Themes > Current Issues
19.04.2004
Pleasure and Pain in Pakistan
Jayati
Ghosh
According
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 surpluses.
The 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 1960-99.
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 generation.
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 felt.
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 recovery.
So maybe, after all, cricket will still be a more reliable source of pleasure for the average Pakistan than the economy.
The 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 1960-99.
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 generation.
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 felt.
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 recovery.
So maybe, after all, cricket will still be a more reliable source of pleasure for the average Pakistan than the economy.
© MACROSCAN 2004