Foundations of economy
In Pakistan’s early days, economic policymaking was in the hands of professional civil servants. This meant leaving the economy in the hands of the private sector but keeping a watch on its activities.
By Shahid Javed Burki
Tuesday, 16 Nov, 2010
LAST week I wrote about the way in which Pakistan’s history has been misrepresented by his torians, mostly under pressure by a succession of governments from the very beginning. But the most mischief was done by the administration headed by Gen Ziaul Haq.
I will focus today on how this telling of history has led to our understanding of Pakistan’s economic foundations. Having proposed a political entity that would provide economic and social com fort to the Muslim community, Jinnah and his associates failed to define its con tours. They seem to have assumed that once an independent Muslim state was created it would pursue the style of polit ical and economic governance that was practised by the British when they ruled India. That did not happen largely because of the transfer of population that accompanied partition.
As a result of the migration of 14 million people who moved across the newly defined border between India and what is now Pakistan, the Pakistani political system was seriously unsettled. This had a profound impact on the making of economic policy in the country.
Later the ‘Muslimisation’ of Pakistan — the fact that the population transfer led to an increase in the proportion of Muslims from less than 70 per cent to nearly 95 per cent — created spaces within which ‘Islamic’ operators in the country were able to redefine the idea of Pakistan. The economic significance of this development was indirect. It had two consequences. It led to an obsession with India in the making of policy and it reoriented Pakistan’s external focus towards the Middle East.
The immediate consequence of the partition of British India and the making of economic policy during Pakistan’s formative years was the attempt to create an economy that was separate from and independent of that of India. To understand why and how that was done we should concern ourselves with at least four subjects.
One, what was the shape and structure of the Pakistani economy in the late 1940s? Two, what was the policymaking environment within which the early decision-makers operated? Three, what were some of the decisions that were taken in the early days of Pakistan? And four, in what way was Pakistan’s economic future affected by the decisions that were taken early in the life of the country as an independent state?
Pakistan’s economic historians have not provided us with a detailed quantitative picture of the Pakistani economy as it was in 1947, the year of the country’s birth. There is much speculation in the picture I am going to paint today. What is Pakistan now — by that I mean the country that emerged in 1971 after East Pakistan separated to become the independent state of Bangladesh — had a population of only 30 million people. In today’s prices and exchange rate, the size of the Pakistani economy was less than $8.4bn and its per capita income was $280.
Seventy per cent of the GDP came from agriculture while almost 90 per cent of the population lived in the countryside. Working from these numbers it would appear that while rural per capita income was only $185 that in the urban areas was close to $1,000, a ratio of one-to-five.
In other words, Pakistan’s economy was primarily rural and there was much poverty in the country. Perhaps fourfifths of the population lived in what today would be called absolute poverty. Another two million people were added by the transfer of population that followed the partition of British India. Since about half the refugees settled in urban areas, the proportion of the urban population increased sharply.
Trade was an important part of the economy with trade-to-GDP ratio of 40 per cent. Much of this was with the parts of British India that became independent India and almost all of it was in commodities — food grains and raw cotton. In return most of the basic consumer goods came from India that had a much more developed industry than was the case in Pakistan.
This structure of the economy was suddenly changed by three circumstances. The first of these was the fact that those who dominated economic decision-making in the early days of Pakistan did not subscribe to any particular ideology. That was not the case in India where the political leadership took command of the economy.
In Pakistan economic policymaking was in the hands of the professional civil servants who had developed their skills in the last couple of decades of the rule by the British. This meant leaving the economy in the hands of the private sector but keeping a watch on their activities.
In India, on the other hand, Jawaharlal Nehru, the country’s first prime minister, was so impressed with the Soviet Union that he put the state on the commanding heights of the economy as Lenin had done in his country. This led to the development of the ‘licence raj’ under which the state had a tight control over the decisions taken by private enterprise. The state’s control over the Pakistani economy came later in 1972 when Zulfikar Ali Bhutto began the task of socialising the Pakistani system.
The second circumstance was the initial domination of the political structure by the migrants from India who were mostly from the urban areas. They had little understanding of an economy dominated by agriculture. Thus disposed they got an opportunity presented by India — the third circumstance — when Nehru refused to accept Pakistan’s decision not to devalue its currency with respect to the US dollar. This changed the rate of exchange from parity to 100 Pakistani rupees to 144 Indian rupees. In reaction India cut off trade with Pakistan and forced rapid industrialisation by the first generation of Pakistani leaders.
This is how the foundations of the Pakistani economy were laid in its formative years. What happened then is still resonating. It takes a good reading of economic history to comprehend how the Pakistani economy came to be developed and how it must move forward. ¦ The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.