THE ECONOMY Since independence in 1947, Pakistan’s gross domestic product (GDP) has increased at a rate of 45 percent a year- one of the highest rates of growth in GDP in the developing world But the performance of the economy during this period was not uniform; there were periods of exceptionally high growth rates as in the 1960s and the early 1970s, and periods of relative sluggishness, as in the 1950s, the early 1970s, and the 1990s The governments were also not consistent in their approach to economic development and in the choice of the sectors to be given special attention From 1947 to 1958, governments depended on the private sector to develop the economy The trade dispute with India in 1949 caused a great deal of hardship in Pakistan There was a serious scarcity of goods of daily consumption, which Pakistan used to import from India but now had to buy from other sources The country did not have the foreign exchange to pay for these imports, however Rapid industrialization, therefore, became a high priority The government encouraged the merchant class to invest in industry

This encouragement took the form of subsidized credit, high tariffs against imports, and public investment in physical infrastructureThe government’s orientation toward economic development changed with the establishment of the first military government in 1958 under General Ayub Khan Ayub Khan believed that without rapid economic growth, he would not be able to solve the country’s basic economic problems: persistent poverty and dependence on foreign capital for investment The economy responded to a number of initiatives taken by his government by growing at an unprecedented rate The GDP grew at 67 percent a year during the Ayub Khan period (1958-1969) By the time Ayub Khan was forced out of office, Pakistan had achieved near self-sufficiency in food Having established an efficient consumer industry, it had also made impressive strides in such producer-goods industries as cement, steel, and machinery The private sector continued to lead the effort in industrialization Another, but at that time little-noticed, accomplishment was the development of the finance sector in both the private and public parts of the economy During the Ayub period, private commercial banks expanded their penetration of the economy, while specialized investment banks in the public sector began to function to fill the gap left by private entrepreneurship

The third major shift in the government’s approach toward economic development occurred in the early 1970s when Zulfikar Ali Bhutto and his Pakistan People’s Party assumed power Large parts of the economy were brought under the control of the government through nationalization This was a wrenching structural change for the economy, for which the country paid a heavy price The rate of growth slowed down to about the rate of population increase Had the economies in the Middle East not taken off as a result of the “oil boom” produced by the sharp jump in the price of oil, Bhutto’s socialist experiment would have resulted in a sharp increase in the incidence of poverty With the Middle East offering millions of jobs for the unskilled and semi-skilled workers of Pakistan, however, the poor began to receive billions of dollars of remittances from relatives who had migrated to the Middle East They used this largesse to meet their basic needs and to invest in the development of their human capital With the country going under martial law once again in 1977, the government was prepared to bring the private sector back as a major player in the economy However, President Zia ul-Haq, Pakistan’s new military leader, did not have the political strength to be able to dismantle the public sector economy that Bhutto had erected Labor and the “economic bureaucrats” were not prepared to countenance the swift privatization of the “taken over” enterprises Operating even under these constraints, the government of Zia ul-Haq succeeded in returning the economy to the rate of economic growth achieved during the period of Ayub Khan

Industrial growth, which had stagnated under Zulfikar Ali Bhutto, significantly contributed to the economic revival The end of military rule in 1988 and the reintroduction of democracy brought about another radical change in thinking about economic growth and development First, the government of Benazir Bhutto (1988-1990), then the administration of Mian Nawaz Sharif (1990- 1993), then again the government of Benazir Bhutto (1993-1996), and the second Nawaz Sharif administration (1997-1999) were prepared to allow a great deal of space to both domestic and foreign private initiative They were also able to overcome the resistance of labor and “economic bureaucrats” to begin the process of privatization of the economic assets that still remained in the hands of the government All four administrations actively encouraged foreign capital to move into the sectors that had been starved of investment for more than a decade and a half These positive developments notwithstanding, the economy suffered during this period, mostly because of poor governance There was widespread corruption involving senior politicians and public servants The rapid change of political administrations eroded business confidence, and private sector investment declined Most of the administrations in this period were highly profligate, spending large amounts of public money on projects with low or negative economic rates of return The result was a sharp slowdown in the rate of economic growth, rapid increase in the incidence of poverty, and significant setback to social development GDP increased at an average rate of 4

1 percent during the 1990s With the military back in power in October 1999 and General Pervez Musharraf as the head of the government, an administration of technocrats agreed to implement a program of economic stabilization with the support of the International Monetary Fund The new government adopted a conservative fiscal stance and brought runaway public expenditure under control Although GDP growth rate was sluggish in the first three years of President Musharraf’s rule, the government was able to lay the foundation for achieving sustained rates of growth in the future The economy began to pick up; in 2002-2003, GDP increased by 54 percent and in 2003-2004 by another 6.1 percent. The rate of GDP growth accelerated considerably in 2004-2005, reaching 8.4 percent. Following the terrorist attacks of 11 September 2001 on the United States and the subsequent lifting of a plethora of sanctions that had been imposed on the country to punish it for developing and testing nuclear bombs, large amounts of foreign aid began to arrive once again. Pakistan was being rewarded for having become the frontline state in the United States’ war against international terrorism. Remittances from Pakistanis working abroad also increased significantly. About a third of the increase in the rate of GDP growth was attributable to the increase in various types of capital flows. Much of Pakistan’s economic success in the period since independence occurred because of large influxes of foreign capital that came in mostly as foreign aid or as remittances sent home by Pakistanis working abroad. This foreign capital provided resources for attaining a reasonable rate of domestic investment. Pakistan cannot sustain a level of growth unless it begins to generate domestic resources for investment.

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