Pakistan’s Economy: A Story of Resilience, Missed Opportunities and Future Prospects

Written By: Shahid Javed Burki

Most Pakistani specialists writing about the state of the country’s economy and its future prospects mostly deal with the present. Their emphasis is on the problems the country faces at this time and what needs to be done by the government to deal with them. This was also the focus of the quarterly reports issued by the International Monetary Fund when the country was subject to periodic reviews by the Washington-based agency. By and large the IMF was satisfied with the handling of the economy by the current set of managers. It was pleased that the Pakistani economy had pulled out from the plunge it took during the tenure of the government that held the reins of power from 2008 to 2013. The quarterly tranches of the program negotiated in July 2013 a couple of months after the present government took office continued to be released. The completion of the arrangement was an achievement since several previous IMF programs were canceled after the release of a few installments. There are, therefore, good reasons why policymakers in Islamabad are happy at what they have achieved in the three years they have been in power. The Fund expects that in the next few years the rate of economic growth could approach 5 per cent a year.

 

It is my belief that the country can do much better than implied in the analyses by the IMF. With good management and some luck it could begin to approach the rates of growth that have become common for the nations of the Asian continent. History is both a guide as well as a pointer to the future. Looking at it that way leads to the type of analysis economists call “path dependence”.

My approach in this essay will be different. Rather than focusing on the present I will read the past; by looking at the 70-year old history of the Pakistani economy, I will draw some lessons that could be applied to the future. It is my belief that the country can do much better than implied in the analyses by the IMF. With good management and some luck it could begin to approach the rates of growth that have become common for the nations of the Asian continent. History is both a guide as well as a pointer to the future. Looking at it that way leads to the type of analysis economists call “path dependence”.


What does Pakistan’s rich economic history tell us about the present as well as the future? Looking at the past we notice several attributes that have enormous relevance for the making of policy for the future. First, the country and its people have shown great resilience and fortitude in dealing with a series of problems that have hit them repeatedly. pakeconomy.jpgMost were successfully dealt with and in the way they were handled left deep impressions on the state of the economy. Second, policymakers often chose easy ways to find the resources needed to grow the economy. Third, they found it hard to break from the past when sustained progress could only be ensured by moving along different paths. Fourth, those in power often did not appreciate the opportunities available outside the country. Fifth, the policymakers did not fully factor in their country’s enviable location in thinking about the future. Sixth, not enough attention was paid to making the country’s rich human resource; an important determinant of economic growth and social betterment. And seventh, the country’s rich agricultural endowment was not used to produce rapid economic growth and increase exports. Long treaties can be written about each of these attributes; I will, however, cover them quickly and briefly.

 

According to estimates by the World Bank, water productivity is very low in Pakistan. The institution measures it in terms of what it calls “crop-per-drop” according to which Pakistan produces one dollar worth of output per cubic feet of water compared to two dollars for India, four for Indonesia, nine for China and 93 for Germany. Significant changes in the pattern of cropping could measurably increase productivity and increase the country’s export earnings.

There is very little recognition about the exceptionally difficult circumstances in which Pakistan was born almost 70 years ago. The country had nothing: there was no capital city, no government, no currency, no central bank, not much of a banking sector, very little industry, and great deal of poverty. On top of all this, eight million refugees, mostly destitute, arrived from India. They had to be accommodated in a population reduced to only 24 million as a consequence of the departure of six million Hindus and Sikhs who left for India. When Pakistan took its first population census in 1951, one out of every four of its citizens was born outside the country. Human history has no other example of the absorption of so many by so few. And yet this was done within a matter of months.


But there was more to come. India, Pakistan’s sibling state, made it hard for the new, predominantly Muslim state, to stand on its economic feet. New Delhi refused to release to Pakistan what were called the “sterling balances”. This was the amount of compensation London agreed to pay the Indian colony for contributing to the war effort. Pakistan’s share was left with India since Karachi, the country’s then capital, did not have a central bank to receive the amount. When Pakistan had made the needed arrangements, New Delhi under Prime Minister Jawaharlal Nehru refused to send the money across. It took a visit by Liaquat Ali Khan, Pakistan’s prime minister and Ghulam Muhammad, minister of finance and intervention by Lord Louis Mountbatten and Mahatama Gandhi before the amount owed to Pakistan arrived in Karachi. This story is well told by the historian Stanley Wolpert who has written extensively on various aspects of South Asia’s history.


But the Nehru administration went even beyond to hurt Pakistan. It cut off the supply of electricity to Lahore that was partly depended on a coal-fired plant that was now on the Indian side of the border. It began to reduce the flow of water into Pakistan from the canal headworks that were now in India. The final blow came in the 1949 when India declared a trade embargo to punish Pakistan for not devaluing its currency with respect to the United States dollar as was done by all other members of the British Commonwealth. “India will not pay 144 of its rupees for 100 of those of Pakistan,” said Sardar Vallahbhai Patel, the powerful home minister in the Nehru cabinet, and closed the border with its neighbor.


Thus jolted Pakistan began the search for external support to purchase the goods and commodities it needed to work its economy. Two things happened to assist the country in its time of need. The Korean War that began in 1950 and lasted for three years created a large demand for some of the commodities Pakistan had in surplus: jute, cotton and leather exports shot up. Additional export earnings could be spent on the critically needed imports. The second development was the realization by the United States that it needed to work with other nations to stop the advance of Communism into Europe and Asia. The Korean War stopped the Communist advance at the 38th Parallel that became the border between North and South Korea. The war was won by the United States with the help of a dozen and half members of the United Nations. With that as its experience, Washington launched other multilateral defense agreements.


Pakistan became an active member of two of the three organizations sponsored by the United States – the Central Treaty Organization (CENTO) and the Southeast Treaty Organization (SEATO). Thus allied with the United States, Pakistan received large doses of economic and military assistance. Much of the economic miracle of President Ayub Khan when the gross domestic product increased at the rate of almost 7 per cent a year was supported by American aid. The rate at which the Pakistani economy expanded was twice as that of neighboring India. Two other periods of high rates of growth followed in the 1980s and 2000s and both were aided by foreign capital flows. A pattern had been set: for Pakistan to grow its economy it needed external capital flows. Pakistan has found it difficult to reduce the dependency on foreign aid. Economic performance depended on the content of foreign policy. This twinning had enormous consequences for the way Pakistan developed. A fundamental reform of fiscal management is needed to have Pakistan rely more on its own resources for developing the economy.


Development thinking in Pakistan has never recognized its enviable location. The country sits on top of India and also is a link between China and the energy rich countries of the Middle East. To the north are five landlocked countries of Central Asia with large land masses, small populations and enormous mineral wealth. Peter Frankopan, in his work on this region, paints well its importance. “It is a region characterized in western minds as backward, despotic and violent… For all their apparent ‘otherness,’ however, these lands have always been of pivotal importance in global history in one way or another, linking east and west, serving as melting-pot where ideas, customs, and languages have jostled with each other from antiquity to today. And today the Silk Roads are rising again – unobserved and overlooked by many.” The China-Pakistan Economic Corridor is a part of this adventure.


Connecting the country to these asset-rich places was never thought of as one of the major determinants of economic growth. This has happened only very recently with the last year launch of the Beijing funded CPEC. Recently there has been much talk about Pakistan’s isolation. It is correct to worry about this but breaking out of it should mean more than courting the West. It should include a rethink of relations with Central Asia. A very rough calculation suggests that properly executed over a decade, the CPEC could add a percentage and a half points to the country’s GDP growth by 2025.


Pakistan’s demographic problems are well known as is the failure of the past governments to commit much to developing the large and growing human resource. The population is poorly educated and poorly trained. Since it is very young – half of Pakistan’s almost 200 million people are below the age of 23 – turning public attention to them would create a potentially rich human asset. My rough estimates indicate that in the megacities of Karachi, Lahore and Islamabad-Rawalpindi some 75 percent of the population is below the age of 23. This is a highly restive segment of the population that needs to be catered for with some urgency. To use a cliché: Pakistan needs to develop the human resource on a war footing, with full engagement by both the public and private sector.


Agriculture is another ignored asset in the country. Pakistan has the largest contiguous irrigated area in the world. It was initially developed by the British in the late 19th and early 20th centuries to provide food grains to the food short areas in the east of its Indian colony. That objective was obtained and once the virgin lands of the Punjab and Sindh were in full production, famines in East India were largely controlled. But Pakistan has remained stuck in this history. It has not used its water resources to full advantage. According to estimates by the World Bank, water productivity is very low in Pakistan. The institution measures it in terms of what it calls “crop-per-drop” according to which Pakistan produces one dollar worth of output per cubic feet of water compared to two dollars for India, four for Indonesia, nine for China and 93 for Germany. Significant changes in the pattern of cropping could measurably increase productivity and increase the country’s export earnings.


These then are some of the features that should figure in the badly needed growth strategy. This should be based on self-reliance; use of the country’s location to better interact with the world outside; improve the quality of the human resource so that the youth can feed into the development and modernization of the economy, and tap the vast potential of the sector of agriculture sector. There is no reason why such a strategy will not help Pakistan to achieve the “miracle rates of growth” attained by so many countries in Asia. But this will happen only with good economic governance.

 

The writer is a former caretaker finance minister and served as vice-president at the World Bank.

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1 Peter Frankopan, The Silk Roads: A New History of the World (London, Bloomsbury, 2015) pp. 511-513.
 
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