Exports, Politics, And Economic Development

Pakistan, 1970-1982

John Q Adams

• Publisher: Routledge
• Year: 2019
• Print ISBN:
  9780367170196
• eBook ISBN:
  9780429717017
• Topic: Politics & International Relations
• Subtopic: Asian Politics
• Index: Politics & International Relations

During the 1970s, Pakistan's export policies went through two major transformations as a result of realignments among its internal interest groups, bringing about significant changes in export composition and performance. As leader of a coalition of labor, small business, and other mass interests, President Z. A. Bhutto supported a more equitable d

Part I
The Political Basis of Pakistan’s Economic Policy

1
Economic Development, Policy, and Politics, 1960–1971

Between 1960 and 1969, Pakistan’s economy grew rapidly and experienced considerable structural change. The ensuing two-year period was characterized by political disturbances which adversely affected the growth process. From 1972 to 1977, although structural change continued, the country passed through a period of slow or negligible growth under radical social and economic reforms. After 1978, growth again resumed under reformulated policies. This chapter reviews economic performance during 1960–1971, and the next chapter surveys 1972–1977 and 1977–1982. In each phase, Pakistan followed different economic policies because of underlying shifts in political constellations. The consequences of those policies were felt in both the economic and political realms. In turn, the stresses of economic growth and structural changes led to calls for new policies and new leadership.

Economic Growth and Structural Change, 1960–1971

At the time of its independence in 1947, Pakistan was predominantly an agricultural economy with a very small industrial base. Agriculture contributed over 60 percent of gross national product, while the share of manufacturing was only 6 percent. (¹) The split with India had deprived Pakistan of industrial markets for its two most important cash crops: cotton in West Pakistan and jute in East Pakistan. Infrastructure was poorly developed. Except for Karachi, Dacca, and Lahore, the country lacked major cities and exhibited low levels of literacy. Prior to 1960 the economy grew at the low annual average rate of 2.5 percent and, with a rate of population growth of 2.4 percent, per capita income was static. Agricultural output was subject to wide fluctuations because of floods and cyclones. The main impetus to growth was provided by the small manufacturing sector, which grew at an average annual rate of 5.3 percent between 1955 and 1960.

After 1960, growth accelerated in all sectors of the economy. During the second plan period (1960/61–1964/65), gross domestic product rose at 6.6 percent annually. Agriculture grew at 3.7 percent and manufacturing at 11.6 percent. Construction expanded at a vigorous 22 percent per year. (²) Investment rose strongly, reaching 21 percent of gross domestic product in 1965. This increase in investment was made possible by the government’s ability to mobilize domestic savings and by a considerable inflow of external assistance. Domestic savings as a proportion of gross domestic product increased from 5 percent in 1961/62 to 13 percent in 1964/65.

In the mid-1960s Pakistan was widely regarded as a success story. Papanek said that Pakistan was “one of the half dozen countries in the world with the greatest promise of steady development. In the face of its pitiful resources and capital endowment at independence and in comparison with other countries, Pakistan’s performance was outstanding.” (³) Despite such enthusiasm, growth weakened in the third plan period (1965/66–1969/70) although there was some variation in performance across sectors. Gross domestic product rose at 6 percent per year. Agricultural growth was more rapid at 5.6 percent, but manufacturing growth decreased to 8 percent and construction growth fell to 5.7 percent. (⁴) The apparent strength of the agricultural sector was based, in fact, on just one very favorable cropping year. Table 1.1 shows that by 1969/70 gross investment had fallen to 16 percent of gross domestic product. Foreign contributions to saving were down, although domestic savings had remained stable. War with India in September 1965 had disrupted the flow of foreign aid while domestic savings and investment were increasingly unsettled by political uncertainty.

While the role of foreign aid in the big push of the early 1960s should not be overestimated, since indigenous factors were crucial, there is little doubt that aid was an instrumental factor. Table 1.2 shows the dramatic increase—in fact, almost a tripling—of foreign assistance between 1960 and 1965. Aid comprised 42 percent of developmental expenditure and covered over one-half the import bill. By the late 1960s, however, aid was proportionately less important in national income, capital formation, and import capacity, although it remained at about the same absolute level as in 1965.

Table 1.1 West Pakistan’s Investment and Savings Rates: 1959/60 - 1969/70 (percentage of GDP at current market prices)

	1959/60	1964/65	1969/70
Gross investment ^(a) (Including changes in stock)	11.6	21.4	15.9
Foreign savings ^(b)	6.6	8.3	2.6
Domestic savings ^(c)	5.0	13.1	13.3
Public savings	−1.4	0.2	1.0
Private savings	6.4	12.9	12.3
Gross fixed investment ^(d)	11.4	21.3	14.4
Public sector	5.6	9.8	7.0
Private sector	5.8	11.5	7.4

Source: Gilbert Brown, “Pakistan’s Economic Development After 1971,” in Lawrence Ziring, Ralph Braibanti, and W.Howard Wiggins. eds., Pakistan:TheLongView (Durham, North Carolina: Duke University Press, 1977), p. 182.

(a) Gross investment = Foreign savings + Domestic savings.

(b) Foreign savings = Gross investment− Domestic savings.

(c) Domestic savings = Public savings + Private savings.

(d) Gross fixed investment = Public sector + Private sector.

Table 1.2 Foreign Aid Compared with Income, Development Expenditure, and Imports

	1960	1965	1967	1968
Foreign Aid (Rs. million)	1,068	3,105	3,334	3,570
Aid as proportion of GNP (%)	3.4	7.5	5.7	5.8
Aid as proportion of development expenditure (%)	38.1	42.2	37.7	34.0
Aid as proportion of imports (%)	31.1	55.8	47.0	49.8

Source: I. Brecher and S. A. Abbas, ForeignAidinPakistan (Cambridge: Cambridge University Press, 1972), p. 24.

Export Growth, 1960–1971

The growth of the period 1960–1971 was accompanied by substantial changes in the composition of gross domestic product. The high rates of industrial expansion almost doubled the share of manufacturing in gross domestic output to 11 percent. The share of the agricultural sector declined from 60 percent in 1960 to 55 percent in 1970. These structural changes, and the rapid growth of the economy, were reflected in the expansion of exports, as illustrated in table 1.3. Between 1955 and 1968, total exports rose at an annual compound rate of growth of 8 percent. Primary exports consisting of cotton, rice, wool, and fish grew at only 3 percent during this period, and their share in total exports dropped from 90 percent in 1955 to 52 percent in 1968. In contrast, manufactured exports, consisting primarily of cotton and other textiles, leather goods, and metal products expanded at a compound annual rate of 24 percent, with their share rising from 6 percent in 1955 to 43 percent in 1967/68.

Rapid industrialization and growth of exports occurred with the help of specific governmental policies. (⁵) Pakistan followed a highly protective industrial policy to encourage import substitution. Incentives were provided in the forms of a highly graduated tariff structure, import licensing, and quantitative restrictions on imports. At the same time, elaborate stimuli were provided to encourage the export of manufactured goods. These included rebates of custom and excise duties on exported goods, credit guarantees to exporters, and tax holidays to industries which exported a proportion of their goods. The centerpiece of the incentives program was the Export Bonus Scheme, in operation from 1959 to 1972, which created a system of multiple exchange rates to favor manufactured exports. The Export Bonus Scheme provided an exporter with a proportion of the foreign exchange his exports earned. A Pakistani exporter received a voucher against which he could import goods. The voucher was transferable and could be sold at a price determined in the market. In 1968, for example, exporters of raw wool, semi-processed goods, and finished manufactures could collect vouchers equal, respectively, to 20, 30, and 40 percent of their f.o.b. sales. The premium on bonus vouchers was around 150 percent of face value. (⁶)

Although the profusion of inducements encouraged the growth of the output and exports of the manufacturing sector, they generated inefficient resource use in industry and created a bias against exports of agricultural goods. Within the manufacturing sector

Table 1.3 West Pakistan’s Exports: 1955 - 1968 (millions of rupees)

resources were often attracted to high-cost industries dependent upon imported inputs. Guisinger and Lewis estimated effective rates of protection for thirty industries and found negative value-added for three cases, implying that the world market value of material inputs exceeded the value of output. Others were also critical of the import-substitution policy. (⁷) Pakistan’s industries were using processes which were economically inefficient, when judged by world market prices for inputs and output. (⁸) Since domestic prices had become distorted by tariffs, quantitative restrictions, and multiple exchange rates, economically inefficient choices of processes and techniques by private businessmen became real possibilities. In effect, producers could purchase capital inputs at well below the opportunity cost to the economy since they were direct licensees for imported goods. An incentive was thereby created to use excessively capital-intensive techniques. Khan found that the capital-labor ratio in many industries in Pakistan was higher than in countries where labor was far less abundant. (⁹)

Guisinger and Lewis showed that agriculture was at a considerable disadvantage relative to manufacturing. In 1963/64, the agricultural sector paid approximately Rs. 8 when it purchased $1 of manufactured goods, while it received about Rs. 5 for its sale of $1 of agricultural goods. (¹⁰) Hufbauer noted the high social cost of the policy of favoring industrial exports. He found that the resource cost of foreign exchange earned by industrial exports greatly exceeded that earned by agricultural exports. (¹¹)

Income Inequalities and Political Stresses

The increased skewedness of Pakistan’s development towards industrial production and exports had regional dimensions. The national process of growth and structural change heightened income inequalities between East and West Pakistan and resulted in a worsening of the income distribution within each region. (¹²) Economic policy in Pakistan under Ayub Khan had been concerned primarily with accelerating the rate of growth of gross national product. This policy was pursued consciously, with extraordinary determination, and with a disregard for other social goals. It could be followed, at least for a time, because of the military’s grip on power and the willingness of the civil service to im...

Table of contents

• Cover
• Half Title
• Dedication
• Title
• Copyright
• Contents
• List of Tables
• List of Figures
• Abbreviations and Conversion Factors
• Preface and Acknowledgements
• Introduction
• Part I: THE POLITICAL BASIS OF PAKISTAN’S ECONOMIC POLICY
• PART II: THE GROWTH, COMPOSITION, AND DIRECTION OF PAKISTAN’S EXPORTS
• Selected Bibliography
• Index