Phase 3: 1972 to 1977

Lecture 8
 Lecture Outline
 Bhutto resuming power
 Constitution 1973
 Economic overview
 Experiment With Nationalization
 Macroeconomic Management
 Pattern Of Growth
 Foreign Trade
 Oil Price Shocks
 External Debt Problem
 Foreign Assistance
 Budget Deficits
 Tax policy
 Inflationary Pressure
 Energy Price Subsidy
 Wheat Subsidy
 Public Investments
 Social Services
– Education
– Health
 Reaching The Poor
 The Bhutto Reforms of 1972
 Bhutto’s Bad Luck Factors
Yahya Khan and Free Elections

 Commander-in-chief, General Yahya khan was appointed as chief martial law administrator
and assumed the office of President in 1969
 He announced:
 1) Basic democracy had not been a success
 2)There would be properly elected government
 3) ‘’One Unit” system would be replaced by provincial government
 Therefore One unit plan and 1962 constitution were annulled and Pakistan provinces were re-
established
 Elections were held on 7 December 1970 on the principal of ‘one man one vote”
 However results of the elections were shocking as they created constitutional crisis in Pakistan
 The Awami league won 160 of 162 seats in East Pakistan
 Reasons
 Sense of frustration felt by people of east Pakistan towards their Muslim countrymen in
West Pakistan
 East Pakistan was not well represented in any aspect of Pakistan’s administration from
government, judiciary , army and civil service
 EP also felt that their province suffered from lack of economic development
 They also argued that largest export was jute that was coming from EP , whereas largest
spending is on defense to protect border with India (for protection of (WP))
Sheikh Mujib and the Six Points

 The Awami League led by Sheikh Mujib-ur-Rehman won 1970 elections based on his six points
 1) Directly elected government
 2) Federal government to control defence and foreign policy. All other decision to be made at
provincial level
 3) Separate currency and/or financial policies for EP and WP, to stop flow of money from EP to
WP
 4)Provinces to tax their people and send a share to federal government. Fed government not to
tax the people
 5) Each province to set up its own trade agreement with other countries and control the money
spent/made through this trade
 6)Each province to have its own troops
 In January 1971, Yahya khan visited EP and tried to convince Mujib to tone down his six points
 Mujib was willing to negotiate on 6 points but was not willing to negotiate from the right to form the next
government and the future assembly rights to decide about the future constitution
 Bhutto announced that PPP would not take seats in the assembly unless Mujib talked with other parties to
reach an agreement on power sharing
 Yahya postponed the opening of the assembly without setting a new date
 REACTION of EP
 EP considered that they had be betrayed by Yahya and therefore started the campaign of civil disobedience,
strikes , demonstrations and refusing to pay taxes
 Outbreak of Civil War
 Yahya khan sent an army to EP in order to maintain order and Awami league was banned
 The government was harsh. Thousand of Bengalis were killed, press censorship was imposed and Yahya
ordered Pakistan army to take control of EP
 Millions of Bengalis were fleeing across border to India
 On March 1971, India declared its support to people of Bengal against WP
 A rebel military force, Mukti Bani (trained by Indian army) took shape and fought the Pakistani army
 On 21 November Mukti Bani launched an attack on a town in EP
 Yahya khan declared a state of emergency and told its people to get ready for war
 On 29th November EP announced the members of its provincial government
 On 4th December India attacked EP. Two days later India officially recognized the Bangladeshi government
 During this war UN was trying to find solution for this war
 UN asked India and Pakistan to stop fighting and withdraw from EP
 A week later Yahya khan accepted the defeat and asked army in EP to surrender
Consequences of the War
 Defeat in the war brought disgrace for Yahya and for the army
 Yahya khan resigned as president and was replaced by Bhutto in WP
 On 21 December 1971, the republic of Bangladesh was officially declared
1973 constitution – Bhutto era (1971-1977)

 Bhutto came to power under martial law and was determined to return Pakistan to
parliamentary democracy
 In 1972 new assembly was called, reflecting the voting in the 1970 elections, in which PPP
won a overwhelming majority
 Committee was set up with representation from different parties in the assembly to draw
up a new constitution
 In 1973 the new constitution, which relied on the principles of the 1956 constitution
became law
 Features of 1973 Constitution

 There would be 2 houses , the Senate and the Assembly. The Assembly would be elected for a period of 5
years and the members of the Senate would be nominated in equal numbers from each of the four provinces
 The leader of the party with a majority in the Assembly would become Prime Minister and select a Cabinet
 The President became largely a figurehead, whose orders had to be signed by the Prime Minister
 Pakistan was an Islamic Republic and both the Prime Minister and President had to be Muslims
 Pakistan was a federal state ( provinces having its assembly, elected by adult, with majority party forming
provincial government)
 All fundamental basic rights were guaranteed
Economic Overview

 The early 1970s were the most traumatic and turbulent years of Pakistan’s political and
economic history.

 The political deadlock resulted in the ill-considered military action in East Pakistan in
March 1971 and start of the armed conflict with the separatists who were given full
support by India and thus began a chain of conflicts which eventually led to a War with
India, Pakistan’s military defeat, and the creation of an independent state of Bangladesh
in December 1971.

 In West Pakistan, Bhutto was brought into power by Pakistan's military and became the
President
 Bhutto undertook large scale nationalization of industry, insurance and banking,
extending the state control of the modern sector significantly.
 Bhutto’s government also took full control of country’s educational system by
nationalizing private educational establishments.

 The economic consequences of the separation of East Pakistan and the large
and unexpected oil shocks in 1973 led to major changes and problems faced by
Bhutto’s regime.

 Agricultural output during the same year also suffered a lot because of adverse
weather conditions, both draught and floods which caused the economic growth
to slow down, inflation accelerated and macroeconomic imbalances widened.

 The large scale inflows of foreign capital and remittances after 1973 cushioned
the impact of the steep rise in the oil import bill.
 Experiment With Nationalization

 After the separation of East Pakistan, Zulfiqar Ali Bhutto was brought into power by Pakistan's military and was
President till 1977.
 Nationalization is the process of transforming privately-owned assets into public assets by bringing them under
the public ownership of a national government or state. 
 Bhutto undertook large scale nationalization of industry, insurance and banking, extending the state control to
different sectors of economy.
 The nationalization programme was implemented for the first time in the history of Pakistan on 1st January 1972, and
it was promulgated through three different stages.
 1st stage: selective industries iron and steel, basic metal industries, heavy engineering industries,
heavy electrical industries, assembly and manufacture of motor vehicles, tractor public utilities,
including the electricity generation
 2nd stage: banking and financial industry and sector in Pakistan. over 13 major banks, over a dozen
insurance companies, two petroleum companies and 10 shipping companies were forcefully
nationalised
 3rd stage: The third programme soon 2,000 cotton, ginning and rice husking units came under the
nationalisation programme launched in 1 July 1976, when approximately
 Bhutto’s government also took full control of country’s educational system by nationalizing
private educational establishments.
 Macroeconomic Management
 During the five years of Bhutto's government the annual growth rate of economy averaged 4.9% and this followed the virtual
stagnation of GDP at 1.7% annual growth in the transition years 1970-2

 With the worsening economic and political relations with East Pakistan and eventual breakup of the country, the slow down of
growth was inevitable.

 There was a virtual stagnation of GDP at less than 1.7% annual growth in the transition years 1971-72.

 During the five years of Bhutto's government the annual growth rate of economy averaged 4.9%.

 Economic growth slowed in the wake of nationalization, with growth rates falling from an average of 6.8 percent per
annum in the 1960s to 4.8 percent per annum on average in the 1970s.

 Most nationalized units went into loss because decisions were not market-based.

 The average GDP growth rate in Zulfikar Ali Bhutto regime was 4.55, while the services, agriculture and industrial
growth rates were 6.55, 2.6 and 4.4 respectively
 Pattern Of Growth
 The major sources of growth during 1972-1977 were construction, public administration, defense and services sector.
o Real investment expanded by 50% between 1972-77

o The rate of investment as per GDP recovered from a low of less than 13% to over 19% over the period of four years.

o Higher military expenditures while adversely effecting long term economic growth did help short term economic expansions.

o The beginning of the boom in worker remittances also had positive effects on the expansion of the service sector.

o The investment in private sector remained as low as 15 percent in the year 1974 while the investment in public sector was recorded as high as 75
percent.

o It shows that the private practice of business was badly discouraged.

o The growth deteriorated, and that too largely due to the failure of Bhutto’s government to fulfill its commitment with the business sector of
ending the process further nationalization.
 Foreign Trade

 The separation of East Pakistan did not lead to a major decline in Pakistan’s exports.

 Three principal reasons:

1. Exports of primary products from West Pakistan, such as cotton and rice which constitute of about half of the inter-wing
trade in the 60s were sold below the international prices to East Pakistan because of national policies which depressed
the effective real exchange rate.

2. The real devaluation of the exchange rate in May 1972 facilitated the exports in international markets.

3. The boom in the international economy and commodity markets in 1972-3 increased the demand for Pakistan’s
exports.
 Oil Price Shocks

 External payment position worsened due to rise of international oil prices at the end of 1973 because of
OPEC.

 Pakistan’s oil import bill was over 6% of GDP during 1972.

 However the official grants and loans from Middle Eastern oil exporting countries increased, so the financing
of the enlarged deficit did not pose major problems.
 External Debt Problem

 Pakistan had to face rising debt servicing burden because of the existing debt of 60s.

o As political crises began in 1971 and economy stumbled, Pakistan found itself unable to meet debt service obligations.

o Pakistan originally became highly indebted in the 1970s, when the government borrowed to cope with the impact of high oil
prices.

o The seriousness of the problem can be judged from the fact that the debt service payments due in 1971-2 would have
absorbed over 40% of Pakistan’s foreign exchange earnings of that year.

o The fresh assistance from abroad relatively neutralized the situation.

 Foreign Assistance
 Western industrial nations, OPEC countries and multilateral banks resumed the
assistance for Pakistan on substantial scale in 1974-5.
 Increase in foreign aid both from the Muslim and the western world (2nd summit conference
of OIC hosted by Pakistan in March 1974)
 Western industrial nations and multilateral banks resumed new assistance on substantial
scale in 1974-5.

 The average level of foreign assistance commitments and disbursements reached a peak,
over 1.2 bill US dollars annually between 1974-78.

 Because of this large foreign assistance, the oil shock on the balance of payments was
greatly neutralized.
 Budget Deficits

 Budget deficits showed explosive growth during 1972-77.

 Government began to borrow on large scale for current expenditures.
 The decision to increase defense expenditure following the separation of East
Pakistan was important political decision made for the demoralized Pakistan
army
 It averaged over 8% of GDP (compared with fiscal deficits of 2-3% of GDP
in the 50’s and 4-5% in the 60s).
 Government also began to incur large deficits on Revenue Account and
between 1972-77; government revenue account deficit was close to 2% of
GDP.
 The high rising burden of defense expenditure was a root cause of fiscal
imbalance.
 Tax policy
 The government was not able to use the tax policy as an effective instrument of resource mobilization.

 Collection from income and corporate tax during the 70’s did not exceed 1% of GDP.

 The essential inelasticity of tax system remained intact with its heavy dependence on indirect taxes and
especially certain duties.
 Profits of nationalized enterprises fell off rather quickly as inefficiencies crept in and growth slowed down.
 Inflationary Pressure

 The growing fiscal deficit, combined with inflation resulted from higher international oil prices, had
serious inflationary consequences.

 The devaluation of May 1972 also contributed to price pressures, as it raised domestic agricultural
prices.

 This fluctuated the exchange rate and further proceeded toward removing the subsidy enjoyed by
industrial sector during that time due to the extra valuation of foreign exchange.

 On the economic front, the rapid rise in price level quickly dissipated any gains from exchange rate
adjustments and reduced the competitiveness of exports in absence of further devaluation

 Exchange Rate and Trade Policy

 The serious distortion caused by the system of multiple exchange rates which prevailed
since January 1959 were finally recognized when the government decided to devalue the
rupee from Rs.4.76 per dollar, to Rs.11 per US dollar in May 1972.
 The Export Bonus Scheme was also abolished at the same time.
 There was a sharp increase in reliance on foreign trade taxes following the 1972
devaluation.
 Custom revenues as percentage of GDP increased from 2.7 in 1971-2 to 5.2% in 1973-4
and remained high during the subsequent years.
 Though initially export taxation was relatively heavy, by 1976-7 most export duties had
been removed
 The bulk of custom revenues in the mid 70’s came from imports.
 The average rate of import tariff on durable imports was close to 50%.
Energy Prices

 Between 1973 and 1976, import cost of petroleum had increased by 300%.
 Gas prices were kept low to promote the use of an indigenous but
unfortunately scarce source of energy.
 As a result of subsidy on energy prices, energy consumption growth
remained high, incentives for increased production especially for oil and
gas were not strong, and dependence on imported energy remained high.
 In 1970 energy consumption expanded 30% faster than growth in GNP
with obvious adverse consequences for the balance of payments.
 Wheat Subsidy

 Initially the government was slow to adjust wheat procurement prices but later
on these price were increased to around Rs.1 per kilo from Rs.0.5 per kilo in
1969-70.

 The efforts to keep wheat prices relatively low provided strong incentives for
the production of raw cotton.

 In order to compensate farmers for wheat prices, which were well below
international prices through out the 70s, government continued to provide large
direct subsidies on fertilizers, pesticides and equipment for plant protection.
 Public Investments

 There was a massive increase in public investment as the total public sector development spending increased
from 4.7% of GDP in 1971-72 to 11.7% of GDP in 1976-77.

 The extension of the role of the public sector was not confined to nationalization and increased public sector
investment in industry.

 There was a massive increase in other areas of public investment as the total public sector development
spending increased from 4.7% of GDP in 1971-72 to 11.7% of GDP in 1976-77.
 A number of factors contributed to the increase in public investment apart from investment
in industry, including the steel mill.

 Expenditure on Tarbella Dam remained sizeable because of technical problems and partly
because of the decision to increase the hydro power generation capacity of the dam.

 About 10% of the development spending was on Tarbella Dam and other Indus Basin
works.

 The government increased spending on agriculture and on infrastructure on power, roads,

education and health.

 An important motivation in quickening the pace of public investment was to spread the
benefits to the people and to the less developed provinces
 Social Services - Education
 New educational policy of March 1972 outlined an ambitious program of educational development including:

o Free and universal education up to class VIII,

o Strengthening of technical education
o An educational program for women in the rural areas
 The immediate focus was the nationalization of private educational institutions
 Take over of private educational institutions adversely affected the development of basic education as well as the quality
of education.
 Only about one third of the education expenditures were directed at the primary level.

 Total government expenditures on education increase from Rs.0.8 million in 1971-2 to Rs.2.8 million in 1976-7 which
represented increase in real terms of around 50% over the period.

 Female education at the primary level did relatively well in the Bhutto’s period as females accounted for 36% of growth
in the primary school enrollment and 55% of growth in teachers during 1972-7.
 Social Services - Health

 Health policy - 1972

o Extension of health facilities to rural areas
o Expansion of medical education
o Shift to the production of generic drugs to avoid the soaring prices of brand
named medicines.

 As a proportion of GDP the growth in health sector was from 0.4% in 1971-2 to 0.8% in 1976-7.
 In northern areas of Pakistan people were trained as health guards who were to provide basic
medical facilities.
 Number of basic health units increased from 249 in 1971 to 786 in 1977 and the number of rural
health centre increased from 87 to 256 over the period and 1900 health guards were trained.
 Labor Policy
 Comprehensive labor policy announced in February 1972
 Labor Unions
 Minimum wages
 measures to improve the income and the bargaining position of labor.
 procedures for speedy and just settlement of disputes, a fair share in profits and participation in the
management of industry, bounces, and better housing, health and education facilities.

 This extended the benefits of reforms to another 1.2 mill workers but elicited a strong negative from the
large number of small businesses which became a subject to a whole new set of regulations.

 The new labor policy added about 12% to the cost of labor and thus met resistance even by the managers
of state enterprises.

 Labor policy combined with uncertainty about the attitude of the government about the private sector
acted as strong disincentive to further investment in large-scale industry in the private sector
 Reaching The Poor
 Food, clothing and shelter for the poor were a key slogan of the founders of the PPP and
it was this platform which had brought Bhutto to power.

 Large parts of Bhutto’s economic and social program land reforms, labor policy,
educational reform, sharp expansion in public development spending, credit policies
for small farmers and businessmen were aimed at improving the conditions poor.

 While there was defined a reduction in absolute poverty after 1971-72.

 Between 1976-79 worker remittances, a major source of poverty reduction increased

from 562 million US dollars to 1749 million US dollars.
 Land Reforms
 Land ceilings were lowered in 1972.
 The land ceiling was fixed to 150 acres of irrigated land and 300 acres of non-irrigated land.
 Unlike 1959 land resumed from landowners would not receive any compensation.
 Land to be distributed free to landless tenants.
 All those peasants who acquired land under 1959 land reforms and had dues outstanding, had their dues
written off and were not to make any further payments.
 Security of tenure was assured through a bar on arbitrary ejections and in the event of the sale of land, the
tenants were given the right of preemption.
 New rules for the tenants were laid down and the burden of taxation was shifted to landlords.
 In all 0.6 million acres were resumed far less than 1959 figure and constituting only 0.001 % of total
farm area in country.
 The act was completely ignored by military government after July 1977.
Bhutto’s Bad Luck Factors

May 1972 Devaluation of Pakistani rupee; initial outcome highly positive with exports
growing by more than 100%

August 1973 Massive floods hit Pakistan; import of food grain

Octber1973 Fourfold increase in international petroleum prices; imports cost much more; prices
of fertilizers; essential inputs, and oil jump; excessive inflation domestically

1974- 1977 World recession follows OPEC price rise; demand for Pakistani exports remain
severely depressed and affects industrial output

1974- 1975 Huge failure of cotton crop by as mush as 25% at a time when international cotton
price risen; affected industrial output

1976-1977 Worst floods n Pakistan’s history; agriculture crops destroyed; further import of
food crops; excessive expenditure on public good measures all affecting industrial
output.