06-04-2006, 11:37 AM
Sunday, June 04, 2006
VIEW: Economic growth under military rule âAhmad Faruqui
Even though Pakistanâs economy has grown faster during periods of military rule, it is unlikely that this would have taken place without large infusions of foreign aid. Such aid has strengthened the militaryâs determination to hold on to power. Military rule has invariably heightened inter-provincial tensions and threatened the polity. This has led to lower economic growth rates during succeeding civilian administrations
Itâs budget season in Islamabad and the clear message in the governmentâs pre-budget presentations is that it has delivered on its economic agenda. The hidden message is that military rule is best for the country. Does this jibe with historical record?
During its first half century, Pakistanâs economy grew at an average rate of 5.5 percent, as measured by the year-to-year growth rate in Gross Domestic Product (GDP). But there was much year-to-year volatility in growth, caused by bad weather, pest infestations, external economic shocks and mismanagement. This volatility (measured by the standard deviation of annual growth rates) was almost half the size of the average growth rate: 2.1 percent. Per capita GDP growth averaged 2.4 percent, and its volatility was almost of equal size at 2.2 percent.
The economyâs performance varied quite a bit by decade:
The (civilian) fifties. The growth pattern was poor and volatile. Within a few months of independence, the first war (with India over Kashmir) erupted. The political situation was unsettled for much of the decade due to domestic squabbling among politicians. On average, GDP grew at three percent a year, barely higher than the rate of population growth. Per capita GDP registered a miniscule rate of growth of about half a percent a year.
The (militarised) sixties. Growth rates picked up enormously, attaining the highest levels that the country has yet seen. GDP grew at 6.8 percent a year and per capita GDP grew at 3.8 percent a year. Unfortunately, income inequalities grew as well and this, coupled with the let down in expectations that followed the inconclusive war with India over Kashmir in 1965, led to massive social unrest that unseated the military government of Field Marshal Ayub Khan.
The (hybrid) seventies. Growth dipped in response to the protracted civil war in East Pakistan, the subsequent war with India and the secession of the eastern province, the first and second oil price shocks, and the statist economic policies of Zulfikar Ali Bhutto. GDP growth averaged 5.2 percent and per capita GDP growth averaged 2.1 percent.
The (militarised) eighties. Economic liberalisation policies of Zia ul Haqâs military regime stimulated economic growth. The economy grew at 6.5 percent with per capita GDP growing at 3.2 percent. Large amounts of US foreign aid flowed into Pakistan to help the army mount a counterinsurgency against the Soviets in Afghanistan. Substantial remittances from Pakistanis working in the Middle East provided another boost. Poverty levels declined. However, due attention was not paid to managing the macro-economy and the budget deficit averaged 7.1 percent of GDP.
The (civilian) nineties. There was a significant deterioration in the economic performance due to the fallout of the Soviet-Afghan war and decline in remittances from the Middle East. GDP growth fell to 4.1 percent and per capita GDP growth to 1.1 percent. The sharp slowdown in economic growth was accompanied by mounting financial difficulties, increasing social tensions, and growing governance problems. Economist Parvez Hasan commented, âThe pattern of Pakistanâs development with its heavy reliance on foreign savings, with its neglect of domestic savings, exports and investments in human capital, and continued high protection to industry was essentially unsustainable.â
Prima facie, growth was higher in the militarised decades. In October 1999, the military took over for a fourth time. In the first year (1999/00), GDP growth was 3.9 percent. During the second year, it dropped to 1.8 percent. In the third year, the 9/11 attacks took place but the economy grew at 3.1 percent. After an initial slump, there was a resurgence of economic growth thanks to a massive US aid programme, which provided $91 million in the first year and $706 million in 2005.
The US forgave all bilateral debts to Pakistan, helped reschedule debts involving multinational lenders, provided billions in economic and military assistance, and encouraged international banks to provide even larger amounts of aid. As a result, Pakistanâs foreign debt declined from $47.8 billion to $30.3 billion (todayâs estimate). Foreign exchange reserves, boosted largely by the transfer of large sums of money from expatriate Pakistanis, rose to $12 billion.
In the fourth year (2002/03), the economy grew by 5.1 percent, in the fifth year by 6.4 percent and in the sixth year by 8.4 percent. In the current fiscal year, growth is projected to dip to 6.4 percent. Overall economic growth has averaged 5.9 percent per year (volatility of 2.4 percent) in the seven years of the Musharraf interregnum.
This performance, while in line with that of prior military regimes, is overshadowed by other factors. Much of the success is coming from foreign aid, one-time remittances from expatriates and cash raised by the ill-conceived and rushed privatisation programme that has the potential of turning Pakistan into Arabistan. The economy is over-heating, with inflation in the near double-digit range, and both the fiscal and current account deficits exceeding four percent of GDP.
Even if one accepts the governmentâs estimate of a 25 percent poverty rate, that leaves 40 million in Pakistan below the poverty line. In addition, while a small portion of the population has become quite wealthy, as evidenced by the opening of a Porsche dealership in Lahore, rising prices and taxes are squeezing the salaried class. On the social front, half the population is illiterate and women continue to face threats, not only to their civil liberties but also to their lives.
While several speakers at the recent Pakistan Development Forum praised the governmentâs reforms, a few noted that Pakistan had a history of boom-bust cycles. These pose a risk to the economic outlook and undercut Shaukat Azizâs prognostications of an eight percent growth rate over the next five years, much higher than the 6.1 percent rate being forecast by the Economist Intelligence Unit for next year.
Forecasts of economic growth in the eight percent range are un-sustainable, given Pakistanâs low rates of savings and investment, its dependence on drought-and-pest sensitive agriculture and its exposure to high oil prices.
Even though Pakistanâs economy has grown faster during periods of military rule, it is unlikely that this would have taken place without large infusions of foreign aid. Such aid has strengthened the militaryâs determination to hold on to power. Military rule has invariably heightened inter-provincial tensions and threatened the polity. This has led to lower economic growth rates during succeeding civilian administrations, which are therefore blamed on the politicians, but whose roots can be traced back to the generals.
If the military wants to find a justification for its intervention in politics, it should look beyond the sphere of economics.
Dr Ahmad Faruqui is director of research at the American Institute of International Studies and can be reached at Faruqui@pacbell.net
VIEW: Economic growth under military rule âAhmad Faruqui
Even though Pakistanâs economy has grown faster during periods of military rule, it is unlikely that this would have taken place without large infusions of foreign aid. Such aid has strengthened the militaryâs determination to hold on to power. Military rule has invariably heightened inter-provincial tensions and threatened the polity. This has led to lower economic growth rates during succeeding civilian administrations
Itâs budget season in Islamabad and the clear message in the governmentâs pre-budget presentations is that it has delivered on its economic agenda. The hidden message is that military rule is best for the country. Does this jibe with historical record?
During its first half century, Pakistanâs economy grew at an average rate of 5.5 percent, as measured by the year-to-year growth rate in Gross Domestic Product (GDP). But there was much year-to-year volatility in growth, caused by bad weather, pest infestations, external economic shocks and mismanagement. This volatility (measured by the standard deviation of annual growth rates) was almost half the size of the average growth rate: 2.1 percent. Per capita GDP growth averaged 2.4 percent, and its volatility was almost of equal size at 2.2 percent.
The economyâs performance varied quite a bit by decade:
The (civilian) fifties. The growth pattern was poor and volatile. Within a few months of independence, the first war (with India over Kashmir) erupted. The political situation was unsettled for much of the decade due to domestic squabbling among politicians. On average, GDP grew at three percent a year, barely higher than the rate of population growth. Per capita GDP registered a miniscule rate of growth of about half a percent a year.
The (militarised) sixties. Growth rates picked up enormously, attaining the highest levels that the country has yet seen. GDP grew at 6.8 percent a year and per capita GDP grew at 3.8 percent a year. Unfortunately, income inequalities grew as well and this, coupled with the let down in expectations that followed the inconclusive war with India over Kashmir in 1965, led to massive social unrest that unseated the military government of Field Marshal Ayub Khan.
The (hybrid) seventies. Growth dipped in response to the protracted civil war in East Pakistan, the subsequent war with India and the secession of the eastern province, the first and second oil price shocks, and the statist economic policies of Zulfikar Ali Bhutto. GDP growth averaged 5.2 percent and per capita GDP growth averaged 2.1 percent.
The (militarised) eighties. Economic liberalisation policies of Zia ul Haqâs military regime stimulated economic growth. The economy grew at 6.5 percent with per capita GDP growing at 3.2 percent. Large amounts of US foreign aid flowed into Pakistan to help the army mount a counterinsurgency against the Soviets in Afghanistan. Substantial remittances from Pakistanis working in the Middle East provided another boost. Poverty levels declined. However, due attention was not paid to managing the macro-economy and the budget deficit averaged 7.1 percent of GDP.
The (civilian) nineties. There was a significant deterioration in the economic performance due to the fallout of the Soviet-Afghan war and decline in remittances from the Middle East. GDP growth fell to 4.1 percent and per capita GDP growth to 1.1 percent. The sharp slowdown in economic growth was accompanied by mounting financial difficulties, increasing social tensions, and growing governance problems. Economist Parvez Hasan commented, âThe pattern of Pakistanâs development with its heavy reliance on foreign savings, with its neglect of domestic savings, exports and investments in human capital, and continued high protection to industry was essentially unsustainable.â
Prima facie, growth was higher in the militarised decades. In October 1999, the military took over for a fourth time. In the first year (1999/00), GDP growth was 3.9 percent. During the second year, it dropped to 1.8 percent. In the third year, the 9/11 attacks took place but the economy grew at 3.1 percent. After an initial slump, there was a resurgence of economic growth thanks to a massive US aid programme, which provided $91 million in the first year and $706 million in 2005.
The US forgave all bilateral debts to Pakistan, helped reschedule debts involving multinational lenders, provided billions in economic and military assistance, and encouraged international banks to provide even larger amounts of aid. As a result, Pakistanâs foreign debt declined from $47.8 billion to $30.3 billion (todayâs estimate). Foreign exchange reserves, boosted largely by the transfer of large sums of money from expatriate Pakistanis, rose to $12 billion.
In the fourth year (2002/03), the economy grew by 5.1 percent, in the fifth year by 6.4 percent and in the sixth year by 8.4 percent. In the current fiscal year, growth is projected to dip to 6.4 percent. Overall economic growth has averaged 5.9 percent per year (volatility of 2.4 percent) in the seven years of the Musharraf interregnum.
This performance, while in line with that of prior military regimes, is overshadowed by other factors. Much of the success is coming from foreign aid, one-time remittances from expatriates and cash raised by the ill-conceived and rushed privatisation programme that has the potential of turning Pakistan into Arabistan. The economy is over-heating, with inflation in the near double-digit range, and both the fiscal and current account deficits exceeding four percent of GDP.
Even if one accepts the governmentâs estimate of a 25 percent poverty rate, that leaves 40 million in Pakistan below the poverty line. In addition, while a small portion of the population has become quite wealthy, as evidenced by the opening of a Porsche dealership in Lahore, rising prices and taxes are squeezing the salaried class. On the social front, half the population is illiterate and women continue to face threats, not only to their civil liberties but also to their lives.
While several speakers at the recent Pakistan Development Forum praised the governmentâs reforms, a few noted that Pakistan had a history of boom-bust cycles. These pose a risk to the economic outlook and undercut Shaukat Azizâs prognostications of an eight percent growth rate over the next five years, much higher than the 6.1 percent rate being forecast by the Economist Intelligence Unit for next year.
Forecasts of economic growth in the eight percent range are un-sustainable, given Pakistanâs low rates of savings and investment, its dependence on drought-and-pest sensitive agriculture and its exposure to high oil prices.
Even though Pakistanâs economy has grown faster during periods of military rule, it is unlikely that this would have taken place without large infusions of foreign aid. Such aid has strengthened the militaryâs determination to hold on to power. Military rule has invariably heightened inter-provincial tensions and threatened the polity. This has led to lower economic growth rates during succeeding civilian administrations, which are therefore blamed on the politicians, but whose roots can be traced back to the generals.
If the military wants to find a justification for its intervention in politics, it should look beyond the sphere of economics.
Dr Ahmad Faruqui is director of research at the American Institute of International Studies and can be reached at Faruqui@pacbell.net