ISSN 1811-5438
THE LAHORE
JOURNAL
OF
ECONOMICS
Lahore School of Economics
Papers read at
The First Annual Conference on
Management of the Pakistan Economy
held from 28th of April to 30th April 2005
at the Lahore School of Economics
Ishrat Husain
Key Issues in Managing
Pakistan’s Economy
Inaugural address
Manzur-ul-Haq
Entrepreneurship, Private
Investment and Economic
Growth
A. R. Kemal
Macroeconomic
Management:
Breaking out of the Debt Trap
M. Ashraf Janjua
Money Supply, Inflation and
Economic Growth:
Issues in Monetary
Management in Pakistan
Pervez Tahir
Institutional Machinery for
Managing the Pakistan
Economy
Rashid Amjad
Pakistan's Poverty Reduction
Strategy:
Sartaj Aziz
Investment in Education and
Skill Development
Special Edition
Why Employment Matters
Khaled Ahmed
Governing the State:
Problems Specific to Pakistan
2005
THE LAHORE JOURNAL
OF
ECONOMICS
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Dr. Shahid Amjad Chaudhry Editor
Prof. Viqar Ahmed Editor
Dr. Salman Ahmad Editor
Dr. Sohail Zafar Editor
Ms. Nina Gera Co-Editor
Editorial Advisory Board
Dr. Rashid Amjad
Dr. Pervez Tahir
Dr. Khalid Aftab
Dr. A. R. Kemal
Dr. Moazam Mehmood
Dr. Naved Hamid
Dr. Tariq Siddiqui
Dr. Azam Chaudhry
Editorial Staff:
Dr. Munir Ahmad
Dr. Nasim Hasan Shah
Dr. Sarfraz Qureshi
Dr. Shahrukh Rafi Khan
Dr. Akmal Husain
Dr. Aslam Chaudhry
Dr. Nuzhat Ahmad
Dr. Kaiser Bengali
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Lahore School of Economics
Special Edition2005
THE LAHORE JOURNAL OF ECONOMICS
Contents
Key Issues in Managing Pakistan’s Economy
Inaugural address
Ishrat Husain
2005
1
Entrepreneurship, Private Investment and
Economic Growth
Manzur-ul-Haq
27
Macroeconomic Management:
Breaking out of the Debt Trap
A. R. Kemal
45
Investment in Education and Skill Development
Sartaj Aziz
63
Money Supply, Inflation and Economic Growth:
Issues in Monetary Management in Pakistan
M. Ashraf Janjua
73
Institutional Machinery for Managing the
Pakistan Economy
Pervez Tahir
107
Pakistan's Poverty Reduction Strategy:
Why Employment Matters
Rashid Amjad
145
Governing the State:
Problems Specific to Pakistan
Khaled Ahmed
179
The Lahore Journal of Economics
Special Edition
Key Issues in Managing Pakistan’s Economy
Inaugural address
Ishrat Husain*
I. Introduction
Pakistan was one of the few developing countries that had achieved
an average growth rate of over 5 percent over a four decade period ending in
1990. Consequently, the incidence of poverty had declined from 40 percent
to 18 percent by the end of 1980s. But the 1990s proved to be a lost decade
for Pakistan; growth in per capita income dropped to slightly over 1 percent.
Poverty resurfaced and about one-third of the population now lives below
the poverty line of $1 per day. Social indicators became worse than those of
other countries with comparable incomes. The country became one of the
heavily indebted countries and was declared as one of the most corrupt
countries in 1996. The challenge facing the government which assumed
power in October 1999 was to put the economy back to its pre-1990 track.
Pakistan has come a long way since the 1998/99 crisis when the
country was on the brink of default and international reserves had been
depleted, economic growth was anemic, debt ratios were alarmingly high,
confidence of the investor community was at its lowest ebb and credibility
among international financial institutions was eroded. The economic growth
rate has reached a solid 6 percent plus, inflation has been contained to 5
percent which has only recently started rising, exchange rate has been
stabilized, fiscal deficit has been drastically reduced, domestic interest rates
have declined dramatically, international reserves have jumped twelve times
their 2000 level, debt ratios have fallen significantly and investment is
booming. Pakistan's creditworthiness has been upgraded to B+ by S&P. It is
one of the few developing countries that have graduated from a successful
completion of an IMF program to directly accessing international financial
markets.
*
Governor, State Bank of Pakistan
2
Ishrat Husain
I will start with an overview of the economic reforms and policies
put in place by the government since 2000, examining their main
components, their aims and objectives and the degree of success achieved.
I will then offer an assessment of the experience during this period and
then offer some concluding remarks.
2. Economic Management since 2000
The turnaround witnessed in the economy has not occurred all of a
sudden but is the outcome of a deliberate and carefully designed program
of economic reforms undertaken over the last five years; some of them still
ongoing. The comprehensive strategy announced by President Musharraf
in December 1999 consisted of four key elements:
(a) Restoration of Macroeconomic Stability and Pakistan's relationship
with the International Financial Institutions.
(b) Structural Reforms to remove distortions.
(c) Improving Economic Governance and reviving key institutions.
(d) Poverty Alleviation through targeted interventions and Social
Safety Nets.
The interconnection between economic growth, poverty reduction,
structural reforms and improved governance is fairly strong in the case of
Pakistan. Macroeconomic stability and the consequent rapid economic
growth help reduce poverty in conjunction with investment in social sectors,
targeted interventions and social safety nets. Structural reforms are needed to
strengthen the underpinning of macroeconomic policies and to remove
microeconomic distortions affecting key sectors of the economy thus paving
the way for accelerating economic growth. Improved governance affects the
quality of growth by allowing realization of higher returns on investment
and is also conducive to poverty reduction through better delivery of social
services to the poor. Poverty reduction, as we know by now, can be achieved
with rapid economic growth, structural reforms and improved governance.
2.1. Macroeconomic Stability
Macroeconomic stability has been achieved through reduction in
the fiscal deficit, acquiring a surplus on the current account balance of
payments, lowering of inflation, and a transformation of the external debt
Key Issues in Managing Pakistan’s Economy
3
profile. These have been brought about partially through the support of
international financial institutions and the Paris Club bilateral creditors
which significantly eased the external payments position that had been a
major and consistent risk to the economy since 1998.
The fiscal deficit was reduced by pursuing a combination of four
sets of policy measures (i) mobilizing additional tax revenues (ii)
reducing subsidies to public enterprises and corporations and (iii)
bringing about a significant decline in debt servicing payments and (iv)
containing defence expenditures.
Monetary policy was kept reasonably tight during the first two
years with money supply growth at about 9 percent. Expansion in private
sector credit in the subsequent years did not put much pressure as
government borrowing was limited to a manageable level. As the
monetary conditions improved, the interest rate came down gradually to a
single digit and demand for credit by private businesses picked up
resulting in higher capacity utilization in manufacturing and increased
industrial production. However, with the mounting of inflationary
pressures in recent months, the State Bank is taking measures to tighten its
monetary policy; the interest rates are expected to go up gradually in the
coming months so as not to hurt the growth of the economy.
External debt management focused on (a) reprofiling of the stock
of official bilateral debt, (b) substituting concessional loans for nonconcessional from international financial institutions, (c) pre-paying
expensive loans and (d) liquidating short-term liabilities. The debt ratio
was thus reduced from 100 percent of GDP to 60 percent in five years
time.
Trade policy in Pakistan has been categorized by the World Bank
as one of the least restrictive in South Asia along with Sri Lanka and this
policy has gradually provided incentives to exporters to increase their
market share in the global markets. Exchange rate policy was pursued to
maintain stability in the foreign exchange markets while at the same time
keeping the competitiveness of Pakistani exports intact. A large
accumulation of foreign reserves played an important role in stabilizing
the exchange rate.
2.2. Structural Reforms
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Ishrat Husain
Financial Sector Reforms
The financial sector has made the farthest progress by transforming
itself into a market oriented, private sector dominated sector performing
efficient intermediation. Reforms that have been successfully implemented
since 2000 spanned over a whole range of initiatives. Prominent among
them were (a) privatization of nationalized commercial banks and
fostering competition, (b) strengthening regulatory supervisory and
enforcement capacity of the SBP (c) lowering the cost of capital by dealing
with non performing loans, reducing corporate tax burden and bringing
cost-income ratios down, (d) revising the legal structure particularly the
foreclosure laws (e) broad basing access to the middle income and lower
income groups by opening up provision of credit for agriculture, SMEs,
consumer financing and micro credit (f) introducing and enforcing
stringent corporate governance, internal controls, transparency and
enhanced disclosure standards (g) liberalizing the foreign exchange regime
and (h) promoting technological upgradation of the banking industry
through E-banking, ATMs etc.
A financial sector assessment carried out jointly by the World
Bank and the IMF concludes that Pakistan had been able to establish a
sound, efficient financial system that can withstand exogenous shocks.
The restructured financial system has responded well to the expansionary
monetary policy that was pursued during the period 2001/02 - 2003/04 to
stimulate aggregate demand and kick-start the economy.
Tax Reforms
Tax reforms have attempted to widen the tax base, strengthen tax
administration, promote self-assessment, eliminate whitener schemes,
reduce multiplicity of taxes and tackle the culture of tax evasion and
corruption. A new Income Tax Ordinance has been introduced in 2001,
which allows for universal self-assessment, uniform tax rates, removal of
non-adjustable withholding taxes, elimination of exemptions and detailed
audit. Moreover, the tax survey and documentation drive during 19992000 has allowed the CBR to bring in additional income tax payers and
new sales tax payers into the tax net. It has also profiled 600,000 tax
payers which will help enhance the effectiveness of tax assessment, and
help detect tax evasion and under-reporting.
Tariff Reforms
Key Issues in Managing Pakistan’s Economy
5
Pakistan made significant efforts in liberalizing its trade regime
during the 1990s. The maximum tariff rate has declined from 225
percent in 1990-1 to 25 percent; the average tariff rate stands at just 11
percent compared to 65 percent a decade ago. The number of duty slabs
has also been reduced to four. Quantitative import restrictions have
already been eliminated except those relating to security, health, public
morals, religious and cultural concerns. The number of statutory orders
that exempted certain industries from import duties has been phased out
by June 2004 and import duties on 4,000 items were reduced. These
measures have brought down the effective rate of protection, eliminated
the anti-export bias and promoted competitive and efficient industries. A
number of laws have also been promulgated to bring the trade regime in
conformity with World Trade Organization regulations. These include
antidumping and countervailing measures and strengthening of
intellectual property rights.
Privatization
Public sector corporations have been a constant source of burden
on the budget as well as quasi-fiscal accounts. As much as one-third of the
fiscal deficit could be directly attributed to the losses of public
corporations. In addition, nationalized commercial banks had been
carrying a large burden of these corporations. A new law was promulgated
under which privatization can take place. This step was necessary to
ensure transparency, provide an institutional and legal framework, avoid
unnecessary delays and litigations, and outline the process through which
the transactions are to be carried out.
Four major banks along with several other key public sector units
have already been sold to strategic investors in the private sector. Shares of
large companies such as Oil and Gas Development Company Ltd. and
Pakistan Petroleum Ltd. have been divested through public offerings.
Plans to sell the Pakistan Telecommunications Co. Ltd. (PTCL) and
Pakistan State Oil (PSO) - the two giants - are under implementation.
Deregulation
As Pakistan has embarked on the process of creating competitive
markets and eliminating direct or implicit consumer and producer
subsidies, a number of steps have been taken to deregulate prices and
trading in various sectors. The most far-reaching reform has taken place in
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Ishrat Husain
the oil and gas sector. Imports and pricing of petroleum products have
been deregulated and the private sector is now free to import and fix
prices. An automatic price adjustment formula for consumer prices of
petroleum products linked with international prices has been adopted.
Price distortions in natural gas have also been eliminated and a new
pricing framework has been put in place.
The government has freed agricultural prices by moving towards
market based pricing. With a view towards allowing farmers to receive
international prices for their produce, all restrictions on the import and
export of agricultural commodities have been removed. Wheat
procurement and trade, which was until recently an exclusive monopoly of
the state, has been opened up to the private sector. Exports of wheat and
wheat products have also been allowed to the private sector.
Deregulation and liberalization of the economy have given rise to
an interesting by product - weakening of the public functionaries' power to
collect rents, extort bribes and exhibit arbitrary behavior. This has a
positive impact on the quest for improved governance in the country.
2.3. Governance and Institutions
The cornerstone of the governance agenda is the devolution plan
which transfers powers and responsibilities, including those related to
social services from the federal and provincial governments to local levels.
This plan was put into effect in 2001. The development effort at the local
level is expected to be driven by priorities set by elected local
representatives, as opposed to bureaucrats sitting in provincial and federal
capitals. Devolution of power will thus strengthen governance by
increasing decentralization, transparency, accountability of administrative
operations, and people's participation in their local affairs.
Other essential ingredients for improving economic governance are
the separation of policy and regulatory functions, which were earlier
combined within the ministry. Regulatory agencies have been set up for
economic
activities
such
as
banking,
finance,
aviation,
telecommunications, power, oil, gas etc. The regulatory structures are now
independent of the ministry and enjoy quasi judicial powers. The
Chairman and Board members enjoy security of tenure and cannot be
arbitrarily removed. They are not answerable to any executive authority
and hold public hearings and consultations with stakeholders.
Key Issues in Managing Pakistan’s Economy
7
The National Accountability Bureau (NAB) has been
functioning quite effectively for the last five years as the main anticorruption agency. A large number of high government officials,
politicians and businessmen have been sentenced to prison, subjected
to heavy fines and disqualified from holding public office for twentyone years on charges of corruption after conviction in the courts of law.
Major loan and tax defaulters were also investigated, prosecuted and
forced to repay their overdue loans and taxes.
Transparency in public policy making, the watchdog role of a
fierce and independent media and vigilance by an emerging set of civil
society organizations are also beginning to make a contribution towards
better governance. The Freedom of Information Act has provided the legal
basis for dissipating the opacity of the decision making process.
The nascent role of the Parliamentary Sub-committees on various
ministries and the strong and visible role of the Public Accounts
Committee (PAC) are also acting as a brake on the whimsical and
discretionary behavior of public officials. But it has to be realized that
most of the accounting and financial rules are outdated and do not meet
the requirements of modern management. This tension between strict
observance of antiquated rules and the imperatives to take timely actions
and implement policies can only be resolved if an exhaustive review of the
rules is undertaken. The fear of the PAC and NAB will otherwise end in a
paralysis of decision making by the bureaucracy.
Institutional Reforms
Civil service reforms aimed at improving recruitment, training,
performance management, career progression, right sizing of ministries
and attached departments, and improving compensation for government
employees are the reforms that have been initiated to build strong
institutions in the country. In order to depoliticize recruitment, promotions
and career development, the independence and responsibilities of the
Federal Public Service Commission (FPSC) have been enhanced and is
now fully in charge of merit based recruitment and promotions. The Civil
Service Act has been amended to reflect performance based career
progression and would enable the government to retire civil servants who
are inefficient and/or corrupt. The public sector educational training
infrastructure is also being restructured to strengthen skill based training of
civil servants at all levels.
8
Ishrat Husain
The reforms in some of the most important federal institutions - the
Central Board of Revenue (CBR), Securities and Exchange Commission
of Pakistan (SECP), the State Bank of Pakistan (SBP) and Pakistan
Railways - initiated some years ago - are already beginning to take some
hold and are making a difference as far as governance is concerned.
Reforms in access to justice will deal with delays in the provision
of justice, case management, automation, and court formation systems. In
addition, human resources, management information systems and the
infrastructure supporting judicial system are being revamped and
upgraded. Small Causes Courts have been established to provide relief to
the poor who have small claims.
Extensive police reforms have been introduced to separate the law
and order, investigation, and prosecution functions of the police and
promote functional specialization. Public Safety Commissions have been
set up at the federal, provincial and district levels, which will
institutionalize public accountability of Pakistan's Police Force. To
improve the overall performance of the policy, enhancing efficiency,
logistics, communication, mobility and training are to be given greater
emphasis. The example of motorway police in this respect is illustrative of
the quick turnaround that can be brought about through better incentives
and logistic support.
The progress on institutional reforms in Pakistan has not made any
serious strides with a few exceptions such as the State Bank of Pakistan,
Securities and Exchange Commission of Pakistan (SECP), Auditor
General and more recently the Central Board of Revenue. Devolution to
local government which started off very well on a good footing in 2001
has been impeded in sorting out the provincial - local government
relationships.
Similarly, the reforms of Civil Service, Police and judiciary have to
be intensified as part of the second generation reforms in the next five
years. As these are quite tough to implement and cut across many
structures and boundaries, a suitable mechanism has to be put in place to
manage this process.
2.4. Poverty Reduction
Key Issues in Managing Pakistan’s Economy
9
Reducing poverty is a medium-to-long term phenomenon and it is
unrealistic to expect a significant decline in the incidence of poverty in the
short term. It took almost 12 years for poverty to rise from 18 percent in
1988-89 to 33 percent in 2000-01. It will take at least another decade to
halve it to 16 percent, if an appropriate strategy is pursued. Therefore, it
becomes essential to examine the elements of this strategy and come to a
conclusion whether this objective is attainable or not.
The medium term strategy for poverty reduction enunciated in the
Poverty Reduction Strategy Paper consists of four elements
(a) Accelerated Economic Growth
b) Increased Public Expenditures
c) Poverty Targeted Interventions
d) Social Safety Nets.
(a) Accelerated Economic Growth
From a low of 1.8 percent GDP growth recorded in 2000-01 the
growth rate picked up gradually to 5.5 percent in 2002-03, 6.4 percent in
2003/04 and most likely to reach 7.5 percent this year. Therefore the key is
to sustain this high rate of economic growth over the next ten years.
Investment ratios have to rise from the present level of 19 percent to 25
percent by 2009-10 and the productivity of investment has to improve at
the same time. The drivers of growth identified in the PRSP are
agriculture, SMEs, construction and housing, oil and gas and information
technology. While the first three will certainly accentuate the pro-poor
pattern of growth and help in poverty reduction energy, security will be
attained from oil and gas exploration and productivity gains from
extensive use of I.T.
(b) Increased Public Expenditures
Agriculture sector growth in Pakistan is highly correlated with
availability of water for irrigation. The reservoirs built in the 1960s and
1970s have made a huge difference to the food security of Pakistan. But
these reservoirs are becoming silted while the requirement for water is on
the rise. Thus public expenditure will give priority to water resource
development through new reservoirs, rehabilitation of existing canals and
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Ishrat Husain
barrages, lining of water courses and conservation of water. Public
expenditure on education has to be doubled from 2 percent of GDP to 4
percent in the next five years and similarly health, water supply and
sanitation will be given higher allocations.
(c) Poverty Targeted Interventions
Economic growth is a necessary, but not a sufficient condition for
poverty reduction. Where poverty is endemic, high economic growth must
be accompanied by direct poverty alleviation measures. Towards this end,
poverty targeted intervention programs consisting of several major
elements are being introduced. These elements include: (i) integrated small
public works programs in both urban and rural areas (Khushal Pakistan
Program), and the (ii) development of the microfinance sector to help
improve the credit access of the poor.
Public Works
Khushal Pakistan Program has generated economic activity in the
country through local public works. The provinces, in close collaboration
with the local authorities and communities, completed almost half a billion
dollars of small projects creating about 1 million job opportunities along
with essential infrastructure in rural and low income urban areas. The
program has resulted in the construction of farm-to-market roads,
rehabilitation of water supply schemes, repair of existing schools, small
rural roads, streets, drains, and storm channels in villages. Moreover, the
program has been supplemented with the schemes for lining of
watercourses and laser land leveling, desilting canals, and provision of
civil amenities in towns, municipal committees, and metropolitan
corporations.
Microfinance
The role of microfinance in poverty alleviation and employment
generation has been widely accepted. The government has established a
micro-credit bank (Khushali Bank), as a prototype institution for providing
credit access to poor households. This bank has so far reached out to
200,000 poor households throughout the country. The work of this bank
has been reinforced by the Pakistan Poverty Alleviation Fund, which
through a network of partner organizations in the non-governmental sector
has reached out to another 300,000 poor families.
Key Issues in Managing Pakistan’s Economy
11
Education and Health
Pakistan's poor educational outcomes have become a major
constraining influence on its quest for integration in the global economy.
High rates of illiteracy, particularly among women, low educational
attainment of the labor force, and lack of qualified technical and scientific
manpower have impeded economic growth.
The strategic thrust of the Education Sector Reforms (ESRs)
consists of (a) achieving universal primary education and adult literacy; (b)
improving the quality of education; (c) renewed focus on technical and
vocational education. Higher education and Science and Technological
research capacities are also being bolstered in the country. Madarassahs
are being brought into the mainstream educational system so that their
products can find gainful employment in the economy. The National
Commission on Human Development is mobilizing community volunteers
to bring out-of-school children into the system. Female educational
enrolments have jumped in the province of Punjab since girl students were
awarded monthly stipends to support their education.
The new health policy follows a "health for all" approach based on
accessibility, affordability and acceptability of health services by the
general population. The health strategy places greater focus on a
continuous shift from curative services to preventive health services by
improving the primary health care system. Improvements in health status
are taking place mainly through maternal and child health, communicable
and infectious disease control and elimination of nutrient deficiencies. The
budget for the Expanded Program of Immunization has been increased and
coverage is being expanded in rural areas as well as among women. A
sound tuberculosis control program, HIV/AIDS program, and anti-malaria
program are also under implementation. The shift of public expenditures
from tertiary to primary and secondary health care and devolving and
decentralizing financial and administrative powers to local tiers form the
crux of the health sector reforms. This new approach provides a clear
signal that preventive rather than curative health care will be given priority
in the allocation of expenditures.
Poor access to water supply and sanitation are often associated
with poor health outcomes. At present only 63 percent of the country's
population has access to safe drinking water, whereas proper sanitation
facilities are available to only 39 percent of the total population. The
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Ishrat Husain
government is planning to increase water supply facilities and sanitation
facilities to reach 100 percent of the population as part of the Millennium
Development Goals. Construction of drinking water supply and sanitation
facilities is already receiving prime importance under the Khushal Pakistan
Program.
(d) Social Safety Nets
As part of the Social Safety Net Program, the government has
launched direct cash-transfer programs for poor families through medical
assistance and educational stipends from the Bait-ul-Maal (a public
welfare program). The Food Support Program covers 1.2 million of the
poorest households with monthly incomes of up to Rs.2,000 per family
(US$35). A system of needs testing has been adopted for the identification
of beneficiaries by linking the program with the zakat system.
The zakat program that targets widows, orphans and the
disabled has been strengthened. About two million beneficiaries
received assistance from the Zakat Fund, of which 0.5 million receive
assistance on a regular basis. It is envisaged that an additional 1.5
million will be added to the list of zakat recipients through
rehabilitation schemes, which will provide micro loans of Rs. 10,000
(US$160) to Rs.50,000 (US$800) each for starting up small businesses.
An allocation of Rs.5 billion (US$80 million) has been made for these
schemes in addition to the normal stipends to mustahqeen (the needy)
out of the Zakat Fund. It is estimated that zakat contributes 10-15
percent to the government's poverty reduction program.
The school feeding program for female students (Tawana Pakistan
Program), which was successfully piloted in a few districts, will be
replicated throughout the country. This program will help address
malnutrition in female students as this has resulted in low enrolment, high
absenteeism/ dropout rate and low cognitive achievement. It is estimated
that community mobilization will strengthen the ownership of this
program and lead to a 30 percent decrease in the dropout rate.
The Employees Old-Age Benefits Institution (EOBI) and
provincial social security institutions provide pension and medical care
benefits to private sector employees. Sindh and Punjab provide medical
care benefits to about 700,000 beneficiaries and their dependents. The
Workers Welfare Fund also provides support to workers and their families.
Key Issues in Managing Pakistan’s Economy
13
3. Assessment and Conclusion
3.1. Assessment
In making an assessment of the last five years, I will address two
questions that are uppermost in the minds of most Pakistanis within or
outside the country.
The first question that arises in the discussion of Pakistan's
economic turnaround is as to how much of this can be attributed to the
favorable external environment created as a result of 9-11 and how much
is due to better economic management.
My own assessment of the situation is that while the favorable
external environment has definitely helped and reinforced the thrust of the
economic policies and reforms, its impact would have been short lived and
transitory in the absence of the reforms and policies and improvement in
governance that have been undertaken during the last five and a half years.
The macroeconomic indicators had started looking good even before Sept.
11 but the removal of sanctions, resumption of assistance, and diversion of
remittances through banking channels definitely provided an impetus. I
would argue that the reprofiling of the Paris Club Debt would have taken
place in any event as the IMF had agreed on the three-year PRGF and debt
reprofiling upon the successful completion of the 9-month Stand-by
Program before Sept. 11. It should be kept in mind that the impact of Sept.
11 upon Pakistan's economy has not been, by any means, an unmitigated
blessing. Export orders were cancelled and export target for that year was
missed by $1 billion. Shipping freights and insurance premia were raised
substantially, foreign investors and buyers stopped visiting Pakistan and
the fledgling I.T. industry suffered a severe set back. Some of the
consequences of that shock are still lingering on in the form of a negative
perception of Pakistan in the Western media.
The quantum of assistance from the U.S. accruing to Pakistan does
not form a significant proportion of our foreign exchange receipts. If we
combine all the bilateral official flows from the U.S. they do not, on
average, exceed $1 billion annually. Pakistan's foreign exchange earnings
will amount to $25 billion this year. Thus, contrary to the popular belief
that Pakistan's economy will collapse if the U.S. withdraws its official
assistance, the truth of the matter is that the amounts involved are too
insignificant. What we really need from the U.S. is better market access to
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Ishrat Husain
our exports on the same terms as allowed to the Central American,
Caribbean and African States. Pakistan can earn twice as much as it will
receive in official assistance from the U.S. if this market access is allowed.
The second popular view that is commonly prevalent is that we do
not have independent economic policies and that we follow the policies
dictated to us by the IMF and the World Bank. It is true that when we
needed the IMF's assistance to reprofile our Paris Club Debt we had no
choice at that time but to comply with the conditionalities set by them. But
once we had achieved that objective and had set our own house in order, it
was no longer necessary to agree to all their conditionalities. We did agree
and implement those which were beneficial to our own interests.
Most of the policies prescribed by them e.g. fiscal discipline,
mobilizing tax revenues, removing tariff barriers, privatizing public
enterprises, maintaining low inflation, etc. all make perfect sense and no
economist in his right mind could take an issue with them. Where the
shoe pinches is that these policies are reduced to quantifiable targets and
performance criteria for each quarter and for any slippages or deviations,
however legitimate they may be during that particular quarter, the
country is penalized and its reputation is put in jeopardy. This sort of
micromanagement is resented by the economic managers of the
developing countries- I would argue that as long as the country is
moving on the right path in implementing the desirable set of reforms,
the speed, phasing and sequencing should be left to the economic
managers and not controlled by the IMF. As you are all aware we have
said good-bye to the IMF since September 2004 and did not draw down
the last two tranches to which we were entitled to on the basis of our
performance. In the past, if we were confronted with the oil price shock
that we are facing today, we would have certainly run to the IMF for
balance of payments support and entered into a program. But, the
resilience of our economy has been tested in the wake of this large oil
price increase and we have been able to maintain a stable exchange rate,
high reserve accumulation and low external debt ratios.
Going forward, Pakistan is faced with several major challenges. In
the short term, as the inflationary pressures have become quite intense in
the last 9 months, serious efforts have to be made to bring inflation under
control. The poor, vulnerable and fixed income groups are the worst
affected by this menace. On the demand side, monetary policy is being
tightened and interest rates have been raised. On the supply side, the new
Key Issues in Managing Pakistan’s Economy
15
wheat crop should be able to quell food inflation. There is still great
uncertainty about oil prices. If they start receding from the peak levels this
will have a favorable effect on the general price level and help in
moderating inflationary expectations in the coming months.
The other challenge is the management of the balance of payments
situation. As imports of machinery and equipment along with the higher
oil bill have pushed the level of imports, the trade deficit has widened. So
far, increased flow of workers' remittances, foreign direct investment and
other concessional flows have been able to finance this deficit but, in the
long run, widening of our export base, penetration in new markets and
increasing the productivity of textile exports are the only safe ways to
minimize trade imbalances.
Pakistan's Tax-GDP ratio has remained stagnant at low levels and
the tax net is limited to 1.1 million tax payers of which 0.45 million are
salaried workers. Thus, the dependence on regressive indirect taxes has
created a disproportionately high burden on the middle and lower income
groups. Tax reforms underway should aim to increase the buoyancy and
elasticity of the tax system.
The biggest problem that has retarded equitable growth in
Pakistan has been low investment in human development, particularly
female education. More recently the active participation of the private
and non-governmental sector has given rise to some hope that the quality
of education will improve. But the critical question of access to
education by the poor quintiles still has not been satisfactorily addressed.
The Government has the responsibility to finance the poor households'
education and health needs but it can provide these services through
other providers rather than itself.
As the economy moves on the path of 7 to 8 percent sustained
growth over the next decade, the shortages, congestion and inadequacy of
physical infrastructure will become quite apparent. Under the given fiscal
envelope the public sector development program can only finance one half
of the annual requirements. The other half has to come through the private
sector or private-public partnership. For the latter, we have to work out
contractual arrangements whereby the end users can easily afford to pay
the cost of these services.
16
Ishrat Husain
Finally and the most important bottleneck, in my view, in the way
of rapid economic growth and poverty reduction will be the lack of
capacity of the Civil Service, Police and Judiciary to function as effective
institutions in implementing the policies and programs, treating the
citizens equitably and with respect and redressing their grievances in a just
manner. The politicization of these institutions has ingrained an attitude of
risk aversion and apathy, an instinct of survival and indifference towards
competence and merit. Unless comprehensive reforms of these institutions
are undertaken, we will have serious difficulty in maintaining the speed of
growth and spreading its benefits to the poor.
3.2. Conclusion
Pakistan has achieved macroeconomic stability, introduced
structural reforms, improved economic governance and resumed the path
of high growth rates. But there is no room for complacency as we are
confronted with challenges of poverty reduction, employment generation,
balanced regional growth, upgrading social indicators and containing
inflation.
The second generation reforms aimed at strengthening the country's
institutions and their capacity to deliver basic services along with the
continuation of sound and consistent economic policy and investment in
human development and infrastructure will be able to steer the country on
the right course.
Key Issues in Managing Pakistan’s Economy
17
Managing Pakistan’s Economy
Charts
Real GDP growth has accelerated
Per GDP Growth (% yoy change)
9
7.6
8
7
6.4
6
5.1
5
4.2
4
3.9
3.1
3
1.8
2
1
0
FY99
FY00
FY01
FY02
FY03
FY04
FY05-est.
18
Ishrat Husain
Per capita income has risen
Per capita income (%yoy change)
6
5.6
5
4.4
4
3
2.9
1.9
2
1.6
1
0.9
0
-0.4
-1
FY99
FY00
FY01
FY02
FY03
FY04
FY05-est.
Debt services capacity has improved
Fiscal balanace (as % as GDP)
FY99
FY00
FY01
FY02
FY03
FY04
FY05-est.
-3.2
-3.2
0.00
-1.00
-2.00
-3.00
-4.00
-3.8
-4.3
-5.00
-5.10
-5.4
-6.00
-4.3
Key Issues in Managing Pakistan’s Economy
19
Public debt has fallen significantly
Per capita income (%yoy change)
95
90
89.6
85.3
85
84
82.9
80
76.9
75
70.5
70
65
60
FY99
FY00
FY01
FY02
FY03
FY04
Debt serving capacity has improved
Interest Payments (as % as Revenues)
60
51.2
50
47
45.1
44.7
40
32.8
30.1
30
25
20
10
0
FY99
FY00
FY01
FY02
FY03
FY04
FY05-est.
20
Ishrat Husain
External debt burden has also fallen
External Debt (as % as GDP)
51
47.6
48
46.6
45
45.1
43.9
42
40.5
39
36
35.1
33
30
FY99
FY00
FY01
FY02
FY03
FY04
External Debt (as % of foreign exchange earnings)
325
299
300
275
252
250
224
225
216
200
170
175
156
150
FY99
FY00
FY01
FY02
FY03
FY04
Key Issues in Managing Pakistan’s Economy
21
Inflation remained low except this year
Inflation (% yoy change)
10
8.8
9
8
7
6
5.7
4.6
5
4.4
3.6
4
3.5
3.1
FY02
FY03
3
2
1
0
FY99
FY00
FY01
FY04
Private sector credit has shot-up
Credit to Private Sector (flows in billion Rs.)
FY05-est.
22
Ishrat Husain
400
362.5
350
325.2
300
250
200
167.7
150
100
84.4
50
56.4
53
FY01
FY02
19.3
0
FY99
* Apr 05
FY00
FY03
FY04
FY05*
Key Issues in Managing Pakistan’s Economy
23
Cost of capital has never been so low
Weighted Average Lending Rates (in %)
16
14.6
13.97
14
12.94
12
12.12
10
8
7.58
6.16
6
5.05
4
FY99
FY00
FY01
FY02
FY03
FY04
* Feb 05
Import of machinery has risen
Machinery Group Imports (billion US$)
FY05*
24
Ishrat Husain
5
4.5
4.2
4.4
4
3.5
2.8
3
2.5
2.2
2
2.1
2.1
FY00
FY01
FY02
2
1.5
1
0.5
0
FY99
FY03
FY04
FY05-est.
Exports have expanded rapidly
Exports (billion US$)
16
13.5
14
12.3
12
11.2
10
8.6
8
9.2
9.1
FY01
FY02
7.8
6
4
2
0
FY99
FY00
FY03
Remittances increased sharply
FY04
FY05-est.
Key Issues in Managing Pakistan’s Economy
25
Workers Remittance (billion US$)
4.5
4.2
4
3.9
4
FY04
FY05
3.5
3
2.4
2.5
2
1.5
1.1
1
1.1
FY99
FY00
FY01
1
0.5
0
FY02
FY03
26
Ishrat Husain
Current account deficit remains under control
Current Account Balance (as % of GDP)
6
4.9
5
3.8
4
3
1.9
2
1
0.5
0
-0.3
-1
-2
-3
-1.7
-2.6
-4
FY99
FY00
FY01
FY02
FY03
External debt & liabilities
Total External debt & Liabilities (billion US$)
FY04
FY05-est.
Key Issues in Managing Pakistan’s Economy
27
40
38.9
39
37.9
38
37.2
37
36.5
36.2
36
35.5
35.3
35
34
33
FY99
FY00
FY01
FY02
FY03
FY04
H1-FY05
Reserve position is strong
Liquid Fx reserves (billion US$)
in weeks of imports (RHS)
14
12.3
12
13
70
60
10.7
10
50
8
40
6.4
6
30
3.2
4
2.3
20
2
2
10
0
0
FY99
FY00
FY01
FY02
FY03
Trends in poverty
Poverty (in %)
FY04
FY05*
28
Ishrat Husain
45
40.4
40
35
32.6
30
25
17.3
20
15
10
5
0
1963-64
1987-88
1999-00
Pro-poor public expenditures have increased
Pr-poor Budgetary Expenditures (billion Rs.)
250
195.1
200
160.3
150
103.9
114.4
122.3
133.5
FY01
FY02
100
50
0
FY99
FY00
FY03
FY04
Social indicators remain weak
Selected Social Indicators - 2002
Country
Life
Infant
Mortality
Pop average
Key Issues in Managing Pakistan’s Economy
expectancy
mortality
rate
82
29
rate under
five
105
annual(%)
growth*
2.2
Pakistan
64
India
63
67
93
1.7
Srilanka
74
16
19
1.4
Bangladesh
62
52
77
1.7
Nepal
60
60
91
2.2
China
71
30
39
0.8
Bhutan
63
54
92
2.9
Thailand
69
24
28
0.7
Phillipines
70
29
38
2.2
Malaysia
73
8
8
2.3
Indonesia
67
34
45
* Pop growth for 2003-04 is 1.9 percent for Pakistan
Source: World Development Report 2003
1.3
Trends in unemployment
Unemployment rate (in %)
10
9
8.3
7.7
8
7
6.1
6
5
4
3
2
1
0
1999-00
2001-02
2003-04
The Lahore Journal of Economics
Special Edition
Entrepreneurship, Private Investment and
Economic Growth
Manzur-ul-Haq*
I. Introduction
Despite impressive macroeconomic indicators, Pakistan’s economy
has not shown the kind of investment and employment generation
performance which is required to move the country on to a growth
trajectory which will mean significant reduction in poverty levels and
substantial improvement in its social indicators.
As can be seen from Figure 1, Pakistan's investment gap widened
with comparable countries during the nineties.
Figure-1. Aggregate Investment Gap with Competitors
4%
3.14%
2.92%
0.93%
2%
0%
-0.26%
-0.91%
-2%
-2.75%
-4%
-6%
-6.31%
-6.81%
-8%
-10%
1982-1991
1992-2001
-9.18%
PakistanBangladesh
Pakistan-India
PakistanSouth Asia
Pakistan-Low
Income
Source: Nabi, I
*
-3.54%
The author is Chief Executive, International Housing Finance Ltd.
Pakistan-Low
Middle Income
28
Manzur-ul-Haq
This downward trend is mirrored in the case of private sector
investment also. Figure 2 shows trends in the private sector investment as
a percentage of GDP. Not only have the rates been below those of our
neighbours, the trend itself is downwards and, if anything, has accentuated
in its decline in the last few years.
It is estimated that private investment will have to grow by 9% on a
yearly basis over the next two decades simply to catch up with its own
growth path projected on the basis of growth in the eighties.
Little wonder that Pakistan ranks at the very bottom in
Figure 2.2b: Trends in Private Investment (% of GDP)
20.00
India
18.00
Pakistan
16.00
Bangladesh
14.00
12.00
10.00
8.00
6.00
4.00
2.00
2002-03
2000-01
1998-99
1996-97
1994-95
1992-93
1990-91
1988-89
1986-87
1984-85
1982-83
1980-81
0.00
competitiveness in most international comparisons. Given the composition
of its population, perhaps the most disastrous effects have been on
employment in general and educated employment in particular.
Source: World Development Indicators 2004. Pakistan Economic
Surveys 1987-88, 1992-93. 200.3-04
Both the imperatives of employment and investment have to be
addressed by the private sector which has to be in the vanguard of a
modem economy. These tasks have to be carried out throughout the
business sector. No only is it important that the existing firms display
vigour, creativity, courage and innovation, but also that new
Entrepreneurship, Private Investment and Economic Growth
29
entrepreneurial firms continuously come into being and survive to
adulthood, creating the desperately needed growth in jobs and investment
and address the decline depicted in figure-2.
The business sector comprises individuals acting as economic
agents on their own or as groups organized as firms and businesses.
Economic growth is essentially dependent on the motivation, quality and
effectiveness of these agents.
This paper focuses on the entrepreneur and entrepreneurship as the
primary instigators of economic growth. For our practical purposes, the
entrepreneur is the individual who starts a business enterprise. He takes his
destiny in his (or her) own hands, invests his (or her) own capital (or
borrows it), bears the risk of the unknown and becomes the change agent
in a society.
In Section 2 we will go on to examine the attributes of the
entrepreneur and his unique functions in an economy and in instigating
economic growth.
Section 3 will consider the entrepreneurship framework of our
economy and hence the context within which wealth-creation takes place.
Section 4 will focus on the Pakistani entrepreneurial scene. The last
section will present some recommendations with a view to improving the
environment for entrepreneurial activity.
2. Entrepreneurship and Economic Growth
The role of the entrepreneur in economic development is central;
he starts businesses and provides jobs. Although all businesses are
reflections of enterprise, the small-scale sector (with less than 100
employees) is perhaps the most explicit example of the individual business
entrepreneur at work. In Pakistan this sector provides 80% of non-farm
employment, contributes 40% to GDP and has a 25% share in the country's
exports.
This is more or less consistent with most other economies. In the
U.S, the small scale sector created millions of jobs in the last decade and
has been the engine of growth which has provided close to full
employment in a large economy. Many other countries show the same
phenomenon to varying degrees.
30
Manzur-ul-Haq
Entrepreneurship in its truest sense is about innovation and
changing the status quo. (P. Drucker, J. Schumpeter). This is, perhaps, at
the core of economic transformations, the internet revolution, the
knowledge-based organization and so on.
In the case of Pakistan, the green revolution in agriculture, the
industrialization of the '60s and the development of the textile industry in
the ‘80s and '90s are some of the examples of transformative
entrepreneurial activity.
This kind of innovation is not of course confined to business.
Innovative and far-reaching changes in social institutions and
technological and scientific discoveries, for example can affect an
economy profoundly. The setting up of schools and universities in the
private sector or not-for-profit hospitals and environmental NGOs are
examples of such social innovations in our own context.
While critically important in the development context, these
societal innovations are not the subject of this paper. For our purposes, we
will confine ourselves to the business entrepreneur.
Interestingly, the role of the entrepreneur in economic development
theory has not been properly incorporated. Baumol1 in his 1993 article
“Formal Entrepreneurship Theory in Economics: Existence and Bounds”
writes:
“It seems to be taken for granted in the literature that, even if
entrepreneurs are not in complete control of our economic destiny,
they influence its direction as few if any others, are able to do. But
having acknowledged this, implicitly or explicitly, normally no
more is done to incorporate the entrepreneur’s role into the
mainstream models of value theory or the theory of the firm.”
The same author writing in 19682 says:
“The entrepreneur is at the same time one of the most intriguing
and one of the most elusive characters in the cast that constitutes
the subject of economic analysis. He has long been recognized at
the apex of the hierarchy that determines the behaviour of the firm
1,2
Lowery
Entrepreneurship, Private Investment and Economic Growth
31
and thereby bears heavy responsibilities for the vitality of the free
enterprise society.”
Thus economic development takes place by ambitious individuals
exploiting innovative ideas, new technologies or new knowledge to create
wealth and jobs.
This causality of economic growth has been debated, to be sure
(Baumol and others). Whether it is economic growth that causes a rise in
entrepreneurial activity and leads to innovation or the other way around
has important policy implications.
“It has been argued that entrepreneurship is omnipresent and,
therefore, cannot be the ‘cause’ of development ........... simply put,
economic growth, driven by entrepreneurship, cannot be explained without
reference to institutions” (Boettke).
This view emphasizes the role of institutions and a basic
framework to facilitate the ideas of risk-taking and innovation.
The role that various framework conditions play in encouraging or
impeding entrepreneurial activity will be examined in more detail in
section 3, but for practical purposes, the motivated entrepreneur is the
essential element in the system and without him the necessary conditions
will not be met.
One of the findings of the GEM study (explained more fully in
section 3 below), which is carried out across countries representing over
60% of the world's population and over many years is:
“in correlating the level of entrepreneurial activity with projected
economic growth, it was found that necessity-based
entrepreneurship is strongly correlated with projected economic
growth, but not the opportunity-based entrepreneurship, which was
rather difficult to explain” (GEM India Report 2002)
The difference is, of course, important as economies exhibit more
opportunity-based entrepreneurship when they are undergoing periods of
prosperity and expansion which produce these opportunities. In this case,
the increased (opportunity-based) entrepreneurial activity is really a
consequence of these positive developments and their cause.
32
Manzur-ul-Haq
We can see this in the case of the U.S.A in 2003, where Total
Opportunity-based Entrepreneurial Activity (TEA) was 9.1% and
necessity-based TEA only 1.7%. Thus only very few people were pursuing
self-employment because of lack of opportunity.
The Indian case again illustrates this. In 2001 necessity-based
entrepreneurship was far higher at 7.5% than opportunity-based
entrepreneurship of 3.7%. This totally reversed itself m 2002 with
opportunity-based entrepreneurship at 12.2% and necessity-based TEA at
5%. The authors of the India GEM report attribute this to a real positive
change in the level of opportunities available in the economy, although
they concede it may partly be attributable to changes made in sampling
procedures, (India GEM Report 2002).
In relatively poor economies, it would be seen that necessity-based
entrepreneurship is the dominant kind (e.g. India, Pakistan) while in richer
economies like the U.S. the opportunity - based entrepreneur is more
prevalent. This is, perhaps, to be expected.
This distinction of the entrepreneur also carries to the nature of
firms being created. Thus, in poorer economies the firms are most likely
low in capital, the business is predominantly low-tech and generally low in
productivity and quality of products.
The kind of entrepreneur is also different in both these cases. In the
former case, he is likely to have a lower education level and will engage
mostly in “imitative” business activity. The size of firms will also remain
small. In the latter case (e.g. U.S.) he is likely to be better educated than
the average population, creates many high-tech ventures and is more likely
to employ more people in the venture than his poor-country counterpart.
This is, again, perhaps, to be expected. While the very act of
entrepreneurial firm-creation is a positive act for the economy and adds
value, if the above state of affairs continues, it will probably mean that rich
economies remain rich or become even richer, while the poor ones are
doomed to remain trapped in a low-tech, low-productivity equilibrium.
The obvious answer is to tap the high-growth producing entrepreneur in
these societies; the one who will have the vision, managerial capabilities
and innovative ideas to bring about a change. Joseph Schumpeter termed
the actions of this kind of entrepreneur as causing ‘creative destruction’ in
the status quo. In a developing economy like Pakistan, he is more likely to
Entrepreneurship, Private Investment and Economic Growth
33
be filling a crucially-important void and providing it the impetus to grow;
and thus breaking out of the low-level equilibrium state.
It is important to realize that entrepreneurship (as opposed to the
individual entrepreneur) is a system within which there is the interplay of
the environmental factors which include the societal norms, values and
institutions and a host of other economic variables such as availability of
credit, barriers to entry for new firms and property rights, amongst others.
The Government is an important party in this system.
Lowrey (2003) sums it up as follows:
“A well-defined entrepreneurship must include the social
constitution, of which each economic man must be granted the
basic rights: the right of free enterprise and the property
(including intellectual property) right. People are granted the
“human right” so that each human being must have the right to be
a human, regardless of such things as gender, race, health
condition, or social status. Each entrepreneur must have the
fundamental right to engage in activities to survive and to
advance in the economy. Entrepreneurship also must include the
economic infrastructure, of which logistical arrangements such as
roads, power grids, waterways, airports, education system,
communication system, legislative system, financial system and
market structure that are all effectively organized and designed
for supporting entrepreneurial activities.’
In the next section we shall see that an attempt has been made to
build a framework for judging the contribution of many of these variables
to the level of entrepreneurial level in a society.
3. Economic Growth and the Entrepreneurship Framework
How does one gauge the health of the entrepreneurship system in a
country? In the long run, of course, the rate of economic growth itself
demonstrates the effectiveness of a nation's entrepreneurial activity. What
the overall figures do not show, however, are the areas of particular
concern or strength.
To understand the context of a country’s entrepreneurial activity a
useful construct is to look at the variables which make up the context in
34
Manzur-ul-Haq
which economic growth takes place. A useful way of looking at the whole
context within which an entrepreneur operates has been developed by the
Global Entrepreneurship Monitor (GEM) study. This is a comprehensive
study initiated by the London Business School and Babson College in
1999 on an annual basis. The main objective of the study is to assess the
level of entrepreneurial activity across countries and over time. By 2003,
the study covered 40 countries and over 60% of the world’s population.
The basic postulate of the model is that there are societal/
institutional framework conditions in a country whose quality impedes or
encourages entrepreneurial activity, which in turn influences economic
growth. The framework conditions range from the cultural and social
support of entrepreneurship to adequacy of physical infrastructure. A list
of the 2002 framework conditions is given below:
1. Financial support to New Firms
2. Government Policy on New Firms
3. Government Programs for New Firms
4. Education and Training Support
5. Research and Development Transfers
6. Commercial, Legal and Professional Infrastructure
7. Market Openness and Ease of Entry
8. Adequacy of Physical Infrastructure
9. Appropriateness of Social and Cultural Norms
These nine framework conditions were later expanded to 14 in the
current year by splitting one and adding four others. The original
dimension of “socio-cultural Norms” was split into “Social Support” and
“Cultural Norms”. The four additional aspects that were investigated in
2002 were: (i) Opportunities for New Venture Creation, (ii)
Entrepreneurial Capacity (iii) Intellectual Property Rights (IPR) Law and
Enforcement, and (iv) Facilitation for Women Entrepreneurs.
(Source GEM India Report 2002)
Entrepreneurship, Private Investment and Economic Growth
35
Some of the findings of the 2002 study were:
 12% of the worlds’ population in the 18-64 year range are
entrepreneurial.
 The number varies from country to country. It was less than 3% for
Japan and more than 18% for India and Thailand.
The country groups graded from high to low are as follows:
 Developing Asian Countries.
 Latin American Countries.
 Former British colonies outside Asia,
 European Countries.
 East European Countries.
 Developed Asian Countries.
Predictably the U.S. emerges as the leader amongst the G7 countries
and outranks the rest of the world on key conditions such as financial
support, entrepreneurship education and training and social norms
favouring entrepreneurship. To quote from the 2003 U.S. report.
“The U.S, entrepreneurial landscape exhibits some very strong
positive characteristics;
 The culture of the United Stales is one of seeking opportunities and
taking risks. The high ranking of the United States in this area is
indicative of the country’s distinct entrepreneurial orientation and
continues to be a strong differentiating factor.
 Among other things, the U.S. population shows a strong perception
of having sufficient skills and abilities to start a new business,
relatively low fear of failure, and relatively high alertness to
unexploited opportunities.”
(Source: U.S. 2003 GEM report)
36
Manzur-ul-Haq
In the next section we shall use this framework to try to understand
and evaluate the entrepreneurial activity underway in Pakistan.
4. The State of Entrepreneurship in Pakistan
Entrepreneurial activity is made up of innovative highly-motivated
individuals who, to be effective transformers of an economy need a
nurturing, supportive environment and a system which addresses the
economic variables of his activity in a positive way.
It is a truism that a society's norms will also be reflected in its
entrepreneurs, like in all its members. In a society characterized by low
educational attainments, abject poverty, primitive living conditions, is it
any wonder that we produce entrepreneurs who are generally necessitydriven individuals with low educational attainments who set up ventures
employing little capital, which are low in productivity and do not use
technology to any appreciable extent?
Given their general background and the limitations imposed by the
educational system, it what has been achieved is creditable.
To be fair, value-added businesses have been established in a
multitude of sectors. Examples are hospitals, schools, universities, internet
services, software houses, cable and TV channels, the fashion industry,
construction and real state, restaurants, and so on. The textile, food and
automobile sector have also demonstrated sizable investments. Most of the
investment in these sectors are for existing large scale firms and, though
relevant are not the major face of this study. Figure-3 shows investments
made by the manufacturing sector over the years.
Figure-3: Industrial Performance 1949-2003
Year
Manufacturing Share in GDP
Growth rates of Manufacturing
(%)
Total
Large
Scale
Small
Scale
Total
Large
Scale
Small Scale
194950
6.39
1.83
4.56
8.39
23.42
2.34
195960
9.91
5.67
4.23
2.53
2.75
2.25
Entrepreneurship, Private Investment and Economic Growth
37
196970
13.44
10.46
2.98
11.32
13.95
2.98
197980
14.51
10.55
3.95
10.25
10.96
8.40
198990
17.59
12.70
4.89
5.72
4.73
8.40
199900
16.66
11.65
5.03
4.53
-0.01
5.31
200001
17.66
12.48
5.18
8.21
9.46
5.31
200102
17,94
12.66
5 28
5.00
4.87
5.3l
200203
18.39
13.09
5.30
7.67
8.65
5.31
Period Averages
1950s
8.78
4.38
4.41
7.73
15.75
2.3
1960s
12.41
8.85
3.56
9.91
13.39
2.91
1970s
13.99
10.423
3.57
5.50
4.84
7.63
1980s
16.65
12.26
4.38
8.21
8.16
8.4
1990s
17.68
12.32
5.36
3.88
3.54
5.06
195003
13.37
9.27
4.09
6.78
8.78
5.06
Source: 50 Years of Pakistan Volume I Summary, Statistical Supplement
of Economic Survey, 2002-03 and Economic Survey 2003-04.
From: Nabi, I. et al.
Many new businesses being created are in the service sector, whose
growing share in the GDP itself is testimony to the appreciable activity and
the contribution of this sector to the economy.
As we have seen above, however, all this has still meant that we
are caught in a low investment, low output trap. The authors of the India
GEM Report, despairing, likewise write;
38
Manzur-ul-Haq
“There could also be one other reason for the seemingly unrelated
movement of entrepreneurial activity and economic growth. It may
be noted that one of the findings of the study was that a very large
majority of the start-ups were ‘imitative’ ventures in the low-tech
areas operated by less educated, low-income groups, with very low
potential for growth. These are probably not the kind of ventures
that can stimulate the economy- The findings thus confirm the need
and relevance of the innovative, growth-oriented entrepreneur (the
Schumpeterian type) for stimulating economic growth.”
(India GEM Report 2002)
As Pakistan is not a member of the GEM study yet, we can only try
to relate some of the framework variables of this study which we looked at
in section 3 above to our own non-empirical experience. A recent study
(2003) done by the Small and Medium Enterprise Centre (SMEC) at LUMS
of 650 SMEs in the manufacturing sector can also be used to draw
inferences about the state of entrepreneurship in Pakistan. Papanek’s study,
though dated, still provides useful insights into the entrepreneurial process in
Pakistan.
The majority of firms (78.8%) in the LUMS study did not intend to
make any investments in equipment/machinery over the next three years.
The major reason by far (27.6%) was expensive utilities/electricity. 9.2%
cited problems of official bureaucracy as the reason and 5.8% law and
order problems. Lack of demand was stated to be a reason by 10.9% of the
participants, ahead of those giving difficulty in obtaining finances as a
factor (8.47%).
The Enabling Environment
The cultural and social factors were not part of the LUMS
questionnaire.
The role that cultural variables play in making societies what they are
is obvious; some societies are probably more entrepreneurial than others,
although the incidence of entrepreneurship in over 12% of the population
universally does mean that it has to be spread over all societies fairly evenly.
The Total Entrepreneurial Activity (TEA) does, however vary significantly. As
we have seen above, it is 3% in the case of Japan and 11% in the case of the
U.S.A and 18% in the case of Thailand and India. This probably also reflects
Entrepreneurship, Private Investment and Economic Growth
39
the development stage of a society, (e g. so that a higher TEA of necessitydriven individuals drives up the total TEA) or the institutional arrangements
that a society prefers (in Japan the preferred individual entrepreneurial role
may be within firms and self-employment is culturally not highly valued,
while in the U.S. self-employment is a reflection of the freedom of the
individual which is so highly prized). There have been a number of
sociological theories of entrepreneurship. Perhaps the starting point was Max
Weber's ideas about the influence of religion in the development of business
enterprises (Protestantism in this case applied to the U.S.). Obviously cultural
(and therefore, religious) norms are important in influencing behavior. What
are our cultural norms in influencing the development of business? Zafar Altaf
touches on this in his work of the ‘80s, but generally relates it to the work
ethics engendered by informal religious education. Obviously the more
conservative and rural entrepreneur (who is naturally in a majority) is
influenced by a different set of values than his westernized, better-educated,
urban colleague.
The cultural influences are probably implicit in the following
spheres;
 The choice of business
 The attitude towards wealth accumulation and investment
 The attitude towards financing, in particular, towards interestbased financing
 The views on insurance
 The treatment of workers and customers
 The view on taxes
 Doing business with non-Islamic communities, and so on.
This is a whole field which needs greater exploration and could
yield many policy options.
Zafar Altaf also examines the supposed attributes of various castes
(Sheikh, Arain, Jat, etc.). While something can be said about the
endowment of business acumen of various communities or concentration
of populations (e.g. Latins and Asians in the U.S.) and there are obvious
40
Manzur-ul-Haq
preferences of families or communities, the nature of entrepreneurial
ability seems to be spread throughout the populations and a case may be
made that it is the incentive structure and the ease of entry which are
probably key to this. As Baumol says:
“While the total supply of entrepreneurs varies among societies,
the productive contribution of the society’s entrepreneurial
activities varies much more because of their allocation between
productive activities such as innovation and largely unproductive
activities such as rent seeking or organized crime. This allocation
is heavily influenced by the relative payoffs society offers to such
activities.”
In the case of India, the GEM findings show overall cultural
support of entrepreneurship to be about at the average level of the sample.
It was higher than the average in the case of support of risk taking and in
encouragement of creativity and innovativeness. I do not think we can say
the same about our society.
Market Openness and Ease of Entry
India scores almost the highest in terms of opportunities for new
firm creation. I think our general investment climate has become better in
the last couple of years. This can also be seen in the investments of the
large - scale sector, which have been on the rise. In this respect the
pessimistic outlook (no intention to invest in the near future of the
majority in the LUMS survey is surprising.
Almost 67% of the respondents in the LUMS survey were first
generation entrepreneurs, but 44% said they had relatives who were in
business. Experience would suggest that it is not easy to set up a business
in Pakistan; and for much of the time people set up a business if they
already have a family background of business. India scored worse than
average in the GEM survey on this account.
Papanek had found that ethnic groups constituting 0.5% of the
population had provided 43% of Pakistan’s industrialists in the ‘60s. Zafar
Altaf’s sample of 195 industrialists in 1980 showed that 70% came from a
trade or industrial background.
Entrepreneurship, Private Investment and Economic Growth
41
This means that we are probably not attracting enough capable
people with varied backgrounds into business who could bring fresh
thinking and new blood to the economy.
This could perhaps be a reason also why not enough innovative and
new-product based ventures are being created. It would also seem that
women entrepreneurs are probably far below the world average of 35% in
Pakistan. We are mining out on a significant potential supply of very
capable, intuitive and creative talent represented by our well-educated
women, many of them in business and management.
Access to Finance
Only 50% of the organizations in the LUMS survey had a bank
account. In line with other countries, capital for start up is generally from
family and friends (even in the U.S. formal venture capital is a fraction of the
U.S. $ 100 billion invested annually in new ventures - GEM U.S.A. Survey
2003).
Even so, formal finance in Pakistan is at a very low level of
availability for small firms. An estimate is that only about 7% of funds for
investment and working capital are from banks or other financial institutions
(SMEDA). If one looks at the total lending of Rs. 247 billion by commercial
banks at end Sept. ‘04 to the SME sector (see appendix) the extent of the
potential of the sector becomes obvious. The LUMS sample had taken around
19% of Running Finance requirements and around 16% of fixed investments
from commercial banks. These are probably the bigger firms in the survey. A
formal venture capital industry is only in its rudimentary stage in Pakistan.
The bigger firms have more access to capital, of course. What is more
important perhaps, is the availability of capital at the beginning of a firm's life.
It is interesting to see that in India, credit to the small scale sector as a
percentage of total net bank credit from public sector banks at the end of
March 1999 was 17.37 up from 15.3% four years earlier. This was not much
different from 18% today in the case of Pakistan. It is probably not just about
credit, but as to where it is available and at what stage of a firm's
development.
Property Rights and Intellectual Property Rights
42
Manzur-ul-Haq
Many of the assets of the small sector are not fungible and trademark
and other intellectual property protection laws are difficult to implement.
These probably prevent licencing and most likely, retard research.
Education and Training
Around 57% of the LUMS entrepreneurs have an education level of
matric or less. Only 6% use a computer. Papanek had also found that in the
'60s entrepreneurs did not have much formal schooling, as did Zafar Altaf in
the '80s. In the last forty years things have not improved significantly, although
the trend is slightly positive. While informal schooling and experience make
up for a lot, this kind of formal education does limit the kind of ventures
which are founded, and their growth once they come into being.
Although India also reflects this, countries like the U.S. have
individuals better educated than the average entering the business sector;
which means more high-tech products, better utilization of research, better
communications, and better managerial abilities, giving the firms a better
chance of survival and growth.
Government policies & interaction
Only 32% of the respondents knew about the SME Bank and even
fewer about other institutions, and almost 90% had never been contacted
by government organizations. The owners and senior officials spend an
average of 164 hours a month dealing with government organizations,
principally WAPDA and the tax department.
The picture that emerges of the small entrepreneur or a new
business owner is generally that of a necessity-driven person who has
other family members in business, is poorly educated in and is generally
short of capital and electricity.
He (overwhelmingly more than a she) is a representative of our social and
value system and in his hands lies the destiny of our nation.
5. Conclusion & Recommendations
This paper has briefly examined the phenomenon of entrepreneurial
activity and its central position in economic growth. While the causality of
economic growth stemming from greater entrepreneurial activity may be a
matter of debate, in practical terms the two reinforce each other; greater
Entrepreneurship, Private Investment and Economic Growth
43
opportunities provided by a growing economy spur greater entrepreneurial
activity, which in turn provides the jobs and innovation which are the lifeblood
of wealth-creation in the economy. This is the virtuous circle that all economies
strive for.
For entrepreneurial activity to play its creative role to its full
potential, it is important that the enabling conditions are improved and a
supportive environment for new-venture formation is created. The
principal aim of a program of incentives has to be to create a context
within which the best-suited individuals in society are motivated to
become entrepreneurs and thus wealth-creators for the nation.
The quality of entrepreneurial activity in Pakistan will improve as
the overall context will become better, the quality and spread of education
being the primary driver and the development of the physical infrastructure
a very important element. In the short term, nevertheless, there are a
number of important policy initiatives that can be fruitfully pursued to
improve the environment for small business and entrepreneurial activities.
A useful list of these is included in the SME issues paper issued by
SMEDA. Others have also suggested various improvements from time to
time.
We need to start by making the idea of business and wealth-creation a
legitimate and desirable pursuit in our society. In general business activity has
been viewed with suspicion and this view has arguably, been reinforced by the
policies of nationalization, and the concentration of accountability measures
almost exclusively on businessmen. Terms like Robber Baron, the twenty two
families etc. have been used to generally denigrate businessmen. While no one
would advocate the concentration of wealth in a few hands or be an apologist
for unethical behavior, one cannot help feeling that somehow business has
been singled out as the culprit for all ills.
We need to make a business career not only socially acceptable but
desirable. How may national civil awards go to businessmen?
The broad areas of concern for us should be the following:
 To attract the most innovative and resourceful individuals (also
women) to start ventures.
 To make it easy to start a business and to enter an industry.
44
Manzur-ul-Haq
 To afford protection to physical and intellectual property rights.
 To provide better education and training facilities for people in
business or to prepare them for business.
 To provide better access to new knowledge and research. The aim
should be to improve productivity and product quality.
 To make the availability of finance a reality for most enterprises.
The venture capital industry has to be given a shot in arm.
These are some of the major areas which can have an impact on
entrepreneurial activity in Pakistan. The important part is to frame realistic
policies and implement them effectively, especially making the provision
of services accessible to those who can benefit from them.
Appendix
Sector-Wise Break Up of Commercial Bank Loans
(Billion Rupees)
June-04 Sep-04
Change during
quarter
Amount
% age
Corporate Sector
Fixed Investments
Working Capital
Trade Finance
741.4
322.6
250.3
168.5
765.9
340.4
265.0
160.5
24.4
17.7
14.7
(8.0)
3.3
5.5
5.9
(4.7)
SMEs
Fixed Investments
Working Capital
Trade Finance
231.7
29.6
151.0
51.1
247.3
28.4
162.1
56.8
15.6
(1.2)
11.0
5.8
6.7
(4.2)
7.3
11.3
Agriculture Production
108.7
117.8
9.1
8.3
Consumer Finance
Credit Cards
Housing Loans
Auto Loans
Consumer Durables
Personal Loans
103.2
11.2
8.2
33.1
1.4
49.2
125.8
12.7
12.4
41.4
1.8
57.5
22.6
1.6
4.1
8.2
0.4
8.3
21.9
14.0
49.3
24.9
25.0
16.8
Entrepreneurship, Private Investment and Economic Growth
45
Commodity Operations
90.0
85.0
(5.0)
(5.6)
Staff Loans
Of which Housing Loans
39.7
28.0
40.0
28.3
0.3
0.3
0.7
1.0
Others
36.1
29.7
(6.4)
(17.8)
1,350.9 1,411.4
60.5
4.5
Total
Source: State Bank of Pakistan
46
Manzur-ul-Haq
References
Altaf, Zafar 1988, Pakistan Entrepreneurs, Croom Helm.
Arif I. Rana. Jamshed H. Khan, Usman Asad and Sarfraz A. Mian: 2003,
The SME PULSE: An exploratory study of the Performance of
SMEs in Pakistan and the characterization of successful firms,
Small and Medium Enterprise Center, LUMS.
Boettke, Peter J. & Coyne, Christopher J., Entrepreneurship and
Development: Cause or Consequence? JEL Classification: 0100
B53 M130.
Casson, Mark; 1982, The Entrepreneur - An Economic Theory Martin
Robertson. Development of SME policy in Pakistan - SME Issues
Paper SMEDA.
Drucker, P. 1985, Innovation and Entrepreneurship, William Heinemann.
GEM Project: Various reports www. gem consortium, org.
Kilby, Peter (Ed.). 1971, Entrepreneurship and Economic Development,
The Free Press.
Lowrey, Y. The Entrepreneur and Entrepreneurship: A neoclassical
approach, Presented Jan 2003 of ASSA Annual Meeting.
Nabi, Dr. I. et al. 2005, Towards a Prosperous Pakistan - A strategy for
rapid industrial growth. Ministry of Industries, Production and
Special Initiatives, Govt. of Pakistan.
Nik Mohammad Affandi bin Nik Yusoff, 2002, Islam & Business,
Pelanduk Publications.
Papanek, G. 1967, Pakistan’s Development ~ Social Goals and Private
Investment, Harvard University Press.
Weber, Max. 1958, The Protestant Ethic and the Spirit of Capitalism,
Charles Scribner’s Sons.
The Lahore Journal of Economics
Special Edition
Macroeconomic Management:
Breaking out of the Debt Trap
A. R. Kemal*
I. Introduction
It is remarkable that from a situation of default and unsustainable
fiscal and balance of payments deficit only a few years back, Pakistan has
come out of the debt trap, balance of payments turned surplus1, and fiscal
deficit has declined below 4 percent of GDP. However, sharp increase in
the inflation rate, widening trade deficit and re-emergence of balance of
payments deficit in the current year are quite worrisome.
With the widening of the balance of payments deficit and the
possibility that fiscal deficit may start rising as the government provides
for the higher levels of public expenditure, would the debt problem not
emerge once again? Bilquees (2003) has examined the growth of debt
over the 1980-81 to 2002-03 period by de-composing the effect of
primary deficit, interest rates and exchange rate adjustments. She argues
that primary deficits are basic to the growth of debt. Higher government
public expenditure compared to its resources leads to higher domestic as
well as external borrowings. The external borrowing with limited
repayment capacity results in exchange rate depreciation with
consequent implications for the debt. The differential between interest
rates and growth of GDP also have implications for the debt but in
Pakistan it did not result in rising debt ratio because the interest rates
have always remained lower than the growth rate.
*
Director, Pakistan Institute of Development Economics (PIDE), Islamabad.
Surplus in balance of payments has been equivalent to 3.9 percent of GDP, foreign
exchange reserves exceeded $12.5 billion, growth of exports accelerated to 13.0
percent, workers' remittances increased to $ 3.9 billion, the average interest rates fell to
around 7.5 percent, and inflation rate has been around 4.6 percent during 2003-04.
Real sector of the economy has also shown improved performance during the year:
GDP registered growth rate of 6.4 percent while the investment increased form 16.4 to
18.1 percent of GDP.
1
46
A.R. Kemal
Since growth of debt is influenced by primary deficit, interest rates
and the exchange rate adjustment, the present study examines the fiscal,
monetary and exchange rate policies pursued since 1987-88 when Pakistan
signed its first stabilization program with the IMF. The plan of the paper is
as follows. After this introductory section, Fiscal, monetary policies and
exchange rate policies are examined in section II, III and IV. Trends in
debt and debt servicing are reviewed in section V. Main conclusions are
summarized in section VI.
II: Fiscal Policy
Unless fiscal deficit is financed through grants, it would result in
rising public debt. However, the debt-GDP ratio would increase only if the
fiscal deficit as a percentage of GDP exceeds the growth of GDP. In
Pakistan, the total public debt is still rising but in recent years, the debtGDP ratio has started declining.
Since 1987-88, when the fiscal deficit had increased to 8.5 percent
of GDP and Pakistan signed the first IMF Stablization programs in 198788, she has been grappling with reducing the fiscal deficit. It is expected
that the demand management policies in the form of contractionary fiscal
and monetary policies would help in narrowing the investment-savings and
the balance of payments gap2. Therefore, each of the IMF programs signed
since 1987-88 called for further reduction in the fiscal deficit, though
without much success.
Fiscal deficit until the late 1990s has been in almost all the
years in excess of 6 percent of GDP. In 1999-2000 it was still 6.6
percent of GDP. It has gradually declined to 4.5 percent of GDP by
2002-03 and to 3.9 percent in 2003-04.3 While there has been primary
deficit upto 1995-96, it turned surplus in later years. During 2001-02,
primary surplus was 2.5 percent of GDP, however, since then it has
declined to 1.3 percent.
2
The impact of fiscal deficit on the economy has been controversial. Keynesians
maintain that stimulation of aggregate demand in the presence of excess capacity
and unemployment through fiscal deficit results in higher levels of income and
output. Neo-classicists believe that fiscal deficits have adverse implications for
savings and growth. The Ricardians believe that fiscal deficits do not have any
impact on growth.
3
The National Accounts base has been changed since 1999-2000. The fiscal deficit as per
new base declined from 3.7 in 2002-03 to 2.4 percent in 2003-04.
Breaking Out of the Debt Trap
47
48
A.R. Kemal
Table-1: Budgetary Deficit in Pakistan
(as percentage of GDP)
Public Expenditures
Total
Tax Total Non- Interest Develop- Budgetar Primar
Revenu Revenue
Develop Paymen ment y Deficits
y
es
s
-ment
t
Deficit
1987-88
17.3
13.8
26.7
19.8
6.9
6.9
8.5
1.6
1990-91
16.9
12.7
25.7
19.3
4.9
6.4
8.8
3.9
1995-96
17.9
14.4
24.4
20.0
6.2
4.4
6.5
0.3
1998-99
15.9
13.2
22.0
18.6
7.5
3.4
6.1
-1.4
1999-00
16.3
12.9
22.5
19.9
8.3
2.6
6.6
-1.7
2000-01
16.2
12.9
21.0
18.9
7.3
2.1
5.2
-2.1
2001-02
17.2
13.2
22.8
19.3
7.1
3.5
5.2
-2.5
2002-03
17.7
13.6
22.2
19.8
5.9
3.2
4.5
-1.4
2003-04
18.0
13.7
21.9
17.7
5.2
3.5
3.9
-1.3
Source: Pakistan Economic Survey and Supplements, various issues and
Annual Report of State Bank of Pakistan, 2003-04.
A number of factors have been responsible for the decline in the
fiscal deficit during 2002-03 and 2003-04. These include debt reprofiling,
slow growth of public debt, decline in the interest rates, reduction in
development expenditure, and an increase in the non-tax revenues.4 Whereas
reduction in fiscal deficit is quite welcome, it needs to be underscored that it
has been due to reduction in the public expenditure rather than an increase in
resource mobilization. Tax-GDP ratio in 2003-04 is a little lower than in
1987-88, while total Revenue-GDP ratio shows slight improvement.
However, public expenditure declined sharply from 26.7 to 21.9 percent.
Whereas non-development expenditure has remained somewhat constant up
to 2002-03, there has been sharp decline in development expenditure. The
development expenditures help in improving physical infrastructure and
social services such as primary education, basic health care, safe water and
sanitation which in turn helps in the growth of output and employment
generation. The declining level of public expenditure especially
4
The tax-GDP ratio, however, has remained somewhat constant.
Breaking Out of the Debt Trap
49
development expenditure, therefore, has serious implications for the
economy. The public expenditure will have to be increased and unless there
is resource mobilization, the fiscal deficit would start increasing once again.
We may also note that though overall fiscal deficit has declined, the deficit
on current account hardly shows any decline.
With the rising interest rates both within the country and outside,
increase in public expenditure, the instability in non-tax revenues, and the
declining impact of the debt rescheduling on fiscal situation there is a need
for a bolder strategy for reduction in the fiscal deficit and the only viable
solution for reduction in the fiscal deficit is resource mobilization by
making the tax structure elastic.
Whereas over the 1990s the direct tax structure was marred by
withholding taxes that made most of such taxes essentially an indirect tax,
the replacement of such taxes with the proper income taxes would help in
improving the elasticity of the tax structure. Structural changes within the
indirect taxes also hold promise for higher tax revenues. As the tariff rates
have been reduced share of custom duties in total tax revenue has shown a
declining trend. From 40.7 percent in 1987-88, the share declined to 10.4
percent in 2001-02, but increased to 12.7 percent in 2002-03 and further to
14.7 percent in 2003-04 because of increase in imports. Whereas share of
excise duties has declined to just 7.4 percent that of sales taxes increased
from just 9.3 percent in 1987-88 to 36.0 percent by 2003-04. The
improved tax structure through better tax administration and widening the
tax net would result in higher tax revenue.
Table-2; Tax Structure of Pakistan
(%age share of tax revenues)
Years
Direct
Taxes
Indirect Taxes
1987-88
13.3
Total
86.7
Tariffs
40.7
Sales
9.3
Excise Duties
18.8
1990-91
16.0
84.0
38.9
13.0
19.3
1995-96
26.2
73.8
29.1
16.3
17.0
1998-99
27.0
73.0
20.1
17.6
16.0
1999-00
28.5
72.3
15.2
28.8
14.1
2000-01
29.1
75.8
14.7
34.8
11.4
50
A.R. Kemal
2001-02
30.8
69.4
10.0
34.9
10.2
2002-03
27.7
72.3
12.5
35.6
8.6
2003-04
29.6
70.4
14.7
36.0
7.4
Source: Based on data derived from Pakistan Economic Survey, various
issues.
Whereas restructuring of CBR and improvements in tax
administration was expected to result in higher tax revenues, growth of
GDP especially in the large manufacturing sector has not been
accompanied with a sharp increase in tax revenues. For example, in 200304, the nominal GDP grew at a rate of 13.2 percent and manufacturing
output from where most of the indirect taxes are collected, grew at a rate
of 21.7 percent, the tax revenues increased by just 8.7 percent. Moreover,
as Table 3 shows, the tax revenues are not correlated with growth.
Table-3: Growth of Tax Revenues
Year
Percentage
growth of
federal tax
revenue
Percentage
growth of
total tax
revenue
Growth rate
of GDP in
nominal
terms
Growth rate of
large scale
manufacturing in
nominal terms
1998-99
10.9
10.1
9.8
6.9
1999-00
3.7
3.8
6.5
10.3
2000-01
9.2
8.9
9.7
21.3
2001-02
8.7
8.3
5.7
3.2
2002-03
16.3
16.3
9.5
13.5
2003-04
8.7
9.5
13.2
21.7
In view of the slow growth of revenues and need for higher public
expenditures, the fiscal deficit can be kept in safe limits only if resource
mobilization is pursued vigorously.
III. Monetary Policy
Fiscal deficit and money supply are interrelated. The pursuit of
monetary policy is rather difficult when the financing of the fiscal deficit
absorbs a large proportion of the increase in credit. Fortunately because of
the decline in the fiscal deficit in recent years there is little demand by the
Breaking Out of the Debt Trap
51
public sector for bank credit5 and that has made it easier for the State Bank
of Pakistan to meet the credit needs of the private sector at low interest
rates without worrying too much about inflationary tendencies in the
economy. For example in 1998-99 money supply was contained but credit
to the private sector increased sharply. However in the next three years,
credit demand of the private sector slackened due to various reasons
resulting in excess liquidity with the banks.
Money supply increased very sharply in the 2001-04 period,
because of sharp increase in the foreign assets as the State Bank of
Pakistan purchased foreign exchange from the banks and open market.
Despite the sterilization money supply increased at rather high rates of
15.4, 18.0 and 19.4 percent in 2001-02, 2002-03 and 2003-04 percent
respectively.
Table-4: Growth Rate of Money Supply
(Percent)
Years
1987-88
Public Sector
Borrowing
17.3
Budgetary
Support
13.3
Private
Sector
13.4
Money
Supply (M2)
12.2
1997-98
8.4
9.5
13.8
14.5
1998-99
-11.8
-13.6
17.1
6.2
1999-00
13.3
7.9
3.2
9.4
2000-01
-7.1
-6.0
8.2
9.0
2001-02
3.7
2.9
2.5
15.4
2002-03
-10.9
-9.9
16.1
18.0
2003-04
9.7
12.5
30.1
19.6
Source: Pakistan Economic Survey, various issues.
The increase in money supply did not result in a sharp reduction in
the interest rates. The average interest rates on advances declined from 14
percent in 2001 to 7.5 percent by June 2004. Over the same period, call
money rate had declined from 9.0 to 1.9 percent. The weighted average
5
In some of the years, the government retired the bank debt.
52
A.R. Kemal
yield on treasury bills declined from 12.0 to less than 2.2 percent. Decline
in interest rates positively impacted the fiscal situation.
While the expansion in credit helped in reducing the interest rates,
it could have pushed up the inflation rate. Surprisingly, despite high
growth rate of money supply in 2001-02, 2002-03 and 2003-04, the
inflation rates have been quite moderate. However, by March 2005, it had
increased to double digit. Contraction of money supplies to control the
inflation would push up the rate of interest. It would have serious
implications for the fiscal deficit which would rise with high interest rates
and in turn increase the debt once again. The rising interest rates would
also impact the growth rates of GDP and investments.
Table-5: Inflation Rates
Period
GDP Deflator
1987-88
Consumer Price
Index
6.3
Wholesale Price
Index
10.0
1996-97
11.8
13.0
13.3
1997-98
7.8
6.6
7.7
1998-99
5.7
6.3
5.9
1999-00
3.6
1.8
2.8
2000-01
4.4
6.2
7.8
2001-02
3.5
2.1
2,5
2002-03
3.1
5.6
4.1
2003-04
4.6
7.9
6.8
9.6
Source: Pakistan Economic Survey, various issues.
IV. Exchange Rate Policy
The exchange rate is also a crucial variable in debt dynamics. Bilquees
(2003) noted that in a few years, the entire increase in debt burden may be
attributed to the exchange rate change. Because of the double digit inflation
rates in the 1990s, Pakistan had to devalue her currency. However, she did not
devalue enough to compensate for the increase in the relative inflation rate and
resultantly, real exchange rate by 1997-98 had in fact appreciated by 8.7
percent. Over the 1999-2002 period, however, there has been real devaluation.
Breaking Out of the Debt Trap
53
Since then the Pak rupee has appreciated against the dollar though the
currency has depreciated against other major currencies of the world.
During 1998-99 when sanctions were imposed on Pakistan, both
export and imports went down rather significantly. Whereas exports
gradually increased and during 2002-03 it grew at a rate of 19.1 percent
and in 2003-04 further by 13.8 percent, imports stagnated due to low
levels of economic activity. However, both in 2002-03 and 2003-04
imports increased by 20.1 percent resulting in an increase in the trade
deficit. Because of a sharp increase in workers’ remittances and decline in
interest payments, the current account balance of payments in the years
2001-02, 2002-03 and 2003-04 turned surplus. During the first 9 months
of the 2004-05 fiscal year the trade deficit has increased to $4.2 billion and
the balance of payments has turned deficit. To the extent the increase in
deficit reflects the increase in imports of machinery it is quite welcome.
However, if most of the growth in imports does not add to the productive
capacity it may be reflecting the diversion of domestic demand to imported
goods resulting in higher external debt in the short, medium as well as
long run.
Table-6: Trends in Balance of Payments
(Million $)
Trade Remittances Current Account
Balance
Deficit
6919
2557
2013
1682
Years Exports Imports
1987-88
4362
1995-96
8311
12015
3704
1461
4575
1998-99
7528
9613
2085
1060
2429
1999-00
8190
9602
1412
983
1143
2000-01
8933
10202
1269
1087
513
2001-02
9140
9434
294
2389
-1338
2002-03
10889
11333
444
4237
-3028
2003-04
12395
13607
1212
3871
-1313
Source: Pakistan Economic Survey, various issues.
Foreign exchange reserves lend stability of the exchange rate.
Foreign exchange reserves in Pakistan have been traditionally low; and
they rarely crossed $ 2 billion. Whenever the reserves fell, Pakistan had to
54
A.R. Kemal
devalue her currency. After the sanctions in 1998 the reserves had been
hovering around $ 1 billion and with rather high debt servicing Pakistan
was on the verge of default. However, in the post-2001 period, because of
reduction in trade deficit, the sharp increase in workers remittances,
deposit of overseas Pakistanis and the capital inflows, foreign exchange
reserves have increased sharply. The foreign exchange reserves have
crossed $12.5 billion of which around $ 10 billion are owned by the State
Bank of Pakistan and the remaining are resident and non-resident accounts
with commercial banks. Higher reserves resulting in stability of exchange
rates have also helped Pakistan in the resolution of the debt problem.
V: Trends in Debt and Debt Servicing
The debt problem has been haunting Pakistani policy makers
throughout the 1990s. Since the fiscal deficit despite some reduction until
recently was much higher than the growth rate of GDP, the public debt
continued to rise at a rapid rate. The public debt increased from Rs.538 billion
in 1987-88 to Rs.3,077 billion in 1998-99 and further to Rs.3,783 billion by
2000-01 i.e. 79.8, 104.7 and 113.5 percent of GDP respectively. The internal
debt increased from Rs.290.1 billion in 1987-88 to Rs.1392.5 billion in 199899 and further to Rs.1731 billion by 2000-01. Similarly, external obligations
increased from Rs.247.9 billion in 1987/88, to 1614.4 billion in 1998-99, and
to 2059.5 billion in 2000-01.Whereas public debt, internal or external debt is a
problem, it is the external debt which has stronger bearings on the economy.
The fact that the magnitude of total outstanding debt and even the per
capita debt increased significantly and Pakistan found it difficult to finance the
debt may suggest that the debt is beyond tolerable and sustainable levels. The
present value of debt as a percentage of GDP shown in Table-8 indicates that
Pakistan's debt is not all that heavy. It is not the debt burden that is excessive, it
is the difficulty to finance the short term debt which has been a major problem.
Table-7: Outstanding Total Debt as Percentage of GDP
Country
Debt as Percentage of GDP
2000
2002
Pakistan
Ethiopia
Argentina
Vietnam
45.0
52.0
56.0
36.0
45.0
63.0
66.0
35.0
Breaking Out of the Debt Trap
Brazil
Bangladesh
India
Sri Lanka
Egypt
Indonesia
Philippines
Morocco
Jordan
Turkey
Thailand
Malaysia
Tunisia
Kenya
Nigeria
55
39.0
20.0
44.0
23.0
96.0
64.0
49.0
90.0
57.0
64.0
52.0
57.0
39.0
74.0
48.0
22.0
17.0
48.0
28.0
89.0
77.0
51.0
83.0
77.0
49.0
57.0
65.0
40.0
82.0
Source: World Development Report: 2003, 2004 and 2005.
Another way of examining whether the debt has been in tolerable
limits or not is to estimate the debt Laffer Curve. Choudhary and Anwar
(2002) using the debt Laffer curve show that Pakistan's debt is not that
high that the creditors could write off at least a part of the debt and would
also gain in the process. The debt problem of Pakistan has been its lack of
capacity- to finance debt servicing. Increasing reliance on short/mediumterm financing to meet external obligations in the 1990s resulted in a sharp
increase in debt servicing. For example, in FY96/97, short/medium-term
debt represented about 18 per cent of Pakistan's external liability and
accounted for over 55 per cent of the debt servicing cost. The debt
servicing accounted for as much as 62.1 percent of the total exports and
46.0 percent of total foreign exchange earnings in 1996-97 (see Table-8).
Table-8: Profile of Domestic and External Debt
(Rs. billion)
1997-98
Total Debt Servicing
Total interest payment
Domestic
278.3
191.6
160.1
1998-99
343.1
220.1
178.9
1999-2000
2000-01
353.9
256.8
206.3
325.0
237.1
178.8
56
A.R. Kemal
Foreign
Explicit liabilities
Repayment of principal
Ratio of external debt servicing to
Export earnings
Foreign exchange earnings
Ratio of total debt servicing to
Tax revenue
Total revenue
Total expenditure
Current expenditure
28.7
2.8
86.7
38.0
3.2
123.0
44.9
5.6
97.1
50.5
7.8
87.9
55.4
34.9
35.3
23.6
36.5
23.4
37.4
23.3
78.4
64.8
43.9
52.5
87.8
73.2
53.0
62.7
87.2
65.9
47.6
55.0
68.9
57.0
49.5
49.3
Source: State Bank of Pakistan, Annual Report 2000-01.
The Government appointed the Debt Reduction and Management
Committee in early 2000 which submitted its report in March 2001
[Government of Pakistan (2001)]. The Report suggested revival of growth,
reduction in future borrowing, bringing down the real cost of borrowing,
divestiture of assets, improving the effectiveness of government
expenditure, and improving the carrying capacity through growth in
revenues, exports, remittances and other foreign receipts for resolution of
the problem. It also came up with a short term strategy which called for
rescheduling of $5.1 billion. While one can hardly disagree with the policy
suggestions the Report failed to come out with concrete policy actions.
Because of various reasons public debt has declined to 79.3 and 72.3
percent in 2002-03 and 2003-04 respectively. Following are some of the
factors for the turn around:
•
Writing off some debt and converting some into debt-social sector
spending swap. Pakistan got a debt relief amounting to $ 1495
from the USA;
•
Receipt of grants as budget support;
•
Rising remittances have improved the balance of payments
situation and has allowed the government to pay back expensive
loans and improve the liquidity situation;
•
Appreciation of the rupee against the dollar has also meant a
reduction in the foreign debt denominated in local currency;
•
Smaller budget deficit; and
Breaking Out of the Debt Trap
•
57
Reduction in interest rates.
Table-9: Profile of Domestic and External Debt
FY 99 FY OO FY 01
FY 02 FY 03 FY 04
3,077.0 3,336.8 3,884,5 3,783.0 3,824.0 3946.3
Total Debt
1. Domestic Debt
1,392.5 1,578.8 1,731.0 1,717.9 1,852.4 1975.4
2. External Debt
1,614.4 1,682.7 2,059.5 2,005.6 1,927.7 1937.5
3. Explicit liabilitiesa
70.1
75.4
94.0
59.5
41.6 33.4
As Percent of GDP
Total Debt
104.7
88.0
93.3
85.9
793 72.3
Domestic Debt
47.4
41.6
41.6
39.0
38.4 36.2
External Debt
54.9
44.4
49.5
45.6
40.0 35.5
Explicit liabilities
2.4
2,0
2.3
1.4
0.9
0.6
Total Public Debt Servicing
343.1
366.3 340.3 431.2 304.7 337.2
Total Public Interest
220.1
269.2 254.4 279.2 241.7 226.0
Payments
i. Domestic
178.9 1218,7 195.4 212.5 189.0 182.0
ii. Foreicn
38.0
44.9
51.3
61.1
49.2 41.0
iii. Explicit liabilities
3.2
5.6
7.8
5.6
3.5
3.0
Repayment of Principalb
123.0
97.1
85.9 164.9
63.4 111.3
Ratio of External Debt Servicing to
Export Earnings
31.6
36.5
32.7
36.7
22.8 32.5
Foreign Exchange Earnings
23.6
23.4
20.4
21.7
12.6 18.8
Ratio of Total Public Debt Servicing to
Tax revenue
87.8
90.3
77.1
90.2
55.1 55.2
Total revenue
73.2
71.5
61.5
71.2
42.5 42.2
Total expenditure
53.0
51.7
47.4
53.8
33.8 34.7
Current expenditure
62.7
58.5
52.7
63.4
37.8 42.9
Source: State Bank of Pakistan, Annual Report, 2002-03 and 2003-04.
Since raising of loans help in alienating the resource constraint, the
rising debt levels should not create problems if the loans were properly
utilized. For example, if it is assumed thut the entire capital inflows are
used only for investment purposes, then the foreien aid on average would
have been responsible for one-fifth of GDP growth. However the
assumption may not be tenable if foreign capital inflows result in higher
level of private and public consumption and as such the savings rate falls.
For example, see Bhagwati (1970), Chaudhary and Hamid (1987), Griffin
and Enos (1970), Mosley (1987) and Nabi and Hamid (1991). By
regressing the savings rates against the foreign capital inflows along with
other variables that affect savings behavior, it has been found that foreign
capital inflows have entirely been used to finance consumption in Pakistan
[See Kemal (1997). The increase in foreign capital has resulted in
58
A.R. Kemal
lowering savings by the same magnitude and as such foreign aid may have
contributed almost nothing to growth. Siddiqui and Malik (2001) estimate
directly the impact of debt on growth rates and argue that debt
accumulation and growth has a non-linear relationship. Up to a certain
level the impact is positive and beyond a threshold level the relationship
turns negative.
Why are the loans not properly utilized? There are at least four
major reasons for improper use of loans, viz. the donor's agenda;
corruption; capital flight; and the adverse impact of loans on domestic
savings. Whereas the donor agencies play an important role in economic
development by providing the requisite finances, they also influence the
policies and agenda of the government through choice of projects and
technology, programs, economic strategy and consequently the levels of
efficiency, employment, poverty, and income distribution. That
sovereignty is compromised has been extensively analyzed. For example,
see Corbo and Suh (1992), Jain and Bongorals (1994), Banuri, Khan, and
Mahmood (1997), Kemal (1994), Killick (1995), Park (1995),
Mcgillivary et al (1995), Morrissey (1995) Pasha (1995), Cameron
(1995), Tetzlaff (1995), and Reiger (1995). Tying of aid to sources and
to certain projects reduces the utility of aid and it may not generate
sufficient output and exports for debt repayment.
Corruption is widespread and a substantial part of the resources
earmarked for development projects are misused [see World Bank (2001)].
Widespread corruption in Pakistan is well reflected in the large number of
cases being investigated by the National Accountability Bureau. We may
note that a part of the money obtained through corrupt practices is used in
conspicuous consumption, while the remaining money leaves the country.
Dornbusch (1985) and Ize and Ortiz (1986) argue that currency
over-valuation, threat of devaluation and increasing domestic financial
instability results in capital flight. While these are important issues in
capital flight, there are many other motives that lead to capital flight. For
example, corruption money may leave the country to avoid any
accountability because the corrupt feel that such money is safer abroad.
Similarly, domestic producers may use foreign resources to fund domestic
investment and invest their own resources abroad even if the return is
lower outside the country as long as they earn more than the cost of funds.
Moreover, when implicit or explicit public guarantees create
interdependence among private investors, a move by one borrower that
Breaking Out of the Debt Trap
59
increases the likelihood of its own default increases the expected tax
obligations of other borrowers and by placing these funds abroad, they
escape increased tax payment6.
How the debt crisis impacts growth has been widely discussed in
the literature [For example, see Williamson (1989), Ahmed and
Summers (1992), Fishlow (1985), and Lustig (1999)]. Whenever the
debt crisis assumes significant proportions, the resource inflows dry out
and there is a negative transfer of resources from the debtor countries.
The investment tends to fall as the debt rises beyond safe limits,
investible resources fall due to a sharp increase in debt servicing,
investors lose confidence, demand falls to low levels, interest rates start
rising and there is a massive capital flight.
Does the writing-off or rescheduling of debt resolve the debt
problem? While it provides the breathing space, it hardly resolves the
crisis. The debt crisis is not resolved until the debt situation is such that
there is confidence in the country's ability to service its debt over time
under a reasonable range of economic conditions, and the debt burden
must not leave the debtor in a state of long term stagnancy [see Fisher
(1987)]. The efficient and pragmatic resolution of the debt crisis as pointed
by Carmicael (1999) is the one that stimulates investment and, through
investment, economic growth; lowers protection; and reforms are
instituted at both the macro economic level (especially fiscal restraint and
sound management of exchange rates) and the microeconomic level
(liberalization of markets, removal of distortions).
VI. Conclusions
The major conclusions of the study are summarized below:
1. Whereas Pakistan has been able to avoid the debt crisis the sharp
increase in the inflation rate, widening of trade deficit and reemergence of balance of payments is threatening the stability of the
economy;
6
Eaton (1987) and Khan and Haque (1985) argue that there is an asymmetric risk of
expropriation facing domestic and foreign investors. Domestic investors invest abroad
and they finance their investments from borrowing abroad especially when the debt is
guaranteed by the government.
60
A.R. Kemal
2. The three main contributing factors to the increase in public debt
are the primary fiscal deficit, interest rate-growth differential and
exchange rate changes;
3. Fiscal deficit until the late 1990s has been in excess of 6 percent of
GDP but declined to 3.9 percent in 2003-04. Since 1998-99, there
has been primary surplus though the surplus has shown a declining
trend since 2001-02;
4. The fiscal deficit has declined because of debt reprofiling, slow
growth of public debt, decline in interest rates, reduction in
development expenditure and an increase in non-tax revenues;
5. Since social and physical infrastructures need considerable
improvements, the only viable solution for reduction in the fiscal
deficit is resource mobilization by making the tax structure elastic;
6. Tax revenues and growth do not seem to be correlated in Pakistan.
Compared to nominal growth of 13.2 percent in GDP and 21.7
percent in manufacturing output, tax revenues increased by only
9.3 percent in 2003-04;
7. Sharp increase in money supply has led to sharp reduction in the
interest rates with positive implications for the fiscal deficit but it
has generated inflation during the current year;
8. Increase in foreign exchange reserves have helped in the
stabilization of the rupee against the dollar and that has positively
impacted the debt situation;
9. Whereas external debt had risen to around $ 29 billion in 2000, the
present value of debt compared to many countries shows that
Pakistan's situation has not been all that bad. However, it was debt
servicing that created the problems. The debt servicing accounted
for as much as 62.1 percent of total exports and 46.0 percent of
total foreign exchange earnings in 1996-97;
10. The total debt has stabilized in the last couple of years and as a
percentage of GDP the total debt has declined to 79.3 and 72.3
percent respectively in the last couple of years. A number of factors
have been responsible for this turn around which include writing-
Breaking Out of the Debt Trap
61
off some debt and converting some into debt-social sector
spending; grants for budgetary support; appreciation of the rupee
against the dollar; smaller budget deficit, reduction in the interest
rate, increase in remittances that improved the balance of payments
situation and enabled the government to pay back the expensive
loans; and
11. The debt crisis emerges because the loans are not properly utilized
and there are at least four major reasons for improper use of loans,
viz. the donor's agenda; corruption; capital flight; and the adverse
impact of loans on domestic savings.
62
A.R. Kemal
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Just Development - Beyond Adjustment with a Human Face
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Bilquees, Faiz, 2003, An Analysis of Budgetary Deficit, Debt
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Cameron, John., 1995, ‘The Impact of IMF and World Bank Policy
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Corbo, Vittorio and Suh, Sang-Mok, eds., 1992, ‘Structural Adjustment
in a newly Industrialized Country - The Korean Experience’. The
World Bank.
Dornbusch, 1985, ‘External debt, budget deficits and disequilibrium exchange
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Fischer, Stanley, 1987, Resolving the International Debt Crisis,’ in Tauris
Guides to Global Economic Issues - International Debt. ed. S. E.
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Management Strategy: Summary Report, Debt Reduction and
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Griffen, Keith and J.L. Enos, 1970, ‘Foreign Assistance: Objectives and
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Ize, Alain and Guillermo Ortiz, 1986, ‘Fiscal Rigidities, Public Debt, and
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Policy and Bureaucracy in Developing Societies’, Friedrich Ebert
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Keith GrifTen and J.L. Enos, ‘Foreign Assistance: Objectives and
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Kemal, A. R., 1994, ‘Structural Adjustment, Employment, Income
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Kemal, A. R., 1997, ‘Debt Accumulation, Debt Servicing and Growth’,
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Khan, Mohsin S., and Nadeem U. Haque, 1985, ‘Foreign Borrowing and
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McGiIlivray, Mark., Moward White and Afaal Ahmad, 1995, ‘Evaluating
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Hans Christoph., 1995, ‘Income Distribution, Poverty
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The Lahore Journal of Economics
Special Edition
Investment in Education and Skill Development
Sartaj Aziz*
“Pakistan’s investment in its people today not only falls below any
decent concept of national governance; we are simply not
preparing the nation for technological challenges of the 21st
century. Where do we start in such a wasteland of human neglect?
The situation cannot be reversed overnight. It would require
considerable investment in human development over a fairly long
period of time.” Dr. Mahbubul Haq:
A National Agenda: Critical Choices for Pakistan's Future: 1993
According to the traditional view in the development debate of the
1960s, land, labor and capital were identified as the main factors of
production and within these the focus was on expanding capital by
increasing investment to at least 15 percent of GDP to achieve a growth
rate of at least 5 percent.
By the early 1970s, however, the definition of capital was
broadened to include human capital. Investment in education, it was
pointed out on the basis of several studies, created better skills and
together with research for improved technology, would lead to higher
productivity and faster economic growth. The economic rationale for
investment in education was thus well established by the early 1980s.
The launch of the Human Development Report by UNDP in 1990
was another landmark in the conceptual framework for development.
Pioneered by late Dr. Mahbubul Haq, the Report prescribed a
supplementary criteria for determining performance called the Human
Development Index (HDI). The Index builds on four indicators: life
expectancy at birth, adult literacy rate, combined primary, secondary and
tertiary gross enrolment ratio and GDP per capita, assigned a maximum
*
Vice Chancellor, Beaconhouse National University, Lahore
74
M. Ashraf Janjua
value of 1, on the basis of which countries are categorized into High
(above 0.8), Medium (between 0.5 and 0.8) and Low HDI (below 0.5).
This concept “put people at the very centre of development” and
emphasized that human development was not just a means to more rapid
economic growth but also an end in its own right, as it provided “human
security to all the people everywhere in their homes, in their jobs, in their
communities and in their environment”.
The transition of the world towards a knowledge based
economy and growing competition in the wake of globalization has
further magnified the importance of human resources in general and of
education in particular as a key element in the process of social and
economic transformation. Key indicators of progress in the coming
decades will not only include the overall level of literacy, but also the
proportion of skilled workers in the total work force, the percentage
labor force employed in different sub sectors of communications and
the investment being made in research and technology. Only societies
which have acquired the required knowledge and skills will be able to
compete in the global markets.
The State of Education in Pakistan
Viewed in this context, Pakistan has a long way to go. The facts
and main indicators are well known, but the following shortcomings and
lags are particularly noteworthy:
1
-
Overall investment in education in Pakistan is still very low,
despite repeated commitments by successive governments to reach
the UNESCO target of 4 percent of GDP. Public spending on
education in Pakistan, as a percentage of GDP is only 1.8 percent
which is the lowest in South Asia1 and has in fact declined from
the peak of 2.6 percent reached in the early 1990s.
-
Because of a combination of high population growth and low
expenditure on education, the average level of adult literacy has
moved very slowly from 26 percent in 1981 to an estimated 54
percent in 2004. If this average is broken down between urban and
rural areas, between males and females and between different
Several Asian countries had already exceeded by the year 2000 the UNESCO target of
4% of GDP. India (4.1%), Philippines (4.2%), Iran (4.4%), Thailand (5.4%), Malaysia
(6.2%).
Money Supply, Inflation and Economic Growth
75
provinces, the wide disparities reflected in the dismal averages
becomes even more glaring. The rate of literacy for rural females in
2001-02 was only 7 percent in Balochistan, 11 percent in Sindh, 13
percent in NWFP and 22 percent in Punjab, yielding a national
average of 18 percent for female literacy. With this level of female
literacy, the program for population control will have only limited
chances of success because according to recent research, the
fertility rate is almost 4.74 for illiterate women and 3.14 for
women with tertiary education.
-
Despite a three fold increase in Pakistan’s GDP over the last 30
years, there has been no corresponding improvement in social
indicators. Pakistan was 144th on the global ranking of the Human
Development Index for 2001 among 175 countries. Pakistan and
Nepal are now the only two Asian countries among 34 countries
categorized with low human development index. The remaining 32
are all least developed African countries.
-
Moving from the quantitative to the qualitative aspects of human
development, the situation is even more depressing. On UNDP’s
Technology Achievement Index based on indicators like enrolment
of science students, patents and royalties, and access to telephones,
internet and electricity, Pakistan's rank is 0.16, compared to 0.20
for India and Sri Lanka, 0.31 for Brazil, 0.39 for Malaysia and 0.66
for South Korea.
-
Similarly on the global Knowledge Economy Index based on
information, infrastructure, economic incentives regime,
expenditure on research and the other indicators of human
development, Pakistan's rank is 1.36, compared to 2.07 for India,
3.11 for China, 3.36 for Sri Lanka, 4.11 for Brazil, and 4.72 for
Malaysia.
It should be clear from the foregoing that a very major effort will
be needed on several fronts if Pakistan is to improve not only its overall
level of literacy but also its ranking on the Human Development Index
(HDI), the Technology Achievement Index (TAI) and the Knowledge
Economy Index (KEI). The focus of these wide ranging efforts should be:
(a) Mobilizing additional resources for investment in education and skill
development, (b) paying greater attention to quality of education, (c)
76
M. Ashraf Janjua
ensuring more effective implementation of educational reforms and plans
through institutional and administrative improvements.
In the past few years, the Higher Education Commission and the
Provincial Governments have taken many important initiatives in the field
of education but there are many structural problems and institutional
obstacles that have affected the implementation of well meaning policies
and plans in the past2. Unless these obstacles are effectively tackled, the
new plans and reforms will not yield the expected results and targets. Four
such problem areas and obstacles are discussed in this paper.
Shrinking Fiscal Space in the Provinces
Under the Constitution, education is a provincial subject and 90
percent of all public expenditures in the Education sector are incurred by
the Provinces, but the Provinces depend primarily on Federal grants and
resource transfers to finance these expenditures.
In the past 15 years, the fiscal space provided to the Provinces
under successive NFC Awards has been shrinking and as a result the
average growth in real development and recurring expenditures has
declined progressively from 1989 onwards, as shown in the following
table:
Average Growth in Real Expenditure on Education (%)
Years
2
Total
Expenditure
Development
Expenditure
Recurring
Expenditure
Apart from education plans, policies and targets identified in eight five year Plans
between 1995 and 1998, there have been at least 12 comprehensive national education
policies and programs:
1. National Plan of Education Development, 1951-57
2. Report of the Commission on National Education, 1959
3. New Education Policy, 1970
4. The Education Policy, 1972-80
5. National Education Policy and Implementation Program, 1979
6. Literacy and Mass Education Commission, 1981
7. 10 Point Program, 1983
8. National Literacy Plan 1984-86
9. Nation-wide Literacy Program, 1986-90
10. National Education Policy, 1992
11. National Education Policy, 1998-2010
12. Education Sector Reforms Action Plan 2001 -05
Money Supply, Inflation and Economic Growth
77
1975-85
9.95
11.89
9.98
1986-89
11.81
17.01
11.73
1990-96
5.91
4.79
6.65
1997-02
-0.90
-10.83
0.56
Source: Federal Budget in Brief and Provincial Annual Budget Statements
(various issues)
After the first NFC Award in 1974, provinces received additional
resources and were able to increase development expenditures by 12
percent and recurrent expenditures by 10 percent per annum in real terms
in the period 1975-85. This trend received a boost in 1986, with Prime
Minister Junejo’s Five Point Program as the rate of annual increase
jumped to 17 percent for development expenditures and 12 percent for
recurrent expenditure during 1986-89. With the 1991 NFC Award, these
growth rates slowed down to 5 percent and 7 percent respectively, as the
practice of covering the budget deficits of the Provinces was discontinued
and the provinces were asked to limit non-development expenditures to
available resources.
Under the 1997 Award, the squeeze on provincial resources
became tighter as the provinces were asked to finance even their respective
development expenditures from their own surpluses and the safeguard
provided in the 1991 NFC Award to cover the provincial component of
PSDP was deleted. In addition, all the taxes including purely federal taxes
such as customs duties were included in the divisible pool with a 62.5:37.5
percent distribution between the centre and the provinces. As the proceeds
of customs duties declined as a result of the structural adjustment
programs, the provinces had to share one third of this decline and received
only one third of the substantial increase in Sales Tax revenues, instead of
80 percent under the 1991 formula.
With some increase in revenues, following accelerated inflows of
foreign assistance and remittances after 9/11, the share of the provinces in
the divisible pool (excluding special grants and electricity profits) has
increased from Rs.190 billion in 2001-02 to Rs.240 billion in 2004-05 but
this increase in educational expenditures has barely kept pace with the rate
of inflation. According to official figures, total expenditure on education,
in real terms, is still below 1.8 percent of GDP in 2004-05.
78
M. Ashraf Janjua
The most daunting challenge before the economic managers of
Pakistan is finding ways and means of raising total expenditures on
education to 4 percent of GDP and ensuring meaningful utilization of these
resources, to achieve universal literacy in the shortest possible time, to
improve the quality of education, and vastly expand opportunities for
technical and vocational education.
In this context, the National Finance Commission might earmark a
minimum percentage of resource transfer from the Divisible Pool, for
education. At present there is a deadlock over the percentage of the
Divisible Pool that will go to provinces which are demanding at least 50
percent against the offer of 47.5 percent from the Federal Government. It
will be in the longer term national interest to accept the provincial demand
on the condition that the additional 2.5 percent (or Rs.14 billion in 200405) will be allocated exclusively to the education sector by the Provincial
Governments. Allocation of larger financial resources for education
though necessary, is not however sufficient for providing quality education
to all. Ways must be found to utilize the resources wisely, cost effectively
and for the right priorities.
The role of the private sector in the field of education has been
expanding and according to one estimate, the private sector now provides
about one third of all educational facilities in the country. This is to be
welcomed. But education is a public good and must be provided by the
government to all its citizens without discrimination and particularly to those
who cannot afford the relatively higher fees charged by the private
educational institutions.
Reform of educational administration
One of the most important lessons of successful development
experience in other countries is the sequencing of various reforms. Economic
and sectoral reforms have yielded positive results only when these were
preceded by administrative and institutional reforms that ensured adequate
implementation. In Pakistan, most of the educational reforms, action programs
or initiatives have floundered because the bureaucratic structures responsible
for their implementation were totally inadequate. An important example of
this mis-match was the Social Action Program launched in 1992 with
substantial support from external donors. Allocations for primary education
under this program were doubled over the next five years, but on the average
only about half the physical and qualitative targets of programs were achieved.
Money Supply, Inflation and Economic Growth
79
Total enrolment increased from 11 to 19 million between 1990 and 2000, and
the literacy improved from 36 percent in 1991-92 to only 47 percent in 19902000. Successive evaluations of the program showed serious inadequacies in
its implementation. One such evaluation showed that as a result of frequent
transfers, the average tenure of the Secretary in the Education Department of
Punjab (with primary responsibility for the program and for a system
employing 350,000 teachers) was less than a year. There were also reports
about the appointment and transfers of teachers on the basis of political
patronage, absence of incentives for good teachers and weak enforcement
mechanisms for ensuring discipline and quality of service delivery. The
general attitude and mindset of the provincial and local bureaucracy was also
reported to be negative and not conducive to a merit based system. As a result
of these assessments, this landmark program was discontinued in 2002.
The institutional and administrative weaknesses of the education
system, mentioned above, have not however disappeared. Unless these are
remedied, other reforms can meet the same fate. Increased allocations can
be readily spent by building physical structures through contractors, but
the physical and qualitative targets in terms of actual enrolment, the
quality of education and more diversified education according to future
needs, will remain illusive.
Institutional reforms have to move in two directions: major
decentralization of responsibility from the provincial to the district and
lower levels and association of civil society with the planning and
implementation of education, including management of educational
institutions, at all levels. As is dramatically illustrated by the success of
many private NGOs in establishing good quality schools for the poor, there
is a growing pool of businessmen, educational experts and social workers
committed to the cause of education. They can play a major role in
upgrading the quality of public education.
Inequalities in Education
The third structural issue is the problem of growing inequalities in
the system. Inequalities in education are not confined to different literacy
rates between urban and rural areas, between males and females and
among different provinces. There is also a very high correlation between
education and income levels. As households with higher incomes have
access to better education and also to technical education, they will
naturally capture a larger proportion of the employment opportunities and
80
M. Ashraf Janjua
other benefits in a growing economy. Education inequalities are thus a
major cause of growing income inequality and poverty in Pakistan.
According to a study recently conducted by SPDC, in which a
District Education Index based on five educational indicators was
constructed for all the Districts in Pakistan, it was found that in Punjab 14
out of 34 Districts are in the highest quintile in terms of educational facilities
and only 1 in the lowest quintile. In Sindh only Karachi is in the highest
quintile and two districts in the lowest, the remaining 13 districts are in the
middle. In NWFP, out of 24 Districts, three are in the highest quintile and
three in the lowest. But in Balochistan only one district (Quetta) out of 26
districts is in the highest quintile, and as many as 15 districts are in the
lowest quintile.
It is absolutely necessary in expanding investment in education to give
special attention to districts falling in the lowest quintile. The basic purpose of
public spending on education should be to enhance the income earning
capacity of the poor and education is the most important starting point for the
process of social transformation leading to greater equality and social justice.
Another and more serious form of inequality springs from the
strong multi dimensional divide between English medium and Urdu
medium systems of education. In the recent past, this divide has been
further accentuated by the rapid expansion of madrassah schools, offering
religious education and catering to the educational requirements of low
income groups. These three streams of education not only provide
education under very different systems but also lead to divergent views
and opinions about political, economic and international issues, often
hostile to each other. This state of affairs, unless corrected through a more
unified system of education, can lend to greater polarization in society,
threatening the very unity of the federation.
System of Learning and Examinations
The fourth structural problem springs from the current system of
learning and examinations in Pakistan. Based on a rigid curricula and very
unexciting text books the system does not evoke the curiosity and
enthusiasm of young learners. Recent research has established that the
retention capacity of a child between the age of 5 and 10, when listening to
a “class lecture” is no more than 10 percent. But if the class is given a
practical assignment on the principle of ‘learning by doing’ their creativity
Money Supply, Inflation and Economic Growth
81
and enthusiasm mushrooms. Independent enquiry is a critical part of
learning provided the content of learning is appropriate for the age and
abilities of students. There is need for a paradigm shift in the curriculum
and in the teaching methodology at the primary level, if the objective of
evolving an inter-disciplinary learning process that stimulates the students
inherent desire to learn and his or her intellectual curiosity is to be
achieved.
The quality of teachers can be improved by recruiting teachers on
merit on the basis of periodical competitive examinations and by offering
higher grades to teachers with higher qualifications.
Similarly, the system of examination has to move away from
memorizing certain lessons for the final exam, to a more systematic
assessment of understanding, reasoning, originality and creativity so that the
system of teaching, learning and testing becomes an integrated process. At
present the conduct of secondary and higher secondary examinations is
centralized under various boards of education. Under this system the
students are taught by one teacher, the examination papers are composed by
another teacher, without knowing what has actually been taught and a third
teacher marks the examination papers. There is no provision to include an
assessment of the projects undertaken by the students or individual
attainment of a student during the year. Examinations are largely based on
text books and tend to be quite repetitive. That is why students also are not
encouraged to go beyond studying (in fact memorizing) certain portions of
the text books. Even laboratory experiments, a vital part of science
education, are reduced to memorizing relevant passages from the lab
manuals.
A gradual shift to the semester system of teaching and assessment in
the system of higher education is necessary to improve the quality of
education in Pakistan. The conceptual framework of the National
Curriculum 2000, prepared by the National Committee, with the
participation of many outside experts is a very forward looking document
but its implementation has been adversely affected by recent controversies
over text books and the Agha Khan Examination Board.
Conclusion
As explained above, the benefits of investment in education should
not be viewed only in economic terms, these include social and political
82
M. Ashraf Janjua
benefits, and extend from the individual to the business firm, civil society
and the country as a whole.
The return on education can also be measured in different ways:
monetary and non monetary, private or social:
-
Private monetary returns in education are reflected in higher wages
or salaries that accrue to the worker or the employee. Higher
returns also encourage more students to enroll in disciplines with
higher demand in the market.
-
Collective or social monetary benefits of education include higher
levels of human capital and skill development leading to
accelerated economic growth.
-
Private non-monetary benefits of education may include greater
political awareness, richer cultural interactions in society and more
useful intellectual contribution to the store of human knowledge.
Finally, education is the most important route to overcome
unemployment and poverty. That is why the time seems ripe to incorporate
in our laws the right to education as a basic human right and give investment
in education the highest priority in managing the Pakistan economy.
Money Supply, Inflation and Economic Growth:
Issues in Monetary Management in Pakistan
M. Ashraf Janjua*
Introduction
*
Dean, College of Business Management, This article is the revised and updated version
of the paper which the author presented at the First Annual Conference on the
Management of Pakistan Economy organized by Lahore School of Economics, Lahore on
April 28-30, 2005. Views in this article are those of the author and not necessarily of the
IoBM or Lahore School of Economics.
Money Supply, Inflation and Economic Growth
83
The experience of the State Bank of Pakistan (SBP) in conducting
the monetary policy of the country over the years comprises a whole range
of regimes. While the overall objectives of monetary policy have remained
the same, policy contents – intermediate targets, choice of instruments and
controls etc. – have varied considerably over the years.
(I) 1948-59
Given the conditions prevailing in 1948 the SBP adopted a
monetarist approach so far as achievement of price stability was
concerned. One of the objectives of money policy was to develop the
various aspects of the financial sector particularly the banking system. In
this context monetary policy gave importance to the asset side of the
banking system. Thus, upto 1960 the bulk of monetary expansion was on
account of credit to the government sector.
In the early years of the country’s economic history the size of the
private sector was small and banks were very conservative in lending.
Thus, upto 1959-60 lending to the private sector was a relatively
unimportant source of changes in money supply compared with deficit
financing by the public sector.
84
M. Ashraf Janjua
Table -1
Rs. Million
Period
Private Government Other
Sector
Sector
Items
Total
Bank
Credit
Foreign Monetar
Sector y Assets
1950-51 to
1954-55
257.2 (12.8)
1468.0
(73.25)
281.5
(14.0)
2006.7
(100)
-573.0
1433.7
1955-56 to
1959-60
724.9
(23.95)
1442.6
(70.98)
-73.57
(5.07)
2094
(100)
287.0
2381
Source: State Bank of Pakistan various publications. Figures in
parenthesis are the percentage share in the total credit.
The demand for bank credit from the Public Sector emanated from
the following factors:
1) Growing need of liquidity in the economy.
2) Government’s heavy expenditure on the development of
infrastructure.
3) Pakistan Industrial Development Corporation (PIDC) was setup to
make up for investment in projects where the private sector was
reluctant to enter.
4) Funds for commodity operations.
Money Supply, Inflation and Economic Growth
85
Percentage Share in Total Credit
1950-51 to 1959-60
Other Items
5.07%
Private Sector
23.95%
Government
Sector
70.95%
Given the underdeveloped financial system** including virtually
non-existent money market, the responsibilities of the State Bank during
the early years of its existence (1948–59) went beyond the conventional
functions of a Central Bank. These included rehabilitation of the banking
system and ensuring its growth through helping the setting up of financial
institutions, developing the money market and training bankers.
(II) Monetary Policy 1960-72
The year 1959-60 marked the beginning of a phase of liberalization
and deregulation of the economy and substantial flow of resources from
abroad. The Government’s liberal economic policies met with an
enthusiastic response from the private sector. Both the expansion in
investment and production entailing liberalization enhanced demand for
credit in the private sector.
With high growth rates of investment and production as well as
large movements in the external accounts, policy changes were made by
the State Bank to keep pace with these developments and adequately meet
the genuine credit needs of the economy. An overview of the monetary and
credit developments during 1959-60 to 1971-72 shows major changes in
**
Financial system comprises (i) Regulatory authorities (ii) Banks and non-bank financial
institutions (iii) financial markets: money, capital and foreign exchange markets and (iv)
Financial infrastructure i.e. legal framework, accounting, auditing, Human resources and
skill and information system etc.
86
M. Ashraf Janjua
terms of policies, rate of expansion in bank credit and its sectoral
distribution.
Table-2
Rs. Million
Period
Private Governmen
Sector
t Sector
Other
Items
Total
Bank
Credit
Foreign Monetar
Sector
y
1960-61 to 4524.4
1964-65
(81.0)
1447.5
(26.0)
-383.2
(-7.00)
5588.7
(100)
-412.7
5176
1965-66 to 5539.4
1969-70
(67.0)
4223.9
(51.0)
-1480.2
(-18.0)
8283.1
(100)
273.6
8557.3
1970-71 to 2043.2
1971-72
(77.0)
3573.8
(134.0)
-2958.5
(-111.00)
2658.5
(100)
235.3
2893.8
Figures in Parenthesis are percentage share in the total
credit
Percentage Share in Total Credit
1960-61 to 1969-70
Other Items
-13.43%
Private sector
72.55%
Government
sector 40.88%
Money Supply, Inflation and Economic Growth
87
Percentage Share in Total Credit
1970-71 to 1971-72
Other Items
-111%
Private
Sector
77%
Government
Sector
134%
(III) Choice of Policy Instruments for Monetary Management 1948 –
72
1) Interest Rate Policy
During this period interest rate as an instrument of monetary policy
was rarely used. The State Bank was of the view that the effectiveness of
interest rate change in the economy was subject to many constraints. During
1949-50 - 1958-59 bank credit formed a small percentage of GDP. Therefore,
the effects of changes in the Bank Rate were unlikely to be substantial. Also, it
was viewed that other general credit control weapons would not be effective
because of imperfections in markets. The banking system was not widespread
and currency constituted a pre-dominant part of the Monetary Assets (M2)*.
Even during the price pressure between July, 1956 and June, 1958,
the State Bank’s view remained that a higher Bank Rate or restrictive
monetary policy all by itself could not possibly offset the powerful
expansionary impact of government operations because of the limited role
that the Bank Rate played as a determinant of money supply.
Change in the Bank Rate from 3 to 4 % on January 15, 1959 to
supplement fiscal policy to check inflationary pressure had no effect on the
level of bank advances and failed to exercise any influence to reduce
consumption.
*
M2 comprises (i) currency in circulation (ii) demand deposits with scheduled banks (iii)
time deposits with the scheduled banks and (iv) other deposits with the State Bank. M 1
comprises M2 minus time deposits of scheduled banks. M0, which is reserve money
comprises (i) currency in circulation (ii) currency in the tills of scheduled banks, (iii)
scheduled banks reserves with the State Bank and (iv) other deposits with the State Bank.
88
M. Ashraf Janjua
Up to 1972 the main thrust of the State Bank policy was based on
the belief that any increase in the interest rate would adversely affect the
investment activity. The Bank Rate was changed twice during this period
i.e. from 4 to 5% on 6 th June, 1965 as a part of containing credit
expansion in the private sector and from 5 to 6% after devaluation of the
rupee on 11th May, 1972 as a follow up measure to protect the benefits of
devaluation.
Even in 1962-63 when credit to the private sector had expanded
considerably the State Bank introduced the quota system and did not favor
an increase the in Bank Rate because of the Bank’s perceived adverse
implications of such a measure for the country’s economy.
(VI) Regulations of Deposit and Advances Rates
During this period deposit and advances rates were also regulated
by the SBP.
(V) Quota System and Cash Reserves Requirements
As a part of containing credit expansion to a prudent level the State
Bank introduced the Quota System on 1st August 1963. This was in respect
of scheduled bank’s entitlement to borrowing from the State Bank against
government securities. Borrowing in excess of the quota was subjected to
enhanced rate of interest.
Changes in the Reserve Requirements and the introduction of
Quota System were found to be ineffective in correcting the monetary
situation. Both the government and the private sector continued to borrow
heavily during 1963-64, and Monetary Assets expanded by 16.9% despite
a contractionary influence of the external sector. Earlier, Monetary Assets
had increased by 17.2% during 1962-63.
In January 1965 all types of borrowing were covered by the quota
system including bank borrowing by the central and provincial
governments. Banks’ borrowing entitlement against government securities
was reduced from 50% to 25%. Borrowing in excess of the quota was
subjected to graduated penal rates. Also, Reserve Requirements of
scheduled banks were raised from 5% to 7.5% in two installments.
Notwithstanding these measures credit to the private sector
continued to expand and the government’s bank borrowing also increased
Money Supply, Inflation and Economic Growth
89
following the 1965 war. As a result of a record expansion in Monetary
Assets (M2) of Rs. 2036 million during 1965-66, imbalance between
demand and supply put pressure on prices which increased by 5.7% during
1965-66 and 10.3% during the following year.
However, credit demand from the private sector continued to
expand. As a result, in the middle of 1967 the State Bank increased the
Reserve Requirement to 6.25% and introduced a whole range of selective
credit controls.
(VI) Selective Credit Controls
During 1959-72 the State Bank made extensive use of Selective
Credit Controls to achieve the objective of monetary policy. Selective
Credit Controls means action on the part of monetary authorities to control
the flow of credit for particular purposes. Selective credit controls aim at
channeling bank credit to socially desirable and economically useful
purposes. As rightly pointed out by Richard Porter “selective credit
controls are less devious and can be asserted without so many unpalatable
side effects; for this reason they have been more acceptable as a policy tool
of the State Bank…….”.
Selective Credit Controls pre-dominantly consist of changes in
minimum margin requirements to be retained by banks on advances
against various commodities, to various borrowers, ban on advances
against selected commodities, margins against letters of credit etc.
(VII) Monetary Policy and Movements in Prices 1948-72
Broadly speaking, the entire period up to 1971-72 can be
described as a period of relative price stability. The average price
increase during the first Five-Year Plan (1955-56 to 1959-60) was 3.2%,
during the second Five-Year Plan (1960-61 to 1964-65) it was 2.3% and
during the third Five-Year Plan (1965-66 to 1969-70) it was 4.5%. This
also included the only double digit increase in prices of 10.3% during
1966-67 which was the combined result of excessive monetary
expansion during 1962-63 to 1965-66 (the annual average of 16.5%
compared with annual average growth rate of 7.65%), poor food crops
and interruption in the inflow of foreign assistance. The relative price
stability over the years resulted from high growth rates, an average of
6.78% during the 10 year period between 1960-61 to 1969-70 and
90
M. Ashraf Janjua
increase in the availabilities because of liberal import policy and deficit
on current account. During the two turbulent years, 1970-71 and 197172, prices came under pressure as a combined result of demand pressure
stemming from turbulent conditions and decline in growth rate to 1.2%
during 1970-71 which rose marginally to 2.3% during 1971-72.
The State Bank authorities constantly monitored the movement in
prices for a possible policy change to contain inflationary pressures.
Whenever the Bank felt necessary, measures were taken to contain
demand through credit management. The State Bank kept two factors in
view: The behavior of price movement in the country was determined by
the agriculture sector which was susceptible to changes in weather
conditions, and the pattern of consumption was changing significantly,
particularly in urban and sub-urban areas because of a rise in per capita
income. When the third Five-Year Plan (1965-66 – 1969-70) placed
greater emphasis on heavy industries and infrastructure, the State Bank
unified Cash Reserve Requirements (25th July, 1963) and introduced the
Quota System in respect of scheduled banks’ borrowing from the State
Bank against government securities.
The excessive monetary expansion was mainly accounted for by
large scale deficit financing. The Third Five-Year plan had envisaged that
deficit financing in the entire Plan period would remain within Rs. 1500
million. Actually, deficit financing during the Third Plan period amounted
to Rs. 4350 million, (Rs. 4.35 billion), though both the growth rate and
availability of aid were less than the original estimates”.
The graph below depicts movements in M 2/y ratio and inflation
during 1950-51 and 1971-72. The graph shows that the biggest price
increases always followed a peak in the M 2/y ratio, with a variable time
lag.
Money Supply, Inflation and Economic Growth
91
12
10
8
6
4
2
0
-2
-4
-6
Rate of Inflation
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
19
50
-5
19 1
52
-5
19 3
54
-5
19 5
56
-5
19 7
58
-5
19 9
60
-6
19 1
62
-6
19 3
64
-6
19 5
66
-6
19 7
68
-6
19 9
70
-7
1
M2/Y
Monetary Expansion and Prices
Ratio
Inflation
(VIII) Monetary Policy and Economic Growth -1948-72
Monetary policy’s direct contribution to economic growth can be
judged from its achieving the objectives of (i) increasing domestic savings
(as a percentage of GNP), (ii) real investment and (iii) the rate of
economic growth including special schemes to provide credit to otherwise
neglected sectors. Indirect contribution means (i) maintaining relative
price and exchange rate stability that should generate confidence among
economic agents (ii) development of institutional framework for
promoting savings and investment (iii) an efficient payments system and
(iv) distribution of credit.
Various governments during this period set goals and adopted
policies to expand exports in order to increase the import of capital goods
and an increase in domestic savings. Various incentive schemes intended
to promote both of these objectives were implemented from time to time.
However, at no time did the government attempt either to increase public
savings significantly by increasing taxation or to increase private savings
by higher interest rates. The government tried to increase real investment
as a share of GNP by means of an import policy that restricted imports of
consumer goods, both by high tariffs and by import licensing and increase
in the share of investment goods (and raw materials for investment goods
industries) in total imports.
A policy of changing the composition of available goods in favor
of investment goods relative to consumption goods – while at the same
92
M. Ashraf Janjua
time not changing the composition of demand – would require an increase
in the relative prices of consumer goods.
During the period under review money supply increased at a rate that
was larger than that consistent with price stability. Also, the government was
not willing to let consumer prices rise and had always attempted to exert
some influence on them. Until 1959/60, these attempts took the form of
legal price controls and, in the case of food grains, requisitioning from
farmers at fixed prices. With effect from 1959/60, the government relied
more on increasing supplies as a means of holding consumer prices down.
It is obvious that the policy of holding consumer prices down by
meeting any increases in demand at the controlled prices through imports –
and by permitting domestic consumers to bid away potential exports – was
inconsistent with a policy of increasing the domestic savings rate and
increasing the share of investment in GNP.
The following table shows savings ratios in Pakistan during 195990 – 1971-72.
Table-3: Trends in Domestic Savings
Year
GDP
Domestic Saving
% of GDP
1959-60
18257
2680
14.679301
1960-61
20032
3073
15.340455
1961-62
20919
3533
16.888953
1962-63
22406
4513
20.141926
1963-64
25157
5762
22.904162
1964-65
28669
7111
24.803795
1965-66
31690
6535
20.621647
1966-67
36126
7465
20.663788
1967-68
38985
6787
17.40926
1968-69
41945
6888
16.421504
1969-70
48298
8290
17.164272
1970-71
51273
8761
17.086966
Money Supply, Inflation and Economic Growth
93
Sharp increase in savings as a percentage of GDP during 1962-63
and 1966-67, a period of high growth rate, was due to liberal imports of
capital goods enjoying a highly preferential exchange rate and high
marginal rate of savings by the Corporate Sector.
The Export Bonus Scheme (EBS), by virtue of providing preferential
exchange rate for the import of investment goods, encouraged investment
and growth. This, combined with inflow of aid till the 1965 war with India, a
liberalized and deregulated environment, a law and order situation that was
conducive to investment by the private sector, contributed to a high growth
rate and impressive marginal rate of savings by the Corporate Sector.
(IX) Monetary Policy 1972-88
Monetary policy during this period was characterized by:
(1) Creation of National Credit Consultative Council (NCCC) and
Annual Credit Plan, 1972
(2) Regimes of credit ceilings with effect from October 1973
(3) Directed, concessionary and mandatory credit targets
(4) Targets for fixed investment and exports
(5) Control on bank deposits and lending rates
Thus the monetary policy, which prior to 1972 was essentially
conducted through an indirect method of credit control, was now run by
fiat. National Credit Consultative Council (NCCC) and Annual Credit
Plan were introduced in 1972. It was realized in 1972 on the basis of past
experience that use would need to be made of more direct methods of
controlling the volume, the cost and allocation of credit in the economy.
Hence a regime of credit ceilings was introduced in October 1973. In
addition, the State Bank prescribed for commercial banks annual
mandatory targets for production loans, tobacco marketing and loans both
for production and development for small farmers. Simultaneously there
were protected targets for fixed investments and refinancing of loans under
locally manufactured machinery (LMM) and agro based activities.
94
M. Ashraf Janjua
Also subsidized/concessionary loans were given under various
Special Financing Schemes introduced by the State Bank during 1972-73.
Before 1972 it had emerged that (a) there was concentration of
credit (b) and interlocking of the ownership of assets structure: industrial
enterprises, banking insurance, shipping etc. The Bhutto Government, as a
part of policy objectives to reduce income inequalities and to bring about a
more just and egalitarian social order, introduced a comprehensive
banking reforms program in May 1972. These banking reforms
emphasized two aspects: (1) End of interlocking of banks and industry etc.
(2) distribution of capital to be spread widely. This was recommended
because when a commercial or industrial undertaking has large interest in
a bank it manages to get easy access to credit facilities of the State Bank
which would lead to further concentration of wealth.
(X) Choice of Policy Instruments - 1972-88
While the credit ceilings regime was by itself the main instrument
of credit management, use was also made of other policy instruments.
i. The Bank Rate
By 1972, it was realized by the State Bank authorities that the past
policy of not making significant changes in the Bank Rate, because of its
likely adverse impact on demand for credit, needed to be revisited, despite
the fact that changes in the Bank Rate between 1948 and May 11, 1972,
generally failed to have the desired effect on credit expansion. Realizing
that availability of bank credit mattered more than its cost, the Bank
authorities became more flexible on the interest rate policy.
On May 11, 1972, the Bank Rate was also raised from 5 to 6%
accompanying the devaluation decision. Although subsequently the Bank
Rate was gradually raised to 10% and the deposit rates and the lending
rates of scheduled banks were also raised, the rates of credit and monetary
expansion accelerated during this period.
ii. Selective Credit Controls
These were used mainly to (a) direct the flow of credit to selected
sectors and sub-sectors (b) to prevent the build-up of inventories
Money Supply, Inflation and Economic Growth
95
particularly of commodities of daily use and (c) serve as an adjunct to
import policy.
iii. Statutory Liquidity Ratio SLR
The Statutory Liquidity Ratio (SLR) was raised from 25% on 1st
September, 1967 to 30% on 6th June, 1973. It was further raised to 35% on
16th August, 1973, to absorb a part of excess liquidity entailing large scale
monetary expansion in the preceding year. But raising the SLR could not
control the overall volume of credit as it could only influence its distribution
between the public and private sectors, or else would result in crowding out
of the private sector if targeted overall credit expansion was kept unchanged.
(XI) Credit Planning and Credit Ceilings: An Appraisal
At the macro level, credit budgeting was, by and large, an effective
instrument of monetary policy in terms of providing adequate liquidity for
the development process without generating unmanageable price increases.
Also, credit budgeting was very helpful in directing bank credit to previously
neglected priority sectors of the economy. However, the experience had
shown that the technique of credit ceilings was not without problems. For
one, credit ceilings tended to adversely affect commercial banks’ incentive
to mobilize deposits. In the same context, credit ceilings also inhibited
competition among banks and gave rise to complications arising from
differences in banks’ types of business, size and current rate of growth.
Credit ceilings severely limited a bank’s ability to respond flexibly to
demands of the economy. It was also observed that before the upward
revision of the rate of penalty, some commercial banks were tempted to
violate the credit ceilings as the earnings expected from their credit
operations more than compensated the loss in the form of penalty. Banks
also began to issue guarantees to their clients who could borrow funds from
DFIs/NBFIs against their guarantees.
Not only did credit for budgetary support enjoy prior claim over all
other credit allocations, very often the Government borrowed excessively
from the banking system, resulting in monetary expansion exceeding the
target agreed in the credit plan. During the five years ended June 1988,
government borrowing from the banking system accounted for nearly 55%
of increase in monetary assets, including 64.5% during 1987-88.
96
M. Ashraf Janjua
(XII) Monetary Policy, Economic Growth and Inflation during 197288
This period witnessed a series of changes in economic management
and policies including in particular financial polices. The Bhutto regime was
marked with radical changes like widespread nationalization – industry,
shipping, insurance, education, banks etc. – and hence the increasing role of
the public sector in economic management. In the absence of both (i) trained
cadres for the management of economic enterprises and (ii) accountability
mechanism, together with intervention in economic affairs by party people
and labor unions, as well as marginalization of the role of the private sector,
economic growth was poor and inflation touched record high levels.
However, during the Bhutto regime sizeable public investment
took place in mega Public Sector Projects. Thus, if during 1974-75 the
budget deficit was 10.6% of the GDP, the public sector program was over
10.2% of the GDP. Economic benefits of these heavy investments were
largely reaped by the Zia-ul-Haq regime.
Economic growth during the Zia-ul-Haq period was quite
impressive, partly attributable to the good performance of agriculture – in
no small measure to availability of water and fertilizer - rehabilitation of
private sector and the law and order situation. Also, there was no political
intervention and economic management was essentially in the hands of
experienced bureaucrats.
The table below shows economic growth, monetary expansion and
changes in prices, during 1972-88.
Table-4: Inflationary Gap 1972-1988
(in percentage)
End June
Monetary
Growth
1972
Consumer
Price Index
(CPI)
(a)
4.7
1973
9.7
22.7
6.7
16.0
1974
30.0
13.3
7.0
6.3
1975
26.7
7.8
3.3
4.5
(b)
3.6
GDP
Growth
(fc)
(c)
2.1
Inflationary
Gap
(b-c)
1.5
Money Supply, Inflation and Economic Growth
97
1976
11.7
25.9
3.4
22.5
1977
11.8
24.3
2.8
21.5
1978
7.8
23.0
7.8
15.2
1979
6.6
23.5
5.6
17.9
1980
10.7
17.6
6.9
10.7
1981
12.4
13.2
6.2
7.0
1982
11.1
11.4
7.6
3.8
1983
4.7
25.3
6.8
18.5
1984
7.3
11.8
4.0
7.8
1985
5.7
12.6
8.7
3.9
1986
4.4
14.8
6.4
8.4
1987
3.6
13.7
5.8
7.9
1988
6.3
12.3
6.4
5.9
10.3
16.3
5.7
10.6
Average
Monetary Expansion, Economic Growth and Inflation 1972-1988
Monetary Expension, Economic Growth and Inflation
1972-1988
35
25
30
20
20
15
15
10
(%)
(%)
25
10
5
5
0
0
1
2
CPI
3
4
5
6
7
8
Monetary Grow th
9
10 11 12 13 14 15 16 17
GDP Grow th (f c)
Inf lationary Gap
98
M. Ashraf Janjua
The table shows that (1) during 1973 and 1976 to 1979 annual
monetary growth was over 20% and this is reflected in the increase in prices.
(2) the average growth rate during the Bhutto regime was 4.6% with an
average price increase of 18%. Corresponding figures for the Zia-ul-Haq
period were 6.6% and 7.3% respectively. Apart from the large fiscal deficit
during the Bhutto regime (an average 8.4% of GDP) and heavy bank
borrowing, quantum jump in the unit cost of imports contributed to inflation as
a cost-push factor.
One thing that emerges from the Table is that during this period
there is no monetary overhang; average growth rate of 5.7% over the years
and 10.3% increase in prices give an average of 16% increase in money
incomes. This compares with an average of 16.3% increase in monetary
growth. This is despite the fact that during the Bhutto period cost push
factors in the form of increases in the unit prices of imports together with
the devaluation of the rupee in May 1972, were quite strong.
(XIII) The Government, the State Bank and Monetary Policy
Since the early 1970s, when banking reforms were introduced
including institutional changes and subsequent nationalization of banks in
1974, the Government has exercised virtually decisive influence on the
management of monetary policy. However, even before the changes, the
rules provided an effective control of the Government in the use of
instruments of monetary policy. More specifically, reserve requirements of
the commercial banks as well as liquidity requirements, the two important
instruments of monetary policy, could be changed only with the
government’s approval.
Very frequently, the actual budget deficit was larger than the original
estimates, mainly because of the Government’s over-estimation of revenues
and under-estimation of expenditure as well as because of unforeseen
developments resulting in additional claims on Government resources.
Borrowing from abroad depended on several imponderables, while nonbank borrowing, being on tap, varied considerably vis-à-vis budget
estimates. An attraction for government borrowing from the banking system
was the sizable subsidy involved. The State Bank was paid a nominal
interest of 0.5% on ad hoc Treasury Bills while banks, over the years, got 4.5
to 6% on Treasury bills on tap. There was no limit on government
borrowing from the banking system. All these features have meant erratic
behavior of government’s actual bank borrowing, both in terms of year to
year changes in absolute amount as well as in terms of actual borrowing visà-vis original and revised estimates. Such changes have constituted an
Money Supply, Inflation and Economic Growth
99
element of uncertainty and very often a leakage in the management of
monetary policy.
It is noteworthy that for most of the period during 1976-88, for which
detailed data are available, Government and Public Sector Enterprises used a
great bulk of total bank credit. During 1975-76 government’s bank borrowing
for all purposes at Rs. 5.24 billion together with bank borrowing by Public
Sector Enterprises of Rs. 1.76 billion constituted 80.57% of total credit
expansion of Rs. 8.51 billion. This percentage stood at 79.5 in 1977-78. It
showed a sharp decline to 41.7 in 1985-86 and further to 37.6 in 1986-87. For
the rest of the years it varied between 56.7 in 1981-82 and 76.4 in 1979-80.
Table-5: Bank Borrowing
Rs. in billion
Government Non-Government
Target Actual Target Actual
Bhutto Regime 1972-73 - 1976-77
9.17 16.69
18.87
16.35
Zia-ul-Haque Regime 1978-88
Total
64.30
105.6
142.21
162.00
74.47 121.85
161.08
178.35
Table-6: Government Bank Borrowing for Budgetary Support &
Commodity Operations (1972-73 -1987-88)
Rs. in billion
Target
Budgetary Support
Commodity Operations
(XIV) Quasi Fiscal Deficit
Actual
43.06
104.30
14.40
21.60
Apart from borrowing from the banking system for budgeting
support, the banking system – both the State Bank and Scheduled banks –
provided resources to Government, both Central and Provincial, to PSEs,
as well as resources and subsidy to government sponsored institutions.
This is a quasi-fiscal deficit, which may comprise the following.
i. Government’s bank borrowing for (stood at Rs. 11.46 billion as of
commodity operations
end June 1988)
100
M. Ashraf Janjua
ii. Bank loans to PSEs
(stood at end June 1988- 36.12
billion)
iii. State Bank lending to development (outstanding as of end June
banks and other institutions
1988 Rs. 34.1 billion)
iv. Subsidy involved:
a) Lending to DFIs / NBFIs
b) Subsidy
on
government
Lending
Rs. 3.7 billion during 1988
to During
billion
1973-88
Rs.
9.43
(XV) Market Based Monetary Management: Reserve Money
Programming
Before the introduction of financial sector reforms State Bank
had adopted monetarist approach to monetary policy. Monetary
expansion and credit requirement of the economy were worked out on
the basis of (i) targeted growth rate (ii) inflation target and (iii) the
likely behavior of the foreign sector. Allocation of credit was through
administrative fiat: credit ceilings, credit deposits ratio and several
schemes of directed, mandatory and concerning credit. The process of
shifting monetary policy to indirect, market-based instruments went
roughly through four phases. Within the overall framework of the
Annual Credit Plan, the elaborate regime of credit ceilings introduced
in October, 1973 for individual banks to meet the credit needs of
private the sector, and later on of PSEs also, continued till end-June,
1992, although by this time a number of reform measures had already
been taken to initiate the transition from administrative fiat to a
market-oriented approach. The system of credit ceilings was replaced
with the somewhat flexible system of credit deposit ratio (CDR) 3 with
effect from 1 st of August, 1992. Various reforms continued during this
phase (1992-93 to 1994-95), culminating in the abolition of CDR itself
on 30th September, 1995. This marked the beginning of the third phase
covering the period up to June 2001. Indicative credit targets replaced
the CDR and the main reliance to conduct monetary policy was placed
3
The decision to discontinue the scheme of credit ceilings was made on 14 th January,
1992 to be effective from 1st July, 1992. The credit- deposit ratio as an instrument of
credit management became effective from 1st August, 1992.
Money Supply, Inflation and Economic Growth
101
on Open Market Operations (OMOs) 4. Subsequently, when the Pak
rupee was put on free float in May 1999 and in the real sense in July,
20005, Monetary Policy and Exchange Rate Policy were fully
integrated. This marked the beginning of the fourth and the final stage.
Market based monetary management involved reserve money
programing, the broad objective of which was to develop a framework to
project the desired path for reserve money, which was consistent with the
targeted growth in money (M2) derived from the macro-economic
framework. The reserve money is affected by (a) deposit mobilization, (b)
government cash position, (c) government borrowing requirements, (d)
maturity of existing government debt, (e) reserve requirements and (f)
borrowings from the State Bank. The State Bank has to watch all these
variables and attempt forecasts in order to arrive at a judgment on the level
of reserve money that is consistent with the target of monetary expansion.
All this is done within the framework of the Annual Credit Plan.
(XVI) Monetary Policy, Prices and Economic Growth 1988-89 - 199899
This period is one of transition of monetary policy management
from Credit Ceilings (upto end June 1992), Credit Deposit Ratio (August
1992 – September 1995) and indicative targets (October 1995 – Jan. 2001)
to reliance of monetary policy on OMOs. Also, this is a period of political
turmoil and substantive policy changes. Political regimes during this
period were more pre-occupied with survival than with medium or longterm economic policies. A number of interim/caretaker governments
undertook important economic and financial sector reforms, especially
during the Wasim Sajjad-Moinudin Qureshi and Farooq Leghari-Malik
Meraj Khalid terms. Politically elected leadership found it difficult to
implement Fund/Bank conditionalities for fear of losing popular support.
As a result, in terms of growth, the 1990s was described by some analysts
4
The State Bank had started OMOs on ad hoc basis in October 1991, and upto September
1995 were conducted on a very restricted basis. SBP sold Treasury bills from its portfolio
in the case of surplus liquidity in the market.
5
In the real sense ‘in July, 2000’ because although Pakistan declared free float in may
1999, it did not observe the basics during 1999-2000 as there was no IMF program in
place and authorities took steps to stabilize the rupee as they wished. (cf. SBP Annual
Report: 2000-2001 pp. 152, 154).
102
M. Ashraf Janjua
as a ‘lost decade’ for Pakistan6, partly because of reforms, punctuated by
lapses, which included demand management in the context of prevailing
high inflation rates and large fiscal deficits. Growth in per capita income
dropped to slightly over 1 percent. In the view of some others, structural
and other reforms, with whatever speed implemented, made possible the
turnaround of the economy by the close of the 1990s7.
In the 1990s the growth rate tumbled largely because of decline in
capital inflows and a number of other factors8 including persistent lapses in
implementation of structural reforms and stabilization measures. Thus in
terms of economic growth, the period came to be known as the ‘lost decade’.
The worsening law and order situation during the 1990s affected not
only the security of life, property and honor of individuals, but it also created
difficulties in entering into contracts and their enforcement. In the wake of
internal instability and judicial lacunas, investors, both domestic and foreign,
could not exploit investment opportunities in the country. Rampant
corruption and worsening standards of governance of almost all national
institutions amounted to a prohibitive cost of doing business in the country.
Pakistan’s credibility was also on the decline externally in general,
but particularly among the International Financial Institutions and also
domestically with the general public. Agreements signed by successive
governments with the IMF and the World Bank were breached more often
than implemented. Tough decisions to end subsidies, to remove price
distortions, mobilize domestic resources, widen the tax base, eliminate
discretionary controls, were avoided with the result that the cumulative
impact of these deferred decisions eroded the productive base of the
economy and created a large credibility gap vis-à-vis the International
Financial Institutions9.
Dr. Ishrat Hussain, ‘Economic Challenges Facing Pakistan’ Lecture delivered at the
Centre for Development & Democracy, Karachi on 19th January, 2001.
7
Sartaj Aziz, ‘Was the 1990s a ‘lost decade’?’ Dawn, Feb. 11, 2001.
8
Rashid Amjad (Director, Policy Planning, International Labour Organization (ILO),
Geneva), ‘Solving Pakistan’s Poverty Puzzle: Who Should We Believe? What Should We
Do?’, PIDE, January 2004.
9
ibid
6
Money Supply, Inflation and Economic Growth
103
Withdrawals from foreign currency deposits of resident Pakistanis
were suspended in May, 1998. This antagonized an important class of
investors10.
In my view the 1990s was not the “lost decade”. In fact despite a high
rate of economic growth, the 1980s was a period of missed opportunities, and
the legacy the economic managers of this period left for those who followed
was not an enviable one. First was the rising fiscal deficit, the result of a very
large increase in government expenditure (including defense), which left a
crushing debt burden on the economy. Second, if the needed economic
reforms to achieve macro balance and competitiveness had been initiated
when the economy was in a relatively strong position it would have lessened
the burden on the economy and the people of undertaking these reforms when
the economy was in a relatively much weaker position.
Juxtaposed to a difficult and trying economic environment, the 1990s
saw a slowing down of economic growth because of shocks beyond the
control of economic managers. There had been large fluctuations and a decline
in cotton production which was persistently hit by pest attacks, continuing
slowing down of remittance inflows, bad weather conditions which directly
affected agricultural production and economic sanctions after Pakistan’s
nuclear explosion in May 1998. Frequent changes in governments in this
period added to economic uncertainty and discontinuity in economic decisionmaking.
Superimposed over these negatively contributing growth factors
were the shortcomings of economic management in the 1990s, which
made matters worse. The foremost among them was the sequencing and
pace of implementation of the economic reforms program.
Table-7: Macroeconomic Indicators: Actual (% Growth)
Year
GDP
Inflation
Monetary Assets
Inflationary
Gap
1988-89
6.7
10.4
7.8
1.1
1989-90
7.0
6.0
17.5
10.5
1990-91
3.9
12.7
17.4
13.5
1991-92
3.4
10.6
26.2
22.8
1992-93
2.8
9.8
17.8
15.0
Dr. Ishrat Hussain: ‘Economic Challenges Facing Pakistan’ Lecture delivered at the
Centre for Development & Democracy, Karachi on 19 th January, 2001 in ‘Leading Issues
Facing Pakistan Economy’ – March 2000-February 2003.
10
104
M. Ashraf Janjua
1993-94
4.5
11.3
18.1
13.6
1994-95
5.3
13.0
17.2
11.9
1995-96
4.6
10.8
13.8
9.2
1996-97
1.9
11.8
12.2
10.3
1997-98
3.5
7.8
14.5
11.0
1998-99
4.2
5.7
6.2
2.0
Average
4.3
10.0
15.3
11
Monetary Policy, Inflation and Economic Growth (1999/00 to date)
This period has witnessed rapid changes in a number of areas
which posed formidable challenges to the economic managers in the
country. In fact, this period has tested the technical acumen of the
country’s financial managers. In this part of the article these developments
as well as the implications of policy responses are dealt with.
(XVII) Economic growth
There is visible optimism in the Pakistan economy: 6.4% economic
growth during 2003, 8.4% growth rate during 2004-05 and 7.8% projected
for the next few years. The growth rate during 2003-04 was driven by
expansion in large scale manufacturing (LSM) in the areas of food,
beverages, tobacco, automobiles, electronics, chemicals and fertilizer.
During 2004-05 almost all the sectors contributed to the growth:
Agriculture (7.5%) Large Scale Manufacturing (12.5%) and Services
(7.9%).
For the last few years the State Bank continued to pursue a growth
accommodating policy stance. Consumer demand materialized as a result
of record level of bank lending to the private sector and consequent
availability of purchasing power. This was the growth engine which the
government used. It was also expected that investments in a number of
industries in LSM would create additional capacity, so that full utilization
of existing capacity does not become a constraint.
All these developments originated in the foreign sector- building
up of foreign exchange reserves entailing inflow of remittances and
reverse capital movements. There were no investment opportunities to
absorb the inflow of capital which resulted in a sharp decline in the
interest rate. This liquidity found its way to real estate, the stock exchange
Money Supply, Inflation and Economic Growth
105
and liberal lending by banks. These developments and issues stemming
therefrom are discussed under the following headings:
1. Monetary and Credit developments
2. Interest rate policy
3. Inflationary pressures
4. Political back drop of these developments
5. Conclusion
6.
Future outlook
(XVIII) Monetary and Credit developments
The increase in liquidity in recent years has been very vast as
shown in the table below:
Table-1: Causative Factors for Monetary Growth
CP1 CP2
Rs. Bin
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY05 FY0
*
5
Government Sector
- Net
Borrowing
68.5 80.9 55.9 -74.8 78.2 -46.7 22.2 -78.4 58.1 13.5
47
65
45
60
-5.1
5
5
2.3
-8
0
Budgetary 51.7 72.5 48.0 -75.2 40.0 -32.3 14.3 -56.0 63.7 16.3
- Commercial banks
na
na
na
na -95.1 -0.8
193.3 3.7
- Central Bank
na
na
na
na 135.0 -31.6
- 60.0 143.0
249.2
5.9 5.7 10.6
3.6 40.1 -12.5
- Commodity Operations
- Zakat, Privatization etc. 10.9 2.8 -2.7 -3.3 -1.8 -1.9
5.3 -26.6 -8.2
2.5
4.2 2.6
Non-Government Sector
63.4 61.9 84.2 119.2 26.0 69.2 19.0 148.5 315.4 331.3 190 330
- Credit to Private Sector
54.8 61.1 76.3 84.1 18.1 56.4 53.0 167.7 325.2 348.7 200 350
- (growth rate%)
17.3 15.9 17.0 14.2
- Credit to PSEs
6.1 2.0
- SBP Credit to NBFIs
2.5 -1.2 -0.7 18.9
Other Items Net
Domestic
Expansion
21.1 5.2 26.8 0.3
2.9
8.1
6.6 18.6 34.3 27.4 15.7 27.5
7.6 20.6 -19.5 -11.6 -2.9 -11.4
-5 -15
0.4 -7.7 -14.5 -7.6 -6.9
-5
-6.1
14.5 30.9 -12.0 -61.7 -9.2 -88.9 11
Credit 152.9 147.8 167.0 44.7 118.7 53.4 29.2 8.5
Monetary Expansion
(% charge)
8.6 16.2
364.3 255.8 30
-5
65
30
113.9 114.6 153.1 74.2 120.1 126.0 235.3 317.4 407.9 326.6 280 360
13.8 12.2 14.5
6.2
9.4
9.0 15.4 18.0 19.6 13.1 11.5 14.5
106
Real growth (%)
M. Ashraf Janjua
6.6
1.7 3.5
4.2
3.9
1.8
3.1
5.1
6.4
6.6 7.0
Inflation (annual avg CPI) 10.8 11.8 7.8
5.7
3.6
4.4
3.5
3.1
4.6
5.0 7.0
M2 over nominal growth -3.6 -1.3 3.2
-3.7 1.9
2.8
8.8
9.8
8.6
Source: Annual Report FY 03 & Statistical Bulletin August 2004, SBP*
July to April 9, 2005.
As can be seen from the Table above the rate of monetary
expansion picked up from FY02 and since then total monetary expansion
has been Rs. 1371.9 billion (upto 25th June 2005) and amounted to 90%
increase over the stock of money in 2000-01. Credit expansion amounted
to Rs. 371.2 billion between 1st July 2004 and 25th June, 2005. Private
sector credit expanded by Rs. 390.3 billion between 1st July 2003 and 25th
June, 2005.
Once liquidity is injected into the system it becomes purchasing
power in the hands of economic agents. This purchasing power keeps
changing hands. Thus, as a monetarist would say, the excess purchasing
power does not guarantee sustained increase in aggregate output. A short
term increase in production will be accompanied by rising prices. Hence
the view that money is neutral and inflation is a monetary phenomenon.
There is always a time lag between the injection of liquidity and its
manifestation as inflation11. The latest research shows that this time lag is
between 18 to 20 months. This aspect of monetary policy has not received
any attention in the State Bank of Pakistan. Lately, the State Bank has
acknowledged the market realities and has started jacking up the interest
rates including the discount rate. However, it still seems reluctant to increase
interest rates to match inflation. Average lending rate in May 2005 was 7.97
while the rate of income in prices is considerably above 8%. There would
not have been any such problem had the State Bank not allowed a sharp
slide in the interest rate in the first place. It appears that emphasis is clearly
on growth and the State Bank compromised its primary objective of
maintaining price stability.
Also, the recent increase in prices was nowhere in the calculation of
the State Bank. The Bank has been changing the expected rate of inflation
during the current year after every few months. This clearly shows that the
11
In the case of Pakistan the length of lag has been calculated by Prof. Anjum Nasim of
LUMS in his monograph on “Determinants of Inflation in Pakistan” and by Manzoor
Hussain of State Bank of Pakistan.
Money Supply, Inflation and Economic Growth
107
State Bank had not done its homework. When increase in prices turned out
to be beyond the State Bank’s expectation, it had no alternative to tightening
the monetary policy. In its second quarterly report the Bank acknowledged
that the token tightening of monetary policy did not have any impact on
demand for credit by the private sector which upto 2nd April 2005 amounted
to Rs.362 billion, compared with original estimates of Rs.200 billion and
revised estimates of Rs.350 billion for the year as a whole.
In fact despite increase in the interest rate, though still negative in
real terms, the private sector continued to borrow from the banking
system. As of 25th June 2005 credit in the private sector stood at Rs. 390.3
billion. The stock market bailout by banks entails a further increase in the
private sector credit over and above normal lending. Full year bank
lending to the private sector may very well be around Rs. 400 billion.
The monetary overhang between FY01 and FY04 was 30%. Even
calculated from FY96, the monetary overhang by end of FY04 was 26.5.
As can be seen from the last row in Table-1 the FY05 has absorbed only
1.2% of this overhang. The rest of the overhang, though not entirely
stemming from credit expansion, will manifest itself sooner or later.
(XIX) Interest Rate Policy
It was as late as 11th April 2005 that the State Bank was awakened to
the need for adjustment in the interest rate to tighten the liquidity in the
economy. Reluctance on the part of the State Bank to raise the interest rates
close to the rate of inflation has been a major failure of the Bank. The State
Bank hesitated for a long time to tighten monetary policy which could be
attributed to the Bank’s (and government’s) perception that cheap credit is one
of the main reasons for strong growth. Since August 2003 market interest rates
became increasingly negative in real terms. This failure, in the context of
excess of liquidity in the economy, gave rise to many problems. This is despite
the fact that the State Bank’s attention was drawn- more than once and by
more than one entity – to the urgent need to adjust the interest rate. More
specifically, with the inflow of money in the form of Net Foreign Assets
(NFA), the State Bank was unable to stop the slide in the interest rate. An
attempt was made to absorb the excess liquidity through the auctioning of
public debt. This was not an effective method of sterilization and the interest
rate declined to a record low level. This decline in the interest rate was of
tremendous advantage to the corporate sector and to the government in more
than one way.
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M. Ashraf Janjua
It needs to be mentioned that auctioning of public debt is not the
conventional way of sterilization. Recently, a number of countries, faced
with similar situations, sterilized capital inflows through OMOs, window
guidance (direct control on the credit volume of selected banks) and / or
increased Reserve Requirements. Sterilization of excess liquidity through
these methods resulted in checking the slide in the interest rate. It was
observed that where lending rate did not fall in nominal terms at the time
of change in the Reserve Requirements, inflation was also declining.
However, in the case of Pakistan the State Bank deliberately kept the
interest rate low to encourage credit expansion presumably to patronize the
growth rate, to the complete exclusion of any consideration for price
stability, which is the primary function of a Central Bank.
The State Bank could have prudently controlled liquidity by using
inflow of capital to retire expensive foreign debt. But the State Bank did
not formulate a policy in this regard. The Bank should have planned
prepayment much earlier. The Bank did it; but it was too late and too little.
Also, the State Bank allowed the government to borrow an unlimited
amount from banks at a low rate of interest. The Government, in order to
keep low interest rate on its debt instruments, borrowed heavily from the
State Bank to finance its maturing loans from commercial banks while
would not rollover the government debt at low interest rate. Thus as of 25th
June 2005, governments net budgetary borrowing at Rs. 68.78 billion was
the result of government borrowing of Rs. 154.55 billion from the State
Bank and retiring their debt with the scheduled banks to the amount of Rs.
85.77. In the process of maintaining a low rate of interest, the SBP allowed
increase in liquidity on two counts: gave additional resources to
commercial banks and added to reserve money which is the base of
monetary expansion. It is not clear whether this was a deliberate policy of
the State Bank or was manipulated by the Finance Division. All the same,
it is a fact that the State Bank compromised in every possible way to keep
the interest rate at an unsustainably low level.
Therefore, the Government benefited heavily from the low interest
rate environment, as it was able to reduce substantially its cost of funding
from both the bank and non-bank sources. The reduction in cost of
borrowing helped reduce the future debt servicing cost and created a fiscal
space for the initiation of development programs. The government was
able to make pre-payments of expensive external debt amounting to US$
1.17 billion during FY04 (the Government should have done more).
Money Supply, Inflation and Economic Growth
109
The low cost funds available to the corporate sector enabled many
companies to strengthen their balance sheets, improved profitability and
invest retained earnings along with bank borrowing for expansion,
modernization or enhance capacity utilization. Due to availability of
cheaper bank financing, corporate issuance of TFCs had declined in the
preceding two years. Banks moved into new areas of business such as
housing, SMEs, consumer durables and agriculture. Thus, higher demand
for funds by the private sector and increased public sector development
spending helped meet the postulated targets of the domestic economy.
At one time it was feared that the State Bank could run out of stock
of treasury bills. It is difficult to visualize what would be the reaction of
the State Bank under such circumstances. The advisable course for the
State Bank was to absorb excess liquidity through Open Market
Operations (OMOs) and not allow the sharp decline in the interest rate.
Also, the State Bank could have issued its own paper to pick up excess
liquidity in which case the State Bank could be more aggressive and
determine the level of interest rate in accordance with the macroeconomic
fundamentals12. However, it appears that the State Bank had decided in
favor of cheap credit which could benefit the Government, the banks and
the corporate sector.
(XX) State Bank's Present Stance
The April 11th hike in the discount rate was a long awaited step in
the right direction. For the first time, the Governor of the central bank had
talked about the need to ease the rapid pace of private sector credit
expansion. Although this pace had been excessive for over two years, it is
better late than never to take corrective steps.
Also the impressive sweep of the April 13th T-bill primary auction
in which the State Bank accepted all the bids on offer and pushed up the
rates was sufficient. The end in view was to reduce inflation. Hence, the
immediate focus of the central bank should be to reduce the pace of credit
12
Reportedly the option was not resorted to, one reason being that the rules governing the
operations of the State Bank do not allow this. It appears that the State Bank is always
caught off-guard whenever there is an unanticipated emergency. Precisely the same thing
happened when there were scandals of Finance Companies in 1979 and again in 1987-88.
By the time the State Bank got the requisite powers and started inspection etc. operators
of Finance companies had made away with peoples’ money. Laws can always be
introduced on an emergency basis if one is clear about the urgency of the objective.
110
M. Ashraf Janjua
expansion. The government may not like this to undermine economic
growth. Hopefully SBP will not be deterred by such external compulsions,
and proceed with its duty to enforce monetary control.
The market feedback about the discount rate hike has been mixed.
Some claim this will hit corporate profitability; undermine export
competitiveness; reduce demand for credit (both consumer and corporate);
increase the fiscal deficit; and slow growth. However, others claim that
since inflation is still higher than revised lending rates, this will not have
much of an impact on the economy. Car assemblers and manufacturers of
consumer durables seem to echo the views of bankers that this adjustment
may not be able to make a dent on the pace of credit expansion. Even the
Ministry of Finance is of the view that this increase in interest rates will
not impact aggregate growth (in other words, the credit that has been
driving growth is likely to remain in place).
To formulate an outlook, the following factors are important:
1. In terms of overall M2 growth, the bumper wheat crop and the
enhanced support price has resulted in a credit expansion of Rs.
21.82 both (June 25, 2005) for commodity operations compared
with a retirement of Rs. 8.62 billion during the same period last
year.
2. The bailout package for the stock market entails funding from
banks, has contributed to credit expansion to the private sector,
which, as of 25th June 2005 stands at Rs. 390.3 billion and is likely
to be around Rs. 400 billion by 30th June, 2005.
To reduce credit expansion banks will have to stop discretionary
loans. The market-based avenue to do this is to incentivize banks not to lend.
This can either be done by enticing banks into government securities, or by
draining away available liquidity. To entice banks into securities, returns
would have to be jacked up sufficiently, so that on a risk-reward trade-off,
banks would rather lend to the government than to the private sector. This
will require a substantial increase in the rate and supply of PIBs, so that
private sector assets cannot compete. With inflation close to double digits,
the quantum increase in market rates is likely to be very large.
In terms of draining liquidity, either SBP rethinks its OMOs and
ensures that bank liquidity remains tight or cash reserve requirements
Money Supply, Inflation and Economic Growth
111
(CRR) should be increased. A one percent increase in CRR will absorb Rs.
22.5 billion, which means CRR would have to be increased by 2 or 3
percent to be meaningful. However, CRR is a very blunt instrument, which
harks back to the days of direct monetary policy. Its use in a nonemergency situation shows that SBP is unable to use interest rates for
monetary control.
A far superior option is to increase liquid asset requirements. At
present, this is 20 percent of demand and time liabilities (DTL): CRR is 5
percent and T-bill/PIB holdings are 15 percent. The best option SBP has is
to increase liquid assets to 25 percent, with the requirement that only Tbills should be eligible. Increasing SLR is a signal of monetary tightening,
but is not as brutal and inefficient as increasing CRR.
Increasing SLR, provided banks are not holding excess securities,
would strengthen the balance sheet of banks by forcing them to hold
government securities instead of private sector assets. There is little doubt
that this drying up of private sector credit will hurt and attract negative press.
However, in this euphoria of high growth, someone has to step on the
brakes, otherwise the banking system is heading towards trouble – the only
question is, how systemic the problem is and how many banks go under.
SBP is unable to bring down inflation in the next few months.
However, it must show real intent – that it is taking tough steps to reduce
the expansion of private credit irrespective of the pain it will cause. Only
this will determine whether the central bank is serious about its main
responsibility – price stability.
(XXI) Inflationary Pressures
In its monetary policy statement in July 2003 the State Bank said
that inflation should not be the only policy objective in countries like ours
and the Central Bank rather should pursue balanced policy, ensuring
growth promotion coupled with containment of inflation, since
employment generation was possible only through high growth to improve
the welfare of people. Yet in practice the State Bank has clearly
compromised its policy objective of maintaining price stability. The Bank
has patronized growth at the expense of price stability. The cumulative
monetary overhang of 26.5%, as of end June 2005 will manifest itself
sooner or later.
112
M. Ashraf Janjua
Credit expansion & Lending rates
1,800
18
1,600
16
1,400
14
1,200
12
1,000
10
O/S Private Credit (Rs bln)
Lending rates (rhs)
Jun-05
Sep-04
Dec-03
Mar-03
30-Jun-02
30-Sep-01
31-Dec-00
31-Mar-00
0
30-Jun-99
2
-
30-Sep-98
200
31-Dec-97
4
31-Mar-97
6
400
30-Jun-96
600
30-Sep-95
8
31-Dec-94
800
CPI 12-m MA (rhs)
Despite a massive monetary expansion of 19.6% during FY04 the
increase in Consumer Price Index (CPI) remained low at 4.6%. The fact is
that at the macro level, the sharp increase in money supply has not had an
immediate inflationary impact for two reasons: one, there is always a time
lag between the injection of surplus liquidity and its impact on prices; and
two, since this funding was generated by the accumulation of foreign
assets, the inflationary impact was further delayed and was less direct. The
impact is still pending. Although the recent increase in price is to an
extent cost-push factors (e.g. basic food items, which constitute 40 percent
of the basket), the monetary overhang continues to impact the Consumer
Price Index (CPI). The recent increase in CPI has been driven by food
items and the house rent index. Food prices have increased because of the
government’s unsuccessful effort to increase the supply of key items
(wheat, sugar, etc), while the house rent index is computed on a basket of
construction inputs. Government’s unsuccessful efforts to contain
inflation and SBP’s measured tightening of monetary policy, has not given
much comfort to the market. The injection of liquidity in the past three
years has not been a part of an ambitious development agenda, but resulted
from reverse capital flows and excessive borrowing from the banking
sector. This means the liquidity is largely controlled by the economic
elite, which implies purchasing power still remains with the rich. Over
time, however, this purchasing power will filter down to the working class,
Money Supply, Inflation and Economic Growth
113
which will eventually begin to impact the prices of basic goods and
services (demand pull).
As stated earlier, three intra year adjustments in the target rate of
increase in prices signal that the State Bank does not have a proper handle
on monetary policy. Inflation during 2004-5 is close to double digit
compared with the original target of 5%. In its assessment of actual
inflation, the State Bank has virtually completely ignored the time lag
between monetary expansion and its impact on prices. Also, the recent
tightening of monetary policy through increase in interest rates shows that:
a) to be effective in developing countries like Pakistan, changes in
doses of policies would have to be rather large for various reasons
b) for the corporate sector, it is the availability of credit more than the
level of interest rate which is more significant .
Therefore, the State Bank has to rectify its stance of
accommodative monetary policy.
The State Bank admits in its second quarterly report 2004/05, that a
sharp increase in inflation has reduced the competitiveness of the export
sector. However, the State Bank is not clear in its interpretation of
monetary management when it says, “the regime of relatively cheap credit
is contingent on fiscal discipline and pro-growth policies”.
The State Bank has not come around to accept that the current
inflationary pressures are largely the result of a loose monetary policy. The
State Bank continues to believe that easy monetary policy is just one of the
factors and that cost push factors like increase in the prices of food and oil
are causing inflation. The State Bank conveniently forgets that the cheap
credit policy added to effective demand in a big way; that the stock of bank
credit to private sector jumped from Rs. 800.46 billion at the end of June
2002 to Rs. 1664.56 billion as of 25th June, 2005, an increase of about 108%
in three years. Earlier, bank credit to the private sector had increased by
112.9% in seven years from end June 1995 to end June 2002. Also credit
deposit ratio rose from 54.9 as of end December 2002 to 68.9 as of 25th
June, 2005.
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M. Ashraf Janjua
The third quarterly report of the State Bank on the state of Pakistan
economy admits that the policy of “easy money” contributed to inflation
but does not say that this is the most important factor. The Report states,
“The impact of rise in aggregate demand due to easy monetary
policy would be effectively curtailed through tightening of monetary
policy, however, following fiscal and administrative measures are required
to ease the inflationary pressures emerged due to supply shocks”: the
report further says, “the hoarders should be dealt with according to the
regulations. It has been observed that the abnormal profit margins at retail
levels are prevailing in the case of vegetables and fruits. Formation of
effective consumer associations may monitor these margins and advise the
consumers about the appropriate prices of these items, or to avoid
consumption of some item, if price is unreasonably high. Alternatively,
responsibilities of the existing price control committees may be extended”.
The bottom line is all the more imaginative “Since price setting is all about
the price elasticity of demand, consumer may show resistance though
collective actions”.
The report suggests eight fiscal measures to contain inflationary
pressures. With these recommendations, the State Bank is passing on the
buck to the government and the people of the country. However, a timely
action by the State Bank to tighten monetary policy would have obviated
the need for such an advice.
(XXII) Are There Price Bubbles in the economy?
Theoretically, price bubbles (of assets) are created where there is
(i) price inelastic demand and (ii) ample liquidity. Price inelastic demand
means that supply will not increase in response to demand and excess
demand is met by sufficient liquidity in the system. Fragmentary evidence
suggests that the sharp increase in prices are concentrated in elite
residential areas in three cities and as far as the stock exchange is
concerned the activity appears to be concentrated in a handful of scrips.
Thus, fixed supply and ample liquidity have given rise to increase in the
price of assets.
(XXIII) Political Considerations
The signal from Islamabad was clear: the government wanted
stronger growth and wanted this to be spearheaded by cheap credit. With a
Money Supply, Inflation and Economic Growth
115
growth program firmly in place, the country’s economic performance has
developed a strong political dimension. The momentum for economic
growth has been ascribed by the government to the following three factors:
(1) the improvement in macroeconomic fundamentals; (2) an intangible
“feel good” factor; and (3) bank credit at affordable rates. There is no
denying the first and last, but the “feel good” factor itself is a direct result
of easy credit. With market concerns about interest rates, this has created a
degree of ambivalence to changing market conditions witnessed since the
beginning of 2004.
There is an increasing pressure on market interest rates, as inflation
has picked up quite sharply. There is also an implicit assumption that
increasing T-bill and PIB rates will undermine the high growth projected
for this year. At the very least, the authorities would want to ensure that
the increase in market rates is not so sharp that banks have less free
liquidity and start pricing up loans to the private sector. Since the
government wants to maintain the growth momentum, it will want to
ensure a smooth flow of consumer financing.
Conclusion
What has been happening in Pakistan’s banking system is the
classic case of using an easy monetary policy to jump start economic
growth. There was a sharp acceleration in private sector credit following
the SBP’s decision to stop supporting market interest rates in November
2002; this followed the equally sharp fall in lending rates as banks
desperately deployed liquidity. To ensure strong aggregate demand, retail
petroleum prices and electricity rates were kept low. The resulting subsidy
bill was effectively the government’s first line of defense to ensure that
inflation does not rise further.13 As the subsidies remained in place, the
fiscal cost continued to rise. With recent adjustment in the petroleum
prices the burden has partly been shifted to the consumer with clear
implications for price increase.
The financial system is basically a closed circuit where funds flow
from one agent / institution to another. If surplus liquidity is injected
beyond the nominal growth of the economy, a monetary overhang is
created. Despite the distinction between core and non-core, inflation is
13
This effort to contain inflation simply postponed the issue and increased the magnitude
of the problem.
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M. Ashraf Janjua
inevitable, even if it has not been fully captured by inflation indices.
Unless the excess liquidity is absorbed, or its future growth is brought
down, inflationary pressures will remain and spread.
To ensure a soft landing, the State Bank should continue to tighten
monetary policy. The balance of payments deficit-including a record trade
deficit of over $6.00 billion during 2004-05 will also absorb some
liquidity. The State Bank should not compromise on holding the price line.
Before 11th April 2005, there was the general impression that there was no
Central Bank in the country and there was no monetary policy. The State
Bank has to improve its image.
Sustainable economic growth requires more than cheap credit. It
needs macro stability; a sustainable source of long-term funding; proper
debt management; and a pool of educated (and healthy) workers who can
be trained to compete. The latter is unlikely to be realized by trickle-down
economics, which means a result oriented focus on social development is
needed. The perceptible loss of price stability and the vulnerability of the
banking system are fundamental issues that need to be addressed if the
country is to sustain high economic growth.
An unbiased assessment shows that in the past three years or so the
SBP’s objectives were as clear as they were misplaced. The central bank
was more interested in growth and justified rising inflation as the cost of
higher growth. By prioritizing the government’s growth objective, SBP had
effectively downgraded its responsibility to maintain price stability.
Furthermore, the fact that the State Bank expressed concern about asset
bubbles, without taking responsibility for the liquidity that created bubbles,
is misleading.
The on-going stock market crisis and the decision to get banks
involved in a bailout, is an ominous sign. With banks already overexposed in an environment of rising interest rates, to impose this bailout
package will not only spike private sector lending, but also leave banks
vulnerable to the stock market.
Also, recent actions of SBP suggests a blurring of responsibilities
between the government and the central bank. Although these institutions
are the most important policy making institutions in the country (and
constitute the economic team), it is important to remember that there
should be a healthy level of tension between the two since these
Money Supply, Inflation and Economic Growth
117
institutions have conflicting end-goals. In other words, the government is
primarily focused on growth (even on the back of subsidized credit or
inflationary finance), while the central bank should prioritize price
stability (even if it reduces economic growth). This is an integral part of
the needed check on a government that can tax, borrow and print currency
notes. When this distinction is no longer meaningful, there is a tendency
to strive for high growth even if it unhinges macro economic stability.
Unfortunately, this is what happened in Pakistan. In other words, the
central bank had internalized the government’s agenda over its own
responsibilities. It appeared that (i) credit plan (ii) price stability as an
important objective and (iii) autonomy of the central bank had lost their
relevance.
(XXV) Future Outlook
1. If SBP wants to rein in credit expansion, it must continue to tighten
liquidity
2. Increase in SLR may be required besides further increase in
discount rate if banks’ discretionary lending to the private sector
does not ease off
3. Inflationary pressures are realized after a time lag, which means no
immediate fall is expected as a direct response to monetary
tightening
4. To contain dollarization, SBP may adopt a more aggressive stance
in terms of increasing domestic interest rates
5. The increase in interest rates (and possible depreciation of the
Rupee) will bring the economy back to macro equilibrium:
a. M2 growth will ease as private sector credit expansion slows
b. Inflationary pressures will start subsiding
c. The current account deficit will start narrowing
d. The gap between savings and credit will start narrowing, so
that banks will not be running large maturity mismatches.
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M. Ashraf Janjua
Credit expansion to the private sector is likely to be around Rs.400
billion by end June FY05. If it does not ease during 2005-06, the exposure
of the banking system will be so large that any shock (internal or external)
could easily undermine the health of the banking system.
The advisable course for the State Bank for the next few years is to
keep the rate of increase in money income (% increase in GDP plus
increase in prices) lower than the rate of monetary expansion by a margin
that should enable it both to absorb a part of the monetary overhang (now
about 28.0%) and allow only a modest increase in prices. This will not be
easy. Yet holding the price line should be regarded as a non-negotiable
objective by the Central Bank.
Money Supply, Inflation and Economic Growth
119
References
Anjum Nasim ‘Determinants of Inflation in Pakistan’ Presented at LUMS.
Dr. Ishrat Hussain: ‘Leading Issues Facing Pakistan Economy’ Lecture
delivered at the Centre for Development & Democracy, Karachi on
March 2000-Febraury 2003.
Dr. Ishrat Hussain, ‘Economic Challenges Facing Pakistan’ Lecture
delivered at the Centre for Development & Democracy, Karachi on
19th January, 2001.
M. Ashraf Janjua, History of the State Bank of Pakistan, Volume III
(19977-88) and IV 1988-2003), SBP Printing Press.
M. Ashraf Janjua, (edited) ‘Monetary and Credit Control in Pakistan – A
Regulatory Approach, Bulletin State Bank of Pakistan, March,
1989pp. i-xvi.
M. Ashraf Janjua, Central Bank and the Government SBP Printing Press,
1989.
Pakistan Economic Survey (various issues).
Rashid
Amjad (Director, Policy Planning, International Labor
Organization (ILO)’ Geneva), ‘Solving Pakistan’s Poverty Puzzle:
Who Should We Believe? What Should We Do?, PIDE, January
2004.
Richard Porter, ‘Monetary Policy in the Economic Development of
Pakistan’ in Studies in Economic Development (with special
reference to Pakistan) Agha M. Ghouse (Edited).
State Bank of Pakistan Annual and Quarterly Reports (various issues).
SBP Annual Report FY03.
Statistical Bulletin August 2004, SBP.
State Bank of Pakistan Quarterly Report 2004/05.
Sartaj Aziz, ‘Was the 1990s a ‘lost decade’? Dawn, Feb. 11, 2001.
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M. Ashraf Janjua
S. A. Meenai, Money and Banking in Pakistan Oxford University Press.
The Lahore Journal of Economics
Special Edition
Institutional Machinery for Managing the Pakistan
Economy
Pervez Tahir*
Introduction
In the heyday of the five year plans in Pakistan, the common
expressions for the officials dealing with the economy and their
institutional affiliations were “planners” and “planning machinery.” The
fiscal crisis of the state and the consequent installation of regimes of
stabilization, structural adjustment and reform gave birth to usages such
as “economic manager,” “economic management” and “economic team.”
It has also marked a shift from the long and medium-term to the near-and
short-term. This paper, however, adheres to the broader view of the
management of the economy and its institutions taken by Ahmad and
Amjad in the eighties. According to them, “National economic
management is a new but growing science. The developing world's
experience of the recent decades underlines the fact that economic and
social progress is an induced process. Governments are not only called
upon to initiate the development process but are also required to
influence its composition, pace, tone, and direction through an
appropriate policy-mix. A consistent framework encompassing various
policies within the bounds of an overall national strategy needs to be
worked out by the national policy-makers.” These authors also pointed
out that there was a gap between the increasing requirements of
management and the capabilities of individuals and institutions.
“Economic management has thus become a critical area for study as well
as introspection.”1
We outline here the institutional machinery for managing the
Pakistan economy to show that it is alive though not always kicking.
*
Chief Economist, Government of Pakistan, Planning Commission, Islamabad. The paper
has been written in personal capacity and the usual disclaimers strictly apply.
1
Viqar Ahmed and Rashid Amjad, The Management of Pakistan's Economy. Karachi:
Oxford University Press, 1984, P.V.
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Pervez Tahir
While its resilience is commendable, the capability to deliver desired
outcomes calls for reflection.
National Economic Council
The apex institution for managing the economy of Pakistan has
been provided in the Constitution of Pakistan Article 156(2) of the
Constitution states: ‘The National Economic Council shall review the
overall economic condition of the country and shall, for advising the
Federal Government and the Provincial Governments, formulate plans in
respect of financial, commercial, social and economic policies; and in
formulating such plans, it shall be guided by the Principles of Policy set
out in Chapter 2 of Part II. Headed by the chief executive of the country,
the National Economic Council (NEC) has as its members the provincial
chief executives, cabinet ministers concerned with economic and social
development and the Deputy Chairman of the Planning Commission
(Annex I). A working definition of Macroeconomic Framework is that it is
a summary statement of a country's development strategy and economic
policies, based on past assessment and future prospects and expressed in
physical as well as financial terms. In this sense, the mandate of the NEC
covers all the key elements of macroeconomic framework. Read with the
Principles of Policy laid down by the Constitution (Annex II) which guide
policy formulation, the mandate becomes a comprehensive development
framework.
Vision statements, long term perspectives, five year plans, annual
plans and the Public Sector Development Programs (PSDP) require the
approval of the NEC. Pakistan 2010 was the first ever vision statement
approved by the NEC in 1998, while Vision 2030 will be submitted to it
soon. Similarly, the first perspective plan was endorsed in the mid-sixties
for 1965-85 and the last perspective plan, called the Ten Year Perspective
Plan 2001-1, was approved on June 7, 2001. The practice of approving
three-year rolling plans also started within the framework of this
Perspective Plan. Preparation and approval of five year plans started in
1957, which came to a halt with the abortive Fourth Five Year Plan
1970-75. It was resumed with the Fifth Five Year Plan 1978-83 and
continued until 1998. The draft Ninth Five Year Plan 1998-2003 was
prepared but not placed before the NEC. The exercise has been re-started
after the recent authorization by the NEC for the preparation of the
Medium Term Development Framework (MTDF) 2005-10.
Institutional Machinery for Managing the Pakistan Economy
109
Annual plans were introduced in 1968 and their preparation and
approval has continued without interruption. Annual development
programs, these days called the PSDP, go back to the start of planning in
the fifties. These related to the public sector, while annual plans take an
overall view of the economy, public as well as private investment.
Ever since its inception, the NEC has been meeting regularly
before the budget towards the end of May or early June. Since 2004, it has
decided to meet during the fiscal year also to consider mid-year economic
reviews and to monitor the progress of major projects and the utilization of
the PSDP. In regard to projects and programs, the NEC has delegated its
authority to its Executive Committee, the ECNEC.
The Cabinet and the Parliament
Though an apex body, the plans approved by the NEC are in the
nature of an advice to the constituents of the Federation. In the light of this
advice, the federal government goes to the cabinet for the clearance of the
federal budget, which incorporates proposals regarding development and
non-development expenditure, and the tax and non-tax resources to be
mobilized for financing, besides the debts to be incurred and serviced. The
final approval of the federal budget lies with the National Assembly. A
similar process is followed in the provinces. While the Senate does not
approve money bills, it debates the budgetary proposals and sends its
recommendations to the National Assembly, which is the constitutional
forum for the approval of the budget.
The federal budget, prepared by the Ministry of Finance in the light
of the directions provided by the NEC, constitutes the official statement on
fiscal policy. It is tabled in the National Assembly of Pakistan and
transmitted to the Senate of Pakistan in terms of Article 80(1) of the
Constitution of the Islamic Republic of Pakistan which requires that an
Annual Budget Statement of estimated receipts and expenditure for that year
be laid before the National Assembly and Article 73(1) mandating that a
copy be transmitted to the Senate of Pakistan. Again, as per Article 80 (2),
the Annual Budget Statement shows separately: (a) the sums required to
meet expenditure described by the Constitution as expenditure charged upon
the Federal Consolidated Fund; and (b) the sums required to meet other
expenditure proposed to be made from the Federal Consolidated Fund.
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In addition to the Federal Budget, the Cabinet approves other
policies which are not necessarily placed before the Parliament. Among
economic policies, these include trade policy prepared by the Ministry of
Commerce, privatization policy, investment policy, labor policy, etc. In the
same genre lie various sectoral policies prepared by the concerned line
ministries, such as industrial policy, agricultural policy, water policy,
transport policy, housing policy, health policy, education policy, national
conservation strategy, etc.
Economic Coordination Committee (ECC) of the Cabinet
The ECC is not only the most frequented but also the most
frequently convened Cabinet Committee (Annex III). Meeting every
fortnight, it is the main coordination point for economic policies,
especially fiscal, monetary, trade and tariff policies. It also adjusts these
policies to the events requiring urgent corrective action. The forum has
been used for the approval of some important policies as well. These
include power policy and on-lending policy for foreign credits. As the
watchdog for prices and inflation, the ECC takes remedial actions
whenever and wherever necessary.
Annual Plan Coordination Committee (APCC)
Of crucial significance is the observance of the discipline of the
plan and its scheme of proportions and balances. The plan can be altered
when circumstances so warrant but not without the concurrence of the
NEC. After the five year plan is approved and published, its successive
annual plans are prepared by the Planning Commission, deliberated upon
at the Annual Plan Coordination Committee (APCC) and finally approved
by the NEC when it meets before the federal budget. The APCC is chaired
by the Deputy Chairman of the Planning Commission and is composed of
provincial planning and finance ministers and the concerned federal and
provincial secretaries (Annex IV). An annual plan document is published
along with the budget documents.
The APCC also finalizes the PSDP as part of the Annual Plan. The
PSDP is an annual document which lists all the public sector projects/
programs with specific allocations made for each one of them in that
particular financial year. It is the operational side of the five year and
annual plans. In other words, it is that part of the country's annual budget
which deals with development expenditure, indicating the total cost of a
Institutional Machinery for Managing the Pakistan Economy
111
project, foreign exchange component of the total cost, expenditure
incurred upto the end of the last financial year, PSDP allocation for the
current financial year together with its foreign aid component. Proposals
for the consideration of the APCC come from the Priority Committee.
Priorities Committee
The PSDP formulation is a crucial component of the planning
process. It embraces projects which have been approved by the sanctioning
machinery of the Government after due scrutiny-technical, financial and
organizational. But the PSDP procedure differs from the project approval
procedure. Due to scarcity of resources, projects compete for funds
available for development. An essential part of the procedure, therefore, is
a shift from the examination of a project in isolation to the selection of
projects out of a large portfolio of approved projects. The procedure is laid
down in detail in a PSDP call letter sent out in October/November, in
tandem with the budget call letter by the Finance Division, to all
Government Ministries/Divisions, Provincial Governments. It sets up a
time-schedule along with guidelines on the preparation of the PSDP and
selection of projects.
Proposals received from the executing agencies and the
preliminary assessment of the Planning Commission are processed at the
Priorities Committee chaired by the Ministry of Finance, which are
subsequently submitted to the APCC. Annex V gives its composition.
After the PSDP proposed by the Planning Commission is approved by the
NEC, it is incorporated into the annual budget. In the past, the Priority
Committee was chaired by the Planning Commission. The Ministry of
Finance has an important role in the determination of the size of the PSDP
because of the responsibility it bears for the mobilization of resources.
Whether this role justifies leaving the priority assignment to the Finance
Division is often a matter of lively debate.
Appraisal and Approval of Schemes
A scheme is a proposal for a project or program. Plans frequently
form the basis of identifying new schemes. Under a systematic planning
procedure, planners only determine general guidelines for the fulfillment
of overall development goals. These goals are further translated into
specific sectoral objectives, alongwith overall resource allocation between
them. Sectoral planning needs more specific information about the
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resources and constraints of the sectors concerned. After the collection of
this information, disaggregated projects and programs are devised which
are individually appraised in the light of guidelines and macro-economic
parameters provided by the NEC/APCC.
Projects and programs to be included in the Public Sector
Development Program require approval of competent fora. These are
discussed in the following paragraphs.
Executive Committee of National Economic Council (ECNEC): This is
the highest body for the approval of schemes. Projects and programs
costing Rs.500 million and above are approved by the ECNEC. It is
headed by the Prime Minister/Finance Minister and has representation
from all development and economic Ministries and Provinces at the
Minister level (Annex VI).
Central Development Working Party (CDWP): Development projects
costing between Rs.40 million and Rs.500 million prepared by the Federal
Ministries, Provincial Governments, Autonomous Organizations, etc., are
scrutinized for the purpose of approval by the Central Development
Working Party (CDWP) which is headed by the Deputy Chairman,
Planning Commission and includes as its members the Secretaries of the
Federal Ministries concerned with development and the heads of the
Planning Departments of the Provincial Governments (Annex VII).
Schemes with foreign funding of 25 percent and above have also to come
to CDWP. The Concept Clearance Committee (CCC), which has the same
composition and meets concurrently with the CDWP, allows negotiations
with foreign donors before the project is ready for approval. But a project
contract is only signed once it is approved by the CDWP for ensuring the
availability of local/counterpart funds. The schemes cleared by the CDWP
costing more than Rs.500 million are submitted to the ECNEC for final
approval.
Departmental Development Working Party (DDWP): This is the forum
for
approving
development
projects/programs
for
Federal
Ministries/Divisions/Departments costing upto Rs.40 million. It is headed
by the respective Secretary/Head of Department and includes
representatives of the Finance Division and Panning Commission (Annex
VII).
Institutional Machinery for Managing the Pakistan Economy
113
Provincial Development Working Party (PDWP): Each Province has a
Provincial Development Working Party which is headed by the Chairman,
Development Board/Additional Chief Secretary (Development) and
includes Secretaries of the Provincial Departments concerned with
development (Annex VII). The PDWP scrutinizes and approves schemes
costing upto Rs.200 million, with foreign exchange cost of less than 25 per
cent. Any scheme involving 100 per cent self-finance can be approved by
the PDWP for upto Rs.1000 million.
The Planning Commission is responsible for the development of
appropriate cost and physical standards for the effective technical and
economic appraisal of the projects. Before the projects are sanctioned by
the CDWP/ECNEC, their technical appraisal is carried out by the
concerned technical sections of the Planning Commission. This includes
the engineering, commercial, governance, environmental and managerial
aspects. Economic Appraisal Section analyzes the projects from economic,
financial and social viewpoints.
Monitoring and Evaluation
The present method for planning, processing and reporting on
development projects is based on five proformae. Two of these deal with
submission of project proposals (PC-I and PC-II) and are required for the
appraisal and approval of projects. Another one is concerned with the
progress of ongoing projects (PC-III) and the remaining two (PC-IV and
PC-V) are to be filled in after completion of a project. As is obvious, PCIll relates to monitoring. All project directors are required to submit
quarterly progress report on a prescribed proforma. The most important
indicators are the achievement status of financial and physical targets and
the identification of bottlenecks. Inter-agency teams coordinated by the
Projects Wing of the Planning Commission also undertake periodic site
visits.
The purpose of monitoring is to assist in effective implementation
while evaluation provides lessons for the future. Evaluation is of two
types: project evaluation and plan evaluation. Project evaluation is carried
out after completion. It focuses more on output indicators than the input
indicators used for monitoring. For the purpose of evaluation, PC-IV is
required to be submitted when the project is adjuded complete and PC-V
is to be submitted annually for five years by the agency responsible for
operation and maintenance. Plan evaluation is concerned with the
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evaluation of a five year plan against its physical and financial targets,
policy thrusts and strategic shifts. Typically the Planning Commission
undertakes a mid-plan evaluation, preliminary evaluation and final
evaluation.
Monitoring of development projects is necessary to check cost and
time over-runs in the implementation of projects. Delay in completion of
projects causes irreparable loss to the economy. The examples of delayed
projects are Ghazi Brotha Hydro Power Transmission Project, IslamabadPeshawar Motorway (M-l), Neelum Jhelum Complex and Thar Coal Power
Project. Keeping this in view, the NEC decided on 29 May, 2003 that
monitoring of PSDP projects would be a top priority. The approach was
changed from 2003-04 to undertake field monitoring of approved
development projects costing Rs. 40 million and above. Projects costing less
than Rs. 40 million would be monitored by sponsoring ministries. The
findings were communicated to the executing agencies and placed on the
external web for public review. Presentations were made to ECNEC/NEC
also. In fact, the ECNEC has been meeting quarterly and the NEC twice a
year to properly focus on monitoring.
This system involved all officers of the Planning Commission in
field monitoring, and not just the Project Wing. While it over-extended the
staff capability, the involvement of the concerned Ministries was not as
much as to build the desired ownership. In order to enable the Ministries
to play a more proactive role in supervising their development portfolio,
it has recently been decided that in future, the ministries/divisions would
ensure regular monitoring of all their projects included in the PSDP and
send a monthly report for each project to the Planning and Development
Division. In case of foreign aided projects, a copy of the report would
also be provided to the Economic Affairs Division. The Principal
Accounting Officers, i.e. the Secretaries are required to hold monthly
monitoring meetings personally so as to ensure effective implementation
of the projects under their jurisdiction. The Planning and Development
Division will, however, continue to undertake monitoring of projects on
a selective basis. The Projects Wing has been strengthened by the
creation of an Evaluation & MIS Section. Also, development of an
electronic link to have a fast and regular exchange of information with
the project authorities, Ministries, EAD, Finance Division & AGPR &
Provincial Governments is planned.
Institutional Machinery for Managing the Pakistan Economy
115
The Prime Minister has also constituted a high level Project
Monitoring Committee under the Advisor to the Prime Minister on
Finance and Revenue, which will communicate the progress of projects
costing Rs. 500 million and above to the Prime Minister every month. The
Projects Wing will be the focal point of all the monitoring and evaluation
activities of the Public Sector Development Program. Performance
indicators are being developed to access timely and efficient
implementation of projects. The outcome of the monitoring exercise will
be presented on a quarterly basis to ECNEC and biannually to NEC for
seeking guidance and policy decisions. The Project Wing will ensure that
all the decisions and directives of NEC/ECNEC are implemented. Each
executing ministry will establish a planning and monitoring cell as per
ECNEC decision to ensure effective monitoring of development projects.
Strengthening the monitoring and evaluation sections of provincial P&D
Departments/Board to ensure effective implementation of their
development projects/programs, has become a priority. Linkages with
District Monitoring Development Committees under the Local
Government Ordinance will be ensured. Finally, better coordination with
Pakistan Planning and Management Institute (PPMI) for training of Project
Directors in the fields of Project Management, Monitoring and Evaluation
is yielding good results.
The PPMI has initiated a training program for the project directors.
The main objectives of the training is to prepare professionals for the
effective implementation of the development projects. Efforts are being
made to train all Project Directors of Projects costing Rs. 100 million and
above included in the PSDP 2004-05. Toward this end the ECNEC has
made PPMI’s training course mandatory for officers to be appointed as
Project Directors.
Monetary and Fiscal Policies Coordination Board
Under its law, the State Bank of Pakistan is responsible for
regulating the monetary and credit system of the country. The general
superintendence and direction of the affairs and business of the State Bank
vests in the Central Board of Directors. The Central Board consists of the
Governor, Secretary, Finance Division, Government of Pakistan; and
seven Directors, including one Director from each Province nominated by
the Federal Government while also ensuring representation to the
agriculture, banking and industrial sectors. The Governor is the Chairman
of the Central Board and all decisions are taken by the majority of
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members present and voting with the provision that in the event of equality
of votes, the Governor may exercise a casting vote. The Board

formulates, evaluates and monitors monetary and credit policy

determines the expansion of liquidity, consistent with targets of
growth and inflation ensuring that the monetary and credit policy is
consistent with macroeconomic policy objectives

determines and enforces the limit of credit by the Bank to the
Federal and Provincial Governments

acts as a policy adviser to the Federal Government

submits a quarterly report on the sate of the economy to the
Parliament.
As the conduct of monetary and exchange rate policies is the
domain of the State Bank of Pakistan, a separate institution has been
provided in the State Bank Act to ensure overall coordination and
harmonization of economic policies. Called Monetary and Fiscal Policies
Coordination Board, it meets before the announcement of the budget to
avoid policy anomolies and to enable the preparation of a consistent
macroeconomic framework. Its functions and composition are given at
Annex VIII.
Other Cabinet Committees
Other Cabinet Committees relate to Social Sector Coordination,
Investment, Privatization, Regulatory Bodies and Agriculture. Their role is
formulation of policies for approval by the relevant fora, inter-ministerial
coordination and monitoring. Annex IX—XIII give their functions and
composition.
Other Decision Fora
Pakistan Environmental Protection Council provides policy guidelines
for environment aad sustainable development. Private Power and
Infrastructure Board clears proposals for investment in the power sector by the
private sector.
A Summing Up
Institutional Machinery for Managing the Pakistan Economy
117
The review of the institutional machinery presented here indicates
its elaborate nature. It has matured overtime by allowing increasing
decentralization of sanctioning powers, greater emphasis on policy
planning and expanding role for monitoring to improve implementation.
The machinery has, over time, adjusted well to the changing role of the
state as a catalyst in the expansion of opportunities. There are problems of
capacity, difficulties in the way of creating a culture of monitoring, a
distaste for evaluation and absence of post-evaluation. While the quality of
macro economic policy-making has improved, the sector policy work
leaves much to be desired. The reason for the latter is the persistence of
the project mindset in sectoral planning. An example here is the inability
to work out innovative public-private partnerships. In the phase of secondgeneration reform, analytical capacity for microeconomic policy will have
to improve.
There has been an essential continuity in the process of economic
planning since the launch of the First Five Year Plan in the late 1950s. The
continuity was maintained even during the interregnum of the 1970s when
medium-term planning was abandoned. This continuity has been possible
because the cutting edge of planning has been the Public Sector
Development Program (PSDP), which is prepared as part of the budget
annually, and under which the size and composition of public investment
expenditures are determined. Both five year plans and annual plans, by
contrast, are documents of an advisory nature. To the extent that they
reflect the economic philosophy of the government, however, they provide
a reference point for policy decisions.
In recent years this cutting edge has been blunted by the rapidly
shrinking fiscal space. The PSDP has experienced a sharp fall from 9.5 per
cent of GDP in the first year (1978-79) of the Fifth Plan period to under
3.0 per cent in recent years. Not only has the allocation made in the
budgets been smaller, relatively as well as in real terms, the releases lag
behind allocations and the utilization lags behind releases. A number of
steps have been taken recently to improve utilization. These include, on
the side of the Planning Commission, (1) the preparation of Cash/Work
Plans by the Ministries/Divisions (2) approval of Cash/Work Plans by the
Planning and Development Division (3) quarterly review of PSDP to
monitor the releases and expenditure of each project included in PSDP (4)
adjustments in allocations on the basis of releases/expenditure incurred by
various projects during each quarter and revision of Cash/Work Plans for
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projects for which re-allocation is made. On the side of the Finance
Division, the steps include (1) release of funds on the basis of Cash/Work
Plans approved by the Planning and Development Division and (2) to
make releases to projects in line with quarterly adjustments made by the
Planning and Development Division.
In the sixties when Pakistan started receiving large doses of foreign
aid, it turned out that the country did not have a sufficient number of good
projects for timely absorption of aid. The system of project approval, which
was also strengthened in the sixties as part of the process of putting in place an
elaborate planning framework, responded by building over time a large project
portfolio. As the deceleration of net aid inflows set in and fiscal deficits
assumed unmanageable proportions, the resources available to accommodate
new approved projects were constrained. A re-defined role of the government
to encourage private initiatives had its own role in reducing the scope of
PSDP.
Approval of a project does not mean automatic inclusion in PSDP,
but it does create pressure for inclusion. The common practice is to press
for token allocation in the hope that inclusion will enable larger allocations
subsequently. This leads to the problem of a huge throw forward of ongoing projects, in addition to the pressures generated by a large portfolio
of the approved projects. Huge resources are preempted by the on-going
commitments. The accommodation of the throw forward leaves very little
for new initiatives. In general, new initiatives have not been included as a
result of spring-cleaning exercises. The allocations for on-going projects
are adjusted to create space for new initiatives, and actual releases are
slowed down further to respond to the political pressures for new
initiatives. Today's new initiatives are tomorrow's on-going burden. The
rapid political turnover left its own baggage. To speed up new initiatives,
the escape routes of anticipatory approvals, special programs, dispersal of
approving authority in the name of decentralization and autonomy have
been adopted. The inevitable outcome is a thinly spread resources
envelope.
Donors’ response to this maze of project proliferation has been to
define a set of core projects and priority programs, which are protected by
a variety of conditionalities. This core periperalizes national priorities.
Concept clearance, essentially an authorization to negotiate with donors, is
another dimension of the pressures to approve. Projects are sometimes
Institutional Machinery for Managing the Pakistan Economy
119
concept cleared even when it is the beginning of an idea whose time may
not have come.
The distinction between development and non-development
budgets makes it difficult to match development with resource availability.
It also works against effective service delivery, particularly in social
sectors. A medium term budgetary framework exercise has been started to
overcome this disconnect.
Table-1: Plan Discipline and Growth Rate
Period
1950-55
1st Plan (1955-60
2nd Plan (1960-65)
3rd Plan 1965-70)
1970-78
5th Plan (1978-83)
6th Plan (1983-88)
7«th Plan (1988-93)
8th Plan (1993-98)
1998-2005
MTDF 2005-10
GDP Growth
per annum (%)
3.2
3.1
6.8
6.7
4.4
6.7
6.3
4.8
4.3
4.5
7.4*
Plan Discipline
Non-Plan Period
Low
Highest
Highest
Non-Plan Period
High
High
Medium
Low
Non-Plan Period
To start on 1st July, 2005
* Target
A simple test of the extent to which the institutional machinery has
been effective would be the growth rate achieved. Table 1 categorizes the
various periods of management in the history of the country by the level of
discipline of medium-term planning. It will be seen that the highest growth
rates are associated with the highest level of plan discipline. Thus the
institutional machinery, when allowed to work consistently over the
medium term, does deliver a respectable level of wealth creation. Whether
this wealth in produced and distributed equitably is an area where this
institutional machinery will have to undergo a profound set of reforms.
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Annexure-I
National Economic Council (NEC)
Composition
Federation
1.
The Prime Minister
Chairman
2.
Minister for Commerce
Member
3.
Minister for Communications
“
4.
Minister for Education
“
5.
Minister for Environment
“
6.
Minister for Food, Agriculture & Livestock
“
7.
Minister for Health
“
8.
Minister for Housing & Works
“
9.
Minister for Industries & Production
“
10.
Minister for Information and Broadcasting
“
11.
Minister for Information Technology &. Telecommunications
“
12.
Minister for Kashmir Affairs & Northern Areas
“
13.
Minister for Labor, Manpower and Overseas Pakistanis
“
14.
Minister for Local Govt. and Rural Development
“
15.
Minister for Petroleum and Natural Resources
“
16.
Minister for Planning & Development(when appointed)
“
17.
Minister for Population Welfare
“
18.
Minister for Ports and Shipping
“
Institutional Machinery for Managing the Pakistan Economy
121
19.
Minister for Privatization and Investment
“
20.
Minister for Railways
“
21.
Minister for State and Frontier Regions
“
22.
Minister for Science and Technology
“
23.
Minister for Social Welfare & Special Education
“
24.
Minister for Water & Power
“
25.
Adviser to the Prime Minister on Finance
“
26.
Deputy Chairman, Planning Commission
“
Provinces
(1)
Chief Ministers
Member
(2)
Provincial Finance Ministers
“
(3)
Provincial Planning Ministers
“
(4)
Chairman, Planning and Development Board/
“
Additional Chief Secretaries (Development) of the Provinces.
Note:
a)
The Prime Minister, Finance Minister, Planning Minister, and
Additional Chief Secretary(development) of the Azad Govt. of the
State of Jammu & Kashmir will be specially invited in the
meetings of the NEC.
b)
Governor NWFP will specially be invited in the meetings of the
NEC to represent FATA.
c)
Secretaries of the Federal Ministries concerned, Governor State
Bank of Pakistan, Chairman WAPDA and Chairman, National
Highway Authority will be invited as special invitees in the NEC
Meetings.
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d)
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The council may appoint such committees or bodies of experts,
officials and technocrats and associate with its deliberations and
meetings as may be necessary to assist the Council in the
performance of its functions.
Annexure-II
Principles of Policy
[Chapter 2 of Part II of the Constitution]
29.
(2)
In so far as the observance of any particular Principle of
Policy may be dependent upon resources being available for
the purpose, the Principle shall be regarded as being subject
to the availability of resources.
30.
(2)
The validity of an action or of a law shall not be called in
question on the ground that it is not in accordance with the
Principles of Policy, and no action shall lie against the
State, any organ or authority of the State or any person on
such ground.
32.
The State shall encourage local Government institutions
composed of elected representatives of the areas concerned
and in such institutions special representation will be given
to peasants, workers and women.
34.
Steps shall be taken to ensure full participation of women
in all spheres of national life.
35.
The State shall protect the marriage, the family, the mother
and the child.
37.
The State shall(a)
promote, with special care, the educational and economic
interests of backward classes or areas;
(b)
remove illiteracy and provide free and compulsory
secondary education within minimum possible period;
Institutional Machinery for Managing the Pakistan Economy
38.
123
(c)
make technical and professional education generally
available and higher education equally accessible to all on
the basis of merit;
(d)
ensure inexpensive and expeditious justice;
(e)
make provision for securing just and humane conditions of
work, ensuring that children and women are not employed
in vocations unsuited to their age or sex, and for maternity
benefits for women in employment;
(f)
enable the people of different areas, through education,
training, agricultural and industrial development and other
methods, to participate fully in all forms of national
activities, including employment in the service of Pakistan.
(g)
Decentralize the Government administration so as to
facilitate expeditious disposal of its business to meet the
convenience and requirements of the public.
The State shall(a)
Secure the well-being of the people, irrespective of sex,
caste, creed or race, by raising their standard of living, by
preventing the concentration of wealth and means of
production and distribution in the hands of a few to the
detriment of general interest and by ensuring equitable
adjustment of rights between employers and employees,
and landlords and tenants;
(b)
provide for all citizens, within the available resources of the
country, facilities for work and adequate livelihood with
reasonable rest and leisure;
(c)
provide for all persons employed in the service of Pakistan
or otherwise, social security by compulsory social insurance
or other means.
(d)
provide basic necessities of life, such as food, clothing,
housing, education and medical relief, for all such citizens,
irrespective of sex, caste, creed or race, as are permanently
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or temporarily unable to earn their livelihood on account of
infirmity, sickness or unemployment;
(e)
reduce disparity in the income and earnings of individuals,
including persons in the various classes of the service of
Pakistan; and
(f)
eliminate riba as early as possible.
Annexure-III
Economic Coordination Committee (ECC) of the Cabinet
Composition
1.
The Prime Minister/Finance Minister
Chairman
2.
Minister for Commerce
Member
3.
Minister for Communications
“
4.
Minister for Food, Agriculture and Livestock
“
5.
Minister for Industries, Production and Special Initiatives
“
6.
Minister for Information Technology and
Telecommunications
“
7.
Minister for Labor, Manpower and Overseas Pakistanis
“
8.
Minister for Petroleum & Natural Resources
“
9.
Minister for Ports and Shipping
“
10.
Minister for Privatization and Investment
“
11.
Minister for Railways
“
12.
Minister for Science and Technology
“
13.
Minister for Textile Industry
“
14.
Minister for Water & Power
“
Institutional Machinery for Managing the Pakistan Economy
125
15.
Adviser to the Prime Minister on Finance and Revenue
“
16.
Minister of State for Commerce
“
17.
Minister of State for Communications
“
18.
Minister of State for Economic Affairs
“
19.
Minister of State for Finance
“
20.
Minister of State for Industries, Production &
Special Initiatives
“
21.
Deputy Chairman, Planning Commission
“
22.
Governor, State Bank of Pakistan
“
23.
Chairman, Securities & Exchange Commission of Pakistan “
Special Invitation
i) Chairman, Export Promotion Bureau.
ii) Chairman, Board of Investment.
iii) Secretary, Commerce Division.
iv) Secretary, Communications Division.
v) Secretary, Economic Affairs Division.
vi) Secretary, Finance Division.
vii) Secretary, Food, Agriculture & Livestock Division.
viii) Secretary, Industries, Production and Special Initiatives Division.
ix) Secretary, Information Technology and Telecommunications.
x) Secretary, Petroleum & Natural Resources Division.
xi) Secretary, Planning & Development Division.
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xii) Secretary, Railways Division.
xiii) Secretary, Revenue Division.
xiv) Secretary, Statistics Division.
xv) Secretary, Water and Power Division.
xvi) Secretary, Privatization Division.
xvii) Secretary, Board of Investment.
xviii) Chief Economist, Planning Commission.
xix) Economic Adviser, Finance Division.
3.
The Committee may invite such other officers to its meetings as
may be required from time to time.
Functions
1.
Consideration of all urgent economic matter and coordination of
economic policies initiated by various Divisions of Government.
2.
To identify and propose measures for the gradual attainment of a
welfare state.
3.
To keep a vigilance on the monetary and credit situation and make
proposals for the regulation of credit in order to maximize
production and exports and to prevent inflation.
4.
To determine the future pattern of growth of major industries.
5.
To review from time to time the country's import policy and its
effect on production and Investment.
6.
To evaluate export performance from time to time in relation to
specific policies and measures for the promotion of exports.
7.
To watch the current price situation with a view to ensuring the
stability of the
prices of goods used by the common man.
Institutional Machinery for Managing the Pakistan Economy
127
8.
Implementation of any other task assigned by the Cabinet from
time to time.
9.
Cases of agreement and licensing for oil prospecting and
exploration.
10.
Six monthly/Annual reports on Autonomous Bodies.
11.
Cases of non-repatriable foreign investment. .
12.
Private sector schemes based on more than 50% imported raw
material.
13.
Cases involving fiscal anomalies.
14.
Review of foreign aid utilization
Annexure-IV
Annual Plan Coordination Committee (APCC)
Functions
1.
To review Annual Plan of current year and to discuss and
recommend Proposed Annual Plan of next year for submission to
NEC.
2.
To review Public Sector Development Program (PSDP) of current
year and to recommend proposed PSDP of next year for
submission to NEC.
Composition
1.
Deputy Chairman, Planning Commission
Chairman
2.
Governor, N.W.F.P., Peshawar
Member
3.
Governor, State Bank of Pakistan
Member
4.
Ministers for Finance and Planning &. Development
of all provinces and AJ&K.
Members
128
Pervez Tahir
5.
Deputy Chief Executive of Northern Areas
Member
6.
Chairman, P & D Board, Punjab and Additional Chief Members
Secretaries of Sindh, N.W.F.P, Balochistan and AJ&. K.
7.
Secretary, Planning & Development, Northern Areas
Member
8.
Provincials' Finance Secretaries
Members
9.
Secretaries of all Federal Ministries/Chief Economist,
Planning Commission.
Members
10.
Chairman,
Members
11.
Economic Adviser, Finance Division/Additional
Secretary (Budget), Finance Division/Director, PIDE.
C.B.R/NHA/WAPDA/PAEC/PNRA/HEC/CDA
Members
Institutional Machinery for Managing the Pakistan Economy
129
Annexure-V
Priorities Committee
Functions
1)
To discuss and recommend the scheme-wise and overall
allocations of Public Sector Development Program of next year for
submission to APCC.
Composition
1.
Additional Finance Secretary (Budget)
Chairman
2.
Representatives of all Ministries/Divisions
Members
3.
Technical Chiefs of P & D Division
Members
4.
Chief, Public Investment Programming Section
Member
130
Pervez Tahir
Annexure-VI
Executive Committee of the National Economic Council
(EClNEC)
Composition
1.
The Prime Minister/Finance
Chairman
2.
Minister for Commerce
Member
3.
Minister for Communications
”
4.
Minister for Education
”
5.
Minister for Environment
”
6.
Minister for Food, Agriculture and Livestock
”
7.
Minister for Health
”
8.
Minister for Housing & Works
”
9.
Minister for Industries, Production and Special Initiatives
”
10.
Minister for Information Technology and
Telecommunications
”
11.
Minister for Local Government and Rural Development
”
12.
Minister for Labor, Manpower and Overseas Pakistanis
”
13.
Minister for Petroleum & Natural Resources
”
14.
Minister for Planning and Development (when appointed)
”
15.
Minister for Ports and Shipping
”
16.
Minister for Privatization and Investment
”
17.
Minister for Railways
”
18.
Minister for Science and Technology
”
19.
Minister for Social Welfare &. Special Education
”
Institutional Machinery for Managing the Pakistan Economy
131
20.
Minister for Textile Industry
”
21.
Minister for Water & Power
Member
22.
Adviser to the Prime Minister on Finance and Revenue
”
23.
Chairman, Higher Education Commission
”
24.
Minister of State for Economic Affairs
”
25.
Minister of State for Finance
”
24.
Deputy Chairman, Planning Commission
”
Provinces:
1.
Provincial Finance Ministers
“
2.
Provincial Planning Ministers
“
3.
Chairman Planning & Development Board/Additional
Chief Secretaries(Development) of the Provinces.
“
Note:
i) The Finance Minister, Planning Minister; and Additional Chief
Secretary (Planning & Development) of the Azad Govt. of the State of
Jammu & Kashmir will be specially invited in all the meetings of the
Committee.
ii) Deputy Chief Executive and Chief Secretary, Northern Areas will
also be specially invited in all meetings of the ECNEC.
Functions
i) Development Schemes costing more than Rs.500 million are
submitted to ECNEC for its consideration/approval
ii) To allow moderate changes in the plan and sectoral re-adjustments
within the over-all plan allocation.
iii) To supervise the implementation of the economic policies laid
down by the Cabinet and the National Economic Council.
132
Pervez Tahir
iv) Reports asked for by the Committee in pursuance of its earlier
decisions.
v) Any other matter referred to the Committee by the Prime Minister,
the National Economic Council, the CCI or the Cabinet or raised
by a member in the committee with the permission of the
Chairman.
Annexure-VII
Scheme Appraisal and Approval Fora
1 CDW
. P
Scrutiny/
approval of
development
projects upto a
certain financial
Members (Federal)
limit. Projects
Chief' Economist, Planning
exceeding this
Commission, Finance Division,
limit are
Economic Affairs Division, Chairman. submitted to the
Pakistan Council of science &
ECNEC.
Technology, Housing & Works,
Industries & Production Environment
& Relevant Federal Administrative
Ministry
Chairman
Deputy Chairman, Planning
Commission/Secretary, Planning &
Development Division.
Approves projects
costing upto Rs.500
million. Projects
above Rs. 500
million are
recommended to
ECNEC for
consideration/
approval.
Members (Provincial)
Chairman, Planning &.
Development Board/ Additional
Chief Secretaries (Dev) of
Provinces.
2 DDW Chairman
Secretary of the Federal Ministry
. P
concerned.
3 PDW
. P
Scrutiny/
approval of
development
projects (upto
Members
Rs.40 million)
Representatives from Finance
prepared by the
Division, Planning Division.
Federal
Ministry
concerned.
Scrutiny/approv
Chairman
Chairman, Planning & Dev. Board/ al of provincial
Additional Chief Secretary (Dev) of projects upto a
Province
certain financial
Approves projects
costing upto Rs. 40
million. Projects
above Rs. 40 million
are submitted to the
Planning
Commission for
Consideration of
CDWP.
—Projects costing
upto Rs. 200 million
(local currency) or
with FEC below 25%
Institutional Machinery for Managing the Pakistan Economy
Members
Secretaries of the Provincial
Departments concerned with
Development
limit. Projects
exceeding this
limit are
submitted to the
CDWP for
consideration/
approval
133
of total cost are
approved by PDWP.
—Projects costing
upto Rs. 1000 million
which are fully
funded through
provincial resources
are also approved by
PDWP.
—Projects costing
above these limits are
submitted to Planning
Commission/CDWP
134
Pervez Tahir
Annexure-VIII
Monetary and Fiscal Policies Co-ordination Board
Composition
(i) Federal Minister for Finance
Chairman
(ii) Federal Minister for Commerce or Secretary Commerce Member
(iii) Deputy Chairman, Planning Commission
Member
(iv) The Governor (SBP)
Member
(v) Secretary, Finance Division, Government of Pakistan
Member
Functions
(a) co-ordinate fiscal, monetary and exchange race policies;
(b) ensure consistency among macro-economic targets of growth,
inflation and fiscal monetary and external accounts;
(c) meet for the purposes of clauses (a) and (b) before the finalization
of the budget to determine the extent of Government borrowing
from commercial banks taking into account credit requirements of
the private sector, liquidity expansion determined by the Central
Board and expected changes in net foreign assets of the banking
system;
(d) meet on a quarterly basis to review the consistency of macroeconomic policies and to revise limits and targets set at the time of
the formulation of the budget, keeping in view the latest
developments in the economy;
(e) consider limits of government borrowing as revised from time to
time in the meetings to be held before and after passage of the
annual budget;
(f) review the level of Government borrowing in relation to the
predetermined or revised targets after every quarter; and
Institutional Machinery for Managing the Pakistan Economy
135
(g) review the expenditure incurred in connection with raising of loans
and Government borrowing.
Annexure-IX
Social Sector Coordination Committee (SSCC)
Composition
1.
Minister for Social Welfare and Special Education
Chairperson
2.
Minister for Culture, Sports and Youth Affairs
3.
Minister for Education
”
4.
Minister for Environment
”
5.
Minister for Health
”
6.
Minister for Housing and Works
”
7.
Minister for KAN A
”
8.
Minister for Labor, Manpower and Overseas Pakistanis
”
9.
Minister for Law, Justice and Human Rights
”
10.
Minister for Local Govt. and Rural Development
”
11.
Minister for Population Welfare
”
12.
Adviser to the Prime Minister on Finance
”
13.
Adviser to the Prime Minister on Women Development
”
14.
Deputy Chairman, Planning Commission
”
Member
Provinces
15.
Minister for Planning &. Development, Punjab
”
16.
Minister for Planning & Development, Sindh
”
136
Pervez Tahir
17.
Minister for Planning & Development, NWFP
”
18.
Minister for Planning &. Development, Balochistan
”
Institutional Machinery for Managing the Pakistan Economy
137
Annexure-X
Cabinet Committee on Investment (CCOI)
Composition
i. The Prime Minister
Chairman
ii. Minister for Commerce
Member
iii. Minister for Communications
”
iv. Minister-for Food, Agriculture and Livestock
”
v. Minister for Industries, Production
”
vi. Minister for information Technology and
Telecommunications
”
vii. Minister for Petroleum & Natural Resources
”
viii. Minister for Privatization and Investment
”
ix. Minister for Textile Industry
”
x. Minister for Tourism
”
xi. Minister for Water & Power
”
xii. Adviser for Finance and Revenue
”
xiii. Minister of State for Privatization and Investment
”
xiv. Deputy Chairman, Planning Commission
”
xv. Chairman, BOI
”
Functions
i) To consider investment proposals and projects involving relaxation
in policies and incentives submitted by Board of Investment
Secretariat.
138
Pervez Tahir
ii) To accord approval to the investment proposals/projects in all
sectors of the economy requiring consent and clearance of various
Ministries and Divisions and resolve issues impeding realization of
projects, their implementation and operation;
iii) To consider and approve the proposals/projects for development
and management of industrial Zones, Free Trade Zones, Free
Industrial Zones and Export Oriented Units;
iv) To deal with the issues facing existing industries/projects in
operation and take decisions to resolve them;
v) To serve as a "clearing house" for resolving the issues relating to
investment projects and authorize the office of the Board of
investment to issue single permission so as to eliminate the need to
seek redressal/permissions of various Ministries/Divisions/
Departments; and;
vi) To consider availability of utilities to be supplied by the concerned
Departments while examining the investment proposals and give
the investors firm indications of their availability or otherwise. On
approval of the project, the line departments will be bound to
supply the facility to the investors within thirty days on receipt of
application from them.
Institutional Machinery for Managing the Pakistan Economy
139
Annexure-XI
Cabinet Committee on Privatization (CCOP)
Composition
i) The Prime Minister
Chairman
ii) Minister for Commerce
Member
iii) Minister for Industries, Production and Special Initiatives
”
iv) Minister for-Information technology and
Telecommunications
”
v) Minister for Labor, Manpower and Overseas Pakistanis
”
vi) Minister for Petroleum and Natural Resources
”
vii) Minister for Ports and Shipping
”
viii) Minister for Privatization and Investment
”
ix) Minister for Textile Industry
”
x) Minister for Water and Power
”
xi) Adviser to the Prime Minister on Finance
”
xii) Deputy Chairman, Planning Commission
”
xiii) Governor, State Bank of Pakistan
”
xiv) Any other officer/persons, which the Privatization
Commission may deem appropriate
Co-opted
Member
Functions
i) To formulate the Privatization Policy for approval of the
Government/Cabinet
ii) To approve the State Owned Enterprises to be privatized the
recommendation of the Privatization Commission or otherwise.
140
Pervez Tahir
iii) To take policy decisions on inter-ministerial issues relating to the
privatization process
iv) To review and monitor the progress of privatization.
v) To instruct the Privatization Commission to submit
reports/information/ data relating to the privatization process or
any other matter relating thereto.
vi) To take policy decisions on matters pertaining to privatization,
restructuring, deregulation, regulatory bodies and Privatization
Fund Account.
vii) To approve the reference Price in respect of the State Owned
Enterprises being privatized.
viii) To approve successful bidders.
ix) To consider and approve the recommendations of the Privatization
Commission on any matter.
x) To assign any other task relating to privatization to the
Privatization Commission.
Institutional Machinery for Managing the Pakistan Economy
141
Annexure-XII
Cabinet Committee on Regulatory Bodies (CCRB)
Composition
1.
The Prime Minister
Chairman
2.
Minister for Commerce
Member
3.
Minister for Health
”
4.
Minister for Industries, Production and Special Initiatives
”
5.
Minister for Information & Broadcasting
”
6.
Minister for Information Technology and Telecom
”
7.
Minister for Petroleum & Natural Resources
”
8.
Minister for Privatization and Investment
”
9.
Minister for Water & Power
”
10.
Adviser to the Prime Minister on Finance and Revenue
”
Functions
i. To consider matters relating to the overall framework of
Regulatory Bodies and their functioning.
ii. To consider issues connected to policy matters referred to the
Committee
by
Regulatory
Bodies
or
concerned
Ministries/Divisions.
iii. To review the performance of Regulatory Bodies on a quarterly
basis.
iv. To consider any matter referred to the Committee by the Prime
Minister or by a Member of the Committee with the permission of
the Chairman, or by the Cabinet.
142
Pervez Tahir
Institutional Machinery for Managing the Pakistan Economy
143
Annexure-XIII
Cabinet Committee on Agriculture (CCA)
Composition
1.
The Prime Minister
Chairman
2.
Minister for Commerce
Member
3.
Minister for Food, Agriculture and Livestock
”
4.
Minister for Industries, Production and Special Initiatives
”
5.
Minister for Water & Power
”
6.
Adviser to the Prime Minister on Finance and Revenue
”
7.
Governor, State Bank of Pakistan
”
8.
Deputy Chairman, Planning Commission
”
Functions
i. To review agriculture policies as well as development plans in the
sector and monitor implementation thereof.
ii. To review and monitor the progress of important projects and
programs in the sector in order to ensure effective utilization and
outcomes.
iii. To take decisions on inter-ministerial issues relating to the sector.
iv. To review proposals of agriculture pricing, agriculture inputs and
credit as well as issues concerning annual crop production,
marketing and exports.
v. To review the performance of major public sector organizations
dealing with agriculture.
144
Pervez Tahir
vi. To take up any matter referred to the Committee by the Prime
Minister or by a Member of the Committee with the permission of
the Chairman, or by the Cabinet.
Institutional Machinery for Managing the Pakistan Economy
145
Annexure-XIV
Planning and Development Division : Rules of Business
I.
(i)
Preparation of Comprehensive National Plan for the
economic and social development of the country;
(ii)
Formulation, within the framework of the National Plan, of
an annual plan and an annual development program; and
(iii)
Recommendations concerning orderly adjustment therein in
the light of new needs, better information and changing
conditions.
2.
Monitoring the implementation of all major development projects
and programs; identification of bottlenecks and initiation of timely
remedial action.
3.
Evaluation of on-going and completed projects.
4.
Review and evaluation of the progress achieved in the
implementation of the National Plan.
5.
Identification or regions, sectors and sub-sectors lacking adequate
portfolio of projects and taking steps to stimulate preparation of
sound projects in those areas.
6.
Continuous evaluation of the economic situation and coordination
of economic policies.
7.
Organization of research in various sectors of the economy to
improve the data base and information as well as to provide
analytical studies which will help economic decision making
8.
Association with the Economic Affairs Division in matters
pertaining to external assistance in individual projects, from the
stage prior to preliminary discussion up to the stage of final signing
of documents with and giving agencies.
9.
Development or appropriate cost and physical standards for
effective technical and economic appraisal of projects.
146
10.
Pervez Tahir
Coordination of all work pertaining to:(i)
World Social summit
(ii)
SAARC' (Human Resource Development)
(iii)
International Poverty Alleviation Forums
11.
National Logistics Cell.
12.
Administrative control of
(i)
Economists and Planners Group;
(ii)
Pakistan Institute of Development Economics.
Institutional Machinery for Managing the Pakistan Economy
147
Annexure-XV
Finance Division : Rules of Business
1.
Finances of the Federal Government and financial matters affecting
the country as a whole
2.
The Annual Budget Statement and the Supplementary and Excess
Budget Statements to he laid before the National Assembly, the
schedules of authorized expenditure.
3.
Accountants and Audit.
4.
Allocation of share of each Provincial Government in the proceeds
of divisible Federal Taxes; National Finance Commission
5.
Public debt of the Federation both internal and external; borrowing
money on the security of the Federal Consolidated Fund.
6.
Loans and advances by (lie Federal Government.
7.
Sanctions of internal and external
concurrence of (lie Finance Division.
8.
Advice on economic and financial policies; promotion of economic
research.
9.
Proper utilization of the country's foreign exchange resources.
10.
Currency, coinage and legal tender, Pakistan Security Printing
Corporation and Pakistan Mint.
11.
Banking, investment, financial and other corporations, that is to
say:
expenditure
requiring

Central Banking; Stale Bank of Pakistan;

Other banking (not including co-operative banking) and investment
and financial corporations with objects and business not confined
to one Province, and
148
Pervez Tahir

Incorporation, regulation and winding up of corporations including
banking insurance and financial corporations not confined to or
controlled by or carrying on business in one Province.
12.
Framing of rules of pay and allowances, retirement benefits, leave
benefits and other financial terms and conditions of service.
13.
Cost Accountancy.
14.
Intentional Monetary Fund.
Mass Media
Devolution
& Area
Development
Industries
& C
ommerce
Member
Production
& Mgmt.
Science &
Technology
Education
Population
& Social
Planning,
Social
Welfare,
Women
Dev. &
Manpower
Nutrition
Health
Member
Social
Sector
NFDC/
PPMI
Transport
& Comm.
Environment
Physical
Planning
& Housing
Water
Resources
Agriculture
& Food
Sr. Chief
Agriculture
& Food
Transport
& Comm.
Energy
Wing
Member
InfraStructure
Governance
Dy.
Secretary-III
Dy.
Secret ary-II
Dy.
Secret ary-I
Joint
Secret ary
(Admn)
Secretary
Deputy Chairman
JACC/IT
DERA
D.G.
(Social)
Projects
Wing
D.G (Infra)
Projects
Wing
D.G.
(Coord)
Projects
Wing
Addl. Sec.
Projects
Wing
Employment &
Research
Money,
Prices &
Fiscal
Policy
Internat.
Trade &
Finance
Macroeconomics
JCE
Macro
Chief Economist
Poverty
Alleviat ion
Economic
Appraisal
Public
Investment
Authorization
Public
Investment
Program
JCE
Operat ions
Organizational Chart of Planning Commission and Planning & Development Division
Institutional Machinery for Managing the Pakistan Economy
149
The Lahore Journal of Economics
Special Edition
Pakistan’s Poverty Reduction Strategy:
Why Employment Matters1
Rashid Amjad
I. Introduction
Despite some slight improvement in the last two years the overall
employment and labor market situation continues to give rise to serious
concern and needs to be given the highest attention in economic and social
policy making in Pakistan. The rise in unemployment rate from around 3
per cent in the early 1990s to around 8 per cent in recent years in a country
where few people can afford not to work for a lack of any effective safety
net, reflects the emergence of a serious imbalance in the labor market. This
more than doubling of the unemployed from around 1 million in 1990 to
around 3.5 million in 2003-04 has been, as we shall argue, a major
contributory factor in the rise in poverty during the 1990s. The severity of
the employment problem is reflected in the fact that unemployment in
recent years has been higher amongst the poor than the non-poor in the
labor force.
The high rates of open unemployment are only partly reflective of
the weak demand for labor in relation to its supply. Pakistan's major
employment challenge is that a large proportion of the labor force earn
extremely low incomes and work in hazardous and poor working
conditions. The ILO estimates that there were around 15 million "working
poor" or one-third of the labor force that lived on less than $ 1 a day in
2001 -02.
In addition the labor market suffers from serious gender disparity.
Female unemployment rates are double that of men at around 13 per cent
in 2003-04 (down from 16.5 per cent in 2001-02). Unemployment among
1
The author is Director (Policy Planning), Employment Sector, ILO Geneva. The views
expressed in the article are his own and do not necessarily represent those of the ILO.
146
Rashid Amjad
young people in the 15-24 age group was around 24 per cent in 2003-04
i.e. more than three times the overall unemployment rate.2
This grim employment situation is compounded by the low level
and quality of skills of Pakistan's work force. More than half of Pakistan's
labor force is illiterate and most skills have been acquired through on-thejob training in the informal economy. This seriously constrains the
country's ability to compete in a global economy where the pace of
competition is intensifying as the new WTO regime unfolds.
Pakistan like most other developing countries has found it
extremely difficult to create good quality jobs in the formal or organised
sector. Over the last ten years most of the new jobs have been created in
the informal economy and this trend has accelerated as seen by the
increase of the share of the informal economy in non-agriculture
employment from 64.6 per cent in 2001-02 to 70 per cent in 2003-04.
There has also been a corresponding increase in contract and other
precarious forms of employment. This increase in informal sector
employment and hiring of contract workers in the organised sector is
reflective of the general slackening of the labor market and a decline in the
bargaining position of labor. It could also partly be the result of a
regulatory framework which places a high cost and imposes a lack of
flexibility in hiring and dismissing workers for those employing people in
the formal or organised sector.3
A well functioning labor market is an essential ingredient for
developing a sound investment-climate and can play a critical role in
stimulating growth and poverty reduction. To the extent that rigidities
exist, whether induced by lack or low levels of skills or a constraining
regulatory framework, it can adversely impact on job creation especially
by small and medium enterprises which are the main engine of
employment generation in Pakistan.
That said, it is also important to recognize that labor markets are
different from other markets. Labor is not a commodity and labor markets
are socially embedded. They rely on human motivations and needs
2
All data comparing 2003-04 with 2001-02 are based on Federal Bureau of Statistics,
Labor Force Survey 2003-04, Islamabad.
3
See Asya Akhlaque and Milan Vodopivec, Generating Investment and Employment
opportunities in Pakistan through Labor Market Reforms : Concept Note for the Proposed
Labor Market Study, Islamabad, 2005
Why Employment Matters
147
including the need for security and social fairness. Freely chosen
productive and remunerative employment must be promoted
simultaneously with fundamental rights at work, an adequate income from
work and an affordable degree of social protection.
The objective must be to develop an efficient and rights-based
labor market based on social dialogue and strong supporting labor market
institutions including employers’ and workers’ organisations. In this
context the labor legislation of October 2002, the Industrial Relations
Ordinance (IRO) 2002, and changes in the administrative arrangements for
the enforcement of labor inspection have given rise to serious concern and
some provisions of the IRO (2002) and other legislation are not in
conformity with international labor standards which Pakistan has ratified.4
The major attention of the government in the four of the last five and
a half years i.e. between 1999 to end-2003, was concentrated in restoring
macro stability through a stringent fiscal policy stance and a restrictive
monetary policy under an IMF program. Having achieved a turnaround on
the macro front and the rekindling of economic growth the government is
now focussing its attention on job creation and poverty reduction. These
priorities are reflected in Pakistan's recently finalized Poverty Reduction
Strategy5 and its draft Medium Term Development Framework 2005-2010.6
Both the Poverty Reduction Strategy and the Draft Medium Term
Development Framework recognize that the most effective means of
reducing poverty is through the creation of productive and remunerative
employment. This paper is divided into two main parts. The first part
analysis in a historical context the growth-employment -poverty nexus to
show how employment and labor market developments have played a vital
if not a decisive role in influencing poverty levels in Pakistan. The second
part of the paper reviews the current efforts being undertaken to reduce
unemployment and improve the deteriorating labor market situation so as
to favourably impact on the high levels of poverty and identifies areas
4
Specifically Convention No. 87 (Freedom of Association and Protection of the Right to
Organise), Convention No. 98 (Right to Organise and Collective Bargaining) and
Convention No. 81 (Labor Inspection Convention).
5
Government of Pakistan, Poverty Reduction Strategy Paper, Accelerating Economic
Growth and Reducing Poverty: The Road Ahead, Poverty Reduction Strategy Secretariat,
Ministry of Finance, Islamabad, December 2003.
6
Government of Pakistan, Working Draft, Medium Term Development Framework 200510, Planning Commission, Islamabad, March 2005.
148
Rashid Amjad
where policies and resources-could be more sharply focussed and areas
where new initiatives could be launched.
These relate to the following key areas:
-
Generating and sustaining a high rate of economic growrh to create
the necessary precondition for more and better jobs for women and
men in Pakistan.
-
Increasing productivity and incomes in the rural economy while
maintaining its labor absorptive capacity.
-
Promoting local development, empowering local communities and
upscaling successes.
-
Creating a favorable environment for entrepreneurship and
enterprise development especially for small and medium
enterprises.
-
Increasing the employment intensity of the public sector
investment program by balancing the more capital intensive long
gestation mega projects with more labor based targeted
interventions.
-
Developing a globally competitive work force.
-
Striking the best possible balance between flexibility in the labor market
for enabling enterprises to adjust while providing security for workers.
-
Improving productivity, conditions of work and incomes in the
informal economy.
-
Maximising development benefits from overseas migration and
remittances.
-
Mainstreaming gender equality.
-
Providing income security and affordable social protection.
-
Improving the existing system of labor market monitoring.
2. Employment and Poverty Challenge
Why Employment Matters
149
In examining the employment and poverty challenge facing Pakistan
the following important characteristics of the labor market need to be noted.
-
With a labor force growth of around 3 per cent, based on historical
trends and a healthy growth in productivity, Pakistan's economy
must grow at a minimum of 6 per cent to absorb the new entrants
into the labor force. It needs to grow even faster if it is to bring
down the exceptionally high unemployment rate.
-
The slackening in the labor market, as a result of the slowing down
in economic growth, is reflected in movement of real wages where
except in the public sector, between 1996 and 2002 they declined
for both salaried and casual workers.
- The agricultural sector and allied industry (livestock, poultry and dairy)
still account for the bulk of the employed labor force with a slight
increase in recent years to around 43 per cent in 2003-04. To reduce
pressure on rural to urban migration and corresponding increases in
low productivity informal sector employment in urban areas the
agricultural economy still needs to play an important part in increasing
productivity and incomes while maintaining its labor absorptive
capacity.
7
-
Women’s participation rate remains extremely low at 16 per cent in
contrast to men’s participation rate of around 70 per cent. If
economic activities carried out within house premises is included
this rate increases to 39.3 per cent but still is much less than their
male counterparts.7
-
Outside the agriculture sector, the informal economy employs
around 70 per cent of the labor force. The vast majority of informal
jobs suffer from low productivity, low incomes and poor and
hazardous working conditions.
-
While the employment rate among the illiterate is particularly high,
as this group can hardly afford not to work, they are
disproportionately more likely to be poor.
For obtaining a better measure of labor participation, especially of females, few new
questions to net in a set of economic activities likely to be carried within house premises
have been introduced in Labor Force Surveys.
150
Rashid Amjad
-
Among educated workers, more education not only brings
significant wage advantage but is also associated with a higher
participation rate particularly among women.
-
A significant number of Pakistanis work overseas, variously estimated
at between 2 to 3 million, mainly in the Middle-East but also in the Far
East and with families in the United States, UK. and Europe. Out and
return migration to Pakistan and remittances from abroad, which have
increased almost four-fold post 9/11 to around $ 4 billion, have played
an important role in labor market developments in Pakistan.
-
Child labor is estimated at 3.3 million and a significant number in
bonded labor.
About one out of thirty-three i.e. 2.8 per cent of the labor force
reported some sort of occupational injury or disease in 2003-04. The
majority of sufferers fall in the category of the self-employed.
3. Growth-Employment-Poverty Nexus in Pakistan
In Pakistan the relationship between growth and poverty has never
been straightforward as different time periods of its economic
development testify. Periods of high economic growth have witnessed
both declines in poverty, as in the 1980s, but also an increase in poverty as
in the 1960s. Periods of low economic growth have seen poverty sharply
increase as in the 1990s but also seen poverty fall as in the 1970s. In recent
years the revival of economic growth on somewhat limited evidence
suggests that poverty levels may again be declining.
While there is now a rich body of literature which reviews these
trends and examines the reasons for the fluctuating levels of poverty8 as
we shall see a key factor in explaining poverty trends has been
developments in the labor market, both domestic and external, as these
have impacted on employment, wages and the relative bargaining strength
of workers.
Table-1: Growth and Poverty
8
See for example Rashid Amjad, Solving Pakistan’s Poverty Puzzle: Whom Should We
Believe? What should We Do?, Pakistan Development Review, Volume 42, Number 4,
Winter 2003, Islamabad.
Why Employment Matters
Year
151
1963-64 1971-72 1976-77 1987-88 1992-93 1998-99
to
to
to
to
to
to
969-70 1976-77 1987-88 1992-93 1998-99 2001-02
GDP Growth rate
7.2
4.8
6.7
4.8
4.2
3.2
Labor Force
Growth rate
1.7
3.5
2.5
1.9
3.6
2.5
Growth rate of
employment
1.5
3.4
2.5
1.5
3.4
1.6
Changes in
Unemployment
rate
0.98 to 2.1 to
1.99
2.6
2.62 to 3.14 to 4.71 to
3.14
4.71
5.9
5.9 to
8.3
Changes in Poverty 40.2 to 46.5 to 30.7 to 17.3 to 25.7 to 30.6 to
levels*
46.5
30.7
17.3
22.4
32.6
32.1
* Data on poverty levels is based on Amjad and Kemal (1997) till 1992-3
and Planning Commission estimates in subsequent years.
Source:
A.R. Kemal, Employment-Poverty Linkages and Policy in
Pakistan, ILO Working Paper, Geneva, 2005.
While data may not be strictly comparable in different time periods
Table-1 provides fairly robust evidence of the relationship between
growth, poverty and labor market developments in Pakistan.
The period from 1987-88 to 2001-02 shows that a slowing down in
economic growth accompanied by an increasing imbalance in the supply
and demand for labor resulted in a sharp increase in unemployment and a
significant rise in poverty levels during this period.
The slowing down in economic growth was the result of large
fluctuations and decline in cotton production, continuing slowing down of
remittance flows, bad weather conditions which directly affected
agricultural production and economic sanctions after Pakistan's nuclear
explosion in May 1998. Frequent changes in governments in this period
added to economic uncertainty and lack of continuity in economic decision
making. Political considerations may also have dictated unsound economic
decisions such as the Lahore-Pindi motorway.
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Rashid Amjad
In addition to these factors poor economic management worsened
the situation. These decisions related to: (i) poor sequencing and pace of
the implementation of the economic reform program; (ii) failure to
effectively protect real incomes of the poor and vulnerable groups against
the rise in prices of essential goods including as a result of removal of food
subsidies and increases in energy prices; (iii) targeted lowering or the
capping of the fiscal deficit as part of the IMF stand by loan agreements
which led to a decline in the public sector development program from
around 6.4 per cent of GDP in 1992-93 to only 2.8 per cent in 2000-01;
(iv) weakening of the bargaining position of workers in the face of rising
unemployment ; and (v) inadequate safety nets for the poor and the
vulnerable to deal with the deteriorating economic, employment and
poverty situation.
The dynamics of the increase in rural poverty and its relationship
with the labor market situation during the 1990s has been demonstrated
very effectively in a recent study.9 The study examines the issue that while
growth was uneven in agriculture during the 1990s, the overall official
economic growth for agriculture was still impressive at over 4 per cent per
annum, then why did rural poverty sharply increase during this period?
While demonstrating through different official sources that actual real
growth was in fact lower at around 3.1 per cent he relates the increase in
poverty due to the skewed structure of landholdings with more than half of
the total farms being less than 5 acres in size and a slackening in labor
demand which adversely affected incomes of the poor rural landless
households which comprise more than half of the rural labor force. The
smaller farmers are less diversified and vulnerable to poverty as a result of
highly erratic yields especially in cotton during this period. The factors
responsible for the decrease in the demand for labor were related to
mechanization in agriculture which reduced the use of non-farm hired
labor, a slowing down in non-farm activities especially construction which
was partly due to the decline in the public sector infrastructure
development program. This resulted in a decrease in real wages of both
agricultural and construction workers which contributed significantly to a
rise in poverty in this period.
In sharp contrast in the period from 1976-77 to 1987-88 a high rate
of economic growth together with employment and labor force growing
9
Sohail J. Malik, Agriculture Growth and Rural Poverty, Working Paper No. 2, Pakistan
Resident Mission Working Paper Series, Asian Development Bank, Islamabad, 2005.
Why Employment Matters
153
around the same level resulted in a decline in poverty even though
unemployment increased very slightly. These favorable domestic
developments were accompanied by a rapid increase in overseas migration
mainly to the Middle- East, with almost one-third of the increase in the
labor force in the first five years of this period finding jobs overseas.
Remittances also increased rapidly reaching a peak of around $2.7 billion,
through formal channels, and since these reflected earnings of mainly
skilled and semi-skilled workers sent to their families in Pakistan, it
stimulated demand for products and jobs in small and medium enterprises
and in the housing sector. Real wages increased in all sectors of the
economy in response to a tightening of the labor market and poverty
declined significantly during this period.
The period 1963-64 to 1969-70 showed that despite an impressive
growth rate, low employment growth and a decline in real wages till at
least 1967-68 contributed to a rise in poverty. In the period 1971-72 to
1976-77, low economic growth but a fast rate of employment generation
including in the public sector, increase in real wages as new labor
legislation increased the bargaining position for workers and more secure
tenancy rights, together with the start of overseas migration to the MiddleEast and remittances led to a decline in poverty mainly during the latter
part of this period.
It may be useful to track labor market developments more closely
post-2002 which has seen a revival in economic growth and based on
projections for 2004-05 the economy would have grown on average at
around 6 per cent in the last three years. This has been the result of a much
better performance of the agricultural economy and very high growth in
large scale manufacturing. The latter has been as high as 17.5 per cent in
2003-04. The direct employment generation resulting from this high
growth in manufacturing may be somewhat marginal. Textiles are now far
less labor intensive and consumer durables (motor vehicles, scooters, air
conditioners) are relatively capital-intensive. The massive increase in
remittances post 9/11 to around $ 4 billion or about 7 per cent of GDP in
2002-2002, a level which they have subsequently maintained, may not
have had the same impact on employment as in the late 1970s and early
1980s as they appear to be coming mainly from professionals for
investment in Pakistan in real estate and stocks, but have contributed
significantly to a construction boom mainly in the housing market. Growth
of formal sector employment in the last few years has taken place in
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Rashid Amjad
telecommunications, media and the IT sector. There has also been a
significant increase in employment in services related to restaurants and
other food facilities in major urban centers.
These favorable developments in the labor market have led to
slight reduction in unemployment from 8.3 in 2001-02 to 7.7 per cent in
2003-04 and an increase in real wages of around 10 per cent in this period
based on Labor Force Survey data. Wages of unskilled construction
workers, masons and carpenters also increased by 11.1, 6.7 and 4.8 per
cent respectively in 2003-04 compared to the previous year. Wages in the
agriculture sector according to data collected by the Agricultural Prices
Commission have not shown any real increase in the same period.10
A small sample survey of around 5000 households conducted by
the Federal Bureau of Statistics in 2004 suggests a slight decline in
poverty compared to 2001 but lack of comparability have raised doubts on
its results. That said, when seen in relation to other labor market indicators
and the strong revival of economic growth, bumper cotton and an expected
good wheat crop in 2004-05, could all point to a reversal in the trend of
rising poverty in the country.
To conclude, the overall analysis of the growth-employmentpoverty nexus in Pakistan, clearly suggests that whereas growth is a
necessary condition for poverty reduction, it is not sufficient. Only if the
pattern of growth embraces those sectors where the poor work and is
accompanied by an increase in employment whether domestic or overseas,
reflected partly in increases in real wages as the labor market improves,
will growth have a favorable impact on reducing poverty.
4. Pakistan’s Poverty Reduction Strategy and Medium Term
Development Framework
Poverty Reduction Strategy Paper
Pakistan's Poverty Reduction Strategy Paper (PRSP) finalized in
December 2003 and its recently released Draft Medium Term
Development Framework (MTDF) 2005-2010 in March 2005 for debate
and discussion both reflect the high priority the government attaches to
employment generation as a major element of its poverty reduction
10
See Kemal (2005)
Why Employment Matters
155
strategy and for redressing the serious unemployment situation and low
level of skills and productivity of its work force.
The PRSP explicitly recognises employment as an essential
component of the poverty reduction strategy by embedding it in its macro
economic framework and investment program for accelerating economic
growth as well as in a separate section outlining measures for employment
creation. It has made a conscious attempt to redress gaps in the Interim-PRSP
which had not sufficiently highlighted the importance of employment in
poverty generation.
The main elements of the employment strategy outlined in the PRSP are:-
Growth must emanate from sectors that have greater potential to
generate employment.
-
Targeted policy interventions for quick relief through short-term
employment opportunities.
-
Agriculture, housing and construction, small and medium
enterprises, information technology and telecommunication
identified as key sectors with strong potential to generate jobs.
-
Importance of developing supporting infrastructure (aviation, ports,
railways and roads) as a huge catalyst for economic activity,
employment and economic growth.
-
Conduct a review of labor regulations and laws that constrain
competition and/or impose high and unnecessary compliance costs.
-
Creating a business environment that is supportive of small and
medium enterprises.
-
A rural development strategy to increase productivity and incomes
through (i) overcoming water shortages facing agriculture through
investment in water infrastructure and improved efficient water
management; (ii) encourage corporate agricultural farming by
leasing out uncultivated state lands; (iii) develop and support
livestock farming that provides 25-30 per cent of income of small
farmers and landless livestock producers; (iv) targeted programs
for boatless fishermen working as laborers and small boat owners;
156
Rashid Amjad
and (v) accelerated distribution of state owned land to small
farmers.
-
Technical/Vocational education in all districts of Pakistan through
area specific skill programs and developing a demand driven
public sector Technical Education and Vocational Training
(TEVT) system through active involvement of the private sector.
-
Targeting through easier provision of micro credit on soft terms,
provision of equal opportunities for women in remunerated
employment by accommodating women-oriented work patterns and
improved facilities for the education, training and skills development
of women.
-
Encouraging growth of women entrepreneurs through the
establishment of an SME bank and customized financing schemes.
-
Elimination of child and bonded labor.
Medium Term Development Framework 2005-10 (Working Draft)
Table-2: Employment Projections
(In million)
Year
2004-05
Populatio Labor Employe Employmen Unemploye Unemployment
n
Force d Labor t Growth
d Labor
Rate (%)
Force
rate (%)
Force
151.55
46,09
42.85
2.63
3.24
7.0
2005-06
154.37
46.94
44.05
2.80
2,89
6.2
2006-07
157.18
47.80
45.30
2.84
2.50
5.2
2007-08
159.97
48.65
46.63
2.94
2.02
4.1
2008-09
162.76
49.49
47,51
1.90
1.98
4.0
2009-10
165.52
50.34
48.33
1.71
2.01
4.0
(Benchmar
k)
Source: Planning Commission (2005)
Why Employment Matters
157
The MDTF aims to reduce the rate of unemployment from around
7 per cent in 2004-05 to 4 per cent by the end of the Plan period 2009-10.
It is based on a projected average growth rate of 7.4 per cent over the five
year period and an implied employment elasticity of around 0.4. This
would lead to employment growth of around 3 per cent which, being
higher than the projected growth of labor, would result in a significant fall
in the unemployment rate.
According to the MTDF, “The employment strategy for the Plan
period is a unique combination of flexible employment relationship
(indicated by a high level of labor and job turnover) and economic and
social security of employees (illustrated by an unemployment benefit
system) along with labor market policy of activation (which upgrades the
skills of the unemployed and thus supports the ongoing transformation of
the economy). Furthermore, this strategy promotes equity in income
distribution through setting of high enough wages to bring a household out
of the poverty trap. It aims at the elimination of the “working poor” along
with generation of employment opportunities.”11
The employment flexibility policies principally aim at increasing
the demand for labor through public works programs (Tameer-e-Pakistan
and Khushal Pakistan Program), encouraging overseas employment and
growth of employment generating sectors namely agriculture, small scale
manufacturing, information technology and construction.
The employment activation policies encompass technical and
vocational training to the unemployed, increasing employability of the
educated to meet demands of the private and social sectors, microfinancing facility for the self-employed, setting up of an SME bank, microcredit facilities through Khushali Bank, micro-credit scheme of Zarai
Taraqiati Bank for self-employment, the Pakistan Poverty Alleviation
Fund to promote micro finance with around $ 350 million available in
resources over the Plan period and the establishment of a labor market
information system.
The employment safety net policies include the setting up of a
minimum wage to ensure elimination of the working poor, the Provincial
Employees Social Security Schemes, Employees Old Age Benefit
Institution (EOBI), Public Sector Benevolence Funds and Group
11
MTDF (2005) pages 454-455.
158
Rashid Amjad
Insurance, Workers Welfare Fund, Worker's Children Education
Ordinance, Zakat Fund and Bait-ul-Maal fund (Individual Financial
Assistance Scheme, Food Subsidy Scheme or Atta Subsidy Scheme).
An important strategic thrust of the MTDF is the development of a
‘knowledge economy’ to compete in the global economy and therefore
emphasis is placed on investing in education and skills development,
science and technology and research and development.
Some key questions related to the Poverty Reduction and MTDF
Employment Strategy
There are many common elements especially those related to
leading sectors for employment generation between the PRSP and the
MTDF employment strategy. Yet there is no doubt that the MTDF presents
a more rigorous framework related to increasing the demand for labor,
active labor market policies for minimizing labor market mismatch and
security for workers through a social protection system and a targeted
safety net for those in need. The Draft Framework also put forward the
proposal for a minimum wage to reduce poverty and income disparities
which is not part of the PRSP.
On the employment projections in the MTDF if the country can
achieve a growth rate of 8 per cent and a rapidly rising investment rate to
26 percent of GDP by 2009/10 then many of the elements underlying the
employment strategy could be realized resulting in a rate of growth of
employment of over 3 per cent and a significant fall in the unemployment
rate even if it is not halved.
There are, however, still some important issues and concerns in the
MTDF employment strategy that need to be addressed. These relate to:
-
There is little discussion on the direct employment generating
impact of the proposed Public Sector Development Program
especially as regards infrastructure development which would
account for around 55 per cent of the Plan outlay.
-
The resources allocated for active labor market policies for
reskilling of the unemployed or appropriate skilling of those first
time labor entrants appears to be very meagre at around Rs. 5
billion in relation to the size of the labor force.
Why Employment Matters
159
-
Similarly schemes for micro-credit and direct poverty eradication
programs need to be analyzed in terms of number of people it
would cover. Again in terms of resources allocated these appear to
be fairly small in relation to the problem being addressed.
-
The use of the minimum wage to lift the working poor who are
mainly employed in the informal economy and in rural farm and
non-farm activities is a bold initiative but needs to be worked out
in terms of mechanisms for fixing the level of the minimum wage
and more importantly its enforcement and its impact on
employment.
-
The various schemes currently in operation provide social
protection to a very small segment of the labor force (around 2.25
per cent)12 and that too those mainly employed in the formal or
public sector. Extending this including unemployment benefits to
cover all segments of the labor force i.e. the informal economy and
agricultural workers would entail extremely high costs, the
financing of which is not covered in the MTDF. Also there needs
to be an analysis of the safety net provided by Zakat and Bait ul
Maal to see the extent of its coverage and concrete suggestions on
how this could be enlarged. Sayeed (2004) based on a World-Bank
study suggests that if all Zakat proceeds go to the poorest quintile
of the population, its income will be augmented by a mere 2 per
cent.
5. Key areas for policy analysis and Proposed New Initiatives
5.1.Generating and sustaining a high rate of economic growth
Achieving a high rate of economic growth is an essential procondition for reducing unemployment and poverty in Pakistan, although as
our analysis shows it may not in itself prove to be a sufficient one. The
MTDF therefore rightly targets a rate of growth of around 8 per cent which
is only slightly higher than what would be needed to absorb the growth in
the labor force growing at slightly less than 3 per cent.
12
See Asad Sayeed, Social Protection in Pakistan; The Concept, Situation Analysis, and
the Way Forward, in proceedings of a joint seminar organized by the Planning
Commission, ILO and UNDP on Employment-based Poverty Reduction Strategy for
Decent Work in Pakistan, Pakistan Institute of Development Economics, Islamabad,
December 2004.
160
Rashid Amjad
The labor force estimates in the MTDF have been derived on the
assumption that the crude activity rate of 30.4 per cent observed in 200304 would continue through the 2005-10 period. These could rise as a result
of slowing down of population growth and higher levels of economic
activity as they have been doing in the recent past. Also an increasingly
educated female labor force could push up their labor force participation
rates. At the same time higher levels of enrolment at primary, middle,
matric and tertiary education levels could reduce the crude activity rate.
On balance the assumed crude activity rate is possibly underestimated in
the MTDF. This is all the more reason for aiming for a high growth rate
averaging 7.4 per cent of GDP over the five year period.
A key question is whether the economy would be able to generate this
targeted rate of growth which though high is not improbable, given Pakistan's
capacity to grow at an average of around 6 per cent during the period 1960-90,
(which came to be known as the “Pakistani rate of growth”), before the slow
down in the 1990s. This would critically depend on attracting private
investment, both foreign and domestic, and an almost three fold increase in
public sector investment by the end of the Plan period. The macro framework
outlined in the end of the MTDF is not altogether convincing on how the
proposed public investment would be financed. The needed fiscal policies to
raise these resources need to be spelt out.
Another important issue is whether there is enough flexibility built
into the Public Sector Development Program (PDSP) in the MTDF to shift
resources towards more employment generating projects in the medium
term. Again while this requires more close scrutiny of the MTDF it would
appear that the PSDP room for flexibility is seriously constrained by the
throw forward of a number of mega infrastructure projects launched in the
last three years. It may therefore constrain the PSDP’s ability to shift
resources towards more labor intensive project if the need arises, for
example, if the economy grows at a lower than the projected rate. This
issue is discussed further in section (4).
5.2. Increasing productivity and incomes in the rural economy while
maintaining its labor absorptive capacity
With almost half of the labor force engaged in the agriculture
sector and with around 70 per cent of the labor force working in rural areas
the strong emphasis on the development of the rural economy in both the
PRSP and the MTDF is more than justified. In relation to agriculture the
Why Employment Matters
161
importance of needed water resources and how best to deliver them is also
rightly emphasised in both these documents. The same is the case for the
development of the livestock, poultry and diary industry in the rural areas
as well as other initiatives outlined earlier.
One of the proposals outlined in the MTDF is the distribution of state
owned lands to landless labor which has proved very successful, as in the
Punjab, in reducing poverty levels of this vulnerable group. It would be helpful
if the MTDF was to provide some estimates of the expected land acreage to be
so distributed and the number of landless labor that this scheme would target.
What is not so clear in the MTDF is whether the giving out of nonirrigated state land for corporate farming would reduce the land available
for distribution to landless labor and whether it may still be better to
develop these lands with public investment and then distribute them
amongst the landless.
Indeed the whole issue of introducing corporate farming even on
unirrigated state land needs more careful examination. If the idea is then to
extend this scheme to even irrigated state land or allowing foreign
investors to undertake corporate farming by buying out small
landholdings, it could seriously undermine the labor absorptive capacity of
the rural economy. At this stage it seems pre-mature to encourage
corporate farming even if one wishes to use this mechanism to stop the
fragmentation of land into very small land holdings.
To be pragmatic the agriculture sector must provide a breathing
space for the economy to absorb the high rate of growth of the labor force.
The need is to increase productivity of those employed in the sector
through making available the relevant technologies many of which already
exist for local use.13
Also pricing policies for the outputs of the agriculture sector need
to take into account the economic conditions of small marginal farmers
without or limited marketable surplus and landless non-farm households in
the village communities whose number is close to one-half of the entire
households in many villages in Pakistan.
13
See S, Hirashima, Comments on Decent Work: An Employment and Poverty Reduction
Strategy for Pakistan, JICA, Islamabad (Note).
162
Rashid Amjad
A serious effort should also be undertaken to study the behavior of the
land market and to explore the possibility of owning land by those who do not
have the initial capital to do so, keeping in mind that the extreme disparities in
land ownership and incomes of those who own land as compared to those who
do not. The schemes outlined earlier for the distribution of state owned land to
the landless must be viewed in this context.
5.3. Promoting local development, empowering local communities and
upscaling successes
Poverty levels could be substantially reduced and job opportunities
created through greater autonomy and use of resources at the local level
based on a local development strategic framework. There is need to assist
decentralized authorities to identify local employment opportunities and to
incorporate elements of basic social protection. Public-private partnerships
and participatory process should be encouraged.
Pakistan has a number of success stories in promoting local
development through a participatory process of which the Aga Khan Rural
Support Program (AKRSP) is a prime example.14 The Pakistan Rural
Support Program has built on this experience and its development
activities in the rural areas now covers 27 districts of all the four provinces
and Azad Jammu and Kashmir. As of February 2002 the National Rural
Support Program had formed around 15,500 community organizations
with a membership of around 326,00 of which 30 per cent were females.
An example of community based initiative to impart short-term
training at the local level is the ILO’s TREE (Training for Rural Economic
Empowerment) project implemented with national partners including the
National Rural Support Program and Directorates of Technical Education
which has been very successful in training people mostly for self
employment in three districts in the NWFP and Punjab Province. It has
targeted persons belonging to low income families, rural women,
unemployed young males and people with disabilities with a very high
success rate. Pilot programs such as the TREE project and other successful
initiatives need to be up-scaled and expanded to different parts of the
country.
14
For a summary review of the underlying strategy and philosophy of participatory
development see Fayyaz Baqir, A Module on Participatory Development based on the
lessons by Dr. Akhter Hameed Khan (late). Institute of Rural Management, National
Rural Support Program, Islamabad.
Why Employment Matters
163
Over the past many years a number of NGO’s (eg. Sungi) have
done very impressive work on a smaller scale in encouraging community
based development. Yet there is still not sufficient recognition or support
at the national or provincial level of the important role they could play in
generating local employment opportunities. The changes brought in
through the devolution process to empower local level government in 2001
provides an opportunity to encourage, enlarge and expand upon such local
level initiatives by providing support to community based development
initiatives, especially through the provision of micro credit and community
based skill development programs. The existing community based
organization could also assist in the training and strengthening of the new
District governments and local bodies being set up.
5.4. Creating a favorable environment for entrepreneurship development
and enterprise development especially for small and medium
enterprises
It is entrepreneurs, in small and big enterprises, in the formal and
informal economy, who play a major role in bringing in new investment
thus raising production and job creation.
Business initiatives should not be taken for granted. A favorable
policy environment needs to be created by simplifying and reducing
regulatory procedures for setting up new businesses, encouraging
competition in product markets and by having greater transparency in
awarding contracts and regulating businesses.
Women entrepreneurship needs to be promoted through training in
basic business skills and improved access to credit and market
opportunities.
Pakistan’s PRSP but more especially the MTDF spells out a
detailed strategy and concrete policy measures for the development of
SMEs. It also suggests a uniform definition for SMEs which would make
it easier to track growth of this sector.
Measures outlined in the MTDF include: (i) technology upgradation and enhancement of business skills; (ii) increase in
competitiveness of SMEs including through provision of subsidized
focused short duration training module to workers and their shop floor
managers; (iii) incentives for investment in the form of reduced taxes for
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Rashid Amjad
enterprises which sign up for up-gradation of business products; (iv)
improve quality standards to compete in the global economy; (v) improve
market access and product information; (vi) strengthening of legal,
taxation and institutional framework; and (vii) improved access to
financial resources and services including a substantial increase in share of
total bank financing for SMEs and credit as venture capital for new startups especially those engaged in export-oriented contract manufacturing.
The MTDF reiterates the demand of the sector for the redrafting
and implementation of less intrusive labor laws and involvement of trade
bodies in the inspection process. The MTDF, however, takes the view that
since important elements of social equity are involved, incentives would
be offered in the form of reduced costs of credit, inputs and tariffs if
owners voluntarily comply with Employees Old Age Benefit Insurance
and Employees Social Security Institution.
The role of the Small and Medium Enterprise Development
Authority (SMEDA) in actively promoting the growth of this sector and
the SME Bank to provide financial support to SMEs including financing
schemes for women entrepreneurs are highlighted in both the PRSP and
the MTDF. The latter also lists a number of high priority activities in
manufacturing, design and services including call centers for investment
by SMEs. Assistance from the Asian Development Bank has also been
sought by the Government to encourage reforms and growth of this sector.
Given the dominant role of SMEs amongst private sector
enterprises (90 per cent employ less than 99 workers in manufacturing)
and the fact that the vast majority of new jobs will be created by them, the
high priority being given to encourage growth of this sector is well placed
and many new initiatives are planned.
Yet it needs to be realized that it is impossible to micro manage the
growth of this sector given its size despite some well intentioned
assistance to a small number of enterprises. What needs more careful
analysis is the overall incentive structure especially the regulatory
framework for setting up new businesses and encouraging competition in
product markets and the impact of such measures on the growth of SMEs.
What would be very helpful is an analysis based on for example the
Census of Small Scale Manufacturing Enterprises to track the growth of
this sector as was done for the period of the 1970s and 1980s.
Why Employment Matters
165
This is all the more important as growth in manufacturing in recent
years is attributed mainly to a few large scale enterprises from established
large industrial houses in textiles and other key sectors. Also it is not quite
clear whether any significant investment has taken place in SMEs in the
past few years especially in manufacturing.
There is therefore an urgent need to conduct an analysis of the
growth of the SME sector in the recent past which should include the
impact of trade liberalization on SMEs’ capacity to compete in the global
economy. The issue of the labor regulatory framework on inhibiting
growth and new investment needs to be judged looking at relative
performance of enterprises in this sector. While opinion based surveys
may be helpful in this regard they are no substitute for an analysis based
on actual performance and identification of factors which help explain
varying performance of SME enterprises.
5.5. Increasing the employment intensity of the Public Sector
Development Program.
Experience in the infrastructure and construction sectors has shown
that investment programs using employment-intensive construction
techniques when compared to conventional equipment-intensive
techniques are: (i) at least 30 per cent cheaper; (ii) able to reduce foreign
exchange requirements by 30 to 40 per cent; and (iii) create 3 to 5 times
more employment per unit of investment without compromising the
quality of the end product.
With the same level of public sector investment the Government
can strongly influence the rate of job creation by: (i) diverting resources to
more employment-intensive programs; and (ii) using more employmentintensive techniques for approved projects.
The Public Sector Development Program (PSDP) is envisaged to
increase from 3.3 per cent of GDP in 2004-05 to 7 per cent in 2009-10. The
annual PSDP is to triple from around Rs. 202 billion in 2004-05 to Rs. 605
billion in 2009-10 with a total of Rs. 2094 billion over the Five Year period.
Table-3: Sectoral Breakdown
166
Rashid Amjad
Billion
Rupees)
Sector
Plan Outlay (200510)
% share
Infrastructure Sectors
1133.6
54.1
Social Sectors
655.0
31.3
Regional Development
239.5
11.4
Production Supporting Sectors
66.1
3.2
2094.2
100.2
Total
Source: MTDF (2005)
Under infrastructure 15.1 per cent of the total outlay is for the
development of water resources, 23.2 per cent for power and 15.6 for
transport and communication. Under the social sectors education and
training are 5.5 per cent of the total outlay, higher education a significant
4.7 per cent, science and technology 2.9 and IT 1.2 per cent. Local/District
Governments are only allocated 2.8 per cent of the total outlay under
Regional Development.
While a more detailed analysis would be required, the MTDF
outlay suggests that taking into account the on-going mega infrastructure
projects that would be completed during 2005-10 the direct employment
generating impact of the PSDP may not be as high as expected and the
allocation of expenditures and choice of projects may need to be reviewed.
The employment intensity of the PSDP as outlined in the MTDF
may for example be increased by shifting some resources towards projects
for local level development such as public works programs and by
increasing resources allocated for Local/District level implementation
while ensuring that sufficient capacity is built up at this level to be able to
execute such projects in a timely, efficient and cost-effective manner.
The employment impact of already selected public sector
infrastructure projects could be increased by selecting more labor-based
technology and implementing them through small contractors using locally
produced raw materials. The MTDF outlines a number of measures and
training programs for officials in charge of monitoring and implementation of
Why Employment Matters
167
the PSDP to ensure its timely and cost effective implementation. Such training
could include examining ways and means of increasing the labor intensity of
selected projects including the mega infrastructure projects.
5.6. Developing a globally competitive workforce
The increasing pressures of competitiveness in the global economy
has made Pakistan very conscious of the low level of education and skills
of its work force. This is not only reflected in the PRSP and MTDF but
also in the Prime Ministers 5-Point program which targets an output of
300,000 skilled workers every year - an almost doubling from the 160,000
being produced annually through the existing formal training system.
Efforts to develop a “knowledge economy” which would provide
Pakistan the cutting edge at the global level include significantly increased
resource allocations for: (i) higher education, with enrolment at tertiary
level education increasing from around 4 per cent at present to 8 per cent
by 2010, (ii) science and technology and research and development; and
(iii) improvements in ICT infrastructure.
The MTDF envisages a very ambitious increase in the number of
institutions (2649) to be set up under the new proposed Technical and
Vocational Authority (TEVTA) with an annual intake of 838,000 at a
capital cost of Rs. 70 billion and recurring cost of Rs.17.5 billion. The
target is to increase TEVT capacity from 0.86 of total enrolment up to
higher secondary level, age groups 10-16 to 2.75 of enrolment in this age
group. The number of apprentices is to be more than doubled from around
40,000 to around 100,000 as well as steps taken to formalize the existing
informal ustaad-shagird (student-teacher) system.
While there is considerable merit in focussing attention on
improving skill levels of the work force, the proposed strategy appears to be
principally supply driven. It is not clear how the targets have been arrived at
and how they relate to the expected increase in demand for skills. While
mechanistic projections of demand for skills is rarely warranted, a careful
analysis of the expected fast growing sectors and more importantly
placement of existing graduates from these institutions and wages for skilled
workers should provide a good idea of whether this large increase is justified
given the high cost of technical education as compared to more general
education. It may also be important to relate the expected increase in
168
Rashid Amjad
demand for skills with skills demanded overseas for which Pakistan could
effectively compete.
The planned increase in the capacity of the TEVTA system also
needs to pay attention to the quality of the graduates, their acceptance by the
private sector and how the increased demand for good quality trainers would
be met. Successful training efforts based on public-private partnership and
tripartite Skills Development Councils need to be replicated and up-scaled.
5.7. Striking the best possible balance between flexibility in the labor
market for enabling enterprises to adjust while providing security
for workers
With respect to the functioning of the labor market and its impact
on employment and poverty alleviation there is a distinct difference in
approach between the PRSP and the MTDF. While the former views the
labor market and the regulatory framework that governs it primarily from
its impact on efficiency and competitiveness of enterprises, the latter also
views it in relation to its impact on equity and its role in alleviating
poverty.
The essential argument in the PRSP is the importance of lowering
the cost of doing business as this would encourage job creation and therefore
the need for the consolidation of around 101 labor laws into laws and
enforcement so that they may have a positive impact on employment and
economic growth. A proposed labor market study15 also argues that labor
market regulations and practices in Pakistan appear to be stringent,
contributing to undesirable labor market outcomes and poverty, and
hindering overall growth. It argues that to circumvent the rigidities of labor
laws that apply to units with 10 or more workers, employers have resorted to
a combination of sub-contracting of production, harnessing of capital
intensive production processes, hiring of contract labor, and fragmentation
and legal subdivision of production facilities into smaller enterprises. The
study claims that as a consequence Pakistan has at 36 per cent the highest
share of temporary or contract employees as a percentage of total employees
in the formal manufacturing sector as compared to its two South Asian
neighbours India at 15 per cent and Bangladesh at 3 per cent.
15
Asya Akhlaque and Milan Vodopivec (2005)
Why Employment Matters
169
Without pre-empting the results of the cited study it could be said
that the deteriorating labor market situation reflected in rising
unemployment, stagnant and declining wages in the 1990s till recently and
resulting weakening position of trade unions have all led to a very flexible
labor market and flexible labor market arrangements and that the labor
regulatory framework in such a situation is easily ignored and difficult to
implement. The increase in contract labor arrangements and other
measures may well be a reflection of these developments.
This is an opportune time to discuss the existing labor regulatory
framework as the labor legislation promulgated in October 2002, the IRQ
2002, has curtailed workers’ rights and the Committee of Experts that
reviews the implementation of International Labor Standards has made it
clear that various provisions of the Ordinance are not in conformity with
Convention 87 (Freedom of Association and Protection of the Rights to
Organise) and Convention 97 (Right to Organise and Collective
Bargaining) to which Pakistan is a signatory.16 It was also unfortunate that
the promulgated IRO 2002 completely disregarded the agreement reached
between the employers, workers and the government in the National
Tripartite Labor Conference held in August 2001.
The PRSP makes it quite clear that the Government aims to
formulate a labor policy that would ensure protection to workers' rights in
all sectors and fair working conditions while enhancing labor productivity
and encouraging enterprise efficiency and competitiveness.17 Also a Labor
Inspection Policy will be formulated which will adopt an innovative
approach to labor inspection that is flexible, transparent and fair and
encourage enterprise compliance with labor policies and laws. The
Government is also in the process of consolidating and rationalizing
various labor laws into six broad categories in line with ILO conventions
ratified by Pakistan to reduce the cost of doing business.
16
See ILO, Report of the Committee of Experts on the Application of Conventions and
Recommendations, Application of International Labor Standards 2005, Geneva, 2005.
17
The First Draft of the Labor Protection Policy 2005 was circulated in February 2005 for
discussion. The Draft Policy expands the scope of its application by including 'all categories
of workers engaged under informal arrangements....' And it covers five main areas including:
basic rights; working conditions; working environment; social security and living
environment. The Draft Policy clearly recognizes the linkage between development and
labor protection. And seeks to commit to a new Labor Inspection Policy.
170
Rashid Amjad
This new labor legislation needs to be developed through tripartite
social dialogue and consensus between employers, workers and the
Government and the need for such consultations and dialogue between
stakeholders is emphasised in the PRSP.
Minimum Wage
The MTDF proposes the establishment of a minimum wage to be
set by the Government in such a way so as to ensure elimination of the
working poor to a very large extent. This is seen as an essential part of the
measures for providing a safety net and security to workers.
The minimum wage law of 2001 which replaced an earlier law
dating back to 1969 has not only revised the minimum wage, but has also
extended its application to employees of all industrial and commercial
establishments as the earlier law was restricted to those establishments that
employed at least fifty workers. The minimum was set at Rs. 2500 per
month which is currently being renegotiated. According to the Labor
Force Survey over half the employees have salaries below the minimum
wage.18
There are arguments for and against a minimum wage law as an
effective policy for poverty reduction. An argument against is that it
distorts the labor market and might drive up wages but may drive down
employment. Arguments for minimum wages point to the possibility that
labor markets, especially those where the poor are to be found, are already
distorted, and a minimum wage might serve to correct the distortion. It
could also have a favorable impact on productivity.
The fact that in Pakistan labor markets are segmented, along lines
of gender or social grouping suggests that labor markets are not
competitive in the first instance.19 Many such sections of the population
are especially disadvantaged and this is then reflected in their wages. Real
wages of rural labor for example has not gone up in recent years while
wages of workers in other sectors have increased.
The issue of a national minimum wage policy as proposed in the
MTDF therefore needs to be seriously pursued as an effective measure for
18
The discussion on the minimum wage is based on Harris Gazdar, An Employment
Based Poverty Reduction Strategy for Pakistan, in PIDE (2004).
19
See Gazdar (2004)
Why Employment Matters
171
poverty alleviation by expanding its scope to all workers regardless of
sector, industry or type of establishment and not only to workers of
commercial and industrial establishments. Such a minimum wage should
also take into account variations in labor market conditions across regions.
Clearly there are serious hurdles in the way of the implementation of a
national minimum wage especially in the informal and rural economy.
Initially it may more serve as a guideline in fixing wages in such sectors
and indirectly serve to improve the bargaining position of disadvantaged
groups in the labor market.
Debate and discussion of the issue of a national minimum wage
may therefore be initiated as part of the discussion on the MTDF.
5.8. Improving productivity, conditions of work and incomes in the
informal economy
It is somewhat surprising that given the fact that almost 70 per cent
of the non-agricultural labor force is employed in the informal economy
and that most new jobs have over the recent years been created in this
sector, both the PRSP and the MTDF do not explicitly target this sector.
However, a number of measures outlined in both these documents
especially the provision of micro credit and other direct support measures
to assist the working poor would be targeted at this sector.
Yet there is perhaps a real need to explicitly recognize this sector
in the Government’s strategy for enhancing employment and incomes and
alleviating poverty. Most micro enterprises and especially self-employed
women are found in this sector and many of the measures outlined for the
support of the SME sector are not really applicable to this sector.
For the Government to recognize the existence of the informal
economy would in itself be an important step as it could lead to measures
to recognize the assets of those working in this sector and to be able to use
it as collateral for gaining access to credit and other services.
Policies must aim to stimulate the economic environment under
which the informal economy operates, especially linkages with the more
dynamic sectors of the economy together with innovative approaches for
initiating a growth process and institutional reforms to integrate the
informal economy into the economic mainstream.
172
Rashid Amjad
To improve working conditions in the informal economy integrated
policies are needed to raise productivity, improve working conditions,
develop affordable social protection, set up skills upgrading programs,
ensure a legal and institutional framework for property and labor rights
and giving a voice to those who work in this sector by encouraging
workers to organize themselves.
The ‘product market’ divide between the formal and informal
economy needs to be overcome through the use of value chain analysis and
marketing approaches and tools to identify links in the production chain
which can be favorably opened up for producers in the informal economy.
There is a need to strengthen the capacity of policy makers at the
local level to provide a conducive policy framework and support structures
for market access for informal sector operators.
Developing and empowering women entrepreneurs should be a
major target of public agencies as well as NGOs working in the informal
economy. The SME Bank and its women entrepreneurship development
program may be well beyond the reach of women working in this sector. A
survey carried out by the ILO of women borrowers in Punjab, Balochistan
and NWFP who obtained micro-finance services from three NGOs namely
National Rural Support Program (NRSP), Sungi Foundation (SF) and
Traqi Trust (TT) between l996 and 2001 found that the majority (71 per
cent) of women entrepreneurs reported a positive change in their status in
the family and community after their enterprises had improved through the
use of credit. While the survey revealed that the repayment rate among
women borrowers is fairly satisfactory, the interest rate charged on loans
varied between 10-20 per cent but reached the level of 34 per cent when
calculated on the basis of the outstanding balance.20
The setting up of a Micro Bank is a good start in meeting the
financial needs of the informal economy but if it is to have any real impact
its operations would need to be drastically increased building upon its
experience.
The other area which needs urgent attention is improving
conditions of work in the informal economy. As the Labor Force Survey
20
M. Sabrina de Gobi et.al., Nepal and Pakistan: Micro-Finance and Micro-Enterprise
Development-Their Contribution to the Economic Empowerment of Women, SEED
Working Paper No. 69, Joint SEED/SFP Publication, ILO, Geneva, 2004.
Why Employment Matters
173
2003-04 has shown the highest incidence of occupational injury and
disease are the self-employed. The returns to investment and campaigns to
increase awareness on occupational, safety and health in the informal
economy can be very high with a favorable impact on productivity and
incomes of those employed.
5.9. Maximizing development benefits from overseas migration and
Remittances
Overseas migration and resulting remittances has played an
extremely important role in reducing pressures on the domestic labor
market and in reducing poverty especially from the mid-1970s to the mid1980s. The MTDF clearly identifies overseas migration as one of the
major areas of demand for Pakistani workers during 2005-10.
The post 9/11 increases in remittances clearly contributed to
improving the macro fundamentals and the turnaround in the economy that
followed. Since these increases have not been the result of any significant
out migration flow its impact on this account has been minimal. Also it
would appear that this increase is coming from mainly more well to do
overseas Pakistanis and its impact has been much more on the real estate
market and housing construction rather than on stimulating demand for
consumer goods as had happened in the 1980s.21 To that extent its impact
on stimulating demand and employment has been much less as compared
to the 1980s.
The MDTF does identify skills in demand overseas as well as
countries especially in South-East Asia and the Middle-East where
Pakistan migrant workers could find gainful employment.
What may be very useful at this stage is to conduct a sample survey
on the use of remittances sent by overseas Pakistanis to their families in
Pakistan and, if possible, on the reasons for their increase by interviewing
overseas Pakistanis in their host countries.
The results of such a survey could assist in formulating policies for
the more productive use of these remittances and thereby help in
stimulating growth and employment. These could relate to facilitating
21
See Rashid Amjad, Remittances and Development in South Asia: Post 9/11
Developments, South Asian Journal, No. 6 October -December 2004.
174
Rashid Amjad
investments by overseas Pakistanis in real estate, housing, stock market
and investments in the ICT sector.22
In recent years donations by overseas Pakistanis have been used
through the setting up of a National Commission for Human Development
supplemented by government funds to launch programs for elementary
education and improved health facilities at the local level.
Overseas Pakistanis may also be attracted to contribute to local
economic development projects in areas from where they migrated. Such a
project proposal has been supported by the UK Resident Kashmiri
Community which numbers around 500,000 for the creation of sustainable
job creation and livelihood opportunities in certain districts in Azad
Kashmir. The project is being developed by the ILO in partnership with
DFID and the Government of Azad Kashmir. Similar proposals could be
developed with other Pakistani communities living abroad.
5.10. Mainstreaming Gender Equality
Women in Pakistan still remain an overworked, neglected and
underpaid human resource who if educated, empowered and integrated
into productive and remunerative economic activities could make a major
contribution to increasing productivity, stimulating economic growth and
reducing poverty in Pakistan.
A holistic approach towards the economic empowerment of
women is to ensure their workers rights by ensuring non-discrimination
and equality at the workplace; by developing their skills levels for
effective participation in the labor market, especially by developing their
entrepreneurial capabilities; by strengthening their participation in trade
unions for effective bargaining and voice representation particularly for
securing adequate social protection and by encouraging the private sector
to develop affirmative action strategies. The ILO Women's Economic
Concerns and Working Conditions project is a step towards demonstrating
this approach.
There have been some impressive developments in empowering
women in the last few years especially in increasing significantly their
representation in the national and provincial legislature and in local
22
See Shahid Javed Burki, Utilizing Expatriate Money, Dawn, 19 April 2005.
Why Employment Matters
175
bodies. Both the PRSP and the MTDF outline in great detail these
achievements and both the documents have separate chapters outlining
strategies for bringing about significant improvements in the status and
active participation of women in economic activities.
The employment chapters in these documents, however, do not
focus sufficiently on the gender disparities in the labor market reflected in
the very low participation rates of females and very high levels of
unemployment.
Of the few women who do participate in the labor market and are
part of the labor force in that they are willing and actively seeking work,
the unemployment levels are extremely high. Overall the unemployment
rate of females in 2003-04 was 12.8 per cent almost double that of the
overall rate. Unemployment of females is especially high in urban areas,
almost 20 per cent overall. In Balochistan and NWFP Provinces
unemployment rates for females is around 30 per cent. Female
unemployment in the age group 15-24 years is also 30 per cent.
These very low participation rates and high unemployment rates
amongst females need urgent action as it could act as a strong disincentive
to invest in female education which is the most important means of
empowering women in Pakistan. Attention must be paid to improving the
environment and conditions in which women work as this may be a
discouraging factor in women wishing to work outside their households.
Also the question of improving facilities to encourage mobility of women,
including the educated, from their households to their possible places of
work needs to be acted upon as this could also discourage women to go to
relatively far away places for work even if employment exists in those
areas.
Some measures have already been initiated to encourage selfemployment and women entrepreneurship through the setting up of the
First Women Bank and actions by the Pakistan Rural Support Program and
other NGOs mentioned earlier with a measure of success but these still
remain marginal in terms of their overall coverage and impact.
Poor women feature prominently among the chronic poor in
Pakistan as in the rest of South Asia. Labor market segregation along
gender lines restricts the employment opportunities for women. Despite
legal provisions to protect women's ownership rights - which might
176
Rashid Amjad
prevent women from slipping further into poverty - discriminatory and
patriarchal property and inheritance customs continue to prevail. Chronic
poverty is also positively correlated in Pakistan with areas in which tribal
and or feudal agrarian relations prevail - including the Federally
Administered Tribal Areas and large areas of Balochistan. The causes of
the relative higher poverty of these areas are related to their physical
remoteness, lack of infrastructure, high population growth and scarcity of
farmland and not to the status of the tribal people as such.
It would be important to build into the employment strategy in the
MTDF concrete ways and means of addressing the gender discrimination
in the labor market as well as the high rates of unemployment especially
among the young and educated women. A more targeted approach for the
educated unemployed and chronically poor women may be warranted. As
regards the former, matching education and skills more closely to market
demand especially in new emerging sectors such as IT and media and in
the case of the latter more targeted programs for chronically poor women
could be spelt out.
Finally, while it is true that the present Government has taken
many bold steps to empower women over the past few years, what is
perhaps missing is a clear and strong signal to all those engaged in policy
making and in the administrative and policy structure of the strong
commitment and resolve of the Government to ensure that its policies on
empowering women and improving their status are carried out.
Conclusions
A review of the Government’s policies as is reflected in its Poverty
Reduction Strategy and the MTDF 2005-10 shows that the Government is
giving high priority to the creation of productive and remunerative
employment and embedding this goal in its poverty reduction programs.
This is a sharp break from earlier Plans and programs.
The paper has reviewed the overall policy environment and
incentive structure for the expansion of employment in the economy
including in key sectors and the importance and urgency of improving the
education and skill levels of the country's work force to compete in the
global economy.
Why Employment Matters
177
In so doing the paper has identified some critical gaps and come up
with suggestions on how to ensure that the goals that have been set in the
PRSP and MTDF can be effectively achieved. Some of the suggestions
relate to:
Trying to build in more flexibility in the Public Sector
Development Plan to switch to more employment generating
projects as the need so arises and examining ways of increasing the
employment impact of the existing and planned projects.

The importance of maintaining the existing labor absorptive
capacity of the agricultural sector while increasing productivity and
incomes of those employed in the sector. In this context the
proposals for introducing corporate farming need to be critically
examined.

While targeted measures for encouraging the growth of SMEs
especially through SMEDA and other agencies are welcome, given
the vast size of this sector, the real need is to ensure an overall
favorable environment to encourage its growth. This includes
reviewing the existing incentive structure and the possible impact
of the new WTO regime on its growth prospects.

In developing its ambitious skill training program there is need a to
move from a supply driven approach to one more closely
responding to market demand and ensuring cost effectiveness and
reasonable rates of return on investments in skills training.

»Recognition of skills including those acquired on the job and
outside the training system as part of a national qualifications
framework would make the existing system more flexible to
rapidly changing skill requirements.

Other active labor market policies (ALMPs) in addition to training
such as provision of employment services closely linked to skill
centers at the district or tehsil level should be considered to better
match supply and demand in the labor market.

In carrying out the planned reforms in the labor regulatory
framework there is need to ensure the best possible balance
between flexibility for enterprises to adjust to changing market
178
Rashid Amjad
demand and security for workers while fully respecting
international labor standards. It is equally important that the
changes introduced should be developed through social dialogue
and tripartite agreement.

There is merit in considering the setting up of a national minimum
wage for lifting the working poor out of poverty and this measure
outlined in the MTDF needs serious discussion and consideration.

Strengthening the institutional capacity of the labor administration
system is required.

An affordable social protection system and social safety nets
should be put in place through innovative programs and microfinance initiatives.

The need for the Government to recognize the existence of the
informal economy which is not explicitly done in the PRSP and the
MTDF as this in itself could play an important part in putting in
place measures that lead to recognition of rights and assets owned
by those working in the sector.

Maximizing the development benefits from overseas migration and
remittances and to tap resources from overseas Pakistan is for local
economic development projects in the areas from where they
migrated and where many members of their families still reside.

The employment chapters in both the PRSP and the MTDF need to
address the wide gender disparity and to focus on targeted
measures for reducing high levels of unemployment amongst
young women.

The importance of developing a rights based labor market in
Pakistan to ensure that the poorest groups participate and gain in
the development process and its importance for ensuring access for
its products in export markets in the new WTO regime.
Why Employment Matters
179
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M. Sabrina de Gobi et.al., Nepal and Pakistan: Micro-Finance and MicroEnterprise Development - Their Contribution to the Economic
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SEED/SFP Publication, ILO, Geneva, 2004.
Rashid Amjad, Remittances and Development in South Asia: Post 9/11
Developments, South Asian Journal, No.6 October -December 2004.
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Believe? What should We Do?, Pakistan Development Review,
Volume 42, Number 4, Winter 2003, Islamabad.
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The Lahore Journal of Economics
Special Edition
Governing the State: Problems Specific to Pakistan
Khaled Ahmed*
In our environment governance usually means law and order but in
its broadest sense it means thinking about ‘how to steer the economy and
society, and how to reach collective goals’. Multinational institutions hold
seminars on governance but carefully avoid discussions impinging on the
third world scale’s sovereignty; they focus instead on administrative
reform, decentralization, elimination of red tape and corruption. But
governance has other ramifications that must be considered. Unless a state
does a whole array of things to position itself appropriately, it cannot hope
to have good governance1.
Reform of bureaucracy: Good governance as administrative reform in
the third world states is taken to mean reform of bureaucracy. But the real
problem is the role of the state in administration and the economy. Most
third world states are still lingering in the Weberian dichotomy of state and
society, but in advanced societies, the state has been made to retreat in two
ways2. There has been devolution of power from the centre to the
provinces and from there to local government. It is assumed - and
experience in the third world proves it right - that a state with centralized
*
Friday Times
Mark Duffield, Global Governance and the New Wars: he Merging of Development and
Security, Zed Books, 2000. The real thrust behind the multilateral thrust for good
governance has been explained in the book. According to the author, after the collapse of
the Soviet Union in 1991, another concept dear to the nation-state, that of state
sovereignty, came to an end. Globalization was the new order and a curbing of national
sovereignty was built into it. And it manifested itself in the opening of the national market
through denationalization, deregulation and free market. State security became an internal
matter and the state was told to focus more on internal security rather than on threats
perceived from external sources.
2
Max Weber (1864-1920) was the most forceful opponent of bureaucracy as the
instrument of state and placed society in opposition to it. In his various writings he
propounded the theory of the weakening of the state through charismatic political
leaders representing society against the power of the state. This however did not come
to pass.
1
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Khaled Ahmed
authority gives rise to bad governance. In recent times, the state has also
retreated from the economy and abandoned the concept of the welfare
state. The idea of the welfare state was predicated on centralized authority.
India did not accept the Cabinet Mission plan of devolution to a confederal
structure because Nehru had a socialist welfare state in mind3. However
after 1947, Pakistan faced problems of national integration and equally
opted for a centralized state. In the mid-20th century centralization was not
yet diagnosed as an element of bad governance. Bureaucracy becomes
more visibly powerful when a state is centralized than when it is not. On
the other hand, if the writ of the state doesn’t run across the board, like
Afghanistan, to which Pakistan can be compared in parts of its territory,
deregulation or decentralization would have a negative effect on
governance.
Condition of democracy: The state is known to be efficient if it is
democratic, that is, if people are governed with their consent, and that
there exists a social contract between state and society. Although an
alternative model exists of high growth rate in Asia based on 'guided'
capitalism without democracy it is dependent on factors not available in all
parts of the world, especially with regard to transition of political power4.
A more fundamental question relates to the nature of the state. In the
nation-state model, in decline in the West and to some extent all over the
world, the process of nation-building takes it in a conflictual direction,
opening up prospects of periodic or epochal war. (Pakistan and India have
3
Sugata Bose &, Ayesha Jalal, Modern South Asia: History, Culture, Political
Economy, Second Edition, OUP, 1994: ‘Jinnah of all people should have understood
why the hard men in the Congress, especially Sardar Vallabhbhai Patel and Jawaharlal
Nehru, needed a strong unitary centre for India, and realised the high price they wou ld
pay to achieve it' (P.I 59). The price was of course Pakistan rather than the Cabinet
Mission plan.
4
Michael D. Ban, Lee Kuan Yew:the Belief behind the A fan, Curzon Press, 2001. The
West admires Lee Kuan Yew for applying capitalism successfully in a region crawling
with communism. He attends Harvard lectures every year and is interviewed on
Washington's C-Span TV channel regularly by fawning interviewers. In Asia, he is
admired for his advocacy of Asian culture in opposition to liberal democracy sought to be
imposed by the West as a precondition. Lee is also a favourite of China. He has steadily
built up his relations with Beijing on the basis of the finance that he funnels into that great
neighbour. It is in this context that General Musharraf met him after coming to power and
was surprised by the pragmatic depth of Lee’s rather harsh observations about Pakistan’s
unrealistic policies. But one must keep in mind that Lee presided over a city-state where
his non-democratic regimentation in the social sector worked. Also, the 'Asian model’ of
growth without democracy is more relevant to ‘trading’ Southeast Asia than in 'warrior'
South Asia.
Governing the State problems specific to Pakistan
181
engaged in a fifty-year epochal war.) This undermines governance. A state
has to be at peace to allow good governance. A study of three nationalisms
in South Asia (Pakistan, India, Bangladesh) will reveal that there is overt
and subtle conflict in their textbook development. There is the ‘painful
birth syndrome5 in Pakistani nationalism, subtexting India’s crime of
ethnic cleansing in 1947. Bangladesh has a similar subtext against
Pakistan that killed ‘three million’ Bangladeshis in 1971. Indian
nationalism as a status quo power is ‘defensive’ but is equally conflictual
by positing India’s survival by ‘defeating the designs’ of its neighbours. In
this equation, the smaller anti-status quo state suffers in governance
because of its need to remain in a permanent state of emergency. The
critical element of disequilibrium rests in the onus of changing the status
quo5.
Status quo versus anti-status quo: In the nation-state model there are
variations. If the state allows a grand narrative based on the status quo,
prospects of good governance are somewhat assured - somewhat because
other states in the neighbourhood may be nurtured on a grand narrative of
revision and that may force the status quo state into conflict and military
preparedness. The anti-status quo state will have a hard time achieving
good governance because its nationalism would be directed away from the
economic function. It will live mostly under emergency and impose the
financial burden of war and military preparedness on society. There is a
better prospect of governance in the status quo power than in the antistatus quo power. Military preparedness is a kind of permanent subsidy
that saps the economic potential of the state. The condition of being antistatus quo but unequal in power leads to a virulent brand of nationalism,
constantly challenging the politician to set governance aside in favour of
the ‘bigger sacrifice of changing the status quo. In Pakistan, the
paramountcy of the army is owed to this nationalism. If Pakistan wants to
Ashley J. Tellis, India’s Emerging Nuclear Posture, OVP, 2002. The author tells us that
India has rationalised its anti-status quo stance vis-a-vis China by unofficially accepting
that the territory it lost in Aksai Chin in the Jammu and Kashmir sector was of more
strategic value to China (because of the route connecting it with Tibet) than to India. It
‘compensated’ itself with the thought that the 90,000 km territory claimed by China in
Arunachal Pradesh in north-eastern India was still under India’s effective control and was
of more strategic value to India. This ‘adjustment’ has allowed India to normalise trade
relations with China and minimise its contradictions with its militarily much superior
neighbour in the north. It would have been interesting to see if the onus of changing the
status quo with China would have complicated the already bad governance in India, as it
has done in Pakistan.
5
182
Khaled Ahmed
go back to normal governance it must amend its nationalism. If the
opponents of military rule continue to support the same nationalism they
will not succeed in restoring good governance6.
The socialist model: A state may survive if it is representative; also, if it
does not exclude any community and allows the provision of human rights
without discrimination. A high-growth state may eventually undermine its
own creative energy by restricting human rights. State coercion may allow
rapid economic growth for some time but may be ultimately negative
because of lack of a social contract. A socialist economy is based on
ownership of assets by the state but a socialist model usually works better
under coercive governance. The capitalist model, though exploitative
under an inefficient state, can give scope to creative entrepreneurship.
Socialist bureaucracy is cumbersome and opposed to private enterprise.
Bureaucracy focuses on the ‘welfare’ aspects of the economy and not its
viability. Above all, bureaucracy does not achieve the kind of rate of
growth required by the economy for its survival. The collapse of the Soviet
Union and the ‘Soviet model’ in the Soviet bloc has unfortunately
removed the only challenge to unsteady capitalism and its ‘deregulation’.
After Russia under Gorbachev wound up the Union, leaders governing the
Central Asian Slates were revealed as dictators7. Socialism with
democracy in Nehruvian India was characterised by bad economic
governance. It was called ‘permit raj’ with a ‘Hindu rate of growth’ and
was accompanied by ills of governance associated with poverty. Today
socialism is catalogued under bad governance but this may be a simplistic
The Friday Times, 13 September 2002, Nationalism in Pakistan’. How has China
tackled the problem of its anti-status quo nationalism in regard to Taiwan? 'The
achievement of China is not in elimination of corruption. Unfortunately, there is more
corruption in China today than ever before. The achievement of China is avoidance of
war at all costs and the use of the economy as an instrument of persuasion at the global
level. It is against the status quo in the region (it wants Taiwan back) but it has not acted
like Pakistan, jumping headlong into overt and covert war and against a rival it cannot
defeat. Instead it has got Taiwan involved in the development of Fujian, the province
facing Taiwan across the strait, and whose people speak the same language and belong
racially to the same stock as the Taiwanese Chinese. To date, the Taiwanese have directly
invested 20 billion dollars in Fujian alone, can buy property there and can take part in
local elections.
7
Shirin Akiner, Sander Tideman & Jon Hay, Sustainable Development in Central Asia,
Curzon Press (1995). The book gives interesting profiles of the post-Scviet Central Asia
ruled by leaders who wanted to use their ample natural resources on the basis of their
knowledge of ‘socialist economies’ while their populations clamoured for representation.
6
Governing the State problems specific to Pakistan
183
judgement. ‘Socialist’ measures in the Western democracies seem to work
but tend to exacerbate problems of governance in the third world.
State and utopia: A socialist economy can be ideological because
of its basis in utopia. Ideology does not allow dissent and is opposed to
freedom of expression. Because there can be no opposition in a society
devoted to the construction of a Utopia, pure ideological states do not
allow political parties end an opposition in the legislature. Ideological
states are also totalitarian and run economies planned at the centre. States
attracted to this model nationalize the private sector in the interest of
egalitarianism and better control of the exploitative aspects of capialism.
While infrastructure is developed at a rapid pace in this welfare model,
lack of representation and freedom of expression intensifies obsolescence;
and economic cycles are mishandled by the state’s large orthodox
bureaucracies. Ideology usually makes a teleological journey towards
Utopia or the promise of a permanent lack of contradictions. In its
intermediate phase an ideological state is intolerant of a variant point of
view and brooks no dissent. Utopia is of ancient origin but in the 19th
century it was thought out in concrete terms by the anarchists and absorbed
from them by Marx. This Utopia was leftwing, worker-based, with a lot of
‘natural nurture’ borrowed from Rousseau and even Kant8. Pakistan has
the longing for an ideological teleology and to that extent it is intolerant of
dissent.
The Soviet-Chinese models: The Soviet and Chinese models of the
ideological state were based on a scientific dialectic. Both reacted to
circumstances from within the ruling elite. The Chinese reacted by
changing the economic paradigm; the Soviet elite reacted by changing the
political paradigm of the ideological state. As a result, the Soviet Union
was abandoned while the Chinese ruling elite modified the state and took
on the more difficult task of constant ‘pragmatic’ reform. The static central
economic dogma of Maoism was abandoned to save the state from
8
Noam Chomsky, For Reasons of State, The New Press New York (1973 reprinted 2003).
Writing as an anarchist, Noam Chomsky in his essay in the book, begins by saying that
anarchism is dismissed today because of its inability to yield a political theory and because it
remains formless, primitive and Utopian, but it can be usefully employed as a yardstick to
understand institutions that are harmful today after serving out their usefulness during a
phase of paramountcy of the economy. Anarchism comes in handy after you have realized
that the political orders in force have created a material and social deficit. He notes that
Engels disagreed with Bakunin that Utopia should begin immediately after Revolution.
Chomsky notes that Bakunin was probably right on this point.
184
Khaled Ahmed
collapsing. The transition was taken to be the transition of the socialist
model; and anti-capitalist elements in the world stopped referring to
themselves as socialists after refusing to accept that the Soviet Union was
a genuinely socialist state. Russia and China saw failure of governance
from two different angles. The Soviet party saw failure in terms of
defective political governance, responding to the West with which it had a
civilizational nexus. The Chinese party saw failure in terms of defective
economic governance and ignored the West as it pointed to China’s
political dissenters. Russia has problems with democracy because of bad
performance in economic governance. China is supposed to run into
economic problems because of its bad performance in the achievement of
democracy. Chinese pragmatism in the realm of foreign policy however
continues to secure it against crises of governance.
Setting aside Third World problems of governance: If governance is to
be studied in respect of Pakistan, it would be useful to discuss problems
that are specific to Pakistan. This statement is based on the increasing
realization that Pakistan’s problems of governance are more severe than
those of the rest of the third world. For instance, law and order in Pakistan
is in a worse condition than in India, that there is more rejection of the
political system and more lack of national consensus in Pakistan than in
India. This takes us to the case of an accelerated dispersal of governance
and the state in Pakistan than in the rest of the world. As for the
fundamental problems of poverty in the third world and the complication
of governance there owing to poverty, some writers have assumed that
poverty should be accepted as a sustainable phenomenon because its
removal would mean an ecological collapse of the third world states
through high consumption, unless of course birth rates are drastically
curbed and brought to zero9.
9
Oswaldo De Rivero, The Myth of Development: the Non-Viable Economies of the 21st
Century, Zed Books, 2003: 'How can the quasi-nation states be made economically viable
when their populations are growing explosively and their export goods consist of primary
goods or only slightly processed products, which fetch low prices and are in little
demand? How are we to deal with ungovernable countries where corruption is rife and the
daily practice of democracy is rudimentary at best? How are market economy and
consumer society to be produced in Latin America. Asian and African countries that have
more than 40 percent of their population living below the poverty line, on less than one
dollar a day? How are nearly 5 billion persons with low incomes to be integrated into
global consumption patterns, without seriously damaging the biosphere? How is the
enormous gap between the rich and poor countries to be closed without gravely affecting
the planet’s ecological balance?
Governing the State problems specific to Pakistan
185
Pakistan should be placed in the third world grid first and its
governance should be ‘pooled’ with the rest of the third world, but if some
of the more urgent problems of governance are to be tackled, then
problems specific to Pakistan and not common to the third world must be
discussed.
Islamic ideological state: Just around the time that socialism collapsed
there emerged on the scene the ideological state of Iran. Its intellectual
mission statement relied on the tenets of Islam, which were quite similar to
those of the Soviet state, but with the difference that the Soviet dogma was
based on a dialectic while in the Iranian case the central dogma was based
on irreversible revelation. In its early phase, Iran was totalitarian and
opposed to dissent like the Soviet Union. There was also the
accompanying rapid development of some infrastructure. Rapid progress
was made in mass education and some troubled aspects of Islam, like its
opposition to contraception, were taken care of because of
authoritarianism. But popular disaffection grew with the governance of a
non-consensual state that allowed little freedom of expression and
performed badly economically despite its oil-producing status. And the
disaffection grew more quickly than in the quondam Soviet Union. An
Islamic ideological state has certain continued contours based on
jurisprudential ‘consensus’. The elimination of political parties and
opposition from parliament/Majlis/shura was also envisaged by Pakistan in
the Ansari Commission Report in the light of which the General held his
1985 ‘partyless’ elections which returned a parliament without
opposition10. By deviating from the Iranian norm, Pakistan became an
‘incompletely’ ideological state, a state without consensus. As the Iranian
and later the Afghan model proved, an Islamic ideological state remains
unstable until the shariah is enforced by the clergy. Stability is achieved
through ideologically mandated coercion. As long as the clergy remains
out of power, an environment of rejectionism surrounds all efforts at
10
Shariful Mujahid; Ideology of Pakistan, Islamic Research Institute, International
Islamic University Islamabad 2003: Maulana Zafar Ahmad Ansari (1908- W I) wrote on
the Islamic concept of sovereignty in his celebrated articles in Dawn in 1955 answering
the objections of many who thought that sovereignty could only belong to the people and
not to Allah as premised in Islam. Before Ansari became an important factor m the debate
on ideology he was assistant secretary of the All-India Muslim League in Daryaganj,
Delhi, feeding important scholarly advice to the Muslim leader, Liaquat Ali Khan (18951951) in his capacity of secretary, Committee of Action, and secretary, Central
Parliamentary Board. That made Ansari an important repository of the thinking of the
Muslim leaders campaigning for the establishment of Pakistan.
186
Khaled Ahmed
attaining ideological purity. In this perspective Pakistan remains a
Caliban-like incomplete entity.
The ‘incomplete’ Islamic ideological state: An ‘incompletely
ideological’ state like Pakistan has all the ills of an ideological state
without its benefits. Its governance is not only bad, it is more difficult to
achieve. Its ‘incompleteness’ keeps the nation in a constant mood of
disaffection. Institutions like the Council for Islamic Ideology, by
constantly making demands for further 'reforms' in favour of the revealed
tenets, spread the feeling that the ruling elite is not interested in enforcing
the true dogma (shariah). A democratic system, an opposition in
parliament and a proliferation of political parties, are all clearly a violation
of the shariah. The shariat on the Statute books does not please the masses
because it is never enforced. The cutting of hands, the stoning to death, the
abolition of bank interest, have never been carried out in reality, thus
convincing the nation that the state is cursed because of its insincerity. In
the case of Pakistan, the ancient post-Madina rejectionism of all
institutions adds to the difficulties of governance. The Federal Shariat
Court remains non-consensual among the clergy because it is inclusive
rather than exclusive. The principle of inclusion is enshrined in the
wording of the Constitution which says any law ‘not repugnant to Islam’
would be accepted as valid. A glaring example of complication in
governance was the revolt of Sufi Muhammad in Malakand who set up his
qazi courts. The province submitted to him by allowing qazi courts of its
own, proving once again that Islamic rejectionism was a genuine problem.
An incomplete ideological state is also under constant invasion from 'hard’
Islam from abroad, particularly the Arab brand, backed by generous dollar
funding. Individual judges in the higher judiciary may be persuaded by a
more conservative Islam than is allowed by the jurisprudence of Hanafi
law in Pakistan. Serving judges have openly revolted against case-law,
firm in their belief that their hard version was valid. This has led to
contradictory judgements and complications of governance.
‘Amr’ and ‘nahi’ or Islamic vigilantism: An Islamic state proves
difficult to reform, unlike the Soviet and Chinese states. It is also
impossible to govern unless it is run by the clergy as a theocratic state.
The main reason is the basic concept of amr and nahi embedded in the
shariah. Will the state stop that which is not good or will the individual
do it? Although great medieval thinkers like Imam Ghazali have written
about it, there is no consensus among the Muslims over the application
Governing the State problems specific to Pakistan
187
of the doctrine11. The problem is resolved if the state goes theocratic
because then the ruling clergy is allowed to suppress fellow-clerics in
order to appropriate the right of enforcing amr and nahi. The doctrine
lies at the root of governance and internal sovereignty of the state. The
doctrine is especially relevant in the case of jihad. Let us consider the
governance-related aspects of amr and nahi. The problem is that amr and
nahi could have become obsolete in our day because of the setting up of
a modern state, the framing of a constitution, the preparation of the penal
code, and the establishment of a police department. If you think that
something wrong is being done or that something right is not being done,
you can look up the penal code, and if the act is described as a crime,
you can go to the police station and register an FIR. In other words, the
state is the enforcer of amr and nahi. If someone ignores this and
enforces amr and nahi on his own, he would seem as taking the law m
his own hands and would be committing a crime himself. Nahi when
enforced like this can be dangerous. In Pakistan, often when an
individual tries to stop eve-teasing or rebukes persons not observing the
fast, he is attacked by the violators and sometimes even killed. Despite
evidence that only the state should enforce the concept of nahi, the
clergy in Pakistan continues to resort to vigilant action, as was witnessed
in Gujranwala in Punjab on 3 April 2005 when a marathon was attacked
by a local MNA belonging to the Mutahidda Majlis-e-Amal (MMA)12.
Governance under jihad: Jihad has been enjoined in the Quran and therefore
lies at the base of the shariah. It is not however clear in Pakistan whether the
state should wage jihad or it is incumbent on each individual to do so. This is
very important because it relates to the doctrine of low-intensity and deniable
warfare that the state of Pakistan has been practising in the recent past. It
violates international law that enjoins the state to declare war and does not
recognize individuals in this respect. In terms of governance, the state has to
surrender internal sovereignty because private jihadi organisations have to be
located in civil society and have to be exempted from municipal law in respect
of their use of weapons and training. States can tolerate diminution of
11
Michael Cook; Commanding Right and Forbidding Wrong in Islamic Thought,
Cambridge University Press (2000).
12
Writing in Jang (6 April 2005) “Nazeer Naji stated that the MMA leader MNA Qazi
Hameedullah who attacked the marathon in Gujranwala along with his extremist
seminarians on April 3 was a hardline Pushtun cleric with a Taliban background. Daily
Pakistan wrote that Qazi Hameedullah led a batch of Afghan students who were illegally
staying at his seminary. The police said that a raid would soon be conducted into the
seminaries to apprehend illegal Taliban students.
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Khaled Ahmed
external sovereignty -mostly owing to economic weakness -- but they cannot
survive surrender of internal sovereignty. There can be no governance when
the state is not sovereign even internally. The problem of ‘extraterritoriality’
is the most pressing problem in Pakistan's governance. More than 50 percent
of the territory is already outside the municipal jurisdiction of the state since
Pakistan has failed to bring the whole of Balochistan under the normal writ
of the state and has preserved the Federally Administered Tribal Areas
(FATA) as a relic of the British Raj ‘buffer’ territory. Jihad has extended
‘extraterritoriality’ or ‘no-go areas’ to the big cities of Pakistan. In the
smaller cities the entire administration may be run by non-state actors, as
happened in Toba Tek Singh when Lashkar-e-Tayba was the most powerful
ISI-supported militia in Pakistan. (Lashkar-e-Tayba also ran a court in
Lahore and advertised it in the newspapers.) Any discussion of law and
order in Pakistan in the past has run headlong into the state's policy of Jihad.
Because jihad was fought with mercenary troops there was a sharing of the
sovereignty of the state with jihadi leaders, reminiscient of the Italian citystates in the Middle Ages13. There is resistance among politicians to the
post-9/11 perceived policy of giving up jihad because the world increasingly
equates it to terrorism. There is apparently no realisation that jihad militates
against governance above all14.
Governance and ‘exclusion’: An Islamic ideological state excludes nonMuslims and women in general and apostatizes certain communities.
When this happens, certain individuals and communities are excluded
from the ambit of rights and certain others become qualified as potential
‘excludables’. The Islamic state has to be in a permanent process of selfpurification. If a law doesn’t work, it cannot be changed because of the
literalist divine sanction behind it. After apostatized communities are
excluded more sectarian communities seem to become qualified for
13
Machiavelli (d.1532) in The Prince: 'Mercenaries and auxiliaries are useless and
dangerous. For mercenaries are disunited, thirsty for power, undisciplined and disloyal;
they are brave among their friends and cowards before the enemy. In peacetime you are
despoiled by them and in wartime by the enemy. Mercenary commanders [cannot be
trusted] because they are anxious to advance their own greatness, either by coercing you,
or by coercing others against your wishes. Experience has shown that only armed princes
and republics achieve solid success, and that mercenaries bring nothing but loss.’
14
As reported in Nawa-e-Waqt (25 May 2002), Nawabzada Nasrullah Khan, chairman of
an opposition alliance, said that General Musharraf’s pledge to the world and India about
not allowing Pakistan's soil to be used for terrorism was not acceptable. He said that these
decisions went against the popular will and would be undone. Daily Jang reported that
Nawaz Sharif stated from Saudi Arabia that General Musharraf had sold the country down
the river 'by submitting to India’.
Governing the State problems specific to Pakistan
189
apostatization. That leads to conflict and the creation of an environment of
insecurity in which no governance can succeed. In fact governance is
further exacerbated by the creation of private security systems within the
state in the form of sectarian militias. State functionaries adhere to the
ideology of purification for which sanction is sought by them from the
tradition of Islamic rejectionism in general and the Pakistan -specific
problem of a consciousness of being ‘incompletely’ Islamic. Such
functionaries have actually taken part in sectarian killings or sided with cosectarians during sectarian conflict15. State functionaries are similarly
inclined to look at the Ismailis suspiciously. This attitude springs from the
understanding that the state is religious and must move towards
purification. If and when a theocracy is established in Pakistan the state
functionaries will move against the Ismailis the same way they have
moved, under law, against the Ahmedis. They have tacitly allowed
outrages against the Shia too and caused a deep rift of suspicion against
the state. This trend is in line with the way the ‘completely’ ideological
states of Iran and Afghanistan (under Taliban) have acted in the past.
Governance without secularism: Pakistan as an incomplete ideological
state has carried out the exclusion of the Ahmedis but is balking at the
formal exclusion of the Shia community. After the possible exclusion of
the Shia, at least two more communities will become qualified as
‘excludable’. The completely ideological state of Iran has excluded the
Sunni community and Iraq, in the long run, may move under democracy to
exclude the Sunnis after a long period of exclusion of the Shia under
Saddam Hussein. The Islamic state faces failure of governance in this age
of global economic interconnection. There is no sign that the tenets of the
Islamic ideological state might be altered, above all, the doctrine of mixing
religion with politics. Governance today is associated with
decentralization of authority and in freeing the economic sector from state
15
Monthly Newsline (June 2001) actually wrote that the intelligence agencies were 'in'
with the sectarian terrorists: 'The official quoted above has no hesitation in accusing the
1ST of orchestrating such (Shia) murders through the militants of sectarian parties, adding
that Sipah Sahaba terrorists are trained by the agency. The Sipah Sahaba are supported by
the MQM Haqiqi Group. Sources reveal that Sipah Sahaba's (sic?) Riaz Basra has been
spotted in the company of a colonel who has also given him shelter in his house.
Similarly, when three members of Lashkar-e-Jhangvi were picked up by the police,
another colonel, who identified himself as their PRO, requested that they be released
forthwith’. Basra’s own militia Lashkar-e-Jhangvi was a breakaway splinter of Sipah. It
should be noted that after his death Basra was buried wrapped in the flag of Sipah-eSahaba. Karachi killed 450 people in cases of sectarian violence since General Musharraf
took over the government in October 1999.
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Khaled Ahmed
diktat. Mixing religion with governance negates that. At root is the
problem of the ‘deductive’ discourse of religion also called kalam: accept
the premise as unchallengeable and unamendable, then project logically
the consequences that it must register. The nature of knowledge under
religion must remain fixed on causes rather than consequences, leading the
state to presume that the only way forward is by forcibly changing the
conditions of life in accordance with the ideological premise. This robs the
state of flexibility of response to crises as they occur. The state becomes
ungovernable when its population refuses, by training, to accept the
rational choice and insists on inviolable 'principles'. An Islamic state may
enjoy relatively good economic and social indicators but may have the
highest ratio of ‘intellectual’ unhappiness among its people at the same
time. There is little realization that a lack of flexibility of response means a
lack of ability to self-correct, a quality associated with the United States
which the people of Pakistan see as the foe of the transnational umma.
Governing a pessimist population: Muslims have a sense of the world
Muslim community like no other religious population. Among the
Muslims of the world, the South Asian Muslims have always felt
‘outward’ rather than 'inward'. A pan-Islamic sense has always pervaded
their worldview, and Pakistan, after emerging as a nation-state, had to
acknowledge it as a part of its ideology. The ‘transnational’ feeling is
integral to the idea of the grand Muslim diaspora after the seventh century.
It emerged from the pattern of the spread of Islam through hijrah
(migration) and conversion. During the days of subjugation to foreign
empires, the transnational feeling contributed to the organization of
resistance among local Muslim populations. In India, Muslim existence
was deemed a kind of permanent emergency (dar-ul-harb) and migration
was considered an option in the defiance of British Raj. Today, the
Muslims of Pakistan find it difficult to accept the international view that
Pakistan has improved its internal order and its economy, as they focus on
the ‘isfortunes’ of the Muslim communities abroad. There is a strong
tendency among Pakistanis to reject the good tidings and interpret positive
developments as ‘conspiracy’ to lull the umma into quiescence. On the
other hand, India is increasingly identified as being peopled with
optimists. Indian writers describe the post-1990 era as a period of the
positive outlook. External writers marvel at the size of the problems India
Governing the State problems specific to Pakistan
191
faces as a society and show surprise at the nation's willingness to tackle
them with a positive mind16.
16
The Economist, April 9th, 2005: Reviewing Suketu MeJita's book Maximum City:
Bombay Lost and Found, the writer stated: ‘Mr. Mehta paints a picture of an India that is
so vast, complex and confusing as to defy generalisation, and facing such terrifying array
of problems that it forbids optimism. Yet most of his characters show the intrinsic
propensity for not losing hope’.
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