Political Economy of Development in Pakistan


Since independence in 1947, successive governments in Pakistan have proclaimed a desire to remove poverty through rapid GDP (gross domestic products) growth rates. To this end, the country had earlier adopted Import-Substitution-Industrialisation (ISI)[1]) and later on neo-liberal (i.e. ‘free market’) economic policies[2]). But what is the impact of these policies in terms of achieving the goals of reducing poverty and inequality in Pakistan?


Proponents of free-market polices ignore the poverty issues and emphasise mainly growth rates, unquestioningly assuming that ‘trickle down’ would solve poverty problems. The ruling elites cite high GDP growth rates as indicative of economic development and consequently the well-being of the people. Contemporary “liberalisation” is occurring within the context of a new, growing form of global financial capital which has slowed down the rate of growth of Western economies by rolling back Keynesian “demand management” policies and by encouraging speculation activities in the name of financial innovation over enterprise in the rest of the world. This in turn will adversely affect export prospects of Pakistani goods. It is also important to note that at present capitalism has entered into a period of protracted global depression and consequently markets in developed countries are not growing to provide a market for Pakistani goods.


Growth and Crisis  

At independence in 1947 Pakistan inherited some skills from the colonial administration and army although severe financial shortages impacted on the running of the day-to-day government and the rehabilitation of millions of refugees from India. The country was largely an agrarian nation with a very small manufacturing sector. Initially, Pakistan’s main concerns related to the difficult situation with its neighbour, India. Moreover, on an organisational level the Muslim League, the party which campaigned for a separate Muslim state, was weak, particularly in West Pakistan. State power rested predominantly in the hands of military and civil servants as the Muslim League was unable to organise at a grass root level. The party had drawn its leadership largely from civil servants, large landholders, merchants and tribal chiefs but witnessed great difficulty after its founder M.A. Jinnah died in 1948 and the Prime Minister Liaquat Ali Khan was assassinated in 1951[3]).


Pakistan and the United States entered into various military agreements which allowed the US to set-up bases in Pakistan against the Soviet Union. Pakistan joined US-led military alliances, SEATO, in 1954 and then CENTO in 1959 bringing the military even closer to the Pentagon. When General Ayub assumed power in 1958, US intervention intensified military and economic affairs. The US needed a strong military in the region to defend their interest in the Middle East and in the North against the Soviet Union. As Jalal (1990) argues, by 1951 the United States’, “policy statement on Pakistan … made explicit what had always been implicit, namely that the kingpin of US interests in Pakistan was its army”[4]).

In the 1950s South Asia became strategically important for the US when Iran’s elected government, led by Musaddiq nationalised foreign oil companies, came to power. The US and UK opposed Musaddiq’s policy of promoting national resources and overthrew Iran’s democratically elected government in 1953. The US was looking for local allies and Pakistani civil and military elites were already looking for opportunities to forge close alliances with the US. Various arms assistance deals were signed with Pakistan. In return for military aid Pakistani territories were used to support US interest in the region[5]).


On the economic front, the country launched Import-Substitution-Industrialisation (ISI) policy in the 1950s. Between1947-1958, Pakistan’s GDP grew at the average rate of 3.1 % annually, ahead of the population growth rate. During this period foreign capital inflows were insignificant and mainly limited to technical assistance. During the 1960s the average growth rate in the manufacturing sectors was quite high and General Ayub’s government called this a ‘Decade of Development’. However, the broader consequences of the economic policies are important to note. As Ahmed and Amjad observed, “This period  of rapid economic growth, achieved mainly as a result of the policies pursued, generated a great deal of economic tension…Increasing disparities in regional income between provinces, a concentration of industrial economic power and the failure of real wages to increase significantly”[6]).


Development strategy was formulated by a group of Harvard University economists and Pakistani civil servants who had received brief training in the US. Officially it was conceived within the framework of Five Year Plans. In fact, in the early years of General Ayub’s rule, profits for the domestic and foreign companies rose dramatically, while at the same time wages stagnated and even declined in a real sense as saturation in domestic demands for consumer goods created an economic downturn. In the 1950s and 1960s rapid growth rates were dependent on foreign aid and government support to business. Growth was seen as important by neo-classical economists who suggested that high growth would eventually ‘trickle down’ to the people. Harvard economists emphasised that the rich would generate savings and ultimately invest leading towards job creation and overall growth, but it did not happen. Moreover, during the 1960s the disparities across classes and regions widened. The public spending on the social sector did not witness any substantial rise resulting in stagnation or little increase in real wages in the organised sector[7]).


The government took the initiative to support the expansion of industries, mainly in the export sector, through the Export Bonus Scheme (also known as Export Boucher Scheme) in 1959 which critics suggest was largely responsible for high growth rates in the early 1960s. This was used to both subsidise exports and lessen import controls. The scheme provided additional income to a certain percentage of their export earnings (i.e. percentage varied from year to year and from commodity to commodity). Exports under the Bonus Scheme acted as import licences. Economic policies pursued during General Ayub’s regime exacerbated the level of inter-regional disparity between East and West Pakistan. It was said that the resources had been transferred from East Pakistan with all benefits taking place only in West Pakistan. Also, in 1950, levels of per capita income were 10 % higher in West Pakistan than in East Pakistan but this disparity had risen to over 30 % by 1966and in 1971 East Pakistan became the separate nation of Bangladesh. West Pakistan was able to successfully export to the market in East Pakistan. However, after the secession of East Pakistan a large portion of the market was lost as 50 % of the total West Pakistan’s export and 20 % of its imports were from East Pakistan[8]).


Zulfikar Ali Bhutto came to power after the collapse of the military regime in 1971. His emphasis was on rapid industrialisation in the public sector and this laid foundation of heavy industries such as steel mills and nationalisation of many private industries to increase state’s role in the economy. Mainstream economists have often cited Zulfikar Ali Bhutto regime’s (1971-77) for adopting policies which led to low growth and higher inflation. Let us examine the economic performance in the light of the facts. It is crucial to look at Bhutto’s government performance in the context of the circumstances and problems that he inherited. Towards the end of Ayub’s regime, private investment was already falling. After coming to power Bhutto nationalised banks and manufacturing industries which he saw as crucial industries with national importance, not be left in private hands. The Export Bonus Scheme was also withdrawn. During the first two years Zulfikar Ali Bhutto government witnessed impressive growth. Agricultural output rose largely due to tightened control over nationalised banks making more credits available to small farmers and medium enterprises. However, the last three years coincided with big investments in key industries with long-gestation periods but economic growth slowed down sharply in both agriculture and manufacturing sectors[9]).


Zulfikar Ali Bhutto’s economic polices of nationalisation of key industries such as banks, steel mills, insurance companies etc. was important, but lacked any long term commitments on how these sectors would contribute towards the modernisation of Pakistan’s economy. Even managers appointed by the government to run these public companies had no enthusiasm, nor capital to modernise and improve productivity and efficiency. As a consequence, these industries soon experienced decline in productivity and profits. Thus, due to mismanagement, lack of funds and motivation, the crisis in nationalised industries deepened. However, the nationalisation programme of the Bhutto government did manage to increase public sector employment. In fact, when the Bhutto government was removed in 1976-77, development spending reached 11 % of GDP, the highest ever in Pakistan’s sixty years history[10]).


It will be interesting to look at global economic situation during the Bhutto tenure. In 1973, a four-fold rise in petroleum prices occurred and import costs of petrol, petroleum products and fertilizers rose sharply, which led to sharp price rise in domestic markets; followed by a world recession which depressed the demand for exports. All these international events were beyond control of the government. In 1973-74, prices rose exponentially to 30 %. Due to the global recession in 1973-74, exports dropped further, while a rise in import prices led to a dramatic rise in import bills. Moreover, the flood in 1974-75 damaged agricultural crops especially cotton, resulting in a decline of export revenue. In addition, a lack of fiscal and monetary discipline caused a high deficit budget so that monetary expansion and inflation rates reached new heights[11]).


General Zia-ul-Haq removed Bhutto in a military coup in 1977 and when, in 1979, the Soviet Union invaded Afghanistan, the US provided huge military and economic aid to Pakistan. The US supplied military assistance to the Mujahedeen (holy warriors) through Pakistan. General Zia maintained the religious theocracy and extremist ideology to prolong his authoritarian rule. During the 1980s Saudi Arabia and the Gulf States also provided massive finance to the Madarssas (religious schools) in Pakistan with full support from the West to advance their strategic interests. Later on religious schools became the most potent vehicle of dissemination of extremist religious views and also encouraged secretarian division in Pakistani society. In fact, Saudi clerics were acting as incubators of religious extremism and fanaticism worldwide. As foreign mainly US military, aid flowed in, General Zia ignored the tasks of building an independent, self-reliant and sustainable economic growth strategy, which would have set the country on the path of modernisation and long term development.


The average total GDP growth rates in Pakistan during the Zia regime were 7 % annually between 1978 and 1987, largely due to an expansion of the construction sector and demands for consumer goods. In the 1980s, nearly 2.5 million Pakistani workers left to work abroad. Remittances have played a crucial role in the country’s economy since 1979 and by the end of 1985 it provided as much as 10 % of the GDP, but its role since then has diminished and is currently less than 3 % of the total GDP. The main reason for this situation stems from the expansion of domestic demands for consumer goods due to huge increase in remittances, which reached US$ 3 billion in 1983. In addition, the steady flow of official foreign loans and grants, amounting to an annual average of US$ 1.45 billion due to the Afghan war. After 1979, the Soviet Union’s invasion of Afghanistan, both bilateral and multilateral aid provided substantial funds for Pakistan’s economy. Foreign aid inflows were an important source to finance industrial investment during both the General Ayub and Zia period. Also, in Zia’s period, remittances from the expatriates helped to remove foreign exchange deficits. However, at the same time talks of mobilisation of domestic resources for investment in modern industries in Pakistan were neglected; this gave the country a false sense of temporary economic security. By the end of the 1980s the remittances exceeded the value of the country’s total exports. Hard currency was largely spent on buying land, building houses and on consumer durables. Also heavy industries set-up during the Bhutto period were operating and benefiting General Zia.


During the General Zia-ul-Haq regime (1977-88) the average growth rate of manufacturing industries was around 9 % per annum. However, a rapid rise in employment generation did not occur and the growth in labour productivity fell in the manufacturing sector during the same period. In 1990, The UNIDO report on manufacturing stated, “an underlying feature of industrialisation in Pakistan is the deteriorating performance of the manufacturing sector in generating new employment opportunities. Although the decade of the 1980s has been a period of relatively high growth in manufacturing value added, the growth in manufacturing employment has remained insignificant. This partly represents more an increase in capital industry that labour absorption during the period of accelerated expansion”[12]).


Average total GDP growth rates in Pakistan during the Zia regime was 7 % annually between 1978 and 1987, largely due to an expansion of the construction sector and demands for consumer goods. Remittances have played a crucial role in the country’s economy since 1979 and by 1985 it provided as much as 10 % of the GDP, but its role since then has diminished and is currently less than 3 % of the total GDP. After 1979, the Soviet Union’s invasion of Afghanistan, both bilateral and multilateral aid provided substantial funds for Pakistan’s economy. At the same time, talks of mobilisation of domestic resources for investment in modern industries in Pakistan were neglected giving the country a false sense of temporary economic security. By the end of the 1980s, remittances exceeded the value of the country’s total exports. General Zia-ul-Haq regime had neither a long term vision on economy nor a clear economic strategy. In real terms, military spending rose by over 160 % under his rule, representing a growth of more than 9% annually. As Hasan (1998) argues “the unprecedented growth in defence spending, on the one hand, squeezed development spending and, on the other hand, fuelled fiscal deficits…Whatever, the merits of increased  defence spending , the hard choices between defence and development were never really debated during the General Zia period”[13]).


Following the death of General Zia in a plane crash, Ms Benazir Bhutto was elected as Prime Minster in 1988. Soon after coming to power Ms Bhutto launched neo-liberal reforms, also know as structural adjustment programmes, under the supervision of IMF and the World Bank[14]). This meant that the government was unable to use fiscal and monetary policies to stimulate the economy. Their main concern was fiscal deficit and was asked to lower its deficit to 4 % of the GDP, to be achieved by increasing indirect taxes and decreasing public spending. For instance, the public spending in the area of development was 9.3 of GDP in 1986, but it declined to less than 3 % by 2004.


Another area of neo-liberal reforms was a reduction in import tariff rates, reduced from 125 % in 1992 to 25 % in 2004. As a result, a large number of domestic industries were closed down as they were unable to compete with cheap imported goods. This resulted job losses and a decline in tax revenue for the government. In the name of ‘openness’ and ‘competition’ the economy was opened for foreign businesses, without providing any protection to domestic producers, resulting in closure of business units and a rise in unemployment.


Once Nawaz Sharif became the Prime Minister of Pakistan, he too carried out IMF’s led Structural Adjustment Programme and the role of the state in the provision of social and infrastructural facilities was further reduced under a wave of denationalisation and privatisation. The public owned industries were handed over to the private sector. A large-scale privatisation was carried out in the 1990 under Nawaz Sharif’s government. A disinvestment and de-regulation committee was formed to identify industries to be privatised in order to raise revenue.  Following the Prime Minister Nawaz Sharif’s decision to carry out a nuclear test in 1998, Western governments imposed economic sanctions and the IMF withdrew all aid to Pakistan. As a result, the country faced a serious balance of payment crisis. Depositors started to withdraw their deposits in panic, which led to a huge capital flight and depletion of reserves. Exports were stagnant around US$ 8 billion during the second half of the 1990s and remittances did not rise as witnessed earlier in the 1980s. In 1997, Pakistan had witnessed a massive foreign debt in excess of 100 % of the GDP. Debt servicing was taking away revenue from developmental and social expenditure projects.


Pakistan was in a deep economic crisis when General Musharraf took over in a military coup in October 1999. Soon after taking over General Parveez Musharraf appointed Shaukat Aziz, then a senior manager of Citibank, as finance minister in 1999. Aziz was promoted to prime minister in 2004 and he was given the task stabilising the macroeconomic situation. His policies of deflating the economy to control inflation and domestic demands resulted in a dramatic decline in growth rates to just 2 % in 1999. The government cut down the developmental and educational expenditure, leading to a further fall in growth rates 1.9 % in 2001. Shaukat Aziz, in order to tackle the balance of payment crisis, sold a number of state owned enterprises such as banks, telecommunications and power into private hands.


After the 11th September 2001 attack on World Trade Centre and soon after the US invasion of Afghanistan, once again Pakistan became a strategic ally in the war. The economic and military aid again started flowing-in and soon after the IMF approved new aid amounting to $1.5 billion and previous debts were rescheduled to Pakistan. The rise in foreign aid and the transfer of payment provided a short-term boost to the economy and the country witnessed a current account surplus. However, the upswing in the economy did not last very long and in 2005 the economy began to slow down, the price of consumers goods rose and the current account deficit increased. This was partially due to poor domestic food grain production and also a sharp rise in global food and petroleum prices. In fact, many other developing countries experienced a similar situation but proved to better prepared, while the Pakistani government failed to show any viable strategy to resolve the crisis. The trade deficit rose to US$ 15 billion in 2008 from $10 billion in 2007. Foreign exchange reserves plunged to $8.5 billion in 2008 from $13.5 billion in 2007. Since 2005 prices were rising at the rate of 12 % annually and inflation further rose to 20.2 % in 2008. In 2007 the poor harvest and higher import prices, especially food, exacerbated an overall price rise. The deteriorating living conditions of the people coincided with a conflict with judiciary and opposition political parties. Moreover, the rich decided to invest their wealth in shares and properties for quick profits. As a result, share prices and urban property went up along with multilateral and bilateral aid which was claimed as a success story. These so-called high growth rates by passed the majority of the people who saw their living conditions deteriorated due to rising unemployment, high inflation and corruption, which led further disenchantment with the military regime.


Khan’s study regarding the nine years of Musharraf regime, finds that there was an increase of 2 percentage points in the unemployment rate while real wages of both skilled and un-skilled declined by 4 to 9 % despite the share and bond market boom. Macroeconomic stability was achieved by cuts in development spending and wages. The number of people living below the poverty line sharply increased, despite inflows of massive foreign aid and the World Bank led anti-poverty reduction programme. Under General Musharraf (1999-2008), corruption and nepotism became more widespread and inequality and unemployment increased further[15]).


Pakistan’s macroeconomic indicators show that inflation has risen since 2004. For instance, the prices rose 7.4 % 2004, which increased to very high levels i.e. 20.2 % in 2008 and declined to 13.9 % in 2009 (see Table 1). The literacy rate is low i.e. 59.8 % (see Table 1). 


Table 1: Pakistan Statistical Summary








Inflation (% change)







Birth rate (per ’000)







Total exports (US$ billions)

Leave a comment