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Published in: Ayesha Jalal (ed), The Oxford Companion to Pakistani History, Oxford University Press, Karachi, 2012

A PERSPECTIVE ON PAKISTAN’S ECONOMIC HISTORY:

GROWTH, ECONOMIC STRUCTURE AND GOVERNANCE

By

Akmal Hussain

Pakistan’s present policy challenge is to achieve a level and structure of economic

growth that can rapidly reduce poverty. Therefore in presenting a perspective on

Pakistan’s economic history we will examine how an economic structure emerged that on

the one hand constrains the achievement of a high GDP growth on a sustainable basis and

on the other constrains the capacity of poverty reduction for given GDP growth rates.

Pakistan began life as an independent state with a balance of payments problem

(there was only rupees 200 million worth of foreign exchange in the central treasury1) as

it faced the challenge of wide spread poverty and inadequate infrastructure. The problem

continues to persist today.

The emerging architecture of Pakistan’s economy is founded in its institutional

structure and the nature of governance, which conditioned the economic policies of

various regimes in its history2.

I. The Ayub Regime (1958-69): Following the Korean boom in 1953, the

government had introduced a policy framework for inducing the large profits of traders in

jute and raw cotton to flow into the manufacturing sector. This was attempted through a

policy of encouraging the domestic production of consumer goods through a variety of

Ayesha Jalal, The State of Martial Rule, Cambridge University Press, Cambridge, 1990. Page 37.

For a more detailed analysis of the relationship between the practice of political power, the process of institutional decay, and the economic structure, See: Akmal Hussain, Institutions, Economic Structure and Poverty in Pakistan, South Asia Economic Journal, Volume 5, Number 1, JanuaryJune 2004, SAGE Publications, London and Delhi, 2004. protection measures during the 1950s3. This import substitution policy was more

systematically pursued during the 1960s.

The decade of the 1960s is seen by many as the ‘golden age’ in terms of the high

growth rates achieved through the provision of subsidies and tariff protection to industry

and an elite farmer strategy in agriculture. It was also a period when the mould was set

for the emergence of an economic structure that was to lock Pakistan’s economy into

increasing income inequality, a narrow and inefficient industrial base, and increasing loan

dependence, for the next four decades.

The magnitude of protection provided by the government to private sector

industry was such that it enabled domestic manufacturers to earn large rupee profits on

the production of goods that were not internationally competitive. It has been estimated4

that during the 1960s, Pakistan’s main industries (when input costs and output values are

both measured in dollar terms) were producing negative value added5.

It has been argued that the phenomenon of negative value added in industry was

an important reason why during the 1960s, inspite of import substitution and large export

volumes, foreign exchange shortages persisted6. This set the “mould” for Pakistan’s

narrow export base (concentration on the low value added end of textiles) and the

associated debt problem, which persisted for the next three decades7.

Consequently the growth in manufacturing industry during the decade of the 1950s was impressive at 8.1 percent, although overall growth in GNP remained at a relatively low level at 3.4 percent. This was primarily because of slow growth in the agriculture sector (2.3 percent), which was the predominant sector in the economy. See: Shahid Javed Burki: Pakistan, Fifty Years of Nationhood, Vanguard, Lahore, 2004, Table 3.3, Page 100.

Soligo, and J.J. Stern, Tariff Protection, imports substitution and investment efficiency, The Pakistan Development, 1965, Pages 249-70.

Indirect subsidies such as the Bonus Voucher Scheme combined with the overvalued exchange rate, enabled domestic manufacturers to earn large rupee profits on exports that brought no gain to the economy in terms of foreign exchange.

Sikander Rahim: Myths of Economic Development, Lahore School of Economics, Occasional Paper No.10, February 2001.

For example, the share of the traditional textile industry in total exports far from falling, in fact increased from 30% in the decade of the 1960s to 50% in the decade of the 1990s. The government during the 1960s adopted a deliberate policy of concentrating

national income in the hands of the upper income groups.8 The economic basis of this

policy was the assumption that the rich save a larger proportion of their income and

hence a higher national savings rate could be achieved with an unequal distribution of

income (the target savings rate being 25% of GDP). In practice while the policy of

distributing incomes in favour of the economic elite succeeded, the assumption that it

would raise domestic savings over time failed to materialize9.

The failure of the economic elite to save out of their increased income resulted

during the 1960s in a seven-fold increase in the requirement of foreign aid10.

Consequently the debt-servicing burden rose rapidly: debt servicing as a percentage of

total foreign exchange earnings increased from 4.2% in 1960-61 to 34.5% by 1971-72.

The magnitude of this figure did not fall for the next three decades.

Given the policy of re-distributing incomes in favour of the rich, it is not

surprising that by the end of the 1960s a small group of families with inter-locking

directorates dominated industry, banking and insurance in Pakistan11.

During the process of rapid economic growth in the 1960s, while an exclusive and

highly monopolistic class was amassing wealth, the majority of Pakistan’s population

was suffering an absolute decline in its living standards12.

“It is clear that the distribution of national production should be such as to favour the savings sectors”, Government of Pakistan, Planning Commission, The Third Five Year Plan, 1965-70, Karachi, Page 33.

It has been estimated that 15% of the resources annually generated in the rural sector were transferred to the urban industrialists and 63 to 85 percent of these transferred resources went into increased urban consumption. Far from raising the domestic savings rate to 25%, the actual savings rate never rose above 12%. (See: Keith Griffin, Financing Development Plans in Pakistan, in K. Griffin and A.R. Khan, Growth and Inequality in Pakistan, Macmillan, London, Page 41-42).

According to official figures gross foreign aid inflows increased from US $ 373 million in 195055 to US $ 2,701 million in 1965-70.

In terms of value added 46% of the value added in the large scale-manufacturing sector originated in firms controlled by only 43 families. In banking, the degree of concentration was even greater than industry. For example, seven family banks constituted 91.6 percent of private domestic deposits and 84.4 percent of earning assets. For a detailed analysis of this phenomenon, see: Rashid Amjad: Private Industrial Investment in Pakistan, 1960-1970, London, Cambridge University Press, 1982.