Pakistan—Economic System | Research & Encyclopedia Articles

In August 1947, the partition of British India into the nations of India and Pakistan produced economic as well as political divisions. Britain had administered its Indian empire as a single economic unit. The partition not only caused population dislocations but also dissolved the integrated economy, and the greatest costs of this economic dislocation fell on Pakistan.

At independence Pakistan's basic physical infrastructure was extremely limited. It had only one seaport, Karachi. In Pakistan's eastern province, East Bengal, there were no port facilities. During the British period East Bengal's exports and imports had movedthrough the Indian port of Calcutta. Rail transport was almost nonexistent in East Pakistan and in the western provinces, and the railways ran from the interior to Karachi but not between the provinces. The world's largest irrigation system, developed by the British, was bifurcated due to the division of Punjab Province between India (which received the eastern portion) and Pakistan (which received the western portion).

Pakistan's private sector consisted of a small-scale trading class. Government services were also limited because few senior civil servants had opted for Pakistan. In short, Pakistan "was not only politically, socially, and administratively backward compared to the rest of India but was, economically, also the poorest part of the British Indian Empire" (Burki 1999: 95). The economy of the new nation was rural, with three-fourths of its gross domestic product (GDP) contributed by the agricultural sector. By 1949–1950 agriculture accounted for 53 percent of the GDP, while the services sector accounted for 39 percent. Industry was a low 8 percent of GDP.

Pakistan's economic development began with government efforts to deal with refugee resettlement. The partition of British India had caused massive population movements, with Hindus and Sikhs leaving the western provinces of Pakistan to move to India and Muslims leaving India to settle in the provinces of Punjab and Sindh (in particular, Karachi) in Pakistan. The transfer of people numbered in the millions. Refugee relief became the first economic development problem confronting the government. Large-scale famine was avoided, and people were resettled.

Without a sizable business community, Pakistan filled the economic void through five-year planning and development of a public-enterprise sector. The first five-year plan, 1955–1960, did not meet its ambitious targets. The GNP growth rate for the decade of the 1950s was about 2.7 percent, while the population growth rate for the same period was approximately 1.8 percent.

The decade of the 1960s saw an improved GNP growth rate of about 6.8 percent, with a population growth rate of 2.8 percent. The government of Pakistan, headed by President Muhammed Ayub Khan, proclaimed the 1960s as the decade of development, and Pakistan was viewed by many as an economic model for other economically less developed countries to follow. The 1960s saw public enterprises playing an even larger role in the economy than in the 1950s.

Ayub's government also encouraged the growth of the private sector through incentives to family-controlled Pakistani businesses. In 1968, however, this strategy was criticized as promoting income inequalities, and Ayub's patronage of the so-called Twenty-Two Families (families engaged in business or industry, who had prospered from government concessions) was charged with creating and not alleviating poverty in the country.

With the transfer of power from military leadership to Zulfikar Ali Bhutto in December 1971, Pakistan's economic development switched gears. One target of Bhutto's wrath was the industrial families who had benefited from the Ayub regime and who were thus, by Bhutto's reasoning, enemies of his government. Beginning on 2 January 1972, just thirteen days after he became president, Bhutto nationalized thirty-one banks and large-scale industrial enterprises, and on 19 March 1972, he nationalized life insurance companies.

In engaging in this nationalization program, Bhutto discouraged domestic investment and increased the government's role in the economy. Each private unit nationalized became a public enterprise. By 1977 the government controlled all domestic banking (90 percent of the finance sector), 90 percent of the energy sector (electricity, gas, and oil), 11 percent of the industrial and manufacturing sector, 50 percent of the transportation and communications sector (with monopolies in air, rail, and shipping as well as telecommunications), and 70 percent of the mining sector.

An economic event that began in the 1970s had a positive impact on Pakistan's economy: the migration of Pakistani workers from the Middle East and South Asia to the oil-rich countries of the Gulf region. Over the next several decades, millions of Pakistanis worked in the Gulf states and sent home remittances. Worker remittances formed the single largest source of foreign exchange in Pakistan for several years. However, the decade of the 1970s witnessed a slowdown in economic growth (4.6 percent) and an increase in population growth rate (3.5 percent).

By the early 1980s individual countries and the international assistance community (the World Bank and the International Monetary Fund, in particular) had become disenchanted with government involvement in the economy and with public enterprises. The assistance agencies began to pressure nations such as Pakistan to disinvest and privatize their public-enterprise sectors. Pakistan initially resisted pressures to privatize. Because Pakistan was playing a central role as a conduit of arms and supplies to resistance groups fighting Russian troops in Afghanistan, Pakistan government officials thought Pakistan might be immune to such pressure.

Because Pakistan was a frontline state in the Afghanistan conflict, countries providing foreign assistance did not pressure Pakistan to make economic reforms to liberalize the economy, for fear that Pakistan would no longer support the resistance movements. Foreign aid continued to flow into Pakistan during the 1980s, helping to substitute for Pakistan's inability to tax its own citizens to further its economic development. The government of Pakistan could not tax its own citizens because of political pressure from elite groups, such as large landowners, whose income from agriculture was exempt from taxation.

As a result of massive amounts of foreign assistance and remittances from its overseas workers, the GNP in the 1980s grew at more than 6.0 percent, while population growth continued around 3.0 percent per annum. This rate of economic growth did not continue in the 1990s. On 1 October 1990, President George Bush suspended economic and military aid to Pakistan, based on new information concerning Pakistan's nuclear program, thus making Pakistan the first victim of the so-called Pressler Amendment to the U.S. Foreign Assistance Act. The Pressler Amendment prohibited the United States from providing economic and technical assistance to nations that were developing nuclear weapons capabilities. By this time, Pakistan was no longer a frontline state because the Soviet Union had withdrawn its troops from Afghanistan. Pakistan lost more than $500 million in capital flow from the United States in 1990–1991.

During the 1990s, Pakistan's economy grew on average around 3 percent per annum. Domestic savings and investment declined. The most recent data show that exports dropped by 10 percent, the national debt rose to $70 billion, which is equivalent to Pakistan's annual GDP, and its foreign exchange reserves could cover only about six weeks of imports.

Over the past five decades Pakistan's economy has moved away from agriculture to services and industry. Today the service sector accounts for 50 percent of GDP, while agriculture (at 26 percent) and industry (at 24 percent) follow. Although some attempts were made in the 1990s to liberalize the economy through limited government disinvestment and privatization, the government is still the main economic policymaker and manager of the economy.

Agenda items for economic reform in Pakistan might include maximizing domestic savings and aligning foreign inflows (foreign assistance and remittances, for example) with productive investment requirements to promote economic growth and poverty reduction. As a result of Pakistan's help in U.S. efforts to dismantle the terrorist network of Osama bin Laden by destroying the Taliban's control of Afghanistan, the economic sanctions imposed by the United States on Pakistan after Pakistan detonated its nuclear device were lifted in 2001. In addition, Pakistan will again receive U.S. economic and technical assistance. Such external assistance will have a positive impact on the economy.

Birkhead, Guthrie S., ed. (1966) Administrative Problems in Pakistan. Syracuse, NY: Syracuse University Press.

Burki, Shahid Javed. (1999) Pakistan: Fifty Years of Nationhood. 3d ed. Boulder, CO: Westview Press.

Burki, Shahid Javed, and Robert LaPorte, Jr., eds. (1984) Pakistan's Development Priorities: Choices for the Future. Karachi, Pakistan: Oxford University Press.

Husain, Ishrat. (1999) Pakistan: The Economy of an Elitist State. Karachi, Pakistan: Oxford University Press.

"Pakistan: Cooking the Books." (2000) The Economist (8 April): 40–41.

Papanek, Gustav F. (1967) Pakistan's Development: Social Goals and Private Incentives. Cambridge, MA: Harvard University Press.

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