Lecture 2

Overview of Pakistan Economy

Lecture Outline

1. Economic eras

2. Structural Changes In Pakistan

65 years of development

• Laying the Foundations:1947-1958 Features

– Predominantly agrarian, undeveloped and newly independent nation

– Little industry, few services and no infrastructure

– Adverse international conditions and precarious domestic situation

– Attempts of bureaucracy to keep Pakistan on its feet

– Lack of capital

– Trade surplus

The Decade of Development:1958-1968

• Achievements

– Considerable economic growth and development

– Significant leaps were made in industrial and agriculture production

– Model Capitalist Economy

– High growth rate in manufacturing sector

– Increase in exports

– Progress in agriculture sector

• Policy Failures

– Increased disparities in incomes

– Concentration of economic prosperity

– Social sectors were neglected

– Little or no increase in real wages

– Trade was highly controlled and closed

– Distortion of local markets b/c of overvaluation of exchange rate

The Decade of Development:1958-1968

The bad Luck Years:1971-1977

• Achievements

– Foundations for future growth and development

– Basic industries were setup

– Base for a capital goods industry

– Middle East boom

– Illiberal economic policies

– Foreign exchange earnings doubled because of devaluation

• Failures

– Events beyond control affected economic program of this era

– Downward trend in growth

– Nationalization

– Cotton crops failure and floods affected Pakistan’s exports

– Crisis in balance of payments

– Devaluation of Pakistani rupee

The bad Luck Years:1971-1977

The second Military Government 1977-1988

• Achievements

– Liberal economic policies

– Higher industrial growth

– Second economic revolution because of remittances from the Middle East and aid from abroad

– Emergence of middle class

• Policy Failures

– Martial rule inflicted deep rooted damage to Pakistani society

– Drugs and arms culture in Pakistan

– Confusion of policies

– Underutilization of resources (foreign aid and remittances)

The second Military Government 1977-1988

The Era of Structural Adjustment:1988-1998

• Achievements

– Return of democracy

– Era of structural adjustment

– Economic liberalization and stabilization

– Privatization

– Reduction in tariff rates to increase exports

• Main focus– Fiscal deficit reduction to 4% of GDP told by IMF

– High taxation and reduced public expenditure

– Indirect taxes imposed and instead of decreasing non development or defense expenditure, development budget decreased (9.3% of GDP in 1981 to , < 3 % in 2000 onwards

– 1996/97 dev budget slashed from Rs. 105 billion to Rs. 85 billion

– Decrease in tariff rates 125% 1992 to 25% today

– Continuous rise in prices of utilities (gas, electricity, and petrol)

– Selling off state owned enterprises, continuous devaluation of Pak rupee

• Policy Failures– Macro economic crisis

– High taxation

– Low spending in social sectors

– Trade reforms resulted in deindustrialization

– Continuous devaluation in the Pakistani rupee

– Increased in the administrated prices of utilities

– High inflation rate

– Unemployment

– Privatization without proper policy

– Loss of sovereignty for the Pakistani state and its people

The Era of Structural Adjustment:1988-1998

Economic Situation:1998-2004• Features

– Acceleration in economic growth

– Increase in industrial production

– Rise in exports earnings

– Strong upsurge in investment

– Pre-payment of high cost external debt

– Increase in foreign exchange reserve

– Strategic re-entry into the international capital markets

– Increase in spending on Education

– Increase in FDI

2005-2007

The economy picked up further in FY2005,

-with GDP growth coming in at over 8.4% for the first time in 8 years.

With sound macroeconomic fundamentals achieved and key sectors strengthened by reforms implemented in the 4-5 years,

the economy was well positioned to sustain 7% or more growth in the medium term.

ADB’s Asian Development Outlook – 2005

Sect oral Contribution to the GDP growth (%points)

Sector 2006-07

2007-08

2008-09

2009-10

2010-11

Agriculture

0.92 0.23 0.86 0.13 0.26

Industry 2.28 0.38 -0.03 2.09 -0.02

Manufacturing

1.55 0.92 -0.69 1.01 0.55

Services

3.61 3.08 0.89 1.54 2.15

Real GDP (FC)

6.81 3.68 1.72 3.76 2.39

Structural Changes In Pakistan

• Structural Change

– Modern economics has given clear evidence that changes in levels of some basic magnitudes are generally associated with changes in composition, which imply STRUCTURAL CHANGE

Reasons of Structural Changes

• To modernize the economy

• To industrialize the economy

• To pace capital accumulation in the economy

Main Sources of Structural Changes

• Growth of population (natural or immigrant)

• Application of technical and mechanized processes of production which change quantity of output per unit of input

• Technical progress which generates a continuous growth of real per capita incomes which implies a growth of demand for goods and services

Structural Changes • Pakistan today is less than half of the country it was in 1947. The contribution made

by East Pakistan to Pakistan’s society and economy was huge.

• Pakistan is basically an agricultural country is no longer true. The services sector has replaced agriculture as the dominant sector of the economy, contributing almost half of GDP.

• Process and extent of Urbanization• In 1951 only 17% of West Pakistan lived in areas designated as Urban;

today estimate suggest that above 40* live in cities and towns.

• Emergence and consolidation of middle class

• The nature of exports from Pakistan has also changed dramatically.

• Feudalism in Pakistan died a very long time ago.

Pakistan: basic indicators,1947-2011

1951 1997 2011

Population (millions) 33.78 140 180.72

Contribution to GDP by sector(%)

i. Agriculture 53.2 24.2 21

ii. Manufacturing 7.8 26.4 12

iii. Others 39.0 49.4 67

An Economic and Social Agenda For Improvement

• Restore confidence

• Initiate and sustain technological change

• Foster stability and trust in social and cultural relationship

Recommended Books

• Ishrat Husain, “Pakistan: The economy of an elitist state”, Oxford University Press.

• Zaidi, S. Akbar,(1999),“Issues in Pakistan Economy”, Oxford University Press.

• Saeed, K. Amjad,(2007)“Economy of Pakistan, Institute of Business Management, Lahore.

• Economics Survey of Pakistan (Latest Issues), Economic Advisor’s Wing, Ministry of Finance, Government of Pakistan