Economic:

Political Stability and Economic development are deeply interconnected, influencing

and reinforcing each other.

Vicious Cycle:

Pakistan has faced political instability in the from of

 Military intervention
 Governance crisis
 Regional as wel as domestic conflicts
 Frequent government changes,
has hindered the Pakistan Economic development.

Contemporary core reasons behind the political instability are

 Political Polarization
 Civil-Military Tension
 Institutional Weaknesses
 Public Discontent

Persistent economic challeneges:

 Poverty
 Unemployment
 Inequality
have contributed to the instability further complicating governance and policy
continuity.
Lack of Self-sufficient Policy:
Foreign Aid:
During the cold war due to strategic importance of Pakistan, the America and
western states helped the Pakistan in the form of foreign aid to uplift the economy
in return of alliance against the USSR.
Throughout the history, Pakistan got the foreign assistance due to regional conflict
which involved the great powers’ interest in the region i.e cold war, and war on
terror.
Due to foreign aid and the loan from international financial institutions as well as
states restrained the Pakistani policy maker to devise the independent and self-
sufficient economy.
Pakistan is now dependent in foreign loans to finance the economic deficits, and
these loans has become the regular mechanism to fill the budget gap (fiscal deficit)
and finance import.
Why need of loans?
 Low Tax Revenue:
 Narrow tax base: large portion of Pakistan economy operates in
the informal sector, which remains largely untaxed i.e food stall,
mobile vendors, small scale farming, fishing, house made work
etc.
 Widespread tax avasion: Elite groups enjoy tax exemptions and
deductions, which limits tax base and reduce the tax collection.
 Weak tax administration: Insufficient tax agencies, lack of
transparency, corruption,
 Trade Deficits:
 Limited Export diversification: export is limited to few sector
such as textile and agricultural products, making the
Pakistan economy vulnerable to global fluctuation in prices and
demands. Lack of high-value industries, such as information
technology, pharmaceutical, and electronic limits Pakistan’s
ability to increase he foreign earnings and reserves.
 High Import Dependence: dependence on the imported goods
and raw materials adds to the trade deficits. these imports
includes luxury goods for elite class, oil, machinery, and
industrial inputs in the form of raw materials. Although these
import are inevitable for industry and energy sector, this creates
dependency on foreign exchange which leads to additional
borrowing.
 Lack of long-term policy due frequent change in the
government:
 Payment of debt servicing: Debt servicing obligations
consume a substantial portion of Pakistan budget, restricting the
spending on education, healthcare, infrastructure and social
welfare, which lead to perpetuating poverty.

Economic Liberty and Limited Government:

Premises that the Government and Liberty are
Antithetical:

Government maintain order --------> Order

calls for laws -------> Laws require
enforcement --------> Enforcement demands
coercion --------> Coercion is the enemy of
freedom.

So, enlargement of government functions

and power means the corresponding
reduction of liberty.
For liberty:
The power of the government were limited ------> this made the
individual free to apply their energy outside the sphere of state --->
This created the vacuum -----> which was filled by the individual
freedom to engage in trade industry and innovation ------> This
trigger the Industrial Revolution.

Bisection of society:
This Individualistic authority started challenging the rulers of
state for the leadership of society. This led to bisection of society:
a) Political order
b) Economic order
This became the reason for the allocation business a position in the
society-----> coordinate with government-----> Economic sphere
would act independently in the society.
It is now the economy which leads to assault the state not the
religion.
Economist and the businessman not the theologian and bishops are
the main impetus towards pluralism.
So now a days Politicians and entrepreneur and government
and businessman are considered whether rivals or partners.

Prior to 18th century, intimacy of the connection

between the politics and economy was not seriously
questioned.

Retrospective analysis: Political Stability and

Economic development in Pakistan:

 Independence and Early years

Pakistan was at distinct disadvantage in division of resources, administrative
capacities, and infrastructure.
Influx of refugees, building of new administrative infrastructure apparatus, agrarian
country with minimal industrial capacities so vulnerable to global economic
fluctuation, frequent change in the government, absence of clear succession plan,
civilian leadership was struggling to consolidate power.
 Ayub’s Era:
In late 1050s, instability had created an environment for military intervention.
Pakistan First military Martial was imposed on Oct7,1958 by Sikander Mirza and
declared Ayub Khan as Martial Law administrator.
Ayub Khan focused on modernization, economic development through state-led
initiatives. “Decade of Development” as well as “Green Revolution” and 6.7% GDP
throughout the 1960s.
 Industrialization
 Infrastructure
 Agricultural Development

All this progress was based on “Foreign Investment” particularly by USA, which saw
Pakistan as strategic ally in Cold War.

 1971 Separation:
Ayub Khan era laid the foundation of economic disparities and political discontent.
Industrial development only in western part while completely neglecting the eastern
part. Western part(Now Bangladesh) highly contributed to export revenues but
received fewer resources for development.
Separated in 1971 due political and economical grievances exacerbated by the ethic
and cultural differences. Huge blow to Pakistan, lost significant portion of population
and economic base.
 Bhutto’s Era:
1971 to 1977, implimented scialist-inspired policies,
Nationalization of key industries, banks, and educational institution.
to reduce economic inequality and empower the working class.
Failed due to corruption, mismanagement, and the low productivity.
 Zia Ul Haq’s Era:
Economic Liberalization: Reduces state intervention, emphasis on private
enterprises.
Foreign Aid was the main driver behind the economic development, due to
participation in war against USSR in Afghanistan through Mujaheddin.
This foreign aid stabilized the economy for short period of time, not worked
effectively for longer period.
Challenges were influx of refugees, proliferation of arms, rise in militancy, social and
economic repercussion.
 Democratic transition from 1988 to 1999:
Economic instability cause of no consistent policy,despite of civilian rule, due to
political instability and frequent change in government, because of allegation of
corruption, economic mismanagement, and political infighting.
Structural Adjustment led to the Liberalization of economy under the aegis of IMF
and World Bank.
Independent Power Producer emergence to solve the country long standing energy
crisis with the help of foreign investment. But failed due to high cost, unsustainable
contracts, reliance on imported fuels, and structural inefficiencies (led to circular
debt)
Challenges were poor implementation of liberal policies, corruption, political
opposition which hinder the economical progress, which led to high level of debt,
balance of payment crises, fiscal deficits, this has become the cause of dependency
on foreign lender, limiting the policy autonomy.
This era highlighted the fragility of democratic institution in Pakistan, and deep-
seated issue of governance, and accountability that impeded both political and
economic development.
 Musharaf’s Era:
In Musharraf era Pakistan experience the economic growth with 7% GDP growth
rate, in mid-2000s.
This era attracted the foreign investment especially in telecommunication and
banking sector. this focused on the Liberalization, privatization, and deregulation.
Flaws: growth was not inclusive. Income inequality and regional disparities were
persisted.
economy grew under the Musharraf but the political instability remained the elusive.
 Post 2008 Era:
Energy shortage, high inflation, and growing public debt, insufficiency in collection of
domestic revenue, an trade imbalances.
political instability, corruption,policy inconsistency.
War on terror led to economic strain as well as security challenges.

 Nature of Current Political Instability:

 Political Polarization and Partisan Conflict
 Weakness of Democratic Institution
 Civil-Military Relation and Institutional Tension
 Public Discontent and Socioeconomic Grievances

 Economic Impact of Current Political Instability:

 Erosion of investor confidence
 Weakening of the Pakistani rupee and inflationary pressure
 Fiscal imbalances and mounting debt
 Stagnation of economic reforms
 Undermining social welfare and human capital

 Long-term consequences of political instability on economic

development:
 Brain Drain and talent loss
 Increased dependence on external aid: The international loan provider impose
certain conditions in the form of Structural Adjustment like spending cuts on
welfare program, tax increase, and subsidy reduction.So this situation creates
the repeated cycle of IMF programs. This directly and indirectly effects the low
income households. Such austerity measures reduce the disposable income,
limit access to essential services, increasing poverty and economic inequality.
 Worsening of regional relations
 Undermining democracy and governance

 Steps to address political instability and and its economic impact:

To address these challenges Pakistan need a Multifaceted Strategy that address the
root causes, strengthens economic resilience and set the foundation of sustainable
growth.
 Strengthening the democratic institution
 Promoting consensus-building among political parties: Consensus on core
economic policies, to agree on long-term economic priorities to avoid frequent
change of policies which leads to trust deficit of investor.This consensus can help
to maintain the policy stability.
 Implementing economic reforms gradually and transparently
 Investing in social protection and human capital
Impact of High Electricity Rates on Pakistan Economy:
 Negative impact on Industrial Competitiveness: increase production cost, price
of the product also increase which reduce the competitiveness in the global
market.
 Effects on Small and Medium Enterprises SMEs: operate on tight margin, and
cannot easily pass on the additional expenses to consumers, resulting in reduced
profitability and potential closure.
resist to expand, effecting the job creation, so lower consumer spending due to
unemployment, reduced the overall economic activity.
 Inflationary pressure on Household: rise in cost of living, effect the consumer
demand, so energy poverty impacts the quality of life, exacerbates social
instability, limits economic participation.
 Dependence on imported fuels and the foreign exchange outflows: vulnerable
economy due to fluctuation in global energy prices.price rise, electricity
generation cost increases, leading to higher tariffs, currency depreciation,
worsening trade deficits
 High energy import, immense pressure on the foreign exchange reserve,
challenge to maintain the stable exchange rate. This leads to circle of
depreciation and increased cost burdens.
 Reduced Domestic and Foreign Investment: Investor seek stable operational
costs.But high and volatile electricity tariffs deter the domestic and foreign
investor, leading to limit job creation, limit technology transfer.
 Environmental and long-term sustainability concerns: Reliance on the thermal
power resources, resulted in the environmental degradation, climate change,
and health problems, which further burden the economy.

Key Factors leading to political instability:

1. Military Intervention and Civil-military tension

2. Frequent changes of government: led to lack of consistent economy policy
discourage foreign as well as domestic investor.
3. Weak Governance and Corruption
4. Ethic and Regional divide also the economic disparities
5. Terrorism and Security issue

Economic Challenges hindering development

 Low foreign direct investment:
Political instability,frequent change in the policies due to change of government,
weak economic policies, security issues, poor infrastructure, High corruption and
mismanagement by the bureaucracy.
 Low revenue generation and fiscal deficits:
Struggle for IMF and World Bank loan which leads to structural Adjustment,which
demand the reduction on social spending, exacerbating poverty and inequality,
which fuel political instability.

 Dependence on Agriculture and lack of industrialization:

According to Pakistan Bureau of Statistic: Agriculture contributed 24% to GDP and
giving livelihood to 37.4% Labour force.
Employing large portion of workforce but giving very little to GDP. A lack of
diversification also makes the economy vulnerable to external shocks, such as
commodity price fluctuation, which exacerbate economic instability.
Industrialization drives higher growth rates and create jobs.
 High unemployment and Poverty Rate:
population is growing at higher rate, creating a young and rapidly expanding labour.
But Pakistan economy has always struggled to provide jobs resulting in high
unemployment, which make the population disillusioned with the economic system
contributing to unrest and instability
High poverty rate also hinder economic growth development. limited access to
education, healthcare, and skill training, the population remain unproductive, unable
to contribute to economic growth. So poverty also fuel political instability, as
marginalized population start supporting the populist and extremist movements,
which can destabilize the political environment.
Strategies for breaking the Cycle:
1. Strengthening democratic institution:
Transparent election, independent judiciary, check and balance and accountability,
empower the civilian leaders and reduce the reliance on military, creating the stable
political environment where the long term policies can thrive
2. Economic reforms for sustainable growth:
Address structural weaknesses, expand tax base, improve tax collection, reduce
reliance on indirect taxes, increase revenue, reduce fiscal deficit.
Foster the industrial growth through incentives, infrastructure, and streamline
regulation.
Economic diversification to reduce dependency on the agriculture and expand
sectors like technology and manufacturing. creating an enabling environment for
small and and medium enterprises(SMEs) and foreign investors.
3. Addressing regional disparities:
fair distribution of resources, investing in underdeveloped areas,promoting regional
autonomy will help to bridge the regional divide and enhance the political stability.
Equitable development policies will create a sense of inclusion among the
marginalized communities, reducing the appeal of separatist or anti-governmental
movements.
4. Investing in Human Capital:
A young and dynamic population will be asset if adequately educated and trained.
investing in education, healthcare, and vocational training will improve productivity
and reduce the poverty. Skilled workers are better equipped to contribute to a
modern economy, improve healthcare reduces economic loses due to illness.
Solutions:
 Political Stability:
 Strengthening of democratic Institution:
 Strengthening the economic related institutions:

Strengthening the FBR by enhancing resources, technology, and

skilled personnel, it will help in improving the tax compliance and
revenue collection.

State Bank of Pakistan (SBP) – The central bank responsible for monetary policy
and financial regulation.

Ministry of Finance – Manages government finances, budgeting, and economic

policies.

Federal Board of Revenue (FBR) – Handles taxation and revenue collection.

Planning Commission of Pakistan – Oversees development plans and economic

policies.

Pakistan Bureau of Statistics (PBS) – Collects and analyzes economic and

demographic data.

National Electric Power Regulatory Authority (NEPRA) – Regulates the power

sector.

Oil and Gas Regulatory Authority (OGRA) – Regulates the oil and gas industry.

Securities and Exchange Commission of Pakistan (SECP) – Regulates the corporate

sector and capital markets.

Pakistan Stock Exchange (PSX) – The main stock exchange for capital markets.

Trade Development Authority of Pakistan (TDAP) – Promotes trade and exports.

Pakistan Investment Board (PIB)/Board of Investment (BOI) – Encourages local and

foreign investment.

Competition Commission of Pakistan (CCP) – Ensures fair competition in the

economy.

Benazir Income Support Program (BISP) – A social safety net program for poverty
alleviation.
Pakistan Institute of Development Economics (PIDE) – Conducts research on
economic policies.

 Enhance investor trust through security and

policy improvement:
 Diversification of Export or trade: promoting the high
value export, and provide incentive like tax break, research
grants, and technical support.
Strengthening the SMEs which are critical for the diversification
of exports
 Discouragement of Imports: promote local
manufacturing, and the invest in renewable resources.
 Restructuring the IPPs:
 Long term policy by consensus among political
parties: Develop a National Economic Strategy for long term economic
vision, foster cross party economic consensus.
 Investing in Human capital and infrastructure:
Investing in education, healthcare (reducing the burden of illness
on the economy), and infrastructure (roads, irrigation, energy
access, waste management, public transportation, digital
infrastructure will reduce the cost doing business and attract the
foreign investors which will lead to job creation, and reducing
the dependence on external funding) can improve productivity
and foster innovation and reduce reliance on debt. It helps in
building a more competitive workforce.
 Improvement in revenue collection: investing in the
digitalization of infrastructure, Amnesty schemes, strong
administration, broadsiding the tax base by bringing the informal
sector into tax net, and reduction in tax exemption and close
loopholes.
Building public trust in taxation through transparency in tax
utilization
 Renewable energy production:
 Prioritizing concessional loans and avoiding the
high cost or high interest rate loan: like the Asian
Development Bank and World Bank Provide the concessional
loans.
 Debt Amortization: negotiating the debt restructuring and
seek relief, and payment of loan in form of small installment.
 Independent economic policy and aloofness from
international loan institutions’ influence:
 Tackle the effect of Climate Change:
 Political stability and strengthening governance:
 Anti-corruption measure:
Agencies like NAB, act independently, resources to investigate the high level
corruption.
Transparency in public spending, public tracking and reporting government
expenditures can reduce opportunities for corruption and it will ensure the direction
of funds towards priority areas.