|
Pakistan
THE ROLE OF GOVERNMENT
Policy Developments
since Independence
Since 1947 Pakistani officials have sought a high rate of economic
growth in an effort to lift the population out of poverty. Rapid
industrialization was viewed as a basic necessity and as a vehicle
for economic growth. For more than two decades, economic expansion
was substantial, and growth of industrial output was striking.
In the 1960s, the country was considered a model for other developing
countries. Rapid expansion of the economy, however, did not alleviate
widespread poverty. In the 1970s and 1980s, although a high rate
of growth was sought, greater attention was given to income distribution.
In the early 1990s, a more equitable distribution of income remained
an important but elusive goal of government policy.
At partition in 1947, the new government lacked the personnel,
institutions, and resources to play a large role in developing
the economy. Exclusive public ownership was reserved only for
military armaments, generation of hydroelectric power, and manufacture
and operation of railroad, telephone, telegraph, and wireless
equipment--fields that were unattractive, at least in the early
years of independence, to private investors. The rest of the economy
was open to private-sector development, although the government
used many direct and indirect measures to stimulate, guide, or
retard private-sector activities.
The disruptions caused by partition, the cessation of trade with
India, the strict control of imports, and the overvalued exchange
rate necessitated the stimulation of private industry. Government
policies afforded liberal incentives to industrialization, while
public development of the infrastructure complemented private
investment. Some public manufacturing plants were established
by government holding companies. Manufacturing proved highly profitable,
attracting increasing private investments and reinvestment of
profits. Except for large government investments in the Indus
irrigation system, agriculture was left largely alone, and output
stagnated in the 1950s. The broad outline of government policy
in the 1950s and early 1960s involved squeezing the peasants and
workers to finance industrial development.
Much of the economy, and particularly industry, was eventually
dominated by a small group of people, the muhajirs (see Glossary),
who were largely traders who migrated to Pakistan's cities, especially
Karachi, at partition. These refugees brought modest capital,
which they initially used to start trading firms. Many of these
firms moved into industry in the 1950s as a response to government
policies. Largely using their own resources, they accounted for
the major part of investment and ownership in manufacturing during
the first two decades after independence.
By the late 1960s, there was growing popular dissatisfaction
with economic conditions and considerable debate about the inequitable
distribution of income, wealth, and economic power-- problems
that had always plagued the country. Studies by economists in
the 1960s indicated that the forty big industrial groups owned
around 42 percent of the nation's industrial assets and more than
50 percent of private domestic assets. Eight of the nine major
commercial banks were also controlled by these same industrial
groups. Concern over the concentration of wealth was dramatically
articulated in a 1968 speech by Mahbubul Haq, then chief economist
of the Planning Commission. Haq claimed that Pakistan's economic
growth had done little to improve the standard of living of the
common person and that the "trickle- down approach to development"
had only concentrated wealth in the hands of "twenty-two industrial
families." He argued that the government needed to intervene in
the economy to correct the natural tendency of free markets to
concentrate wealth in the hands of those who already possessed
substantial assets.
Although Haq exaggerated the extent of the concentration of wealth,
his speech struck a chord with public opinion. In response, the
government enacted piecemeal measures between 1968 and 1971 to
set minimum wages, promote collective bargaining for labor, reform
the tax structure toward greater equity, and rationalize salary
structures. However, implementation was weak or nonexistent, and
it was only when the government of Zulfiqar Ali Bhutto (father
of Benazir) came to power in 1971 that there was a major shift
in government policy.
Bhutto promised a new development strategy more equitable than
previous policies. Yet he downplayed economic analysis and planning
and relied instead on ad hoc decisions that created many inconsistencies.
In May 1972, he promulgated a major act that devalued the rupee
(for value of the rupee--see Glossary) by 57 percent and abolished
the multiple-exchange-rate system. This act greatly stimulated
exports and indicated that the removal of price distortions could
spur the economy. But devaluation also completely altered the
cost and price structure for industry and affected the level and
composition of industrial investment and the terms of trade between
the industrial and agricultural sectors. Devaluation helped agriculture,
particularly larger farms that had marketable surpluses. Mechanization
increased but had the adverse side effect of displacing farm laborers
and tenants, many of whom migrated to cities seeking industrial
jobs.
In 1972 Bhutto's government nationalized thirty-two large manufacturing
plants in eight major industries. The industries affected included
iron and steel, basic metals, heavy engineering, motor vehicle
and tractor assembly and manufacture, chemicals, petrochemicals,
cement, and public utilities. Subsequently, domestically owned
life insurance companies, privately owned banks, domestic shipping
companies, and firms engaged in oil distribution, vegetable oil
processing, grain milling, and cotton ginning were nationalized.
The result was a drop of nearly 50 percent in private investment
in large-scale manufacturing between FY 1970 and FY 1973. By FY
1978 such investments were little more than one-third (in constant
prices) of those in FY 1970. Private capital fled the country
or went into small-scale manufacturing and real estate. Between
1970 and 1977, industrial output slowed considerably.
The public sector expanded greatly under the Bhutto government.
In addition to the nationalization of companies, plants were built
by the government and additional public companies were created
for various functions, such as the export of cotton and rice.
Able managers and technicians were scarce, a situation that became
worse after 1974, when many persons left to seek higher salaries
in Middle East oil-producing states. Labor legislation set high
minimum wages and fringe benefits, which boosted payroll costs
for both public and private firms. Efficiency and profits in public-sector
enterprises fell. Public industrial investment rose, surpassing
private industrial investment in FY 1976.
Many of the other economic measures undertaken by the Bhutto
government were largely ineffective because of the power of vested
interests and the inefficiency of the civil administration. Ceilings
on the size of landholdings were lowered, tenants were given greater
security of tenure, and measures were enacted to tax farm income
(see Agriculture
, this ch.). Bhutto also supported large, but inadequately planned,
long-term projects that tied up the country's development resources
for long periods. The largest projects were an integrated iron
and steel plant, a major highway on the west bank of the Indus
River, and a highway tunnel in the mountainous north.
After 1977 the government of Mohammad Zia ul-Haq (1977-88) began
a policy of greater reliance on private enterprise to achieve
economic goals, and successive governments continued this policy
throughout the late 1980s and early 1990s. Soon after Zia came
to power, the government instituted constitutional measures to
assure private investors that nationalization would occur only
under limited and exceptional circumstances and with fair compensation.
A demarcation of exclusive public ownership was made that excluded
the private sector from only a few activities. Yet government
continued to play a large economic role in the 1980s. Public-sector
enterprises accounted for a significant portion of large-scale
manufacturing. In FY 1991, it was estimated that these enterprises
produced about 40 percent of industrial output.
Islamization of the economy was another policy innovation of
the Zia government. In 1977 Zia asked a group of Islamic scholars
to recommend measures for an Islamic economic system. In June
1980, the Zakat and Ushr Ordinance was promulgated. Zakat
is a traditional annual levy, usually 2.5 percent, on wealth to
help the needy (see Zakat as a Welfare System, ch. 2).
Ushr is a 5 percent tax on the produce of land, allowing
some deductions for the costs of production, to be paid in cash
by the landowner or leaseholder. Ushr replaced the former
land tax levied by the provinces. Self-assessment by farmers is
checked by local groups if a farmer fails to file or makes a very
low estimate. Proceeds of ushr go to zakat committees
to help local needy people.
The government of Prime Minister Nawaz Sharif (1990-93) introduced
a program of privatization, deregulation, and economic reform
aimed at reducing structural impediments to sound economic development.
Top priority was given to denationalizing some 115 public industrial
enterprises, abolishing the government's monopoly in the financial
sector, and selling utilities to private interests. Despite resistance
from officials and labor unions and criticism that the government
was moving too quickly, by March 1992 control of twenty industrial
units and two banks had been sold to private investors, and plans
were under way to begin denationalizing several utilities. As
of early 1994, proposals to end state monopolies in insurance,
telecommunications, shipping, port operations, airlines, power
generation, and road construction were also in various stages
of implementation. Private investment no longer requires government
authorization, except in sensitive industries. Investment reforms
eliminated government sanction requirements, eased restrictions
on repatriable direct and portfolio investment from abroad, enabled
foreign firms to issue shares in enterprises in Pakistan, and
authorized foreign banks to underwrite securities on the same
basis as Pakistani banks.
Although the Nawaz Sharif government made considerable progress
in liberalizing the economy, it failed to address the problem
of a growing budget deficit, which in turn led to a loss of confidence
in the government on the part of foreign aid donors. The caretaker
government of July-October 1993 led by Moeen Qureshi, a former
World Bank (see Glossary) vice president, asserted that the nation
was near insolvency and would require a number of measures to
impose fiscal discipline. The government thus included sharp increases
in utility prices, new taxes, stiffer enforcement of existing
taxes, and reductions in government spending. In early 1994, the
government of Benazir Bhutto, elected in October 1993, announced
its intention to continue the policies of both deregulation and
liberalization carried out by Nawaz Sharif and the tighter fiscal
policies put in place by Qureshi. The government also said it
intended to devote a greater proportion of the nation's resources
to health and education, especially for women (see The Status
of Women and the Women's Movement , ch. 2; Benazir Bhutto Returns
, ch. 4).
Data as of April 1994
|
