Economic Progress of Pakistan: 1947-2018

By Sajjad Shaukat

When Pakistan emerged as the independent state on August 14, 1947, the country inherited 20 percent of the subcontinent’s population. Pakistan’s share in industry was less than seven percent, mostly consisting of small-scale and minor industrial units.

Pakistan had no large industry. Pakistan that included East Pakistan (now Bangladesh) as well had only 34 factories. The total employment provided by these factories was around 26,400. The East Pakistan produced 70 percent of the world’s jute. But, there was not a single jute mill and India’s West Bengal was almost the sole buyer. The newly-emerged state of Pakistan did not even have its own bank sand depended on the reserve bank of India. Similarly in 1947, Pakistan did not have a single ordnance factory.

Therefore, rapid industrialization of the country was a great challenge for Pakistan. With the services of the patriot economic experts, engineers and capitalists, the country achieved high growth rates in manufacturing in Pakistan for 1950-55.

In this respect, in their research-based paper, Iqbal Anjum and Rasquale Michael Sgro write: “At its inception in 1947, Pakistan had a predominantly agrarian economy–agriculture contributed 53% of GDP in 1947, and 53.2% of GDP in 1949-50. Then, Pakistan had a population of 30 million with 6 million people living in urban areas, 65% of the labour force working in the agricultural sector, and agricultural output contributing 99.2% of exports and about 90% of Pakistan’s foreign exchange earnings. Pakistan’s resources, in East Pakistan and West Pakistan, were an immense reservoir of land and mineral resources…Pakistan had a per capita income of almost $360 (1985 international dollars) in 1950 and a literacy rate of 10%, 5 amidst economic crises–absence of economic infrastructure, financial resources, and industrial base. Then, poverty incidence ranged from at least 55% to 60% in the West Pakistan…In 1949-50, Pakistan registered a national savings rate of 2%, foreign savings rate of 2%, and an investment rate of 4%. Then, manufacturing contributed 7.8% of GDP and the services/trade/other sectors contributed 39% of GDP…The 1950s was the first decade of planning. After launching the Colombo Plan in 1951, Pakistan instituted a series of Five-Year Plans during the period 1955-1998 and a Ten-Year Perspective Plan alongside a rolling Three-Year Development Plan…During the Korean War (1950-1953), Pakistan’s public and nascent private sector thrived on spectacular merchant profits, which were transformed into industrial capital that accelerated industrialization. Pakistan banned the imports of cotton textiles and luxury goods in 1952 and regulated virtually all imports in 1953. Consequently, Pakistan joined the group of the most rapidly growing countries in the 1950s. After achieving self-sufficiency in cotton textiles in the late 1950s, export development assumed vital significance…Agriculture grew at a rate of 1.6% per annum and manufacturing grew at a rate of 7.7% per annum in the 1950s…era of economic growth…political stability enabled Pakistan to sustain high rates of growth in the 1960s…Pakistan achieved an agricultural growth rate of 5% per annum by achieving…significant investments in water resources, increased incentives for farmers, mechanization of agricultural production processes, increased usage of fertilizers and pesticides, and the increased cultivation of high yielding varieties of rice and wheat. The large-scale manufacturing grew at a rate of 16% per annum during 1960/61-1964/65 due to protection of domestic industry from imports and subsidies for exporters. In the wake of the Pakistan India War of 1965, the reduced foreign economic assistance caused the large-scale manufacturing to grow at a lower rate of 10% per annum during 1965-70. Pakistan achieved an average annual growth rate of 6.7% in GDP during 1960-1970. In 1969-70, poverty incidence declined to 46%32…The 1970s: era of socialism and its aftermath because of growing interregional economic disparity, East Pakistan revolted against West Pakistan and became independent (Bangladesh) in 1971. Then…empowered…Pakistan People’s Party amidst very difficult macroeconomic circumstances−poverty incidence rose to 55% in 1971-72, there was an increase in Pakistan’s import bill due to the October 1973 world oil price shock, a serious post-1973 global recession during 1974-77, failures of cotton crops in 1974-75, pest attacks on crops, and massive floods in 1973, 1974, and 1976-77. Pakistan experienced the worst inflation during 1972-77, when prices increased by 15% per annum. During 1973-77, annual average fiscal deficit/GDP ratio was 8.1%. Trade balance deficits were US$337 million in 1970-71 and US$1,184 million in 1976-77. A military coup d’état occurred on 5 July 1977, and the martial law regime accomplished denationalization, deregulation, and privatization. Agriculture grew at a rate of 2.4% per annum and the large-scale manufacturing grew at a rate of 5.5% per annum in the 1970s. While the large and medium-scale private manufacturing contributed 75% of the value-added and 70-80% of the total investment in manufacturing in the 1970s, the remainder of the 25% of the value-added was contributed by the small-scale manufacturing.”

They further write: “The 1980s: era of revival of economic growth Hallmarks of the 1980s were the reversal of the nationalization regime of the 1970s and the revival of private sector’s industrial investment, which led to high rates of growth. Poverty incidence declined to 29.1% in 1986-87. Unemployment rate declined from 3.7% in 1980 to 2.6% in 1990. During 1985-88, the Government tried to implement the Islamic interest-free banking system, which introduced Islamic business partnerships between entrepreneur and the owner of capital based on the principle of sharing profits and losses. Pakistan achieved a national savings/GDP ratio of 16% in 1986-87 amidst massive inflows of worker remittances from the Middle East. During 1980-1990, Pakistan’s average annual growth rate of GDP was 6.3%. A manufacturing exports’ boom occurred in the 1980s, with an annual large scale manufacturing growth rate of 8.8% and an annual agricultural growth rate of 5.4%. The 1990s: era of debt crisis In the 1990s…During 1980-1995, the external debt/GDP ratio increased from 42% to 50%…exports ratio increased from 209% to 258%…Similarly, the public debt/revenues ratio rose to 624% in 1998-99, interest payments/revenues ratio rose to 42.6%…Likelihood of external debt default emerged in 1996, and 1998, due to the Western economic sanctions imposed in reaction to Pakistan’s nuclear tests on 28 May 1998. Sanctions triggered massive capital flight…In March 2010…Pakistan experienced remarkable development-oriented structural transition…GDP share of the services rose from 37.2% in 1950 to 53.4 % in 2010….The history of Pakistan’s economic development highlighted the key role played by the manufacturing sector. Pakistan progressed from its status as a low-income to a lower middle income country and achieved her objective of poverty reduction.”

In this regard, Riaz Haq elaborates: “Pakistani economy grew at a fairly impressive rate of 6 percent per year through the first four decades of the nation’s existence. 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. After a relatively peaceful but economically stagnant decade of the 1990s, the year 1999 brought a bloodless coup led by General Pervez Musharraff, ushering in an era of accelerated economic growth that led to more than doubling of the national GDP, and dramatic expansion in Pakistan’s urban middle class. Pakistan became one of the four fastest growing economies in the Asian region during 2000-07 with its growth averaging 7.0 per cent per year for most of this period. As a result of strong economic growth, Pakistan succeeded in reducing poverty by one-half, creating almost 13 million jobs, halving the country’s debt burden, raising foreign exchange reserves to a comfortable position and propping the country’s exchange rate, restoring investors’ confidence and most importantly, taking Pakistan out of the IMF Program…the volume of international trade increased from $20 billion to nearly $60 billion. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government’s social policies contributed to a reduction in poverty and improvement in many social indicators.”

He adds, “The decade also cast a huge shadow of the US war on terror on Pakistan, eventually turning the nation into a frontline state in the increasingly deadly conflict that shows no signs of abating. Along with the blood and gore and chaos on the streets, there are hopeful signs that rule of law and accountability is beginning to prevail in the country with the restoration of representative democracy and independent judiciary, largely in response to an increasingly assertive urban middle class, vibrant mass media and growing civil society…Pakistani economy has done well under military governments and performed poorly when led by politicians”.

It is notable that a report of the World Bank said on April 17, 2018: Pakistan’s growth continues to accelerate…Pakistan’s GDP growth increased by 0.8 percentage points over the previous year to reach 5.3 percent in FY17. Major impetus came from improved performance of services and agriculture sector. Industrial sector also saw some recovery. Low interest rate environment contributed to the growth in private sector credit, which supported businesses. On the demand side, consumption made up almost 92 percent of GDP, and contributed nearly eight percentage points towards GDP growth at market prices. Average headline inflation for Jul-Feb FY18 remained 3.8 percent compared to 3.9 percent in Jul-Feb FY17…Exports, after contracting for three consecutive fiscal years, have started to recover in FY18…The projected poverty rate continued to decline…The tax-to-GDP ratio, at 12.4 percent, is one of the lowest in the world…Continued reforms to broaden the tax base and increase revenues will therefore need to remain a priority. Service delivery is the responsibility of sub-national governments, whose capacity varies, but the federal Government needs to play an assertive stewardship role as increased financing has to be accompanied by meaningful improvements in quality of services. A strategy to greatly improve development outcomes would therefore need to combine efforts to increase the level of public spending as well as improving its quality, with a focus on provincial level capacity…In addition, a greater share of revenues has been passed to the provinces through the National Finance Commission Award (NFC) in order to enable them to perform these functions”.
However, the Independence Day is a reminder of pessimistic economic picture of Pakistan—the country made its mark among the comity of nations by building from ashes through dedication and hard work. Present economic conditions in Pakistan are much better than those of 1947.

Now, Pakistan has a creditable ordnance factory, vibrant steel, plastic and auto-industries. The country is producing tractors, cars and motorcycles, having a world class textile industry—producing fertilisers, chemicals, sugar, and cement. If the economy is still in disorder, it is owing to the corrupt politicians and bureaucrats who have parked cumulative assets of around $300 billion outside the country, which is equivalent to the total size of Pakistan’s economy.

As regards the potential of this country, a leading newspaper reported: “Pakistan is the 9th largest producer of wheat in the world, fourth largest producer of milk, 12th largest producer of rice and is among top six exporters of the commodity. It is the 4th largest cotton producer and 3rd largest cotton consumer in the world. It has the largest integrated canal irrigation system around the globe. It has the largest rock salt deposits in the world, its coal reserves are the fourth largest on this globe, and it is the most efficient producer of cement in the world. All that is needed is will on the part of those in the power corridors to bring things on track.”

Nevertheless, Pakistanis should not lose heart, as they can regain the growth momentum, if they work with the same national spirit which was displayed by them in 1947—the country passed through a long way from almost zero industrial bases in 1947 to a creditable manufacturing centre more on the strength of its huge economic potential and progress in various fields.

Nonetheless, credit must also be given to the planners of that time for facilitating industrial growth with scarce resources. Hence, while adopting modern technologies, the policy makers, economists and industrialists should also follow the strategy of the initial years of 1947, pursued by planners of the country.