A Comparison:

Pakistan Economy: Dictatorship vs. Democracy

Pakistan got its independence from the British occupation on 14th August 1947. Since emergence of the state on
the political background of the world, economically, it has experienced a bumpy ride all together. Many reasons
for this are given by the experts and arguments are presented as to how the situation can be remedied but
situation has gradually worsened over the years.
Economic and social outcomes in Pakistan over the last sixty years are a mixture of paradoxes. Pakistani
economy grew at a fairly impressive rate of 6 percent per year through the first four decades of the nation's
existence. A feat achieved by a very few nations. In spite of rapid population growth during this period, per
capita incomes doubled, inflation remained low and poverty declined from 46% down to 18% by late 1980s,
according to eminent Pakistani economist Dr. Ishrat Husain. This healthy economic performance was
maintained through several wars and successive civilian and military governments in 1950s, 60s, 70s and 80s
until the decade of 1990s, now appropriately remembered as the lost decade.
Politically, however, the interplay of religious fundamentalism, sectarianism, ethnic cleavages and regional
economic disparities has made the country volatile and unstable. Various East Asian countries that were behind
Pakistan in the 1960s have surged far ahead in most economic and social indicators. Pakistan has thus been
unable to realize its potential. South Korea is a prime example of this case. In 1960’s both counties were almost
at the same economic stage but owing to the inability to implement the economic plans appropriately, the gap
between the two states widened with the passage of time in South Korea’s favor.
Despite sharing a common historical, cultural and social milieu, Pakistan and India have pursued different paths
since independence in 1947. Both countries have done reasonably well in improving their economies and
reducing absolute poverty levels. India has, however, emerged as a stable and vibrant democracy while Pakistan
has spent half of its post-independence years under military dictatorships and is currently struggling to quell an
Islamic insurgency in the northwest part of the country. The democracy–development nexus appears to be well
entrenched in the case of India, while it is faltering in Pakistan. A great deal of recent literature has suggested
that China and India are the typical representatives of authoritarian and democratic regimes, but fewer attempts
have been made to resolve this puzzle in the case of India and Pakistan, two countries that are more akin to each
other and share a common legacy.

In order to address these questions it is useful to revisit the essential dimensions of Pakistan’s economic and
political history, a history which can be divided into six distinct periods:

 The Fifties, 1947 to 1958

 The Sixties, 1958 to 1971

 The Seventies, 1971 to 1977

 The Eighties, 1977 to 1988

 The Nineties, 1988 to 1999

 The Hundreds, 1999 to 2007

The Fifties, 1947 to 1958:
This era marked the government of Liaquat Ali Khan and initiation of First Fiver Yearly Plan. It was initiated
by Ministry of Finance, studied and developed by the Economic Coordination Committee (ECC) and framed
after the USSR example. The plan was based on the theory of Cost of Production value, and also covered the
areas of Trickle-Down economic system. State Bank of Pakistan was established to kick start the economic
engine of the nation and major economic infrastructural expansions took place in the process. Currency war
between Pakistan and india was also a highlight of this era which started with the devaluation of pound sterling
and refusal of exchange in PKR by Indian authorities in 1949. In the mid-1950, these relations were restored
and trade resumed between the two nations.
This era also marked the start of the Korean War which led to economic bloom the local economy but the
growth was retarded by the assassination of Liaqat Ali Khan in October 1951. In 1953 the plan collapsed
altogether due to lack of funds. The plan was initiated unsystematically, inadequate staff and lack of ambition is
listed among few of the many causes. Also the shortage of consumer goods like food, clothes, medicines and
sharp fall in production due the monsoon floods of 1951-52 and 1952-53 were a decisive force to hinder the
progress of the nation. Thus, in the end, Prime Minister Khawaja Nazimuddin was forced to end the program
after sending his request to provide economic assistance from the United States and other friendly counties.
In 1955, Prime Minister Muhammad Ali Bogra again revived the plan and published in 1956. After reassessing,
the program was again launched with focusing (as highest priority) on agricultural development, and the strong
emphasis placed on rapidly increasing the developmental effort in East-Pakistan and in the less-developed areas
of West Pakistan. Prime Minister Husain Suharwardy of Awami League gave much priority to food, agriculture
and social development in country. The concept of Collective farming was introduced by Suharwardy and
around Rs.27Million were spent in order to organize the agriculture in the country. However, this program was
built entirely in the absence of much essential information and basic statistics.
In practice, this plan was not implemented because of its enormous size that lacked the physical and personnel
assistance. The shortage of technical knowledge also devastated the program. The Awami League's government
also had shortage of foreign exchange to execute the plan, and was unable to find outside assistance to fulfill its
commitment to the first five-year plans.
The political atmosphere was too vitiated; political instability was too acute; tensions between the different tiers
of the government were so damaging; the challenge of setting up the organs of a new state was so formidable;
and the influx of millions of refugees from India was too demanding. As a result, economic management took a
back seat in this formative phase of Pakistan’s life.

The Sixties, 1958 to 1969:

Field Marshal Ayub Khan, the first military dictator of Pakistan, assumed complete control of the state in
October 1958 and reigned over the golden period of Pakistan’s economic history. With the help of Harvard
advisors, General vigorously implemented the Planning Commission on Economic Management and Reforms
with impressive results.
Despite the failure of first five-year plans, the programs were revived and restated by the military government.
The second five-year plans gave highest priority to heavy industrial development, advancement in literature and
science, and had single underlying purpose: "to advance the country as far as possible, within the next five
years, along the road of these long-range objectives.
GDP growth in this decade jumped to an average annual rate of 6 percent from 3 percent in the 1950s. The
manufacturing sector expanded by 9 percent annually and various new industries were set up. Agriculture grew
at a respectable rate of 4 percent with the introduction of Green Revolution technology. Governance improved
with a major expansion in the government’s capacity for policy analysis, design and implementation, as well as
the far-reaching process of institution building. By 1969, Pakistan’s manufactured exports were higher than the
exports of Thailand, Malaysia and Indonesia combined. Though speculative, it is possible that, had the
economic policies and programs of the Ayub’s regime continued over the next two decades, Pakistan would
have emerged as another miracle economy.

However, the perception that income inequalities between the East and West had increased substantially and
that wealth was concentrated in the hands of twenty-two families fuelled resentment among Bengalis who
accused Ayub’s regime of reducing the East to an internal colony.
After the 1965 Indo-Pak War over Kashmir, FDI declined and economic constraints were imposed on Pakistan.
The third five-year plan was designed along the lines of its immediate predecessor, produced only modest
growth. The country had become urbanized by 1970 and 10% population lived in rural areas as compared to
1950. The third five-year plans promoted the activities of private sector investment and tend to increase the
directly productive investment for the stable financial sector development.
The third program focused on Gross national product (GNP) growth which was increased at 122% and had
focused on the enhancing the capabilities of private sector to operate in the country. The size of the third
program was determined in the light of a careful evaluation of the recent experience under the second program.
Although the third program successfully ran for the first three years of the Third Five-Year Plan, but at the end,
the third program proved to be even more of a disappointment in terms of proclaimed production goals. The
performance of the third program was undeniable that led the economical disaster in the country. Dramatically,
the agriculture growth sharply declined and desperately devastated the farming class of the country.
The fourth five-year plans were abandoned after the successful succession of the East-Pakistan, and the brutal
defeat at the hands of intense rival, India. Virtually, all fourth five-year planning was bypassed by the Prime
Minister Zulfikar Ali Bhutto. Under Bhutto, only annual plans were prepared, and they were largely ignored.
The fourth year plan was replaced by nationalization program by the then government.
The Seventies, 1971 to 1977:
Bhutto’s populist policies of nationalizing industries, banks, insurance companies, educational institutions and
other organizations, derailed Pakistan’s journey toward modernization and faster economic development. This
setback hit Pakistan so badly that the East Asian countries that were lagging behind Pakistan in growth and
economic indicators in the late 1960s not only overtook it but also became huge success stories. The oil price
shock of the 1970s as well as droughts, floods and the withdrawal of external assistance did not help the
situation, either. The growth rate in the 1970s fell to 3.7 percent per annum from the 6 percent recorded in the
1960s. Worst of all, the main plank on which the Bhutto government came to power social justice proved to be
extremely weak. Income inequalities rose compared to the previous period while inflation accelerated,
averaging 16 percent between 1971 to 1977, thereby hurting the poor.15 The large-scale manufacturing sector
performed very sluggishly, netting a growth rate of only 3 percent, primarily sparked by vast public sector
investment.
The idea that government control of the commanding heights of the economy can best spearhead industrial
growth, allocate resources and invest in the activities that it considers a priority not only failed to materialize
but antagonized the private sector. The lesson learned from this experience was that good populist politics are
bad for the economy.

The Eighties, 1977 to 1988:

The overthrow of the Bhutto government by a military coup in July 1977, Zia ul-Haq took over the President
office, used religion to provide legitimacy to his takeover. The roots of present Islamic fundamentalism in
Pakistan can be traced to this period. Zia benefited from participating in the campaign to overthrow the Soviet
Union in Afghanistan, as large amounts of military and economic assistance from the United States flowed into
Pakistan. The long-term costs were, however, massive.
Economic conditions, however, did improve: The Fifth Five-Year Plan (1978–83) was an attempt to stabilize
the economy and improve the standard of living of the poorest segment of the population. Increased defense
expenditures and a flood of refugees to Pakistan after the Soviet invasion of Afghanistan in December 1979, as
well as the sharp increase in international oil prices in 1979-80, drew resources away from planned investments.
Nevertheless, some of the plan's goals were attained. Many of the controls on industry were liberalized or
abolished, the balance of payments deficit was kept under control, and Pakistan became self-sufficient in all
basic foodstuffs with the exception of edible oils. Yet the plan failed to stimulate substantial private industrial
investment and to raise significantly the expenditure on rural infrastructure development.

45,000,000,000.00
GDP
40,000,000,000.00
35,000,000,000.00
30,000,000,000.00
25,000,000,000.00
20,000,000,000.00
15,000,000,000.00
10,000,000,000.00
5,000,000,000.00
0.00
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988
The sixth five-year plans represented a significant shift toward the private sector. It was designed to tackle some
of the major problems of the economy: low investment and savings ratios; low agricultural productivity; heavy
reliance on imported energy; and low spending on health and education. GDP grew at 6.6 percent annually, with
agriculture at 4 percent and the manufacturing sector at 9 percent. Fiscal deficits, however, widened to 8 percent
of GDP despite a decline in development expenditure. Domestic borrowing to finance these deficits did not
weaken growth immediately but had serious consequences for public finances and macro-economic stability in
the 1990s. As a consequence, Pakistan had to approach the International Monetary Fund (IMF) for assistance in
1988.

Inflation
14
12
10
8
6 Inflation
4
2
0
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

The rate of Inflation drastically declined.

Unemployment
4.5
4
3.5
3
2.5
2 Unemployment
1.5
1
0.5
0
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

Level of unemployment reduced to 2.7% of total Labor force.

The Nineties, 1988 to 1999:
Nine different governments (four interim-appointed, four elected and one following the military coup of
October 1999) ruled Pakistan in this period. Like the 1950s, when eight successive governments were formed,
this period saw heightened political instability. Despite far-reaching reforms introduced in 1991, economic
indicators once again fell sharply in contrast with the 1980s for several reasons other than political instability.
The failure to implement successive agreements led to the loss of Pakistan’s credibility among the international
financial community. The confidence of local investors eroded when the foreign currency deposits of Pakistanis
were suddenly frozen. Foreign investors were unhappy as all the power purchase agreements were re-opened
and criminal action was initiated against HUBCO, Pakistan’s largest foreign-owned power generation company.
The GDP growth rate decelerated to 4 percent. While the agriculture sector recorded higher output, growth of
the manufacturing sector was low. The investment ratio fell to 13.9 percent during 1998 and 1999 as foreign
savings, which formerly bridged the gap between national savings and investment, dried up in May 1998.

The persistence of fiscal (above 7 percent of GDP) and external deficits (4 to 5 percent of GDP) led to the
accumulation of large levels of domestic and external debt throughout the decade. Development expenditures
took a major hit and GDP dropped to 3 percent from 8 percent in the first half of the 1980s. Social sector
expenditures were squeezed to accommodate higher debt service and defense expenditures. Total external debt
levels became unsustainable, rising from $20 billion in 1990 to $43 billion (47.6 percent of GDP) in 1998.
Exports stagnated and Pakistan lost its market share in a buoyant world trade environment. The incidence of
poverty nearly doubled from 18 to 34 percent, and the unemployment rate rose as well. Social indicators lagged
behind other countries in the region. The Human Development Index of the United Nations Development
Program ranked Pakistan in one of its lowest development categories.
At least three main factors determined Pakistan’s economic performance in the 1990s. First, political instability
and frequent changes in the government followed by a reversal of decisions taken by the preceding government
created an environment of uncertainty and a lack of predictability. Personal, narrow-minded and party loyalty
considerations dominated decision making while institutions were bypassed. Second, there was a lack of
political will to make timely and difficult decisions. The cumulative effect of avoiding and postponing such
decisions, coupled with the failure to correct the distortions at the right time, proved too costly. Third, there
were unforeseen exogenous shocks, such as the nuclear testing in May 1998 that shook investors’ confidence,
accelerated the flight of capital, led to the imposition of economic sanctions and disrupted external economic
assistance.
An interesting paradox is that the economic policies of both major political parties, the Pakistan Muslim League
(PML-N) and the Pakistan People’s Party (PPP), who took turns ruling during the 1990s, were similar and could
not be faulted. Both parties were committed to deregulation, privatization, liberalization, greater reliance on
market forces and other economic reforms. The supporters of PML-N and PPP argued that the dismissal of the
Nawaz Sharif government in 1993 and of the Benazir government in 1996 did not allow positive trends to
persist. It can only be speculated whether the economic output for the decade would have been better had these
governments completed their terms in office. Poor governance would have been largely offset by the continuity
in policies, programs and projects. The stop-and-go cycle faced by Pakistani economic actors imposed
enormous costs in terms of macroeconomic instability.
This era marked two 5 yearly plans. The seventh plans provided for total public-sector spending of Rs350
billion. Of this total, 36.5% was designated for energy, 18% for transportation and communications, 9% for
water, 8% for physical infrastructure and housing, 7% for education, 5% for industry and minerals, 4% for
health, and 11% for other sectors. The plan gave much greater emphasis than before to private investment in all
sectors of the economy. Total planned private investment was Rs292 billion, and the private-to- public ratio of
investment was expected to rise from 42:58 in FY 1988 to 48:52 in FY 1993. It was also intended that public-
sector corporations finance most of their own investment program through profits and borrowing.
In August 1991, the government established a working group on private investment for the Eighth Five-Year
Plan (1993–98). This group, which included leading industrialists, presidents of chambers of commerce, and
senior civil servants, submitted its report in late 1992. However, in early 1994, the eighth plan had not yet been
announced, mainly because the successive changes of government in 1993 forced ministers to focus on short-
term issues. Instead, economic policy for FY 1994 was being guided by an annual plan.
From June 2004, the Planning Commission gave a new name to the Five Year Plan - Medium Term
Development Framework (MTDF). Thirty two Working Groups then produced the MTDF 2005-2010.

The Hundreds, 1999 to 2007:

In October 1999, the incoming military government led by Gen. Pervaiz Musharraf was faced with four main
challenges: heavy external and domestic indebtedness; high fiscal deficit and low revenue generation capacity;
rising poverty and unemployment; and a weak balance of payments with stagnant exports.
The country faced a serious external liquidity problem as its reserves were barely sufficient to buy three weeks
of imports and could not possibly service its short-term debt obligations. Remittances decreased by $500
million, foreign investment flows declined by $600 million, official transfers turned negative and Pakistan had
no access to private capital markets. In the domestic sector, the declining tax-to-GDP ratio and inflexible
expenditure structure, whereby 80 percent of revenues were preempted to debt servicing and defense,
constrained the government’s ability to increase the level of public investment.
Structural policy reforms combined with an improvement in economic governance laid the foundations for
accelerated growth from 2002 to 2007. The economic growth rate averaged 7 percent, up from 3.1 percent in
2001 to 2002. Poverty was reduced by between 5 and 10 percentage points, depending upon the methodology
used. The unemployment rate also fell from 8.4 percent to 6.5 percent and approximately 11.8 million new jobs
were created between 1999 and 2008. Gross and net enrollment ratios at the primary school level recorded
upward movement. The re-profiling of the stock of debt brought down the debt-to-GDP ratio from 100 percent
to 55 percent. Foreign exchange reserves increased to cover six months’ imports from a few weeks’ imports.
The fiscal deficit remained below or slightly above 4 percent of GDP. The investment rate grew to 23 percent of
GDP and an estimated $14 billion of foreign private capital inflows financed many sectors of the economy. The
exchange rate remained fairly stable throughout the period.
Since then, the elected government has not pursued the unfinished agenda of reforms with the same vigor and
commitment. Governance issues that characterized the 1990s have begun to rear their ugly heads once more.
The situation worsened after March 2007, when the government became embroiled in a judicial crisis. The
preoccupation with the impending elections resulted in serious lapses in economic management as key
adjustment decisions to escalating international oil and commodity prices were postponed. The assassination of
the most popular leader of the country, Mohtarma Benazir Bhutto, plunged the country into a state of
uncertainty while the transition from the military to the civilian-elected government was not managed properly.
Lack of attention to economic issues by the incoming government further contributed to macroeconomic
instability and created an atmosphere of crisis in the country. The global financial turmoil and the recession in
OECD countries did not help either. So while domestic factors were mainly responsible for Pakistan's economic
crisis, adverse external conditions worsened the problem; the global financial turmoil hampered foreign private
inflows and the recession in OECD countries reduced the demand for Pakistani exports.
Conclusion:
Political Instability and Economic Growth:

Pakistan has seen twenty-three governments in the past sixty years, including: fourteen elected or appointed
prime ministers, five interim governments and thirty-three years of military rule under four different
leaders. Excluding the military and interim governments, the average life span of a politically elected
government has been less than two years. If the five-year period of Bhutto is excluded, then the average span
falls to 1.6 years.
The economic policy regime, on the other hand, has only changed twice in all of Pakistan’s history. The liberal
private sector-led growth model that was put in place in the 1950s and accelerated in the 1960s was rolled back
by Bhutto in the 1970s and became the socialist economic model. Since the rejection of this model in 1977 and
the revival of the liberal model, the general thrust of economic policy has remained unaltered.

Dictatorship vs. Democratic Regimes:

In Pakistan, the debate over whether authoritarian or democratic regimes have delivered better results in terms
of economic performance has been quite fierce since General Khan took power in 1958. The spurts in economic
growth during the 1960s, 1980s and 2000s, when the country was governed by military dictators, have led many
to conclude that authoritarian regimes are better suited to bring about economic development. Parallels are
drawn with China, Indonesia, Korea and Singapore.

Detractors of the authoritarian regimes, however, have skillfully torn apart the economic performance record of
the Ayub, Zia and Musharraf periods. Since the legitimacy and perpetuation of these regimes were justified on
the basis of good economic outcomes, those opposed to these regimes have assailed the very economic record
that has been espoused as their achievement. Such detractors lay out three arguments.
First, they argue that the United States had always been more favorably disposed toward Pakistan’s military
dictators, as they are relatively more obsequious and subservient to the American interests. Thus, it is the
acceleration of inflows of foreign assistance to Pakistan that led to the observed higher growth rates rather than
sound economic policies, better governance and the efficient utilization of resources. Although empirical
evidence to substantiate this argument hardly exists, it has become popular folklore: Ayub was rewarded for his
close economic and military ties with the United States in confronting the Soviet Union; Zia ul-Haq received a
boost as $5 billion was channeled through Pakistan for Afghanistan’s mujahideen; and Musharraf’s decision to
openly support the United States in the war on terror brought in approximately $10 billion of military
assistance.
Second, the solid record of high growth rates under military regimes is believed to result invariably in adverse
distributional consequences. The Ayub period is blamed for the widening regional disparities that led to the
secession of East Pakistan. Zia ul-Haq’s policies were criticized for their failure to deal with structural
weaknesses or reverse the damage done by the policies of nationalization. The long period of political stability
and sustained growth under Zia ul-Haq offered major opportunities for dealing with the underlying structural
issues but these were not exploited.” Musharraf’s economic strategy, which made Pakistan one of the fastest
growing Asian economies, was also dismissed on the same grounds: that consumer-led, credit-induced, service-
focused growth neglected agriculture and the manufacturing sectors, making the rich richer and the poor
poorer. While the World Bank and Asian Development Bank publicly acknowledged a significant decline in the
incidence of poverty and International Labor Organization (ILO) experts validated the fall in the unemployment
rate, the authenticity of the poverty and unemployment data has been challenged. It became the norm to practice
selective acceptance of government-produced data showing negative trends and outright rejection of the data
from the same source showing positive trends.

The third line of argument is quite persuasive. Economic accomplishments devoid of political legitimacy,
however impressive they may be, prove to be short lived. Without the involvement and participation of the
people, elegant and technically sound economic solutions developed by authoritarian regimes are quickly
replaced once the regime changes, causing irreparable losses to the economy. The recent example whereby
good initiatives taken by the Musharraf regime were either suspended deprived of funds or abolishedcompletely
attests to this phenomenon. Some of these initiatives, such as revitalizing higher education and expanding adult
literacy and health programs have been brought to a grinding halt. The Devolution Plan of 2001, which
decentralized the delivery of basic services to local levels, is at serious risk of abandonment.

The phenomenon of abandoning the previous government’s plans and policies is not confined to the military-
civil transitions but also from one elected civilian government to the other. Benazir Bhutto rightly embarked
upon public-private partnerships by inviting independent power producers (IPPs) from the private sector to set
up electricity generation plants to overcome power shortages. The IPPs were put on hold by the new
government, which alleged that corruption was involved in the awarding of contracts. In another example, the
incoming Bhutto government suspended the motorway project initiated by the Nawaz Sharif government. By
the time the project had resumed, time delays, cost over-runs, contract cancellations and legal entanglement had
reduced the efficacy of the project.

Both the civilian-elected and military regimes have demonstrated the same characteristics and weaknesses—
personality cult leadership, centralized decision-making, repression of opponents and cronyism. When one goes
beyond labels and examines the actual behavior of military and civilian regimes, most distinctions appear
superficial.

Pakistan has over the last sixty years been an authoritarian polity both under the civilian as well as military
regimes. ‘Authoritarianism’ involves great relevance and obedience to authority and stands opposite to
individualism and freedom that come with it. Both the civilian leaders coming from an agrarian and feudal
social background and military leaders from the Command and Control structure of the armed forces have
demanded absolute loyalty and compliance with their institutions of origin.