduates have been
found guilty of robbery and involving in other social menaces. It is all due to crumpled and sick economy.
Adding fuel to the fire are the increasing rates of electricity, which is going beyond the reach of the lower
class.

Terrorism, extremism, ethnic and communal riots have jeopardized our peace, worsened our economy
and have periled the integrity of the nation. All our trade links with neighbouring countries have been cut
off and exports have reached new lows due to security situation.

IMF Deal: A Flawed One

Pakistan’s recent tryst with IMF is not satisfactory and is worsening the woes of our already wobbling
economy. This deal has certain in-built faults and is a pusillanimous action on part of the government.
The IMF programme comes with certain conditions such as increasing the rates of electricity, withdrawal
of subsidies which will essentially increase the prices of the items of daily use. Regrettably, we have no
paraphernalia to maintain balance for stabilization of economy. It is a well known fact that unemployment
and inflation have reached at climax and people have been lambasting for unleashed surge of hike in
prices of petrol and other necessities.
 Resource Mobilization: A Panacea to Strengthen
Economy
All ins and outs of economic agenda are prepared and manipulated by D-20 countries. They consider and
rethink the pernicious economic history of underdeveloped countries and set new horizon of goals to get
salvage from impediment in the way of economic growth and form distinctive set pattern of economy
boosting rules.
There is no denying the fact that to strengthen the economy; firstly, there should be no anachronism and
supine theory. But, Pakistan is in topsy-turvy due to economic degradation. So, policy of economy must
be prepared by the “cream of the crop” with an ardent approach of pessimism. Otherwise, it may cause
tense atmosphere and uncertain upheaval for economically depressed people. Moreover, outrageous
passions of poverty-victims can cause further property and life loss.

Besides, Allah Almighty has blessed Pakistan with natural resources like coal, copper, iron, and
molybdenum, another precious metal. Pakistan’s leadership should be proactive and must introduce a
coherent and organized mechanism of good governance. Investing in resources is need of the hour.
It is high time to enhance skill power of our young generation by providing them technical skills. India in
our neighbourhood is a world leader in the field of technology but, contrarily, we are lagging far behind.
So, we should take concrete steps for mobilization of resources, for determination of administration and
for uplifting of economy.
Some Suggestions
To improve the economic structure of the country, we must:
1) Prioritize the necessary equipment in each field and leave the unnecessary.
2) Invest more in natural resources, education, agriculture and industry.
3) Recognize that every investor, native or foreigner, is attracted if the government guarantees a safe
environment. Hence, it is the utmost need of Pakistan to get rid from “war of terror” because our
international trade has been severely affected by security threats.
4) For strengthening and stabilization of economy government should focus on alternative energy
resources i.e. energy from wind (Cati Bander in Sindh Gharo and Hyderabad territory may be used to
produce 20,000 MW energy from wind).
Conclusion
In a nutshell, for making Pakistan a top-notch economy, the government should collect tax especially
from elites all over the country. Simultaneously, we should also prefer which is our real need and not that
is just a luxury. Resource-mobilization is the single most important step that can bring favourable
atmosphere and can regain economic stabilization.
Understanding Preconditions for Voluntary Tax Compliance
Economic Growth without Distributive Justice Breeds Violence

ECONOMIC DIPLOMACY The New front in foreign policy of Pakistan

Pakistan’s economic promise