Experimenting with growth models
By Shahid Javed Burki
Monday, 26 March, 2012
PAKISTAN`S poorly performing economy calls for a well thought out growth strategy. The Planning Commission has drafted one but it is unlikely that it will get to be implemented.
It calls for a major change in the way the economy needs to be managed and developed. Its aim is to realise a reasonably high and sustainable rate of growth by concentrating not on investment but on increasing the efficiency of the economy.
The proposedstrategyneeds the full backing of the political establishment which will be difficult to secure as the governing political coalition gets ready for the next general election. What a quick reading of history tells us is that Pakistan has been subjected to so many policy changes in the past that those who would have liked to invest in the economy are holding back.
Investors don`t appreciate uncertainty. From the perspective of economic management, Pakistan`s history divides fairly neatly into several periods. The first began almost 65 years ago when the country gained independence and lasted for a dozen years. Those who governed in the period from 1947 to 1958 were preoccupied with two problems.
The first was the way the Indian administration under the leadership of Jawaharlal Nehru looked at Pakistan as the latter triedstand on its own economic legs.
It appeared to those responsible for managing the Pakistani economy that India was determined to cripple it, perhaps in the hope that Muhammad Ali Jinnah, Pakistan`s founding father, would apply for readmission into the Indian union.
The second problem the first Pakistani administration needed to deal with was the settlement of eight million refugees who arrived from India. Thus preoccupied, the new administration had no time to deal with the question of economic growth. That was left to be dealt with at a later date.
Serious economic planning began under General Ayub Khan, the first military president. He placed the Planning Commission in his own office and appointed himself as the chairman. Saeed Hasan, a senior civil servant, was appointed the Commission`s deputy chairman.
The president also asked the United States for technical assistance for preparing the Second Five Year Plan. This came in the form of nearly a dozen economists from Harvard University who were deployed as advisors in the Planning Commission and in the then two provincial planning and development departments.
A plan was produced in 1960 to cover the 1960-65 five year period.
It had three important features: emphasis on growth, reliance on the private sector with only light guidance provided by the government, and significant augmentation of domestic savings by official development assistance (ODA).
The United States and theInternational Development Associations (IDA), a new affiliate of the World Bank, were the main sources of ODA.
The second plan was remarkably successful in accelerating the pace of economic growth. It more than doubled the increase in per capita income which reached an unprecedented level of three per cent a year. The third plan (196570) followed the same model and would have produced the same result had it not been interrupted by two developments. The first was the 17 days war with India in September 1965 just as the third plan period was beginning.
The second was Ayub Khan`s illness which weakened him physically and affected his resolve to bring about the country`s rapid development. He was forced out office in 1969 by General Yahya Khan, the commander-in-chief of the armed forces. The new president was himself thrown out of office after he had caused East Pakistan to separate and become the independent state of Bangladesh.
This change of administration happened in a coup in December 1971 staged by a group of young military officers. They brought Zulfikar Ali Bhutto, a civilian, to govern first as president and chief martial law administrator and later as prime minister.
Bhutto had a deep interest in economic matters but his approach was quite the opposite to the one that had produced the 1960s miracle. His model of economic management and change also had three elements: a majorrole for the state, state-led industrialisation, and tapping the rapidly increasing wealth of the Middle East for external finance. He achieved the first objective by nationalising the privately owned large industries, banks and insurance companies.
To achieve the second, he established a number of state-owned corporations. For the third he encouraged the migration of millions of construction workers to help the oil-rich countries build infrastructure. These policies jolted the economy from which it took a long time to recover. It was surprising that Bhutto an avowed socialist did not have any place in his scheme of governance for disciplined planning. The public sector projects implemented during the period were not subjected to the kind of analysis used during the period of Ayub Khan. Many reflected the whims and interests of the ruler and the ruling establishment.
The next economic period began in 1977 when Bhutto was removed from office and lasted for 11 years until the death of General Ziaul Haq, the country`s third military ruler. The new administration attempted to put the economy back on the track on which it was moving before the Bhutto interregnum. Powerful bureaucrats and a clutch of economists were back in power. Mahbubul Haq, the principal author of the Second and Third Plans, was brought back from the World Bank and placed in change first of the Planning Commission and then of the ministry of finance.
Growth returned to the econo-my but not because a well thought out strategy was put in place. It was largely the consequences of the large flow of external assistance provided by the United States in return for the effort Islamabad made to expel the armed forces of the Soviet Union from neighbouring Afghanistan.
Most of the structural changes made during the Bhutto period remained. Pakistan had to wait for the death of President Zia before the private sector once again be-gan to play the leading role in managing the economy.
Yet another distinct period in the country`s economic history saw the reversal of some of Bhutto`s policies. The financial sector was placed in private hands and `Washington Consensus` set of policles were adopted. These included the opening of the economy to the world outside. However, this fundamental change in the approach did not bring growth back to the economy.By that time a number of fault lines had opened up under the economic structure for the country and these were not removed since no administration stayed long enough to affect change. The country was politically unsettled. Seven administrations four elected and three appointed as caretakers governed during the eleven year period between Zia`s death and the fourth military intervention in October 1999.
Under President Pervez Musharraf the tried and tested model of economic management was put in place again. The three features of the Musharraf`s model were the provision of space in which the private sector could operate without much constrain by the state, centralisation of economic policy making with little provincial autonomy, and dependence on external finance to augment paltry domestic savings. As was to be expected, the economy rebounded largely because of the activation of the capacity that had been created during the earlier periods.
With the return of democracy in 2008, nine years after Musharraf`s rule, the political establishment was too preoccupied with managing the transition to civilian rule to pay much attention to economic management. This is where the situation stands today while the economy continues to slip without much guidance provided by the policymakers. Will the administration that takes office following the next general elections adopt a viable growth strategy? Only time will tell.
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