Economists believe that the state of any given economy depends a great deal on history and historical experience. They have a phrase for this: they call it “path dependence”. Where Pakistan is today reflects where it was yesterday and the day before. Most of the economic and social problems the country faces today and those that would prevent it from realising its potential can be traced to history. The following four need to be the focus of attention of today’s policymakers. One, the inability to raise domestic resources to finance development; two, the inability to break from the past and adopt the policies and strategies that would realise the country’s potential; three, weak governance, not just at the level of the government (federal and provincial) but also in the firms and private entities that are important for guiding the economy towards a better future; and the fourth, to lay the ground for moving the economy and society to a higher technological plane. The fourth needs a detailed discussion which I will do in a later article.
Pakistan’s economic history has periods of high rates of growth followed by periods of sluggish performance. The high growth periods were short; those during which the economy performed poorly lasted for much longer time. This record points to one important conclusion: that the country was not able to develop institutions, adopt policies and create an enlightened citizenry which, working together, could sustain a healthy rate of economic growth.
The 1960s, the 1980s and the early years of the 21st century were periods of respectable growth. The military was in charge during these three eras. However, that should not lead to the conclusion that the military has found a way of better managing the economy compared to civilian leaders. What distinguishes these high growth periods is the fact that during them Pakistan received large foreign capital. This inflow came in the form of official development assistance (ODA). The United States was the principal source of ODA. Development banks, in particular the World Bank, also got actively involved in developing the Pakistani economy.
Military leaders were successful in aligning the country’s external relations with America’s strategic interests. During the 1960s, when General (later Field Marshal) Ayub Khan was the country’s president, Pakistan joined two defence alliances launched by Washington. The Central Treaty Organization (CENTO) and the Southeast Asia Treaty Organization (SEATO) were founded to stop the march of Communism into Asia. Pakistan, in fact, was the link between the two defence pacts. In return for providing this kid of support, Washington rewarded Islamabad with large amounts of economic and military assistance. In the 1980s, back under the rule of the military with General Zia ul Haq in charge this time, Pakistan became a major player in the effort to push back the Soviet Union’s advance into Afghanistan. Pakistan’s Inter-Services Intelligence (ISI) partnered with the Central Intelligence Agency (CIA) of the United States to aid the fight against the Soviet troops by seven groups of Afghan mujahedeen. The highly motivated Islamic groups succeeded in expelling the Soviet Union out of Afghanistan. Moscow pulled out its troops from Afghanistan in early 1989. The humiliation it suffered led to the collapse of the Soviet Union two years after the exit from Afghanistan. The third growth period also saw the military in power with General Pervez Musharraf occupying the presidency. This time Pakistan agreed to join the United States in the “war on terrorism”. Once again, large flows of capital came to the country as reward.
These episodes resulted in Pakistan becoming dependent on external capital flows to develop its economy. No – or little effort – was made to adopt fiscal policies aimed at raising domestic savings in both public and private sectors. This meant Pakistan did not rely on its own resources to finance development. Each growth period ended with the withdrawal of American interest in the country and also in the geographic area of which Pakistan is a part. At the time of this writing, Pakistan is faced once again with the same set of circumstances.
While the government saved little, private firms also did poorly in setting aside a significant proportion of their revenues for innovation. Firm-owners diverted a good part of their revenues into real estate. Driving through any part of Lahore or Islamabad one can’t help being impressed by large billboards announcing the arrival of fancy residential apartment buildings. The two cities – and presumably other as well – are now going vertical with considerable private sector investments.
The second important feature of Pakistan’s economic landscape is that the country has found it difficult to move away from the past and create a new framework based on its natural endowment. The sector of agriculture offers a good illustration of how the country has failed to realise fully its potential. The system of canal irrigation that draws water from the country’s large rivers was developed by the British in the early years of the 20th century to save the eastern part of their Indian colony from facing repeated famines. Irrigated virgin land in the provinces of Punjab and Sindh were meant to provide grains for the food deficit provinces of Bengal, Bihar and Orissa. A system of roads and railways was constructed to carry the gran surpluses from the food grain surplus to food-deficit areas. The port of Karachi was also improved to handle bulk commodities. Once the country gained independence, it should have moved away from this reliance on grain production that in other parts of the grain-producing world rely on rain.
The world’s three largest producers of food grain – Russia, the US and Ukraine – grow the crops on rain-fed rather than irrigated land. Pakistan should have moved away from grain production to producing high value-added products. It is interesting that the only time the state got involved in promoting technological development was when the government headed by President Ayub Khan worked hard to bring high-yielding crops (wheat and rice) to Pakistan. The government’s involvement brought what came to be known as the “green revolution” to Pakistan.
Strong governance is the third pillar on which I believe Pakistan should rest its economic and social structures. Of late the academia has begun to recognise that there is a close relationship between economic and social development on the one hand and political modernisation on the other. In their well-received book, Why Nations Fail, an MIT economist and a Harvard University political scientist have shown why what they call “inclusive political development” is a critical contributor to economic progress. The institutions on which they believe sound economic advance can be achieved must have the capacity to reach all segments of society. The only time Pakistan attempted to move in that direction was during the period of President Ayub Khan when, what came to be described as the system of “Basic Democracies”, brought about significant broadening in the reach of the political system. At the base of the system were 10-member Union Councils made up of directly elected people. The system was criticised by those who had wielded political power based on patron-client relationships that gave them political power and authority. Pakistan should, therefore, look carefully at its economic history to plan for the future.
Published in The Express Tribune, April 11th, 2022.