Impact of Political

Instability on the
economic growth
of Pakistan
Shahrukh Alaya
20171-22140
Table of contents
 1-Introduction
 2-History of Political Instability in Pakistan
 3-Literature Review
 4-Significance of Political Instability on Economic
Growth
 5-Political Instability effecting Pakistan’s economy
 6-Lack of Law and Order
 7- Economy Under Imran Khan’s Leadership
 8-Conclusions
 9-Recommendations
Introduction
 PoliticalInstability means: when there is a propensity of
government downfall due to the competitiveness, conflicts
and violence between political parties.

 Politicalinstability leads to frequent changes of policies,

which creates volatility in the economy, leading it to negative
affect on macroeconomic performance.
 From the last 50 years, Pakistan and its economy has suffered
on the hands of political instability.
 The constant change in government and policies has greatly
affected the economy of Pakistan.
History of
Political Instability in Pakistan
 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.
 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.
 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 took a hit after this war as defense
spending rose from 4.82% to 9.86%, of GDP, which increased
to massive 55.6% by 1971.
 The result of war was the foreign investments were decreased
and economic constraint 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 seperation of
East Pakistan
Post East India 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 programm.
 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 megacorporation, 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.
 Many people criticize the Bhutto’s nationalization approach as the
ruppee was devalued in his leadership.
 In 1973, opec oil embargo and incrreased 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, who 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.
 Pakistan's rate of GDP growth rose to an average of 6.5 percent per annum in
the 1980s.
 But Zia’s inflicted a leadership deep rooted conflict to Pakistan’s ethnic groups,
It caused violence, intolerance in the society
 Due to which, Pakistan still suffers with ethnic, religious conflicts and violence.
 He borrowed with high interest rate to pay government wages.
Benazir Bhutto (PPP)
 Benazir Bhutto has been a very
popular, most dynamic and controversial leader of the time. She was the first
female prime minister of Pakistan.
 This was also the reason why, other 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 shares of Pakistan Steel Mills and Pakistan Railways were kept under
government management ownership.
 The Nationalization had a disastrous affect on the economy. It damaged the
confidence of investors in the country.
 In 1998, Nawaz Sharif declared an economic emergency and froze all assets under
government control to prevent financial collapse.
 The GDP growth rate sank to 4 percent and Pakistan faced persistent fiscal and
external deficits, triggering a debt crisis.
 Poverty nearly doubled from 18 to 34 percent.
 Resulting in Pakistan as lowest development in the Human Development Index of
the United Nations Development Programm.
 She and his husband Asif Ali zardari were charged with corruption.
Nawaz Sharif (PMLN)
 In 1990, Nawaz Sharif got elected
as PM Pakistan,
 The stock market did improve in Sharif's second term and
inflation was contained at 3.5 percent, as opposed to 7 percent in
1993–96
Pervaiz Musharaf
 After the military coup 1999, Pervaiz Musharaf became the President of Pakistan
 The poverty expenditure rate statistically dropped to 34.5%—17.2% in 2008 as part of the
privatization programme.
 He started to work on the issues like external and intern debtness, high fiscal deficit, rising
poverty, unemployment and stagnant exports.
 Pakistan had low foreign exchange reserves, to fund their imports, and Pakistan had almost no
access to prival capital markets.
 After these Structural reforms, it accelerated the economic
growth between 2002 and 2007.
 Around 11.8 million new jobs were created.
 Debt to GDP ratio was decreased from100 too 55%
 Pakistan's reserves increased from US$1.2 billion in October
1999 to US$10.7 billion on 30 June 2004. 
 The Rupee value was improved.
 But if we look at the political point of view, Pakistan was
once again caught up in War against Terrorism.
 These gains were mostly due to the billions of dollars worth
US aid in exchange of Pakistan support to US led war again
terrorism in Afghanistan.
 In 2008, Pervaiz Musharaf resigned due to legal and public
pressure.
Asif Ali Zardari (PPP)
 After 2008, Asif Ali Zardari as President of Pakistan and Syed Yousuf
Raza gilliani as PM.
 They brought up nationalization again.
 Their government oversaw the rise in violence, corruption, and
unsustainable economic policies that forced Pakistan to re-enter the era of
stagflation.
 The Pakistan economy slowed down to to 4.09% as opposed to the 8.96
to 9.00% in Musharaf’s era.
 The yearly growth rate fell from a long-term average of 5.0 percent to
around 2.0 percent.
 PIDE stated "nation's currency in circulation as a percentage of total
deposits is 31 percent, which is very high compared to India”
 The private sector had no key role, so it was the main cause of slow
economic growth.
Nawaz Sharif-PML(N)
 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.
 The panama paper leaked documents in 2016 from law firm Mossack Fonseca, stated
that Sharif family hold around millions of dollars’ worth of property and companies in
UK and around the world under different names.
 On 28 July 2017, after thorough and long investigation, court announces its decision.
 The court disqualified Sharif from holding public office, stating that he had been
dishonest in not disclosing his employment in the Dubai-based Capital FZE company
in his nomination paper.
 He was sentenced to 10 year prison and his daught Maryam Nawaz was sences to 7
years prison with fine of  £8 million and £2 million, respectively.
 Sharif and Imran Khan started to enage in a bitter feud between 2011 and 2013. This
rivalry grew in later 2011, both government leaders were blaming eachother on various
poilitical 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.
 He was sentenced to 10 year prison and his daught Maryam Nawaz was sences to 7
years prison with fine of  £8 million and £2 million, respectively.
 Sharif and Imran Khan started to enage in a bitter feud between 2011 and 2013.
This rivalry grew in later 2011, both government leaders were blaming eachother
on various poilitical 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
 Political stability is an important element for economic development. The economy
can severely be vulnerable to political instability. (Mustafa, Nawaz &Rubab, 2017)
 The concept of political instability is ascribed to Lipstel (1960) that stated that for a
country to be deemed as stable, it must have democracy or, even dictatorship
continuously for 25 years.
 The investors perceive that frequent change in government results in threat to
policies and, resultantly, they intend to invest in safer environment with less
political uncertainty (Alesina & Perotti, 1996).
 Pakistan has been experiencing fluctuation in growth rate since 1970 when a great
political turmoil resulted into war due to which Pakistan had to face great loss of
men and money. As Pakistan recovered from aftershocks of war, the growth rate
became sustainable, though started to diminish again at the end of 1990s strictly
due to political unrest and inconsistent policies. Another rise can be seen after at
the beginning of 21st century when GDP was seen to be increasing (Hussain,
2009).
 According to Qureshi (2010), the economy of Pakistan has been influenced by
largely by political instability since long. Since formation, 33 years has been spent
under military control and rest under political regimes.
 The civil unrest, strikes are the main cause of instable political system which can
leads towards low investments and finally a collapse in economic system of a state
said by Velasco and tornell (1992)
 Zaidi(2006) said that economic growth was effected due to the irregular policies
of government in the period of nationalization.
 For the remedy of the economic growth, according to Barro (2013) is to free the
government and its institute from corruption as the investors would be motivated
to invest which will lead to economic growth
 As (Rakhshani 2021)stated that stumbling and segmented political organization is
one of the root causes of an unstable political condition that is being faced by
every government in Pakistan. On the other hand, weak political parties compelled
every government to seek help from the coalition to come into power.
Significance of
Political Instability on economic growth
 Political Instability has a negative impact on economic growth as it
disrupts the market activities and labour 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 gets 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 increases labour cost and energy
consumption.
 According to (Mustafa, Nawaz &Rubab, 2017), The
political instable environment creates inflation and
unemployment that leads to public riots in the form of
strikes against governments.
 The political instability shortens the time of governments,
that leads to continuous policy changing, which shortens the
long term economic policies.
 Long term economic policies are better for the for the
countries as it results in better economic performance.
Lack of Law and
Order
 Law and order situation arises when there is violence,
insecurity in the country.
 Pakistan since its independence has law and order qualms. The
lack of law and order has a huge affect 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.
This graph shows that
the countries where Rule of Law
prevails, have higher incomes.

 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 indicator measures the extent to
which agents have confidence in and abide by the rules of society. (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)

Figure 1 Figure 2
Economy Under Imran
Khan’s Leadership
 In 2018, Imran Khan became the PM of Pakistan
 Khan sought the bail out from IMF.
 In exchange for the bailout, Khan's government slashed subsidy
spending in the energy sector and unveiled an austerity budget to curb
the fiscal deficit and limit government borrowing.
 Pakistan's overall balance of payment's position improved significantly
following record-high remittances in 2020, which stabilized the central
bank's foreign exchange reserves
 The fiscal deficit narrowed to less than 1% of GDP by 2020 due to the
government's austerity policies.
 The rate of debt accumulation had significantly slowed, but Pakistan's
debt remained high due to the high borrowing of previous governments
in which the current government had to allocate $24 billion to pay off
loans taken during the tenure of previous governments.
Conclusion
 As discussed, we now know that the political
instability in Pakistan, terrorism, lack of law and
order have an adverse affect on the economical
growth.
 The economical growth is inversely proportion the
political instability.
 The constant shift in governments, inconsistent
policies, ethnic diversity, 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.