2: AYUB’S ERA
1958-1968
Lecture 3
Hamna Ahmed
Introduction



Military take over by General Ayub Khan in
October 1958
It brought about a new era for development in
Pakistan
There had been considerable deterioration in the
economic and political situation in the country
Introduction

Economic and social reforms were high on Ayub’s
agenda
 These
reforms included economic planning and
providing basic needs such as food to the overall public
of Pakistan.
Introduction

Large increase in flow of foreign assistance due to:
 Domestic
political stability
 Strong
political allignment with US through Pakistan’s
membership in CENTO and SEATO
 CENTO:
Central Treaty Organization
 Adopted
in 1955 by Iraq, Turkey, Pakistan, Iran and Britain
Introduction
 SEATO:
South East Asian Treaty
 Formed
in 1954,
 Comprised of Australia, Great Britain, France, New Zealand,
Pakistan, the Philippines, Thailand, and the United States,
 Objective: Collective defense against aggression in south
eastern Asia and the south western Pacific:
 Abolished in 1977.
Growth

Growth Targets





First Five Year Plan: 3%
Second Five Year Plan: 5%
Third Five Year Plan: 6.5%
GDP growth in Pakistan of nearly 7% per annum during the
1960s was exceeded among large countries only by Korea,
Thailand and Mexico.
Agricultural growth rate in Pakistan rose to a peak of 6.3%
annual rate during 1965-1970 as record increases were
registered in the production of wheat and rice.
Growth Rates
Measured by GDP growth, economic performance in Pakistan in the 1960s clearly
exceeded initial expectations.
1950’s
1960’s
Overall
1.9
4.0
Agriculture
1.9
2.7
Non-agriculture
2.9
5.0
Overall
3.1
6.7
Agriculture
1.4
5.0
Non-agriculture
5.0
7.9
East Pakistan
West Pakistan
Investment
Table 3.2*: Fixed Investment
(As percent of GDP)
East Pakistan
Private
West Pakistan
Public
Total
Private
Public
Total
1959-1960 2.0
4.0
6.0
4.3
7.2
11.5
1964-1965 4.5
8.1
12.6
11.6
9.2
20.8
1969-1970 4.0
8.4
12.4
7.0
7.3
14.3
Investment



During 1960-1965 real investment grew very rapidly,
reaching a peak of 21.5% of GDP in 1964-1965 before
declining rather sharply to 14.6% in 1969-1970.
Private investment growth in West Pakistan during 19601965 was explosive as it increased over three folds in
short period of just five years.
It declined by 20% in next five years but still during the
1960s, real private fixed investment more than doubled,
grew faster than public investment, and accounted for
nearly half of the total fixed investment by 1969-1970.
Investment
Reasons for increased investment:
Political stability
 Liberalization of investment controls
 Availability of foreign exchange


The increase in investment contributed to an increase
in economic growth naturally.
Defence vs Development

The squeeze on West Pakistan’s investment came
from two resources:
 Sharp
increase in defence spending
 Conscious effort to increase development outlays

Following the war with India in 1965, defence
allocations were given high priority and phasing out
of US military assistance after 1965 put additional
burden on domestic resources.
Defence vs Development
Table 3.3: Defence vs. Development
(Rs. Billion)
Development
Spending
Defence Spending
19601965
Actual
13.95
1965-1970
1965-1970
Planned
30.00
Actual
21.75
(7.1)
5.50
(2.8)
(9.8)
6.89
(2.2)
(7.1)
12.38
(4.0)
Inflation


Inflation remained in check - the average annual rate
of growth of prices was only 3.3%
As a part of the package of measures to fight inflation,
government borrowing from the banking system for
financing fiscal deficits was reduced sharply.
Tax mobilization



The 1960s were the only period in Pakistan’s fiscal history
when significant public savings i.e. the excess of government
revenues receipt over revenue expenditures materialized.
Efforts to broaden the direct taxation system kept the
indirect taxation to minimum and hence prices of goods
remained stable.
Needs of additional defence spending were met by
additional taxation.

Substantial additional taxation, undertaken especially during the
Third Plan, helped to increase the ratio of taxes from 6.1 % of
GDP in 1959-60 to 7.6% in 1969-70.
Problems and Failures
Negligence of Social sector


Pre occupation with increasing long term investment in
water and power and raising food grain production
after 1966 led to major neglect of Social sector
investments.
Ignored education and health.
Problems and Failures

Foreign Aid and Domestic Savings
 Too
much concentration on foreign aid mobilization led
to a relative neglect of domestic saving effort.
 Led
to problems of debt – an issue which the economy
faces even today.
Problems and Failures
Widening Regional Disparities:


The sharp acceleration of growth in West Pakistan
during the 60s meant that even though the growth
rate in East Pakistan also increased significantly,
the regional disparity in incomes widened.
In 1970, West Pakistan’s per capita GDP was at
least 60 % higher than that of East Pakistan
The Planning Commission

What sets the 1960’s apart from the other periods
in Pakistan’s economic history is the central role
given to the planning process as a tool of economic
policy making and coordination
The Planning Commission

The Second and Third Five Year Plans:



Quickly became out of date as the central assumptions underlying them
changed significantly within months of their finalization.
In case of second plan, much larger foreign aid availability made possible a
more than 40% expansion in public sector development spending over
original levels.
In case of third plan, the opposite happened.

The Second Five Year Plan (1960-1965) had originally set a target
of GDP growth of 20% over five years compared with the modest
goal of 15% in the First Five Year Plan.

The Third Plan (1965-1970) formulation was undertaken in a mood
of great optimism and the annual growth target was set at 6.5% per
annum.
Water and Power Investments



Massive investments including the Indus Basin Replacement
Works spending
Total water and power investments in West Pakistan during
the 1960s accounted for more than 50% of total public
sector spending
The most explosive of Indo-Pakistan disputes was the
question of sharing the waters of the Indus basin.

International Bank for Reconstruction and Development offered
the offices of the Bank for the solution of the water problem
Water and Power Investments
A
solution acceptable to both governments was agreed
upon in 1960 at the Indus Basin Development Fund
Agreement at Karachi. This treaty is commonly known as
the "Indus Water Treaty”
 Tarbela
Dam: Reluctant donors were persuaded to
include Tarbela dam in Indus Works.
 Completed
in 1971, just in time when there was oil price hike
(1973-OPEC) which made thermal power extremely expensive
Foreign Aid
Political alignment with the US through Pakistan’s
membership in:
 Central
Treaty Organization (CENTO) -1954
 South East Asian Treaty Organization (SEATO) - 1955

By the mid 60s net foreign aid flows were financing
over one third of total investment spending, over 45%
of imports and meeting much of the gap in food grain
supply for Pakistan as a whole.
Foreign Aid: The consequences of
Growing Dependence
 Foreign aid ->  domestic saving effort


Excessive concentration on foreign aid mobilization led
to relative neglect of the domestic saving effort
Led to the problems of foreign debt which we are still
facing today
Trade policy


Like many developing countries, Pakistan did not give importance
to its exports during initial period.
Performance > Expectations


Between 1960 and 1970, West Pakistan exports increased by around 7
% annually, more or less in line with the growth of output
Turnaround in 1960s:



Due to expansion in the export of manufactured goods which registered
real annual growth of over 20% in the 1960s.
However, exports were narrowly focused on cotton textiles and required
large export subsidies through Export Bonus Scheme
There was no significant improvement in the structure of exports over the
period.
Export Bonus Scheme

Introduced in January 1959



Provide incentives for exporters of manufactured goods financed
from the excess profits which could be made on imports due to the
overvaluation of exchange rate
By 1966-7 the premium on the bonus voucher had
increased to 160%. For importers using bonus vouchers for
imports, it meant a cost of foreign exchange of Rs 12.35
per US dollar (against the official rate of Rs 4.76).
The main purpose of the scheme was to increase non
traditional exports but, at the margin transferred excess
import profits to exporters of manufactured goods.
Export Bonus Scheme was a system of multiple exchange
rates which:
1. Sustained a high degree of overvaluation of the official
exchange rate
2. Seriously distorted incentives between agriculture and
industry and within industry
3. Led to a lack of transparency and stability in export
incentives.
Ayub Khan’s Policies – An Assessment

Quickening the tempo for growth

Dramatic turnaround in investment and growth in both East and West Pakistan.

This development momentum was seriously disrupted by the 1965 war with India.



Reduction in foreign aid availability and increased defence spending squeezed
investment.
Growth of GDP remained high both in East and West Pakistan in the second half of
1960s but this was concentrated mostly in agriculture in West Pakistan.
In economic policy terms, major failures were the perpetuation of the industrial and trade
policies of 1950s and an excessive reliance on external assistance.
Comment on the performance of the industrial and the
agricultural sector during the formative years i.e.
1947-58. What policies were responsible for this
performance?