The Political Economy of Pakistan: Failures of Policy and Reform Regimes

Saleem M. Khan  

conomic Development in Pakistan since 1950s has used the framework of a mixed economy. This concept combines the economic activities of both public and private sectors. In this framework the government plays a dominant role by regulating and guiding all economic activity. Management of the national economy under a mixed economic system produces two potential effects: the predominance of government in both national economic affairs and private sector activities. These effects make it difficult to predict the course of the economy and complicate economic management. The widespread failure of development efforts especially in poor countries has created doubts about the effectiveness of employing these mixed economy strategies.
                During the post-World War II era, there was strong justification for an active role of government and adopting the framework of mixed economy. Development economists and the profession considered these factors critical for economic growth. In the present environment of open competition in major parts of the world, the strategy of free markets has become more popular. The development experience of the past five decades (1950-2000) and the record of performance in both social and economic areas in Pakistan make a strong case for thorough re-examination of economic policy in both its formulation and implementation. This paper’s focus is on the identification of problems, their impact on the economy, strategies for reform, and suggestions for possible improvements in future endeavours.

The framework of mixed economy in Pakistan has remained strictly under official authority. Government intervention has determined the pattern of development, defined the roles of public and private activities, and entrusted the bureaucracy with the tasks of implementation. This government control and sponsorship of business monopolies has failed to create a competitive environment in the free market. The mixed economy, instead of becoming an instrument of balanced development and dynamic performance, has created an administrative and bureaucratic economy. The overwhelming bureaucratic involvement in economic affairs has affected the efficiency of economic institutions. Over the years the availability of external resources has allowed the Pakistan economy to make some economic gains, but the gains from these efforts went mainly to those who held market power or were politically influential and the bulk of the population felt little or no improvement.

Successive regimes in Pakistan, as they conducted economic affairs, tried to practice paternalism. They were often pressured by foreign resource donors to adopt untested, and untried development approaches. A list of the diverse approaches adopted in Pakistan brings this point to the fore: self-reliance (1949-1955), growthmanship (1955-1970), growth with distribution (1972-1978), basic needs (1978-1983), supply-side economics (1983-1992), liberalization and privatization (1992 to date). These approaches and programmes were largely dependent on the employment of foreign resources, whereas domestic resources, especially human resources, were grossly under-employed.

Overall, the mixed economy has failed to produce people-friendly benefits and trickle down gains in Pakistan. The control over economic institutions, by a dominated market structure, the lop-sided distribution of income, its ignorance of people’s potential and their needs, and economic inefficiency has failed to achieve socially acceptable results. The nation and its people have paid a heavy price; the dismemberment of their country in December 1971 may be attributable at least in part to the denial of political participation and economic opportunity to its people.  

Problem Identification  

In an international conference on economic development organized by the Pakistan Institute of Development Economics in Islamabad in January 1997, many bureaucrats and policy-makers (both former and current incumbents) made presentations and participated in discussions during a public forum (PIDE, 1997). They were able to arrive at a rare consensus on the many shortcomings that have continued to haunt the economy of Pakistan. They acknowledged three main causes, which led to this poor socio-economic performance:

·            Poor Governance

·            Priority of Projects over Policies

·            Fiscal Imprudence

The dimensions of these problems remain to be researched and analyzed in depth. I will merely outline a few facts and observations that bear upon the nature and scope of the three main causes.

The process of governance in Pakistan has been flawed in many respects– a centralized rule, weak political institutions, widespread corruption and lacking in a tradition of political accountability. The implications have been far reaching for the political-economic system. Bureaucrats, military and feudal leaders continue to seek to control the political and economic institutions and with the avowed purpose of governing the nation. Their attempts to seize and hold power fails to recognize and establish the traditions of democracy and they have paid very little attention to achieving peoples’ participation in national decision making. This pattern of governance has seriously compromised the principles on which the effective functioning of national institutions, formulation and implementation of policies, quality of economic structures, and the impartiality of the legal system depends.

The roots and extensions of misrule in Pakistan lie in its centralized system of governance. Its dictates are reinforced through a hierarchy of civil servants that seeks to control federal, state and local administrations while at the same time avoiding personal responsibility. In the absence of decentralized decision-making , state and local governments have often been ineffective and lack adequate financing. Besides, authorities at the center have never recognized the need for grass-roots participation. This conflict between central authority and local aspirations creates a strong demand for regional autonomy and encourages breakaway tendencies.

Political intrigues and attempts at self-aggrandizement began with the birth of Pakistan and paved the way for interventions in the political process. After a decade of misrule prompted by many bureaucratic interventions, the army, in the name of saving the country, declared the first martial law in 1958, cancelled national elections and abrogated the constitution. The hallmark of this new regime was the attempt to manipulate basic democracy. This attempt failed. Yet another military regime came to power in 1969 and held the first and the last free and fair election in 1970. Unfortunately it deemed the results unsatisfactory and refused to transfer power to the properly elected representatives of the people.

The elected successor government which assumed power in 1972 in the wake of the national debacle of December 1971, tried to pursue populist policies. It promised its people freedom and paved the way for still another period of martial law. Another military regime overthrew the government elected in 1977 first suspending and later amending the 1973 constitution. The legacy of this regime was a misuse of religion, mismanagement of the economy and the gross violation of human  rights. Moreover, under this regime many excesses took place during attempts to silence political dissent.

Starting in 1988, the next two so-called democratic governments have taken economic corruption to new heights. This new breed of leadership emerging from a younger generation proved even more incompetent in attempting to serve public interest and often indulged in mimicking the lifestyle of the “rich and famous” as seen on western television. One government made headlines in The New York Times on January 9, 1998 for leaving a trail of corruption extending across the world while the other had become famous for its financial scandals (The New York Times, 8 January 1998).

There has been systematic pattern of undermining of the existing political and economic institutions-democratic system, constitution, judiciary, commercial banking, labor unions, small business and small farm owners in particular. The democratic system has not been given a chance to function. The constitution has been tampered with so as to serve the needs of each successive ruler. The judiciary has been seriously weakened.  The banking sector after having been nationalized is being used for politically driven loans, which are often non-performing. Only big business and large-scale industry have received generous support by the government in subsidies, tax relief, licensing privileges and cheaper investment financing. Small businesses are left on their own. Labor unions have been kept weak. Policies that led to declining real wages have seldom been reviewed. Agriculture has remained subject to unfavorable pricing, disinvestments, and an out-dated land tenure system. In the absence of real land reforms rural life remains in tight feudal grip and remains the victim of share-cropping. Economic institutions that underwrite and promote popular welfare have come under frequent assault. Official irregularities in economic areas have been rather widespread. Some profiles of corruption and mismanagement are described below.

There is a legacy of politically directed lending of non-performing loans from the nationalized banks. Special development funds and rural development programs are clear examples of rent seeking behavior. There is also a scandal involving billions on the import of South Korean cars.

Corruption and bribery have become institutionalized and accepted as a way of life in the country. Economic policies and political activities are tied up in a cycle, which evolves around the corrupt system of licenses, controls, government approval for investments, imports, exports, employment, land purchase, hiring and dismissals, and virtually every other aspect of economic activity. Pervasive corruption greases the wheels of civil service at local state and federal levels, and industry and commerce are badly affected by it. Red tape, abuse of authority for personal gain, and widespread bribes undermine economic efficiency. In the absence of a credible process of accountability and in total disregard of adherence to minimum standards of economic management and efficiency, public money is spent on projects, which have little social or economic value. This culture of corruption discourages an inflow of foreign direct investment (FDI). Billions more are spent on creating symbols, uninspiring and meaningless national celebrations. Politicians frequently go on foreign travel, taking along planeloads of families and friends and political cronies on shopping and pilgrimage on state expense. Billions disappear in investment leakages and military contracts. No wonder Pakistan ranks as the 10^th most corrupt country in the world according to Berlin based Non Governmental Organization (NGO) Transparency International.

Regarding the priority of projects over policy the picture that emerges is even more dismal. Administrative decision making and bureaucratic management have made the economy of Pakistan even more tightly controlled. Foreign assistance and western advisors played a key role in selecting and financing projects in industry, agriculture and infrastructure development and investment in human capital. These have failed to meet the criteria of long-term goals of industrialization, infrastructure building, and agricultural modernization. The development projects that were undertaken were of low national priority and of questionable merit. By and large, they have proven to be expensive and of doubtful value.

Some of the high priced projects were at odds with national priority and needs. For example, railway electrification in Punjab, development of urban centers, and settlement of Punjabis on virgin lands in Sind. The latest is the construction of a Lahore-Peshawar motorway. This on-again, off-again planning, has cost the country dearly in terms of  cost escalation, foregone commercial and business activities, investment constraints and has failed to create employment opportunities while reducing state revenues. Other white elephants, projects of a non-developmental character, include the palatial President and Prime Minister Houses, and several other status symbol government structures in Islamabad. Their opportunity cost is high and can be measured in terms of forgone investment in social programmes and other more productive sectors of the economy. The welfare expenditures of Islamabad city put a large burden on the national treasury. It is officially acknowledged that the Islamabad Capital Development Authority’s (CDA) budget is almost 80 percent of national social expenditure.

Project-based development in Pakistan has adversely affected the economy. The economic landscape is full of distortions and dislocation. It has deprived the nation and its people of basic necessities. The existence of excess capacity in industry and the concomitant shortfall in essential raw materials and spare parts has increased the costs for private investors. Another drawback to this project strategy is the resulting environmental damage. The nations health has become hostage to both pollution and congestion. Billions of dollars are lost each year due to environmental degradation.

Fiscal prudence in public finance is the key to macroeconomic stability and sustained economic development. Shortfalls in revenues and wasteful non-development expenditures emanate from poor fiscal management. In a political system, which places few constraints of accountability at any level of government, public borrowing and big budget deficits have become the easy way out. Federal deficits exceed 7 percent of gross domestic product (GDP), domestic debt outstanding and interest payments account for 45 percent and 8 percent of GDP. Besides, there is a huge external debt of $ 35 billion with financing charges absorbing 35 percent of the annual export earnings. Currently, external debt stands at about 60 percent of the GDP. The combined sum of domestic and external debt plus annual finance charges is approximately 120 percent of the GDP (The World bank, 1995-98) (International Comparisons – see Appendix A). Pakistan is in a “debt trap” and its development process is under siege. Development has become hostage to domestic corruption and external pressures.

Policies such as building a new capital city of Islamabad, the not so well thought out programme of industry and banking nationalization, the phony programmes of rural development and public works, run-away military defense expenditures and so-called programmes of national pride have increased the cost of capital, wasting and diverting it from more productive investments.  

Socio-Economic Impact  

The socio-economic impact of the above-mentioned problems has been in the form of a lop-sided pattern of development, economic dislocations and social inequalities. The economic costs can be defined in terms lost human capital and wasteful use of capital. The social costs to Pakistani society are in the form of unemployment, inflation, environmental degradation, violence and crime. The burden of these costs on the people has reinforced social inequalities. Among the following are a few illustrations of development-based social costs in Pakistan and their implications.

·               Market distortions have created income disparities and apparently free lunches-by taxing the poor and subsidizing the influential.

·               Involuntary unemployment has resulted in lost wages and output causing the depreciation of human capital.

·               Development generated inflation has discouraged productive investment and curtailed purchasing power and the social welfare of the common people.

·               Environmental degradation has lowered the quality of life and increased health costs.

·               Crime and social deprivation have adversely affected investment and productivity environment in Pakistan.

A survey of the current socio-economic landscape in Pakistan reveals glaring deprivations. Recent estimates indicate that seventy percent of its 40 million people are illiterate; 60 million people lack access to health services, safe water and sanitation. The gross enrollment in elementary education is less than 24 percent and over 30 percent of population lives in poverty; only 35 percent of the population is in the labor force (United Nation Development Program, 1997-98). The future outlook is not optimistic either. Population growth is nearly 3.2 percent, one of the highest in the world. Annual public expenditure on education and health is 2.7 and 1.8 percent of GDP, which is even lower than other countries with lower incomes (International Comparisons- see Appendix B). Overall, the profile of human development is dismal.

The irony is that while the wealthy and influential are being compensated for social costs in a system of government welfare the poor have been forced to pick up the tab.

The adoption of a mixed economy in Pakistan has affected adversely performance levels in both private and public sectors. In the private sector, there are striking examples of “market failure”. Agriculture is far from being modernized and has not become a vibrant sector of the economy. A big segment of farm life is affected by sharecropping and suffers from feudal culture. Public sectors contribute to government failures. The economy is captive to bureaucratic incompetence and inefficiency. The economic gains Pakistan has made in the last five decades would have been made irrespective of role of the government and its so-called planning and the costs could have been much smaller.

Examining the nature and scope of the problems and costs inflicted on the economy and the people does not mean that the problems encountered and cost inflicted have gone unchallenged. These issues are not new to national debate and have been widely acknowledged in official, professional and national forums. Reforms in the areas of governance, economic policymaking and fiscal management have been instituted and tried but without much success precisely due to the problems identified by the architects of failed development approaches.  

Reform Regimes  

The nature and scope of economic problems reveals how flawed the process of national policy-making has been in Pakistan. It is not only that projects took precedence over policy making in the official decision-making but also the policy making over the years was not adequately institutionalized and remained an ad hoc process giving power and discretion to individuals rather then pursuing the rules of institutions.

Other evidence also indicate that very few concerted efforts were made to formulate a worthwhile industrial policy, modernize agriculture and develop human capital. Policy decisions have largely responded to domestic political expediencies and external influences and pressures. Reforms in four key areas are worth mentioning: governance (1960s-80s), industrial reforms (1972), land reform (1959, 1973), and economic reforms (1988-98).

Governance based reforms were introduced in the 1960s, 1970s and 1980s. These reforms amounted to introducing poor models of democracy, arbitrary firing of civil servants charged with corruption, instituting numerous anti-corruption programmes and expanding the security apparatus to maintain law and order. But the root causes of poor governance such as tampering with the constitution and the political process itself were rarely addressed. Frequent interventions in the political process by the leadership coupled with the bureaucratic, military, and feudal controls on the economy have been the real stumbling blocks. The road to good governance and accountability is through a stable and free democratic process, transparency and popular participation in national governance.

Industrialization in Pakistan started in 1950s by establishing consumer goods industries. The industrial reforms of 1972 focused on restructuring and diversification. These strategies were aimed at expanding an industrial base by building a steel mill in Karachi, a heavy tool factory in Taxila, capital goods industries, and agro-based industries such as fertilizer and food processing at various sites throughout the country. However, frequent disruptions in the political process mismanaged the industrial reforms.

The commissioning of land reforms spread over two decades from 1958 to 1977. These reforms were aimed at changing the land tenure systems, distributions of land and loosening the feudal grip and redistribution of land among the landless tenants. But these attempts did not succeed. Land reform programmes in each period were neither effectively designed nor efficiently implemented. At the dawn of the 21^st century, the country is still clinging to a feudal dominated land tenure system whose dominant features are sharecropping and backward relations of production subservience of tenants to landowners.

The economic reforms of 1983-97 were based on supply-side approaches– liberalization of the economy, trade, investments and privatization. However, their success depended upon a concerted effort in implementation and obedience to the “rules of the marketplace.” Due to half-hearted efforts, the expected outcomes of the economic reforms such as rapid economic expansion, export-led growth, higher incomes for all groups, expanded health and education benefits, better housing, and building of “social safety net” have not been adequately realized.  

Conclusion  

The failures of policy and reform regimes in Pakistan have been due mainly to poor governance and non-involvement of the people. In order to adequately attack national problems, the country needs a fresh start. The experience in governance, institution buildings, policy making, and economic reforms gained at such a high cost during the past five decades can provide lessons for changing the future course of national reconstruction and development. Some of my suggestions include the following.

By creating a system of good governance we can develop a workable system of democracy, which both imparts the right of decision making to the people and gives them a stake in its success. Restoring the constitution of 1973 could be a good beginning. It had a process of built-in-accountability. In the future we should avoid temptation to intervene in the political process. Previous interventions have proven to be costly and counter-productive.

The economic policymaking process should be institutionalized. Ad-hocism has proven to be flawed. Fiscal prudence requires reducing non-development expenditures. Civil administration and defense spending should be reexamined and steps  taken to reduce them.

One vital factor in our national life that we have often failed to acknowledge is the people, their lives and welfare. The prospect of participation can motivate the people as they discharge their responsibilities and exercise their rights. Once confident of their participation in a more favourable environment they should advance the goals of national rehabilitation and reconstruction much more effectively.

Finally some reflections. At the start of the first millennium, our forefathers led the world in the areas of governance, culture, architect, science and technology. At that time, our world was the center of all that was progress. Baghdad (Iraq) and Cordova (Spain) were the citadels of learning and the shining seats of knowledge, science and technology. In that period of history the focus of the development was on the good governance and the people. In the contemporary period the successive regimes in Pakistan have ignored improvements in governance and have resorted to pushing the people around rather than leading them. Consequently, we have deprived ourselves of progress.

If our citizens are able to participate in national affairs, receive education, enjoy proper nutrition, live in a safe healthy environment and fully develop their natural mental and physical aptitudes in an intellectually stimulating culture, we may regain our lost respect in the world and make progress. If we persist in ignoring the importance of the individual and continue to restrict personal development than we have unfortunately condemned ourselves to a harvest of exactly what we have sown.