to the international financial press, Pakistanis have
much to smile about today, despite their cricket team's
loss of the series against India. Certainly, according
to the conventional economic indicators, there is source
for some pleasure. Economic growth is up, after a dismal
period of more than a decade, especially in the commodity-producing
sector. Exports have increased substantially in the
past year and the current account shows ever-growing
exchange rate has largely remained within a narrow range,
unlike the volatility of just a few years ago. Capital
inflows are up, and the relatively small stock market
has zoomed. Budgetary trends are consistent with the
declared targets. While inflation rates have gone up
recently, they are still within manageable limits.
All this would have appeared unlikely, even a few years
ago. The 1990s was a very adverse decade as far as the
material conditions of most Pakistani people were concerned.
Average growth rates of national income plummeted in
the 1990s to less than 4 per cent per year compared
to the earlier decade's rates of more than 6 per cent
per year. This deceleration in growth was associated
with historically low rates of investment, as private
investment failed to pick up and counterbalance the
decline in public spending.
Industrial growth rates almost halved from 8.2 per cent
to 4.8 per cent per annum. The earlier success at reducing
poverty was reversed in the 1990s, as the per cent of
households living in absolute poverty increased from
21.4 per cent in 1990-91 to 40.1 per cent in 2000-01.
By June 2001, more than 56 million Pakistanis were living
below the official poverty line.
Even the growth that did take place was associated with
very inadequate performance in terms of human development
indicators. This was true over the longer period since
Independence, when economic growth rates were in the
region of 5 to 6 per cent per year. The Pakistani pattern
has been characterised as ''growth without development'',
because despite its respectable per capita growth over
the second half of the 20th century, the country systematically
underperformed on most social and political indicators,
such as education, health, sanitation, fertility, gender
equality, corruption, political instability and violence,
and democracy. Significantly, output growth was also
associated with very low employment growth, at the trend
rate of only 2 per cent per annum for the long period
In the 1990s, the growth process became much more volatile
even as the trend rate of growth was lower. And this
growth was based largely on unsustainable public expenditure
using a build-up of public debt. By the end of the 1990s,
total debt-servicing (of external and internal debt
together) accounted for more than 70 per cent of current
government revenues, which also meant that future expansion
could not rely on debt-driven public spending alone.
One strange feature of the Pakistani economic growth
process was the lack of any direct relation between
growth and employment generation. Output growth was
relatively low in the 1970s, increased in the 1980s
and dropped again in the 1990s. But employment growth
followed the opposite pattern, being at its highest
at 3 per cent over the 1970s and dropping to 2 per cent
in the next two decades.
One important factor in explaining the poor employment
performance was the behaviour of the manufacturing sector.
In Pakistan, as in most other developing nations, the
sector is characterised by a high degree of dualism,
with a large-scale sector that dominates output (producing
two-thirds of the value added in manufacturing) but
employs only 17 per cent of manufacturing workers, and
a small-scale sector that dominates employment (with
83 per cent of the manufacturing workforce) but accounts
for only one-third of the manufacturing value added.
The output and employment shares of these two categories
have been remarkably stable over time.
The small-scale sector, operating under major and increasing
constraints and with huge disadvantages, has been relatively
moribund in the past decade, and shows all the characteristics
of a refuge labour sector. As in India, this was largely
due to the threat posed by imports, poor infrastructure
conditions and reduced access to institutional credit.
Meanwhile, the large-scale sector has been plagued by
excess capacity (due to deficient aggregate demand resulting
from deflationary structural adjustment policies, and
import penetration) as well as by increasing capital
intensity and in capital productivity due to newer technologies,
which have had the effect of reducing labour demand.
So, much as occurred in India over the same period,
investment and output growth in manufacturing in Pakistan
tended to be capital-augmenting and labour-displacing.
Since manufacturing was the lead sector in employment
generation, this then affected the employment possibilities
elsewhere in the economy, and contributed to both the
persistence of low-productivity employment in the other
sectors and the low and declining rates of employment
The pattern of both income growth and employment over
the 1990s was affected by the economic ''reforms'' introduced
in Pakistan over this period. A very major and direct
role was played in this case by the constraints imposed
on public investment. The investment-GDP ratio declined
from 17.3 per cent in 1998-89 to 14.7 per cent in 2000-01,
and this was entirely due to the collapse in public
investment from 8.5 per cent of GDP to 5.6 per cent
over the same period. Private investment, which was
strongly interlinked with public investment and expenditure,
faced a deficiency of demand as a result, and did not
rise to meet the emerging slack.
In addition, various other elements of the structural
adjustment programme operated to reduce average growth
rates, accelerate inflation, and thereby increase unemployment
and poverty. The standard package of structural reforms
included privatisation of public assets, ceilings on
wages and employment in the public sector, cuts in subsidies,
cuts in development expenditure, including on ''social
sectors'', increases in user charges for public utilities
and services and frequent devaluation. This last feature
also had the unintended consequence of reducing the
inflow of remittances from foreign workers, which has
been an important source of sustenance of Pakistan's
balance of payments.
Thus, ironically, the macroeconomic strategy based on
Structural Adjustment Programmes imposed and approved
by the IMF and World Bank supposedly to change the structure
of the economy so as to improve the balance of payments,
control inflation and revive growth, had the opposite
effects in practice. This was also why the incidence
of poverty increased over the 1990s, as the combination
of deflationary macro-economic measures and de-industrialisation
following upon trade liberalisation has made itself
Within a year after Pakistan's third military coup which
brought the military government of General Musharraf
to power, roughly 15.4 million more people were pushed
below the poverty line. Unemployment rose, real wages
fell and income distribution worsened. Human development
indicators, which were poor to start with, worsened
over this period.
The first two years were especially bad because the
insistence on the IMF-style reform measures was combined
with even more economic volatility, the effect of sanctions
by the West because of the nuclear tests, and then military
instability in the region (including both the US-led
war on Afghanistan and the build-up of troops along
the border with India).
However, recent geopolitics has impacted in different
and more positive ways upon Pakistan's economy. In several
ways, the willingness of the Musharraf regime to be
a key ally of the US in the so-called ''war on terror''
also had substantial effects upon the economy. It has
meant the waiver or rescheduling of more than one-third
of Pakistan's external debt, which provided much-needed
short-term relief. It has led to increased foreign aid
flowing back to Pakistan and the reinstating of export
quotas in textiles and garments. It has led to a massive
increase in remittances (to as much as 14 per cent of
GDP) allowing the build up of foreign exchange reserves.
However, since the domestic investment rate is still
below the savings rate, the inflow of aid and remittances
is not really contributing to future economic activity,
but simply being stored as foreign exchange reserves.
So the current economic revival is essentially based
on the particular geopolitical position of Pakistan
and the strategic choices made by the Musharraf regime.
Internally, the same economic policies which generated
the desolate decade of the 1990s remain in operation,
which means that the impetus to growth and employment
generation from within the economy are very limited.
Since the current recovery is based so much on the (fickle)
goodwill of the western powers, it is inherently unstable.
Further, it has still not entailed any real improvement
in the conditions of ordinary people, either in terms
of more productive employment opportunities or better
provision of basic services. As has been the case, the
current growth is essentially benefiting a small elite
that includes both the landed and industrial classes
and the urban professional groups.
There are other sources of instability. The same political
expediency which has dictated the Musharraf regime's
pro-US tilt has also created dissatisfaction and resentment
among important sections of Pakistanis. This means potential
for unrest which can undermine the still fragile economic
So maybe, after all, cricket will still be a more reliable
source of pleasure for the average Pakistan than the