Main Features of the Political Economy of Pakistan

Shahid H. Raja
12 min readJun 15, 2022

Introduction

The present is by and large an unfinished agenda of the past. What are the main features of the political economy of Pakistan that have been the result of the initial conditions Pakistan inherited as a colonial heritage in 1947 and the policies and strategies adopted by the 23 military regimes and political governments Pakistan witnessed in its 7 decades of the post-independence period? So where does Pakistan stand in terms of economic progress today regarding her position in 1947?

Has she done good, very good, bad? Has she been able to bring the desired structural transformation? Are these rates by their potential? How this growth can be compared to other countries which started the journey with the same initial conditions? What costs have been paid for this growth by the people? Have the fruits of growth been equitably distributed? Was this growth sustainable and indigenous or was it always spurred by the injections of foreign aid?

These are very pertinent but tough questions and there are no easy answers except saying ‘on the one hand and the other hand’ type of explanations for the growth performance. Here we do the same.

  1. Impressive but Inconsistent Growth Rates:

The average growth rate of Pakistan has been not bad, in fact fairly impressive for the last sixty-nine years of its existence as an independent country. Growth has occurred in brief spurts followed by sharply declining GDP growth. The average annual GDP growth during the 1950s was 4% which was followed by more than 6 % growth rates achieved during the 1960s. The early 1970s saw growth rates of around 4% which accelerated to 6% in the late 1970s/1980s to be followed by a sharp decline in the subsequent decade of the 1990s. Another spurt occurred during the 2000s when GDP growth reached 6percentcent, declining sharply to 2percentcent in the subsequent years and continuing

However, these rates have not been consistent throughout this period; very high rates in one year have been invariably followed by a dismal performance the next year and so on with few exceptions here and there. There is a structural inability to sustain growth over a long period.

2. Two Different Streams of Growth Rates:

Economists used to taunt India for growing at the Hindu rate of growth of 2.5% for several decades after independence. Pakistan can also share this taunt with a caveat; we have followed two different rates of growth-military rate of growth of more than 6 % and a civilian rate of growth of 4%. Relatively high GDP growth rates were achieved mainly during the three military regimes as all the above growth years corresponded with the military regimes while unfortunately, all the low growth years occurred during civilian rule.

Low growth rates of the 1950s corresponded with civilian rule while high growth rate es was achieved during the Military rule of the 1960s and so on. Spurred by the massive inflow of foreign aid, military and civilian, during these military hegemons, Pakistan’s economy witnessed phenomenal growth rates. However, at the end of each high-growth period, the structural constraints of a low domestic savings rate and slow export growth were manifested in fiscal and balance of payments pressures. It invariably induced a subsequent slowdown in GDP growth due to serious deficiencies in the basic economic structure of the country-uneven growth clusters, inadequate infrastructure, low human development, un-diversified export bag, etc.

3. Less than Potential Growth Performance:

In vertical analysis, comparing its performance with its potential, one feels saddened by lackluster performance. Despite alllacklustrecaps with which Pakistan started its journey it could have done far better than what the above facts and figures reveal. Countries grow in their momentum even if no conscious and deliberate efforts are made by the state in this respect. After all, Europe’s success owes it to the ingenuity of her businesses more than that of the state. Here the state devoted so many resources and efforts to accelerating this very rate of growth and still stands at where our 70 million children are out of school, percent cent living below the poverty cent, etc. It is not the question of a glass half full half empty. It is human tragedy and suffering, not a philosopher’s glass of water.

4. Impressive Socioeconomic Structural Transformation:

This growth performance has been accompanied by an all-rounded, though the not very spectacular, structural transformation of the political economy of the country. In the linear analysis, comparing today’s Pakistan with that of 1947, there has been a marked difference between the two stages of her economic development. Take any socioeconomic indicator and you will find impressive improvement, despite all the reservations about the inadequacy or accuracy of data collection and its interpretation. From a population of 35 million people in 1947 living in present-day Pakistan, now around 200 million people reside here, showing the improved healthcare facilities made available to them.

Her Gross Domestic Product has grown from US$ 5 Billion to more than US$ 270 Billion with a per capita income of US$ 1350 -not a mean achievement. In Purchasing Power Parity trait she is the 26th largest economy in the world with a per capita income of US$4500 which places her in the middle-income countries of the world. Agriculture now contributes only 19 per cent to this GDP as compared to more than 65 per cent in the 1950s. On the other hand, the industry is now more than 25 per cent while the services sector contributes around 55 %. Pakistan is now more urbanised with 45 per cent living in urban towns and cities as compared to less than per cent in the 1950s.

5. The futility of Cross Country Comparison of growth Performance:

Comparing Pakistan’s performance with other developing countries, particularly with those which started their journey at the same time as we did, is an exercise in futility because of the peculiar nature of the circumstances of each country. Such comparison is a good way of judging where we stand in terms of various socioeconomic indicators but does not give us any criterion to judge our policymakers for their ineptitude or to eulogize their good work. Maybe there were just fortuitous circumstances that pushed them up while we are hamstrung due to historical baggage or geographical misfortune. South Korea was developed as a province of colonial Japan that construct a first-class infrastructure, created institutions, and developed its human resources as per its standards. The development we inherited was the spin-off of the imperial imperatives of a colonial power that used us as a colony, not a province of the UK.

6. Widespread and Consistent Perception of Vulnerability:

Historically, Pakistan’s overall economic output (GDP) has grown every year since its Independence with one of the exceptional years of 1950–51 when it went into negative on account of bad agricultural sector performance. Despite this record of sustained growth, paradoxically Pakistan’s economy had always been construed as unstable and highly vulnerable to external and internal shocks. It looks all strange that an economy that has proved to be unexpectedly resilient in the face of multiple adverse events ranging from the dismemberment of the country in 1971 on the one hand to the various global financial crises 197 of 1998 and 2008/9 on the other should carry this stigma.

A country that fought four wars with India hosted four million refugees for two decades, remained under severe economic salt, ions, and is presently at war with terrorists, home-grown and foreign, for the last decade cannot be construed as a weak economy. Maybe the basic resilience of the Pakistan economy owes it to its thriving informal economy which according to different estimates ranges from 50% to 90% of the total economy. Maybe we pass judgment about the state of the economy based on the figures about the formal economy which are deceptive in the face of the above-mentioned unrecorded economy thriving in Pakistan.

7. Regime-neutral Consistent Economic Policies:

Pakistan has seen twenty-three governments in the past sixty-nine years, including fourteen elected or appointed prime ministers, five interim governments, and thirty-three years of military rule under four different leaders. Excluding the military and interim governments, the average life span of a politically elected government has been less than two years. The economic policy regime, on the other hand, has only changed twice in all of Pakistan’s history. The liberal private sector-led growth model that was put in place in the 1950s and accelerated in the 1960s was rolled back by Bhutto in the 1970s and became the socialist economic model. Since the rejection of this model in 1977 and the revival of the liberal model, the general thrust of economic policy has remained unaltered.

8. Persistent Obsession with Overvalued Rupee:

Whether civilian or military, almost every regime in Pakistan had an obsession with the over-valued and excessively rigid exchange rate. It started with the early development experience when Pakistan did not follow the Indian example of devaluing its currency vis a vis the British pound and it paid dividends thanks to the Korean War. Then it became a favourite strategy of policymakers throughout our history, supported by the importer’s class who always benefit from an overvalued exchange rate.

There is nothing sacrosanct about an inflexible exchange rate kept stable through artificial means. Simply put, a country has to find external markets for which its exportable surplus must be competitive. That demands either your costs of production should be lower or your cost of exchange (value of your currency) should absorb the increased costs and must be devalued to that extent. That is precisely one of the major reasons for Japanese growth as they kept on improving their competitiveness by adopting both methods short-term term measures cannot be continued in the long term if it has inherent structural flaws; rigid exchange rates have that flaw. Keeping currency unreasonably high distorts the economy so much that successors have to clean the mess left by them.

9. Agriculture Still Occupies a Prominent Place:

Although Pakistan is no more a predominantly agricultural country, thanks to the rapid strides it has made in its quest for industrial transformation, agriculture still occupies a prominent place in Pakistan’s overall economic structure. Being a pivot around which all other economic activities move, it is a major contributor to the country’s economy in terms of GDP, foreign exchange earnings, employment generation, the raw material for the manufacturing industry (primarily textile), and the most vital, national food security.

Pakistan’s survival and growth are directly dependent on its agriculture due to its socio-political interconnectedness and its economic and financial linkages; backwards and forward, horizontal and vertical. Its performance still dictates all our macro indicators — growth rates of the economy, poverty profile, foreign exchange reserves, inflationary pressures, etc. Given this positive association mentioned above, the pursuit of high growth with policy agriculture should be the cornerstone of Pakistan’s future development strategy.

10. Lopsided Structural Change in the Recent Past:

Structural change, a fundamental characteristic of growth and development, entails a gradual shift from the low-productivity sector (agriculture) to the high-productivity sector (manufacturing) in the middle stage of its economic development and finally to the services sector. In the case of Pakistan, the structural change has largely bypassed the middle s, stage, and Pakistan, from being a largely agrarian economy in terms of contribution to GDP, has become a services-led economy, with services accounting for more thanpercentcent of the GDP. Even though the services sector has become the main driver of growth in Pakistan, its potential contribution to employment is limited as compared to the manufacturing sector. Therefore, the agriculture sector continues to provide more than 40% of employment to the country’s labour force. This shows that a major part of the labour force is stuck in the low-productivity sector.

The service sector employs above 30 per cent ofthe labour force while the industrial sector employs only 20 per cent. Given the deteriorating performance of the manufacturing sector in the past years, most of the workers move from the agricultural sector to the services sector implying that the sector with the highest value addition has the lowest share in terms of employment. This is a matter of concern since the movement of labour from low-productivity sectors (agriculture) to relatively high-productivity sectors (such as manufacturing) is what generates the surplus that spurs growth.

11. Slow Speed of Specialisation:

Pakistan’s development has also been graduating towards specialisation at a very slow speed as against the empirical evidence of a ‘U’ shaped relationship between a country’s income level and its degree of product specialization- high at low levels of income per capita at the initial stages of development. But as the country becomes richer it tends to diversify to produce and export a wider range of relatively more sophisticated goods until its income reaches a level where specialization increases in technologically advanced and high-value-added goods. This implies that increased product diversification is a middle stage in the process of structural change and an important driver of the sustained growth of a country.

12. Limited contribution of Total Factor Productivity:

Another peculiar characteristic of the manufacturing sector has been the limited contribution of factor productivity to the growth process of Pakistan. During the period 1960–to 2005, about 80 per cent of Pakistan’s growth rate was explained by capital accumulation and labour expansion, whereas Total Factor Productivity or TFP contributed the remaining per cent of the overall growth. (TFP is a variable that accounts for effects in total output not caused by traditionally measured inputs of labour and capital. If all inputs are accounted for, then TFP can be taken as a measure of an economy’s long-term technological change or technological dynamism.)

According to a well-researched report, over the period 1998–2007, total factor productivity in the overall manufacturing sector increased by only 0.9 per cent. This implies that the growth of the manufacturing sector has been mainly driven by growth inputs i.e., labour and capital, and the contribution of total factor productivity has been fairly low. This evidence suggests that Pakistani firms have consistently failed to replace less productive assets with more productive ones

13. Private Sector as Main Driver of Growth:

Despite the active role played by the state in the economic development of the country, the initiative in driving the economy can be credited to the private sector. The agricultural sector, representing 20 per cent of the GDP, is owned and managed by private farmers. Manufacturing, with a few odd exceptions, is under the control of private firms. Wholesale and retail trade, transportation (except for railways and Pakistan International Airlines), personal and community services, finance and insurance, ownership of dwellings, and the construction sector all fall within the purview of the private sector.

Only public administration, defence services, and public utilities are directly managed and operated by the government. Imports and exports of goods and services are also privately managed. A rough approximation would indicate that goods and services produced, traded, and distributed by the private sector amount to 90 per cent or more of thenational income while the government directly or indirectly owns, manages, controls, or regulates the remaining 10 per cent of the national income. So it is the strength of private initiative, with all its flaws, operating in a relatively liberal policy environment, which has been the main driver of long-term economic growth in Pakistan.

From the book “Pakistan Affairs: 25 Essays”, published by Amazon and available at

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