Economic Challenges in Pakistan

Past paper questions:

(Pakistan Affair)

1. Discuss corruption as number one problem in Pakistan. What practicable and

feasible steps should be taken to eradicate this menace? (2000)
2. Write a note on unemployment in Pakistan. (2000)
3. What are the problems of industrialisation in Pakistan? How they can be solved?
(2002)
4. Write a short note: Pakistan is a rich country, where poor people live. (2003)
5. Account for the initial concentration of agro based industry in the manufacturing
belt of Pakistan. (2005)
6. What are the principal industries of Pakistan and what problems govt of Pakistan is
facing for its industrial development? (2008)
7. Inspite of strong research-base, rich lands, reasonable water-resources and various
land-reforms, why agriculture sector remained less developed in Pakistan? (2009)
8. Pakistan’s industry is providing jobs to various categories of workers and is earning
foreign exchange for the country. Comment. (2010)
9. “Pakistan can become one of the richest countries of the world, if we make the best
use of our natural resources”. Elaborate in the light of present situation of the
country. (2014), (2019)

(Current Affairs)

10. Write a note on IMF’s objective in funding Pakistan. (2000)

11. Evaluate the structural changes introduced in Pakistan’s economy over the period of
last two years? (2001)
12. Write a note on human development . (2007)
13. Write a note on free market economy and economic meltdown. (2009)
14. Potential and challenges for Pakistan in WTO regime. (2008)
15. The issue of central importance about corruption and accountability in Pakistan is
the increase in corruption despite six decades of efforts to eradicate it. Analyse and
comment on the root cause of rampant corruption. (2010).
16. How Pakistan can reduce foreign debt? Suggest mechanism in Pakistan economy to
handle external perspective of Pakistan economy. (2011)
17. How can the corruption be managed in Pakistan? (2012)
18. How can the corruption elimination be made part of the government systems of
Pakistan? (2014)
19. What measures would you suggest to improve the economy of Pakistan particularly
in the areas of debt reduction and enhancing export capacity. (2016)
20. How can the corruption elimination strategy be made part of governance system?
(2019)
21. Questions about population are also repeated many times.
Important Domains:

Economic characteristics of Pakistan

 Poverty
 Population explosion
 Unemployment
 Stagnant economic growth
 Dependence on aid and loans
 Agriculture based industry
 Lack of industry
 Corruption
 Mismanagement of resources
 Trade imbalances
 Trade restrictions
 CPEC
 Digitalisation

Important References and Quotations:

 Henry Chu wrote in the Los Angeles Times in August 2011, “Globalization
means that people and economies are connected more than ever, but it
doesn't necessarily mean that everyone swims or sinks together”
 On average, each citizen in western Europe, the United States and Japan
consumers 32 times more resources such as fossil fuels than people in the
developing world.
 Economic problems in the developing world include corruption, poor
infrastructure, lack of skilled labour, political instability, weak protection of
intellectual rights, and the possibility of contacts being cancelled on a whim.
 In his book The Fortune at the Bottom of the Pyramid , C. K. Prahalad says
that the poorest two thirds of the world's population have $5 trillion in
purchasing power.
 To rule a country of a thousand chariots, there must be reverent attention to
business, and sincerity; economy in expenditure, and love for men; and the
employment of the people at the proper seasons. (Confucius)
 “Extreme poverty anywhere is a threat to human security everywhere.”  —
Kofi Annan, Seventh Secretary-General of the United Nations
 “Poverty is the parent of revolution and crime.”  — Aristotle, Greek
philosopher
 “Poverty is the worst form of violence.”  — Mahatma Gandhi, Indian political
and spiritual leader
 “Poverty is like punishment for a crime you didn't commit.”  — Eli Khamarov,
writer
 “In a country well governed, poverty is something to be ashamed of. In a
country badly governed, wealth is something to be ashamed of.”  —
Confucius, Chinese teacher and philosopher
  “An imbalance between rich and poor is the oldest and most fatal ailment of
all republics.”  — Plutarch, Greek historian
 Of all aspects of social misery nothing is so heart breaking as unemployment.
(Jane Addams)

Important Readings :
Why Pakistan cannot perform well in economic terms. ( a general over-view)
 Sachs wrote: “The failure of the Third World(Pakistan comes in this category) to
grow as rapidly as the First World is the result of a complex mix of factors, some
geographical, some historical and some political. Imperial rule...left the conquered
regions bereft of education, health care indigenous political leadership and adequate
physical infrastructure."
 “Often, newly independent countries in the post-World War II period made
disastrous political choices such as socialist economic models or a drive for self-
sufficiency behind inefficient trade barriers. But perhaps most pertinent today, many
regions that have been left further behind have faced special obstacles and
hardships: diseases such as malaria, drought-prone climates in locations not suitable
for irrigation, extreme isolation in mountains and landlocked regions, an absence of
energy resources such as coal, gas and oil and other liabilities that have kept these
areas outside the mainstream of global economic growth."
 The economies grew slowly after World War II.. There was little foreign investment.
The gap between the rich and poor grew. There were large numbers of unemployed
and under employed. In the countryside, peasants remained under the control of
landowners.
 With independence, governments controlled much of the revenues sources such as
oil and local merchants obtained a larger percentage of the import-export trade.
Large land owners were able to continue controlling much of the land. and were able
to make handsome profits selling raw materials to Western countries.
 In the 1960s and 70s, developing countries promoted self-reliance and regarded
foreign investment as a form of imperialism and multinational corporations and as
agents of evil.
 The boom in the 1990s left many developing nations, about 25 of them in Africa,
worse off. Foreign aid declined, debts increased, AIDS-HIV rates soared and the
prices of important commodities dropped.
 Developing countries suffered greatly as a result of economic crisis in 2008 and 2009
even though they had nothing to do with starting it. They suffered as demand for
their exports dried up, investors didn't want to invest, loan money dried up, and
developing countries were more reluctant to provide aid.
How to attract foreign investment: 
 Foreign investors seek out countries with cheap labour, good basic infrastructure
such as roads and airports, reliable sources of electricity and energy, trainable
workforce and stable political conditions. The companies they invest in learn to
 operate under conditions with currency swings, buying local materials when the
currency is weak, then stockpiling them to use when the currency recovers.
 Foreign investors in developing countries have helped contribute to a rising standard
of living for some even though their primary goal is to make profits not to improve
the living standards of their workers. As workers skills improve, their wages rise and
they begin to buy consumer goods for themselves. A middle class is generated.
 

Pros and cons Foreign Companies in the Developing World(Pakistan):

Nike, MTV, Disney and McDonald’s, are as well-known in the developing world as they are in
the developed world. Shops in remote villages that often don't have milk, cheese, or butter
always seem to have plenty of Coca-Cola, Pepsi and Orange Crush plus calendars and
posters produced by these companies. Coke or Pepsi truck are sometimes among the few
vehicles you see on the roads in remote areas. In some mountainous areas you see people
carry basketfuls of Coke and Pepsi bottles on their backs on footpaths and trails.
 McDonald’s, Kentucky Fried Chicken and Pizza Hut are franchises that are locally owned.
Coke, Fanta and Pepsi are made by local bottlers. They provide badly needed jobs for the
people and taxes for the government.
 Unilever has been very successful marketing products like shampoo in small packets in the
developing world. Nestle sells instant milk and baby formula.
 General Electric is aiming to become a one-stop general store for developing world
infrastructure, offering a wide range of things including jet engines, health care equipment,
turbines, rail products, water oil and gas equipment, and even financial services. G.E. is
taking this route in part because it sees more growth potential in the developing world than
it does in the developed world and aims to create good relations with the countries it does
business with by employing local people by doing things like shipping parts for locomotives
and having them assembled locally.
 Shoe manufacturers and textiles makers that rely on cheap labour are among the first
industries to arrive. They mainly produce goods to be exported back to the country where
the company is from or for the world market. These companies raise wages and living
standards. While they have been accused of exploiting labour and damaging the
environment in the United States and Europe they are welcome in emerging economies as
engines for growth.
A study of Oxfam found that multinational retailers and grocery chains in their quest for
ever lower prices for customers are driving down wages and lengthening work hours for
millions of workers, the vast majority of them women.
 

Pakistan Economic Woes and Way Forward:

Pakistan’s economic woes – dwindling foreign exchange reserves, low exports, high
inflation, growing fiscal deficit, and current account deficit – are nothing new, and once
again, the country finds itself knocking on the doors of the International Monetary Fund
(IMF) for what will be its 22nd loan. While the exact amount of this package has not been
determined, Pakistan already owes the IMF billions from previous programs. Indeed, 30.7
percent of Pakistan’s government expenditure is earmarked for debt servicing, which cannot
be supported by its decreasing revenues. Already on the Financial Action Task Force’s (FATF)
grey list, and with the current Pakistan Tehreek-e-Insaaf (PTI) government enjoying internal
institutional consensus on the national agenda, Pakistan must focus its attention on
resolving its economic woes before it finds itself on the shores of bankruptcy.

Current State of the Economy

In 2019, Pakistan finds itself facing a dire macroeconomic crisis. It is spending more on
imports than it receives on exports, with its current account deficit having risen from $2.7
billion in 2015 to $18.2 billion in 2018. The major driver of this rising current account deficit
is an expanding trade deficit, which is mostly due to the rising imports under new China-
Pakistan Economic Corridor (CPEC) projects and low exports in general. The previous
government focused more on import-led growth strategy to finance large scale projects
under CPEC. By the end of June 2018, the gross public debt of Pakistan reached USD $179.8
billion, showing an increase of $25.2 billion within a year. More than half of this increase in
gross public debt was due to an increase in public external debt, which grew by 30.1
percent. In 2018, the depreciation of the Pakistani rupee against the U.S. dollar alone was
responsible for an excessive USD $7.9 billion increase in public external debt.

Despite the massive depreciation in the rupee, Pakistani exports have remained almost the
same. Meanwhile, the government’s external debt has also increased from $64.1 billion in
June 2018 to $65.8 billion in January 2019. The inflation rate is now touching 9.4 percent,
which is a record level high over the last five years mostly due to rupee depreciation and
rising energy prices. In addition, increased defense spending and its ongoing fight against
extremism only further burden the economy. Along with a depreciating rupee that has
made imports costlier, low foreign investment due to Pakistan’s security and political
challenges has also severely hit its foreign exchange reserves.

Despite rising deficits, Pakistan’s tax revenue was only 13 percent of its GDP in 2018. During
the current fiscal year, the country has seen a decline in its revenues while expenditures
have increased, resulting in a half-year fiscal deficit of 2.7 percent of GDP, the highest since
2010-11. According to the State Bank of Pakistan, the sharp decline in revenue can be
attributed to a fall in development spending, reductions in income and corporate taxes, and
taxes on petroleum products, as announced by the previous Pakistan Muslim League-Nawaz
(PML-N) government.

Similarly, the previous government failed to make any significant progress in enhancing
exports: in fact, Pakistan’s total exports fell in real terms during the PML-N’s tenure. In its
recent report “Pakistan @100: Shaping the Future,” the World Bank held weak governance
responsible for the fiscal deficit. Pakistan’s poorly regulated financial system facilitates tax
evasion, which contributes significantly to the growth of the fiscal deficit. Having inherited
this economic crisis from the previous government, the PTI government, led by Prime
Minister Imran Khan, has an enormous task ahead: steer Pakistan’s struggling economy out
of a macroeconomic crisis by fostering economic development.

With its domestic industry in ruins, Pakistan has not been able to rely on consistent foreign
investment for more than stopgap measures. It did recently receive $2 billion from the
United Arab Emirates (UAE) through the Abu Dhabi Fund for Development (ADFD), which
provides concessionary development loans. This inflow has increased Pakistan’s foreign
reserves from $14.956 billion at the start of March 2019 to $17.398 billion. In February, the
Crown Prince of Saudi Arabia, Mohammad bin Salman, signed seven Memorandums of
Understanding (MoUs) with Pakistan, pledging up to $21 billion worth of investment over
the next six years. However, relying only on foreign aid and friendly countries for loans is
not enough. If Pakistan is to tackle its current account deficit in the long run, the
government must take substantial steps to improve the macroeconomic conditions of the
country and modernize its industrial sector to become more competitive in international
markets.

The Way Forward: Steps for the Pakistan Government

To make a significant impact on the current account deficit, Pakistan needs to ensure an
investment-friendly environment that attracts more foreign direct investment (FDI), instead
of relying so heavily on foreign aid. According to the World Bank’s Ease of Doing Business
report, Pakistan ranks 136th out of 190 economies. To improve this ranking and draw more
investment, Pakistan should ease customs laws and regulations, improve the security of the
country, and rebrand and boost its international image as a desirable destination for
tourism and industry alike – a goal the current government is set to pursue as it eases its
visa policies, including its introduction of e-visas. It should also encourage domestic
investment through more flexible tax policies, particularly targeting small and medium-sized
enterprises (SMEs). Such measures would reposition Pakistan on the international stage as
stable, competitive ground for foreign investment.

Pakistan also needs to focus on building its domestic industry to expand its export portfolio
and enhance its competitiveness in the international markets. In 2018, Pakistan ranked
107th out of 140 on the Global Competitiveness Index (GCI), which measures the
performance of countries in indicators such as infrastructure, ICT adoption, macroeconomic
stability, labour market, skills, financial stability, innovation capacity, etc. The low ranking
signifies that the Pakistani government needs to take measures to stimulate economic
growth and provide favourable business environment. The country’s ongoing energy crisis,
which has caused significant losses in industry, has led factory owners to increasingly
relocate to countries such as Bangladesh. Moreover, since its exports currently lose out to
low-priced, good-quality products from countries like China and Bangladesh, Pakistan needs
to modernize its industrial sector by establishing new plants and equipment to enhance
global integration. It can do this by investing in research and development (R&D) to
encourage product innovation and enhance labour productivity.

On top of these issues is the larger question of Pakistan’s failure to expand its export
portfolio beyond a few low value-added products, such as textiles, rice, surgical goods,
carpets, sports goods, and leather items, which is one of the largest factors behind its
balance of payments deficit. Broadening the country’s export portfolio and exploring new
export destinations such as Eastern European and Central Asian countries could revitalize
foreign exchange earnings. As a security-oriented state, Pakistan’s priority has never been
the economy, but it now needs to focus more on geo-economics over geostrategy.
Currently, Pakistan is not taxing its agriculture sector and large businesses are often
given big tax breaks. Hence, Pakistan needs to broaden its tax base – by taxing the
agricultural produce of landlords with big land holdings and stop giving tax amnesties to big
businesses – instead of overburdening current taxpayers, improve fiscal transparency, and
strengthen tax collection coordination at the national and provincial levels to ensure that
revenue targets are met. These steps would go a long way to addressing the myriad financial
and deficit issues stemming from the country’s weak governance.

Conclusion

The coming months are going to be tough for the current government as the rupee is
expected to depreciate further, causing inflation to rise. Pakistan’s economic crisis cannot
be resolved overnight. Support from the IMF and friendly countries like Saudi Arabia, China,
and the UAE will only provide some breathing room in the short term to its shattered
economy. Promoting manufacturing by creating a more investment-friendly environment,
broadening its tax base, and encouraging innovation and modernization in export-led
industries are just some of the most urgent measures the government can take to address
the growing fiscal and current account deficit.  Pakistan must take advantage of this
moment of hard-won reprieve by building a truly stable and sustainable economy before it
once again finds itself digging its own economic grave.

Reasons of poor economic performance of Pakistan:

1. We Consume More and Save Less. Out of every hundred rupees of our national
income, we consume 85 rupees and save only 15 rupees, which means that the
amount of money which is available to invest for economic growth and advancement
is too little. Because to grow by 6%, you need at least 24-25% investment rate - and
if you want to rely on domestic savings, your saving rate should be 25%. India’s
saving rate was about the same, but last year they recorded 34% saving rates.
China’s saving rate is 50%, so this is the contrast as to why we are in serious difficulty
because as a nation this is a problem which we have to recognize. We have to at
least double on savings rate otherwise we will remain dependent on foreign sources.
2. We Import More and Export Less. Till 2007-2008, 80% of our imports were financed
by our export earnings. This ratio has come down to only 50%, it may go up to 60%
but a gap of 40% of financing needs in order to keep with the import level still exists.
As a nation we prefer to use even the basic commodities of foreign countries rather
than locally manufactured goods. Unless we do not change this attitude of preferring
the imported goods we have to keep on relying on outsiders to fill in this gap b/w
 our imports and exports. Relying on outsiders’ means that there are cycles, ups, and
downs i.e. when things are good, one gets financing, and when things are bad one
starves for financing. No nation which strives to preserve its honour must go through
this particular route. The lower is this gap between our export earnings and
expenditure on imports - and that can be achieved only by expending our exports;
our reliance on external sources would be reduced.
3. Government Spends More than it Earns as Revenues. Fiscal deficit is the difference
between the revenues which are collected in a year and the total expenditure
incurred by the Government. Pakistan’s government takes away 20% of national
income as its own. 80% is left in the private sector and 20% in the hands of the
government is spent on defence, debt servicing, development on education, health,
general administration etc. The revenue generated is only 15% of the GDP at best,
and in the worst days it is 12 to 13%. Out of the every rupee of income received by a
Pakistani, on average, tax paid is only 9 paisas and 91 paisas remain with the
individual. In 2007-2008, Pakistan’s fiscal deficit was more than 7% which means its
income or revenues were only 13% of GDP whereas, expenditures were 20%.
Therefore, fiscal deficits have to be financed from somewhere, so how do you
finance them; you either go again begging the external donors, or to the State bank
of Pakistan. The financing provided by the State bank of Pakistan is dangerous
because it creates high inflation in the economy, which is injurious to the middle
class, those earning fixed wages and salaries, and the poor. Therefore, there is an
uproar in the country if the inflation rate goes up. In 1999, our Debt to GDP ratio was
100%, which means that the entire national income was pledged as debt. Every
single penny was pledged to the creditors. This ratio was reduced gradually over next
six to seven years and brought down to 50%, an average for all the economies.
However, the way the things are going for the last two years, it has moved from 50%
in last two yrs to 58%, and with all the borrowings it may go to 60%, while the Fiscal
Responsibility Law 2005 says, that the government should not exceed the debt GDP
ratio more than 60% and is required to reduce it by 2.5%; and that is not happening.
The reason the fiscal deficit is widening is low revenue collection. How can you
expect that only nine paisas out of every rupee of income generated by Pakistani
population suffices to meet the requirements of defence, infrastructure,
development, debt servicing etc. This is just not possible. In India, tax GDP ratio is
15% and still they have fiscal deficit. So Pakistan is way below the norm for
developing countries. Many people say that defence takes away a lot of government
expenditure. Whereas, the fact is that defence expenditure is only 20% of
government expenditure. It is only 4% of GDP, and is not such a large expenditure as
compared to debt servicing which is 7-8% of GDP and almost 40% of government
expenditure. Therefore, government has to contain its fiscal deficit by raising
revenues. Agriculture incomes are exempt, professionals, retailers, wholesales,
transport owners and many other service providers evade taxes by paying a small
fraction of what is due. Continuing large fiscal deficits year after year may plunge the
country into debt trap again.
4. Our Share in the World Trade is Shrinking. In 1990, Pakistan’s share was 0.2% of the
world trade. After 20 years it has come down to 0.12% in a very buoyant world
economy. World trade has been growing faster as compared to the world output.
India in the same period had doubled its share from 0.7% to 1.4%, while Pakistan is
 going the other way and that is the reason why exports/imports imbalance is
increasing. We are not taking advantage of the opportunities which a buoyant world
economy is providing. Pakistan is stuck with only a few commodities – textiles,
leather, rice, sports, goods and the surgical goods. We have not entered the markets
for more dynamic products. All our exports are to a few markets – the USA, EU and
the Middle East. So this narrow export base and very limited geographical spread are
not allowing us to expand our share. Unless we improve the quality of our products,
go out and do the marketing abroad, invest in research and development, the
prospects do not look promising. That is why we are lagging behind other countries
which from way back are over taking Pakistan.
5. We Badly Lag in Social Indicators. One of the most glaring weaknesses is that a
country like Pakistan that should have had best indicators in literacy, infant
mortality, fertility rates, in access to water supply, in primary enrolment ratios has
social indicators which are more comparable to Africa rather than to the countries of
similar per capita income. Even Tajikistan, which is a very poor country, has better
literacy rate and primary enrolment ratios than Pakistan. What does it means? It
means that if we had literacy rate of 100% instead of 55%, then in 2009-2010 our per
capita income would have been 2000$ rather than 1000$. Instead of 30 million
middle class in Pakistan we would have 60-70 million middle class people; we would
have poverty reduced to 15-20%. We have committed to achieve the millennium
development goals by 2015 i.e. we will be able to reach 80-85% literacy rate, but it is
doubtful that this will happen. Why do we have regional inequalities? Why
Baluchistan is lagging behind other provinces? It is because of literacy rates and
primary enrolment ratios. There is a direct co- relation between regional inequities
and backwardness with the level of education.
6. We Face Energy and Water Shortages. Another challenge we face today is energy
and water shortages, and that is not because we are not generating enough
electricity or we are not having enough water. With the losses of KESC from the
point it has generated to the point they realize the billing is 45%, so 55% people are
paying for those who are stealing the electricity. Government of Pakistan out of its
own limited resources is paying 200 billion rupees every year as subsidies for
electricity. Our industry is at a disadvantage that they get the orders from foreign
countries but they cannot execute the orders because there are electricity outages.
In addition to economic losses it also creates inconvenience for pursuing normal life.
We have silting of our dams, but no additional dams have been constructed since
Tarbela in 1974. We have water course losses of about 20-25%. Even after these
losses, the water is inequitably distributed. The influential land lords are able to take
greater share of water from the canals as compared to poor farmers. Therefore, the
productivity of poor farmer is only one ton per acre as compared to 3 tons by large
holders. If we provide the water equitably to the small farmer, he would also be able
to increase the productivity from one to at least two tons resulting into additional
income, increase in exports of food grains, cotton and fruits and vegetables which
will add to export earnings of Pakistan. With the climate change taking place with all
the glaciers in Himalayas which are going to melt, we are going to have difficulties in
future due to global warming.
7. Cost of Doing Business is High. Pakistan is ranked among the bottom half of the
rankings of the countries where cost of doing business is quite high. It is not high for
 any particular reason but because of our bureaucracy totally sitting on their seats
without taking actions or decisions in time. Unless there is some pressure or
incentive for them, the normal businesses particularly the small and medium
businesses have serious problems at the hands of bureaucracy. Even if we have
investors who are welcomed by the federal government, when it comes down to
provincial and local governments there are given a run around – the land is not
available, the water is not available, the gas is not available, electricity is not
available, road is not available. Lack of coordination among various government
agencies, innumerable laws and regulations that are antiquated and outdated have
proved to be serious impediments Labour laws, inspections by multiple agencies, the
delays in the court system, infringement of intellectual property rights and evasion
of taxes by competing firms in the informal sector have rendered some of the well-
established firms unprofitable, or the feasibility of starting near ventures
questionable.
8. Crisis of Governance and Implementation Weaknesses. If we glance on policy
documents of various governments on education, agriculture, health, trade policy
etc, and look at the same policy forty years ago and the problems, there is hardly any
significant record of implementation of those policies or plans over this period. We
produce five years plans and all kinds of medium term frameworks, but it is the poor
governance and implementation that are the weak links in getting things done.
Unless we strengthen civil services and bring about a merit based system of
recruitment, promotion, performance evaluation, compensation, disciplinary action,
etc, we will not be able to see any difference in the quality of governance. Orders are
given by the higher ups but they are not carried out; summaries are approved, but
they remain buried in the files and therefore; whether it is education, health, water
supply, revenue or law and order, you can pin down the problem to the governance
issues. Unless we fix the governance issue, the economy is not going to take off at
the speed which is required.
9. Uncertainty and Unpredictability due to Lack of Continuity. Every government
whether military or civilian starts with a clean slate, as if nothing happened before
them and nothing will happen after them. This is not the way the real world works.
You take the projects and programmes which were initiated by the previous
governments, evaluate them as to what the strengths and weaknesses were, fix
those weaknesses and carry them forward. It will take only few years to bring these
inherited projects to completion and the country will benefit from new motor ways,
new ports, highways, educational institutions etc. But the blame game of successive
governments results into abrupt termination of all such projects and programs.
When these are resumed the cost has escalated three times and it takes several
additional years to complete them. In the meanwhile the people of Pakistan suffer
because of this lack of continuity. When faced with such unpredictability about the
future, the investors are pondering whether they should invest in this country as
they are uncertain whether the new government when comes in would stop or alter
what the previous government was doing, or adhere to the commitments made to
them. Take the example of Higher Education Commission, which was sending 1700
students for PhDs abroad but the new government comes in and suspends the
funding of those programmes. This solved down the process of faculty development
 for our universities at a time when we should have been sending twice as many
scholars.
10. Political Stability, Law and Order/Security. The overall arching theme is that for a
robust economy we should have political stability, law and order and security. The
Armed Forces of Pakistan deserve gratitude for what they have done in Malakand
Division to bring about stability as far as the law and order situation is concerned.
The sooner the country is gotten rid of this image of political instability, poor law and
order situation and insecurity, whereby investors from all over the world hesitate in
coming to Pakistan and invest, we will not be able to make any progress in this
country. In 2007, Pakistan was one of the most favourite countries among the
international investor community. A thirty year piece of paper was floated which was
a bond for Pakistan to be paid in 2037 and Pakistan got four times over subscription
at a price which was only 300 basis points above the US treasury. Very few countries
can claim to have that kind of credibility with international fund managers. However,
in two years’ time we have missed that boat. Therefore, it is imperative that we
resume the journey which has been interrupted by nurturing a stable, secure and
peaceful political environment.

Prospects/Solutions to Improve Economy

How can we overcome these challenges and problems and improve our economy? A lot has
been written and talked about, but I will focus on only a few action points.

1. Change in National Psyche and Mindset. We as a nation are too much negative
oriented and too much cynical where we find everything wrong in this country.
Unless we change our mindset and unless everybody who is doing what he is
supposed to do, carries out his or her task with sincerity and honesty, we are not
going to go anywhere. We should not expect any Messiah to come and fix our
problems we have to do it ourselves individually and collectively. There are no short
cuts available. Media is muddying the water by their sensational stories and inviting
so called experts who contribute in projecting negative thinking and negative
national psyche. Unless we have a positive “can do” mentality, it will be difficult to
progress. Unless each one of us changes our mindset rather than blame the
government and the system, we are not going to go anywhere in this race for global
economic survival. This is easier said than done. But I expect our younger generation
to be more responsive and responsible.
2. Building up of Human Capital. There is no substitute to building up human capital.
Private sector, public sector, NGOs, local communities, philanthropists etc, all here
to put their hands on deck and participate in making sure that every child goes to
school. Every high school graduate has some technical and vocational skill or goes for
higher education. Unless we build up human capital, we are just going to be left
behind because the world economy is going to be a knowledge based economy. It is
not an economy where you memorize material or reproduce that in the exam and
forget about it - that is no longer the case. One has to acquire the knowledge and
use it in order to apply to problem solving. This is a new paradigm where human
capital is as important as machinery and equipment. Pakistan lags behind other
 countries in the institutions, infrastructure and incentives for human capital
formation. We have no choice but to accelerate the pace to catch up with others.
3. Use of Technology. The technology is spreading like a wild fire. How many people
five years ago could have thought that even in a small towns and villages of Pakistan,
one would access to mobile telephones. 95 million Pakistanis have mobile phones
today. You can use this technology in order to provide them banking services,
information on climate/weather, agriculture extension, health, education etc. It is a
powerful tool which can leapfrog a lot of time which we have wasted. Using
technology particularly the information/communication technology for the
betterment of social and economic problems of Pakistan is something which needs
to be done but it cannot be done the way we have compartmentalized this into
different ministries. A more holistic and comprehensive approach that deploys
technology for poverty reduction has to be put in place.
4. Young Labour Force. Pakistan is one of the few countries which has a young labour
force which can be harnessed for its own and global economy. Japan, Europe, USA
and after 2050 China are going to have aging population where the ratio of old to
young people is going to increase. India and Pakistan are two countries where the
ratio of younger people to the older ones is going to increase. If we tool these young
men and women properly, we increase the female labour force participation, give
them skills and knowledge, they can become the labour force for the rest of the
world. This will give a big boost to Pakistan’s own economy. In 2001, worker
remittances were less than a billion dollars; today we have almost 7-8 billion dollars.
Now this can be multiplied by three or four times if we have educated labour force
i.e. skilled labour force going for overseas employment. This is also a way to create
employment opportunities because if you have large number of younger people
coming to labour force and you don’t have job opportunities for them you can have
social upheaval. Therefore, it is imperative to create employment opportunities for
them and one of the avenues is to train them in the kind of the skills which are
needed not only by the national economy but also by the international economy.
5. Governance, Devolution and Decentralization. As the population is increasing, one
cannot govern Pakistan sitting in Islamabad, Karachi, Lahore, Peshawar or Quetta.
One has to devolve powers, decentralize and delegate authority, provide resources
to the local/district governments so that they can take decisions at their own. Those
decisions would be very much in accordance with the requirements and the needs of
those communities. Sitting in Islamabad one cannot visualize what is needed in
Chaghi or Loralai, but the people in Loralai and Chaghi know exactly whether they
need water, fertilizers or fruit processing industry. Let us devolve powers to the
people at the grassroots level and there would be much better allocation and
utilization of resources. There must, however, be accountability of the local
governments by the provincial governments and of provincial governments by the
federal government but not interference or usurpation of powers. If we do that, then
a lot more can happen with same amount of resources which are being wasted
today, and the economic growth rate can be raised from 6-7 percent average to 8-9
percent annually.

Impact of political instability on Pakistan’s economy:

Political situation:

DECADE OF 1950s:

After the death of the first prime minister, Liaquat Ali Khan, and the
ascent of bureaucrat Ghulam Mohammed to the office of Governor-General,
the supremacy of politicians in the political order was lost. In 1953, martial law
was imposed in Lahore to suppress the anti-Qadiani movement. Prime Minister
Khwaja Nazimuddin was dismissed by the governor general. He observed three
major conventions ,the impartiality of the governor general, cabinet and party
solidarity and the role of legislature as the maker and sustained of
government—had been destroyed or gravely weaken. Pakistan’s ambassador to
the United States, Mohammed Ali Bogra was the new prime minister and six of the
nine ministers of the dismissed cabinet joined the new government.
Changing political loyalty has since become one of the main causative factors of
political instability. The seeds of separation were further sown when the
Muslim League lost the 1954 provincial elections in East Pakistan due to a
growing disaffection with the ruling political elite in West Pakistan. This elite from the
Punjab province, instead of coming to grips with the grievances of East Bengal,
adopted a confrontational strategy to consolidate their power by merging all four
western Pakistan provinces into one province. As a result, East Pakistanis
were antagonized when their province, which contained the majority population,
was forced to accept parity with newly-formed West Pakistan in the
Parliament. The three smaller consolidated provinces—North-West Frontier
Province (NWFP), Sindh and Baluchistan—also protested Punjab’s attempt to
establish hegemony. 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. GDP growth in this decade was 3 percent.

DECADE OF 1960s:

General Ayub Khan was ready to capitalize on the existing political instability in the
country. He had good exposure of state affairs being a close associate of
Governor General Ghulam Muhammad. Ayub Khan had introduced number of
experiments that had profound impact on the future politics of Pakistan. One of them
is the shifting of capital from Karachi to Islamabad that was not only the physical
shifting but it shifted the focus of politics from Karachi to Punjab. Ayub Khan
introduced a new idea of controlled democracy. Basic Democracy System was the
brainchild of Ayub Khan through which he strengthened its position on state
functionarie. His agricultural and industrial reforms gave big boost to economy but
failed to introduce inclusive development. A new industrial and landed
aristocracy had been patronized and the political trends had been changed
in this period. After 1965 Pakistan-India war, another important political
development during Ayub regime was the uprising in East Pakistan which was
totally mishandled by ruling elites of West Pakistan. Under mounting
pressure Ayub Khan had to handover the power to another general Yahya Khan
who did not comprehend the magnitude of uprising in East Pakistan and
Pakistan broke up just because of denial of democracy and administrative
mismanagement.

DECADE OF 1970s:Zulfikar Ali Bhutto took advantage of the hatred against Ayub’s
economic policies and promised to restore the principles of distributive justice
and equity to the forefront of Pakistan’s development strategy under the
slogan of Islamic socialism. Democratic policies of nationalization of industries ,
banks , insurance companies, educational institutions and other organizations Bhutto
, spoiled Pakistan’s journey toward modernization and faster economic
development. This setback hit Pakistan strongly that East Asian countries which
were lagging behind in Pakistan growth and economic indicators in the late 1960s,
not only exceeded it, but also became a huge success stories . No oil price shock of
the 1970s , as well as droughts, floods and the withdrawal of foreign aid does not
help in this case, either .Decreased growth rate in the 1970s to 3.7 percent per
year from 6 percent recorded in the 1960s.Increased inequality in income compared
with the previous period , while inflation accelerated ,averaging 16 percent between
1971-1977 , and thus hurting the poor . The performance of the manufacturing sector
on a large scale was very slow , netting a growth rate of only 3 percent ,raised
primarily through investments in large public sector .And the 1971 war in which
these partition of East Pakistan also give a seriously stock to Pakistan’s economy.
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.

DECADE OF 1980s:The overthrow of the Bhutto government by a military coup in

July 1977 and the ascendancy of a right wing military leader, General Zia ul-Haq,
halted the socialist experiment. Political party activity was soon banned, thereby
limiting political participation to the local level only. This small liberty, however,
could not mask the centralization of political power in the hands of one man. Zia ul-
Haq used religion to provide legitimacy to his takeover and subsequent rule,
asserting that Islam should be a unifying force for overcoming ethnic,
linguistic and other propensities prevailing in the country. Centralization and
personal control over the affairs of the state thus became easy to manage
under this paradigm. The nexus between the military regime and
components of the religious right, such as Jamaat-e-Islami, was extended to engulf
the Islamic militant groups that participated in the Afghan war against the
Soviets. 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, colossal. The spread of Kalashnikovs and drug culture, ethnic and
sectarian violence, the smuggling of goods and the emergence of jihadist
parties can all be traced back to the 1980s.18Madrassahs and training camps for
militant groups proliferated during this period. State laws were modified, new Shariah
courts were established and the educational curriculum was revised to inculcate a
more hard-line or radical Islamic way of life. Economic conditions, however, did
improve: GDP grew at 6.6 percent annually, with agriculture at 4 percent and the
manufacturing sector at 9 percent. Fiscal deficits, however, widened to 8percent of
GDP despite a decline in development expenditure. Domestic borrowing to finance
these deficits did not weaken growth immediately but had serious
repercussions 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.

DECADE OF 1990s:Benazir Bhutto and Nawaz Sharif then served twice as prime
minister from 1988 to 1999. Nawaz overreached himself, and the military deposed
him by a bloodless coup. The military’s dominance will likely continue for several
years, even if the forthcoming October 2002 elections lead to the creation of a
nominally civilian government under guided military supervision.

DECADE OF 2000:President Musharraf(2000-2008) introduced several steps to

improve the condition economy. His political reforms set the popular participations in
the democracy in Pakistan. Devolution of Power Plan, eighteen years voters
age increase the size of electoral college, increase numbers for women
reserve seats, new electoral constituencies and last but not least the opening of
number of independent news channels are significant steps that paved the way for
genuine democracy in the country. Strong and elected local government system
performed in major districts of Pakistan.

IMPACT OF POLITICAL INSTABILITY ON PAKISTAN’S ECONOMY:

The above analysis of Pakistan’s politics reveals inconsistencies in

economic policies and planning. These inconsistencies stem from personal
interest, provincial biases, and economic beliefs of the leadership. Here,
keeping in view the above analysis, Pakistan’s economic performance that
directly or indirectly affected by the political decision-making in Pakistan is presented
below Economic Performance under political decision-making:

DURING 1950s:The decade of 1950s earmarked with the institutional infrastructure

for rapid industrialization. This included the creation of the Planning Board, Pakistan
Industrial Development Corporation and Pakistan Industrial Credit and
Investment Corporation. Despite political instability, the formative phase of
Pakistan (1947-1958) established state institutions that run the state affairs of a
nascent state.

DURING 1960s:Ayub Khan took over in 1958 and set the new standards
of economic growth. Ayub Khan strongly supported public institutions and
reformed agricultural and industrial sector in Pakistan. He improved the investment
climate for the private sector and his ability to delegate authority to his economic
managers were all responsible for the dramatic turnaround in investment and
growth in both East and West Pakistan, in sharp contrast to the economic
stagnation in the second half of the 1950s. However, almost single-minded focus
on economic development was possible only because the large-scale military
assistance which started in 1954 and the continued strong foreign policy alignment
with the US reduced the gap between defence and development. His development
process was slowed down by the escalation of tension with India.
Economic consequences of the 1965 war were even more disastrous for Ayub Khan.
It left a deep distrust in East Pakistan. In economic policy terms, the major failures of
the period were the perpetuation of the industrial and trade policies of the 1950s and
an excessive reliance on external assistance. But, overall, the guided democracy
produced healthy economy in the first half of 1960s (Noman, 1988). Despite major
economic policy failures, the Ayub era was an exceptionally successful
period of economic management. Large investments in water and power, generally
effective use of public resources, conservative monetary and fiscal policies, focus on
family planning, genuine attempt to reduce regional disparity between West and East
Pakistan, and forceful efforts in support of the spread of green revolution were all
important elements of good economic management. Ayub khan adopted incentive
to private initiative. There is some valid criticism on economic boom during Ayub’s
regime. The 1960s represented a boom decade particularly for
manufacturing which had a 10 per cent growth rate. However, the small base in this
period and that sustaining such high growth rates becomes progressively more
difficult. Foreign aid and market oriented policies gave the economy an impetus but
on the other hand the nature of the crony capitalism practiced let to the exclusive
development in the country that was pretty much protected and provided non-
competitive and weak economic base for future. This concentration of economic
power and the perceived injustice brought about a backlash in the form of rioting that
put an end to the Ayub Khan period. 8

DURING 1970s:Zulfiqar Ali Bhutto, assumed power in 1971, attempted to de-

concentrate capital and ownership. He nationalized all major sectors of industry,
banking, and financial services in Pakistan. The result was disaster. But the results
of this experiment were disastrous. Private investment flows virtually stopped,
industrial growth halted in the absence of competition, over staffing because of
political appointments. This inefficient resource use by state-owned enterprises run
by a small group of bureaucrats led to the fiscal imbalances, weak monetary
policy, and domestic debt burden. Meraj Mohammad Khan, a rebel PPP leader
emphasized on the liquidation of feudalism, Bhutto was opposed to this and
wanted primary emphasis placed on controlling or fighting capitalism because
imperialism depended upon capitalism and not feudalism. Bhutto’s apparent support
to feudal lords can only be explained in the light of the state traditions of favouring
rich farmers through consistently increasing allocation of resources for provision of
facilities like irrigation and power. Misdirected nationalization precipitated
successive market failures in various ways. Persistent unemployment, less
competitive enterprises, low production and meagre foreign investment were the
results of Bhutto’s nationalization policy. Bhutto’s policy initiatives and style of
government have had extremely negative and lasting consequences for the Pakistan
economy and have gravely hindered progress towards selfsustained and
balanced economic growth in the country.

DURING 1980s:General Muhammad ZiaulHaq (1977-1988) dragged the pendulum

of economy back to market economy. ZiaulHaq introduced key policy changes
included privatization and deregulation and market determination of key macro
prices such as interest rates and the exchange rates. Once again quick economic
recovery resulted in the general prosperity and relatively stable prices made
the Zia period appear to be an era of exceptional political and economic
stability in Pakistan’s history. He used bureaucracy for economic management, and
under the able guidance of Ghulam Ishaq Khan, introduced good short-term
economic management by using missed opportunities and dealing structural
issues in Pakistan. The flexible exchange rate policy strengthened export
incentives and improved the climate for private investment. The initial9

reduction in budget deficits through additional taxation and efforts after 1980 to
reduce subsidies and to bring agricultural prices in line with international prices, all
helped economic growth and moderated the inflationary pressures. That high
economic growth was partly because of the influence of exogenous economic
developments, notably the boom in workers remittances, did not detract from
the steady and more or less consistent day to day management of economic policies
during the 1980s. The point, however, is that the long period of political stability and
sustained growth under Zia offered opportunities for tackling the difficult underlying
structural issues which were not exploited. Zia’s death in August 1988
unleashed a great political instability that led to the slow economic growth and
foreign exchange crises. Pakistan was one of the few developing countries that had
achieved an average growth rate of over 5 per cent over a four decade period ending
1980.DURING 1990s:The 1990s proved to be a lost decade for Pakistan. Growth
in per capita income dropped to slightly over 1 percent. Poverty resurfaced and
about one third of the population came under the poverty line of $1 per day. Social
indicators appeared worse than other countries of the region. The country was
turned into one of the heavily indebted countries and was declared as one of the
most corrupt country in 1996. The decade of 1990s once again proved incapacity of
our democratic government. Civilian rules in 1990s promoted the politics of hatred
and nation once again plunged into provincial and ethnic conflicts. The successive
governments of Benazir Bhutto and Nawaz Sharif failed to improve the political
stability in the country and deteriorating economic conditions. These governments
had parochial and vested interests and they hardly put serious thought to economic
uplifting in the country. Throughout1990s democracy has been failed due to
increased intervention of agencies and because of incompetence of the so called
political leadership of the country. Family-owned political parties did not meet the
criterion to be a political party. Their economic management was interrupted by the
family’s influence and Pakistan earned a bad reputation in the world.

DURING 2000:The political instability of the 1990s ended up with swift quo by
General Pervaiz Mushurraf in1999. General Musharraf major steps in four areas to
put the economy back on track: 1.Macroeconomic stability and the restoration of a
working relationship with international financial institutions (IFIs).2.Structural reforms
to remove distortions in the economy.3.Improving governance, especially economic,
and reviving key national intuitions.4.Poverty alleviation measures. The
implementation of this strategy has been broadly successful; with some se backs
because of an extremely difficult environment in the first two years of the Musharraf’s
government. Some factors were beyond the reach of economic managers.
For instance, continuing economic sanctions after Pakistan’s nuclear tests in
May 1998 and the imposition of new sanctions after the suspension of democracy.
9/11 incident brought the international hostilities to Pakistan’s borders.
Unprecedented drought severely affected the backbone of Pakistan’s economy,
the agriculture sector. In addition to that global recession further strained
Pakistan’s economy. Musharraf’s government took these challenges with reforming
all sectors including governance. Along with macroeconomic stability and structural
reforms government speed up the process of privatization and deregulation,
improved financial sector and capital market. On governance front, government
introduced devolution of power plan that gave birth of new local government system.
The plan aims to start holistic development in all the districts and empowered people
at the grass root level. The public participation in the development of their
areas gave a new impetus in the masses. Big cities of Pakistan showed
visible growth and development and accelerate urban economics. However
due to strong resistance with in the departments these reforms were not
implemented completely. The political team of Musharraf regime went along these
developments. However few decisions taken by the government set the downhill
path that eventually ended with commencement of new election in 2008. Removal of
chief justice, steel mill case and right but mishandled case of Lal-masjid
set an anti-government movement that weakened the position of ruling party.
The defeat of Muslim League Q was not because of economic policies but it
was the result of mass movement against President Pervez Musharraf. Pakistan
People Party led coalition government took over after 2008 national election
whose economic policies are under way. So far, there is no sign of improvement.
Rather put in this way that there is visible sign of further deterioration in economy
and well as in politics.

CONCLUSIONPakistan has seen twenty-four governments in the past sixty five

years, including: fifteen elected or appointed prime ministers, five in UK terim
governments and thirty-three years of military rule under four different leaders.
Liberal economic model and socialist economic models have been experienced. By
and large the liberal capitalist model survived successfully in Pakistan. Pakistan
history is filled with governance failures. Narrowly based elite and personality
and family-owned political parties advanced their parochial interests in
Pakistan. Parliamentarians by chance, in general aimed to multiply their wealth
under state patronage. Pakistan’s future is still under shadow of corruption, bad
governance and misdirected foreign and economic policies. Political instability and
bad management of the national economy appear to be manifestations of a high
degree incompetence and inefficiency of the political leadership in the country.
Pakistan’s failure, or success, must be described in both the language of
state failure, which various objective criteria can measure, and the failure of the idea
of Pakistan, which is a far more subjective and contentious matter. Pakistan is
unlikely to fail as a state; the downward trend in many indicators of state failure can
be temporarily halt In the long run, however, the lack of economic opportunity,
the booming birth rate (one of the world’s highest), and the weak
educational system could leave Pakistan with a large, young, and poorly educated
population that has few prospects for economic advancement and that sees the
promise of Pakistan as a cruel joke. There are some positive signs for Pakistan to
become a viable state. It’s very size (it will soon become the world’s fifth most
populous state); its ties with many Arab and other Islamic states, especially Iran; its
nuclear capabilities; and its geopolitical significance can make Pakistan an
important player not only in the region but also in international politics provided our
economy must improve steadily. Successive Pakistani governments have
used this argument when approaching others for support and resources.
Weak credibility of the leadership and weak institutions in the country could
not convince international community to support Pakistan. China a trusted neighbour
showed its concern over the state of affairs in Pakistan. Another dangerous trend
in Pakistan was the growing extremism and terrorism. Since the
Russian invasion in Afghanistan, jihadi group mushroomed in Pakistan and
their activities racked and ruined Pakistan. These groups and their extreme
beliefs were by and large rejected by the moderate people of Pakistan. However,
these groups have strong following in a miniscule percentage of Pakistan’s total
population. After 9/11 Pakistan became so vulnerable against international pressure
to play the part of frontline state in war against terror. These Jihadi groups have now
turned their guns towards Pakistan and army is struggling to control the situation with
aggravating the situation further. Analysing political scenario of Pakistan, my humble
conclusion is that there is no true left and no true right in Pakistan. Pakistani society
and politics in an amalgamation of elites, pressure groups, army, families and
huge mass of deprived people, which has hardly any parallel in the world. In my
view Pakistan has never been experienced a true democratically elected
government in its history. The full restoration of democratic government
and the efficient rebuilding of the Pakistani state is still a dream that has to be
happened in reality. The present government came in power through NRO
and some unrevealed international commitment. So in near future agenda for
Pakistan is not yet seen clearly. Even the military rule could not even conceive a
radical change in the system. Musharraf in his early years, attempted to break the
nexus through devolution of power, civil service reforms and police
reforms and special promotion of independent media has introduced healthy trends
in the political state of affairs. But his last mistake that is NRO and tussle with
judiciary made him highly unpopular in his last days. This is so difficult to suggest
remedies and action plan for economic development unless political leadership
brings prerequisite cognitive change in the mindset. If they are not sincere with the
country they will ruin themselves and their future generation.

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Agenda for Reforms, Royal BookCompany, Karachi, Pakistan.Ali, K. (1982). Pakistan:
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(1985). Zia's Pakistan: Politics and Stability in a Frontline State. Boulder,
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(1989). Breaking the Curfew: A Political Journey Through Pakistan. Michael Joseph,
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Issue of Poverty and Government Efforts:

Causes of Poverty:

o Unemployment
o Illiteracy
o Lack of opportunities
o Poor agricultural practices
o Weak industrial base
o Dependency burden

Govt efforts to eradicate poverty:

Pakistan does not have any general or universal social protection system that covers
all of its population. It does not even have an umbrella institution that would extend
social protection and social safety nets to the poor. However, a number of programs
targeted at improving governance and responsibility of public institutions to be able
to better respond to the needs of the poor, assisting them economically by creating
income and employment opportunities, and improving their access to basic services
are being implemented by the government, NGOs, and the private sector. Each of
these sectors operates in a distinct manner as discussed in this section.

Governmental reforms

The Decentralization Plan revealed in March 2000, is an essential governance

reform that targets to replace the existing highly centralized and control oriented
government with a three‐tier local government system that institutes “people‐centred,
rights and responsibility‐based, and service oriented” government structures. The
important poverty determined facilities, such as health and education, have been
transferred to district and lower local governments under this strategy. Provinces,
once mainly responsible for the provision of services, assumed new responsibilities
to support and supervise the performance of local governments, not as
administrative members of the provincial administration, but as independent
corporate bodies accountable to the electorate through political leaders.

Numerous civil service reforms have been implemented by the government to

improve public sector and make it more accountable and approachable to the
citizens. The issue of improving the financial management system in the country has
received particular attention. Microfinance is another step that government took to
provide basic support to the poor. Khushhali Bank was established in 2000 with the
support of Asian Development Bank. The main aim of this bank was to benefit the
poor through income generating activities, to establish small‐scale enterprises and
small infrastructure ventures. Within first 2 years of its establishment, the bank had
distributed an amount of Rs. 100 million to 15,000 beneficiaries, while 30% of the
bank’s borrowers were women. This bank also supported social mobilization
activities within poor communities and development of infrastructures such as water
channels and link roads in the neglected rural areas.
Pakistan Poverty Alleviation Fund (PPAF) was founded in 1997 by the government
to help poor through loans. Now, it works with the World Bank, to increase the
access of poor and microenterprises to credit facilities. Policy guidelines for PPAF
are provided by the board of directors, which contains three members from the
government and nine members from the civil society. PPAF works as a supplier that
distributes its credit through fellow organizations mainly non-profit organizations.
However, the effectiveness of PPAF in this regard has not been officially measured
since 1997. So, the policymakers and researchers could not evaluate its benefits to
poor.

The Zakat and Ushr Department was established in 1980, which was based on
Islamic traditions in which rich people should pay a specific amount at the rate of
2.5% on their wealth to the poor. Zakat is imposed on different assets such as saving
bank accounts, fixed deposits saving certificates, mutual funds, government
securities on which return is paid and life insurance policies. Banks, companies, and
financial institutions that operate these assets deduct Zakat. This deducted amount
of Zakat transfers into Central Zakat Fund at State Bank of Pakistan. Central Zakat
Fund transfers funds to Provincial Zakat Fund, which further transfers it to District
Zakat Committee, based on population basis. Each District Zakat Committee further
transfers funds to Local Zakat Committee at village, Mohalla (street or small towns),
and other organizations such as Deeni Madaris (religious schools), government
educational institutions, and vocational training institutes.

Pakistan Bait‐ul‐Mal (PBM) was set up as an autonomous corporate body in 1992.

PBM was established to work for poverty alleviation through its focus on widows,
orphans, disabled, needy, and poor people irrespective of sex, caste, creed, or
religion. It provides educational assistance, residential accommodation and
necessary facilities, free medical treatment, and promote self‐employment schemes.
Federal government is the main financing source of PBM but it also receives small
grants from the Zakat funds as well as from provincial and local governments.

Social security schemes

The Social Security Scheme for Employees was first introduced in March 1967. It
was the first formal initiative to provide social security to the state employees.
Originally, this scheme particularly covered workers in the textile industry with the
objective of providing protection against possibilities of illness, maternity, work‐
related injury, invalidity, and death. The coverage of the scheme was expanded in
1969, which also included workers from commercial and other industrial
establishments having ten or more employees.

The Workers Welfare Fund Scheme and the Worker’s Children Education Ordinance
were initiated during the early 1970s. These schemes provide education, matrimonial
and housing related benefits to workers in the formal sector. The Employees Old
Age Benefits Institution (EOBI) was established in the year of 1976 as a federal
scheme to provide old age benefits, invalidity and survivor’s pensions as well as old
age grants to those eligible. It covers formal sector establishments, employing ten or
more workers.

Nevertheless, none of these schemes cover workers from the agriculture region, the
informal economy and those in the formal sector who are either employed
temporarily or through contractors or are employed in companies with less than ten
workers.

Role of NGOs and civil society

There is a close connection between NGOs, civil society, and democracy in any
country. In this connection, NGOs are part of civil society that strengthens the
society through activities. This process, in turn, supports the democratic
development. Civil society and non-profit sector have appeared as a significant
performer on the development aspect in Pakistan, particularly in the last two to three
decades. The development of NGOs and civil society as an active development
entity is widely seen as a response to the failure of the state in providing successful
and well‐organized basic social services, and in its overall suppression. Most of the
NGOs are working with partner organization at grassroots level for poor and
marginalized groups.

However, the exact extents of the non-profit sector in Pakistan are not known
because of multiple laws under which NGOs and civil society organizations can be
registered with no centralized system of recordkeeping in government agencies, and
also because many organizations are not registered with any agency. For example,
in order to be registered, NGOs in Pakistan can opt between five different legal
frameworks.

Civil society has considerably progressed in past few decades. It is flourishing in

Pakistan with the recent development of technology, geopolitics, and markets. This
development stimulates the construction of many civil society organizations, giving
rise to exciting representation of citizens at both online and offline platforms.

There are different types of NGOs, which are associated with different types of social
services. Welfare‐oriented NGOs are primarily philanthropic institutions working with
vulnerable groups. Edhi Welfare Trust is the best example for this type of category. It
operates a countrywide network of relief services such as ambulance, old houses,
orphanage houses, women shelter houses, poor feeding houses, and its work has
been recognized internationally.

Social sector, NGOs, and other civil society organizations are mainly focusing on
social development limited to health or education. Agha Khan University health
program is one best example, providing health and education services to poor.
Numerous NGOs are employing cohesive rural and urban development programs in
different parts of the country and provide a range of development services. Most of
these have adopted a participatory approach and work closely with local
communities.

Benazir income support program (BISP)

Benazir Income Support Program is considered an important public scheme to
support poor families in all parts of the country. It was launched in 2008 as a social
safety net platform aiming to increase the living standards of the poor and controlling
the negative effects of slow economic growth, food crisis and inflation of the poor
(predominantly women). It was started with the goal of providing money to poor
families, which would help them to buy basic needs of life such as food and house
expenditures. This program is very significant support of government’s development
program on poverty eradication and women empowerment. Government of Pakistan
has continuously increased the allocation of funds for BISP since its formation.

To allocate the poor people, BISP developed a better research design and data
collection method. In the opening year, members of National Assembly (MNAs) were
given the task to supervise the allocation of poor in their respective areas. However,
later on, it was substituted by a Poverty Scorecard (PSC) constructed on a Proxy
Means Test (PMT) applied on household census data. PMT consists of 23 variables
and uses poverty characteristics such as number of assets, education level of
household head and the number of dependents, to identify the poor [24]. It has
identified 7.5 million families that are eligible for support fund. However, 4.6 million
eligible families are already receiving support funds, which comprise of 17% of the
total population. Eligible families were receiving a cash amount of 1000 Pakistan
rupees per month in 2012, and the amount is expected to increase in the next years.

The need for improved social policy structure

The literature on poverty and poverty alleviation in Pakistan used comprehensive

approaches to measure the level of poverty and poverty alleviation. Key initiatives,
including government reforms mentioned earlier, reflect this comprehensive
approach. The recent findings of international institutions such as the World Bank or
the UN have confirmed a relative success in the Pakistan’s recent efforts to reduce
poverty [10, 12, 13]. However, this comprehensive approach needs appreciation, but
it also needs evaluation because there are gaps that still exist in the poverty
literature in the country. Schemes that can be found in literature on poverty are
mostly related to income‐based poverty or to economic wellbeing. Therefore, there is
a gap among the overall objectives of these policies and their interventions. A
comprehensive approach of poverty and poverty alleviation agendas should take into
consideration some other dimensions such as gender equality, women’s
empowerment, human rights and inclusive social policy.

The role that the state plays in poverty alleviation is determinant for two main
reasons. First, it is widely recognized that decentralization of power favors an
increase of effectiveness of antipoverty efforts. Second, one‐size‐fits‐all (or a
national) approach in eradicating poverty tends to increase regional inequalities
because poverty is not evenly distributed across the country. Therefore, in order to
have better outcomes in poverty alleviation, the government should consider a more
contextual approach in designing antipoverty policies for different regions in
Pakistan.

In the scenario, poverty is not evenly distributed across the country of Pakistan. At
the county level of accumulation, poverty is overwhelmingly a rural problem, with the
most remote rural places at the greatest disadvantage. Thus, the country should
focus more on the reasons for poverty instead of personal choices of favoritism.

On the other hand, the government has also tried to implement economic policy to
reduce the poverty. Nevertheless, economic policy is different from social policy in
some patterns. First, social policy identifies that social and political structure in which
people live. It also determines the physical and economic environment for wellbeing
of people. It recognizes the significance of the organization and institutional context
within which people exist. Second, it identifies the significance of the poor’s own
awareness of poverty and the context of their specific identification of priorities. It is
an ambiguous concept of poverty in which policy makers and rich assume that they
know what poor people want and need. Other characteristics are often neglected
except measuring underlining income and consumption. Whereas being poor has
various criteria and it is often a mystery that divides them into categories and
identifies what do poor need, instead of realizing the real need for poor.

As poverty is more prevalent in rural than urban areas, it calls for special attention
from the state toward rural areas. Social policy also appears to face additional
barriers to effectiveness in rural areas. A study on the effects of the changes in
social policy on employment and poverty among rural and urban female‐headed
households determined that rural and urban areas differ in personal characteristics
of the population, local labor market environments, work barriers, or availability of
services that make it more difficult for the social policy changes to move single
mothers in rural areas into employment and out of poverty [25].

Conclusion and future strategies

Even if some progress has been made in terms of poverty alleviation, the
government’s policies have had a marginal success, especially in rural areas. Rural
areas are suffering from more poverty than urban areas; therefore, the government
should give priority to rural areas to reduce poverty. The government must follow a
long‐term economic plan by considering the fast‐changing demographic and
economic trends. At this level, Pakistan should pay more attention to the quality of
poverty instead of quantity. There are four comprehensive plans and supplementary
policies that states might follow in reducing poverty, particularly in rural areas. In
addition to these strategies, further research is required on the features of poverty.

Provision of local economic development

Different studies (for example, see Ref. [26]) had mentioned that income subsidies,
tax credits, and low‐income loans to employers are incentives that policymakers
might think for disadvantaged rural areas. Such tools can act as incentives for
employers to expand their business, create new jobs, hire low and semiskilled
workers, and offer services like onsite childcare and van shuttles. Another research
argues for regional cooperation and for including poverty and underdevelopment
among the explicit criteria to retarget economic development funds to places most in
need [27].

This condition requires the development of local economic structure that not only
benefits local communities but also helps national economic development. The
biggest criticism to this model is that local governments does not have satisfactory
human, financial, and logistic resources. In addition to this, administrative staff at
local government lacks basic technical and managerial skills. This criticism does not
provide enough strength to national or provincial government in order to transfer
power to local governments. However, training and support should be provided to
local governments and their staff instead of forbidding them. Because central
governments at national and provincial levels are unlikely to have the capacity to
assess the diversity of local conditions or local requirements and capabilities, their
staff is possibly more trained and skilled, but also more remote and far away from
local conditions.

Therefore, Pakistan needs a local economic development that offers opportunities

for local governments, private sector, NGOs, and civil society to work together to
improve the local economy. This development centers on improving effectiveness,
increasing sustainable growth, and confirming the inclusive growth. The practice of
local economic development ought to be assumed at different geographic measures.
This development model provides better opportunities to local communities for
economic development compared to national economic model.

Construct community capability and institutions

Policies to reduce poverty would have to focus on establishing the right

circumstances for new industry masses to develop. The key conditions are the
institutions that advocate knowledge formation, a business culture that supports
entrepreneurship, institutions of higher education such as rural community colleges.
As some studies (for example, see Ref. [28]) proposed in the American context, the
evidence from workforce development evaluations suggests that institutional
collaborations, for example, the participation of business and community colleges in
workforce investment initiatives can improve employment outcomes for low‐income
workers. Therefore, institutions in domestic region not only provide new facilities and
jobs but also engage the local community to improve local situations.

Furthermore, if we consider the policies that inspire new concepts of economic

development, then we cannot ignore the necessity of local institutions and their role
in the local development. This objective can be achieved only by cheering the
communicative and dialogic exchange among different stakeholders at both, national
and local levels. Therefore, the relationship among local authorities, economic
divisions, and citizens could redefine the reasons and effects of poverty, as well as
strategies to reduce poverty. Consequently, institutions would not only provide
opportunities for work, but they will start the movement to stimulate the local
communities.

Social and institutional contribution may look complex because of the different levels
of contributions among local actors. However, it will change the behavior and
feelings of citizens to be part of local development. Their active participation
definitely helps their communities to escape the poverty trap.

Improve workers’ productivity

Development of education and workforce has been seen to have important beneficial
effects on earning capacity. A review of policy evaluation for workforce development
in low‐income workers concluded that education and job training are the most
successful ways to help local communities to improve social conditions [29].

Occupational health and safety is a major factor for improving workers’ productivity,
especially in developing countries like Pakistan that are lagging far behind in health
conditions. Common features that may decrease the health safety and workers’
productivity are inappropriate workplace design, weak structured jobs, mismatch
between worker abilities and job demands, and poor capital‐labor ratio. Most of
these factors are not directly connected to poverty; however, these are connected
indirectly by means of workers’ productivity. Therefore, it has direct or indirect effects
on the overall performance of country’s profile for poverty alleviation. Thus, the
government should make an effort to improve worker productivity through education
and training.

A recent study (for example, see Ref. [30]) develops some policy recommendations
through production jobs to reduce poverty. This research reviews the literature on
poverty and growth, and suggested to set up capable institutions for productive jobs
that will ultimate help to reduce poverty. Market, organizations, and government are
three main institutions that are essential for development. Market is spontaneous
where firms provide best practices and productive jobs to the poor areas and the
government’s role is to establish a correct governing agenda for business
development.

Social security for workers in rural area

As in Pakistan, social security is only serving the workers of public sector and only in
urban areas. Thus, government must construct a social security policy for workers in
rural areas that provides safety at their retirement age, like governments employees.
Provision of social security not only reduces the dependability of old people on their
children but also helps to reduce poverty by providing enough funds to old people to
look after themselves. BISPK is a first step toward social security for low‐income
families across the country. However, it does not cover the elderly population who
claims to be in retirement age. Poverty in rural areas is different from poverty in
urban areas and vice versa. Similarly, causes of poverty are also different in both
areas. The biggest cause of rural poverty is lack of social security for workers,
because most workers depend on their daily or monthly wages which contribute to
their current life that does not provide security for the future. Therefore, initiatives
should have been taken to provide social security to every citizen including private
and rural workers.

Unemployment:
It is a hard fact that unemployment has become the number one problem of
Pakistan. This is growing by leaps and bounds not only in rural areas but also in
urban areas of Pakistan. Many top universities of Pakistan producing thousands of
young graduates every year but failing to get a good job on completion of their
degree. It is a fact that we hear from our friends or relatives who do not get a job
even after graduation. Pakistan Bureau of Statistics reported that the unemployment
rate has increased to 5.1 % to 5.7 % and it is still growing. This is a very alarming
situation especially for the youth as they are looking to get a job as soon as they
have a degree in their hands. But unfortunately, we are lacking to provide adequate
measures to reduce this unemployment rate. To address this persistent issue we
should dig deep into the reasons behind this prevailing unemployment. Although
there are many causes of this constant issue, some of the major bases of the
problems are following.

A rapid increase in population 

The growth rate of Pakistan is considered to be one of the highest population

proliferates. Rapid growth in population is also one of the major determinants of
increasing the unemployment rate of Pakistan. There are several reasons for
population growth; lack of family planning education, lack of women empowerment,
poverty, preference to have more sons and many other constraints are there. These
are the real threats of population growth and consequently a great cause of
unemployment.

Constant recession 

The current economic crisis of Pakistan are huge due to this there are many trade-
offs we can see from the last couple of years. The global recession has affected
Pakistan’s economy but unfortunately we failed to take extraordinary measures to
get rid of with the crisis. IMF has approved a loan of $6 Billion to support Pakistan
economic condition which may help to have sustainable growth in the country. It may
also help to reduce the unemployment rate in the country.

Impact on inflation 

A favorable economic growth, low unemployment can only help to maintain a low
inflation rate. The increase in the general price level reduces the buying power of
people. Monetary policy can be used to stabilize the general price level. The
government should also take measures to improve employment, so consumer’s cost
of living does not increase; hence there is a positive change in the economy and no
increase in inflation.

Culture of Nepotism (Sifarish) 

We can observe the culture of Nepotism everywhere in Pakistan. Irrespective of the

fact, whether you are looking for a job in the private sector or public sector. The
culture of Nepotism (Sifarish) exists there. Such social evils are also one of the major
reasons for unemployment. People, who are hard working and are skilled, don’t find
a good job because they don’t have any reference or sifarish. Such kind of
preferential treatment should be eliminated from Pakistan and Jobs should be given
on merit basis.

Lack of industries 

In the current situation as Pakistan is facing serious financial crisis which is resulting
in a rapid increase of dollar rate because of the insufficient balance of payments,
Pakistan stock exchange is also facing a downfall. The demand for labor has
decreased. Due to the backwardness, the industrial sector is accommodating only a
small number of people. On the other end, insufficient growth in the industrial sector
can be seen. The causes behind this are shortage of capital and investment in the
country to build new industries. Less collection of taxes also hinders the government
of Pakistan to establish new factories and industries in the country.

The solution to the problem 

I would like to suggest that both the government and the private sector should take
the initiative to solve this persistent issue of Pakistan. Proper economic planning,
effective Government policies law and order situation in the country should be
improved. The latest technologies should be used in the agriculture sector; the use
of advance machinery can help in boosting agriculture output in Pakistan. Almost 44
% of people get jobs from agriculture, which is 20.9 % of the total GDP of the
country. Therefore we seriously need to expand this sector.

INTRODUCTION
The relationship between politics and economy remained a favorite
subject of economists.
Pakistan’s history reveals strong correlation between the two. Although with the
changing pattern
of politics and governments, the relationship never remained on the same
pace. Political
instability is used to define political disorder or unrest within a certain
country. Political
instability is considered by loss of control of a countries territory, inability to
provide public
service and erosion of legitimate authority. Political instability hinders economic
growth within a
country.
The politics in Pakistan has dominated economic decisionmaking in the country. In
sixty five
years of history, Pakistan experienced military and civil rules. However, during the
civil rule,
military remained a major stakeholder in the decision-making. This seems interesting
and ironic
at the same time that Pakistan’s economy always improved during military
rule. Pakistan’s
economic growth remained unprecedented during Ayub Khan and
PervaizMushurraf’s period.
Pakistan’s manufacturing, industrial and agricultural sectors performed robustly and
data show
that the fiscal gap has been reduced during military rule. Mega projects
and infrastructural
development and capital investment touched highest during military regimes.
POLITICAL INSTABILITY AT A GLANCE
Military and civil rules in Pakistan did not facilitate efficient and
independent institutions.
Reasons are many vary from social structure of the country and geopolitical
exigencies of a
nascent state. Indian fear syndrome had established the viability of Pakistan Army in
the state of
affairs, especiallyin foreign policy matter from the inception of country. Land
reforms, sub-
nationalism, provincial identities, language controversies started contributing in the
weakening
of the state by every passing day. The dull below happened in the very next year of
the birth of
Pakistan, when father of nation Mohammad Ali Jinnah was died in way from Ziarat to
Karachi.
3
 DECADE OF 1950s:
After the death of the first prime minister, Liaquat Ali Khan, and the
ascent of bureaucrat
Ghulam Mohammed to the office of Governor-General, the supremacy of
politicians in the
political order was lost. In 1953, martial law was imposed in Lahore to suppress the
anti-Qadiani
movement. Prime Minister KhwajaNazimuddin was dismissed by the governor
general. He
observed three major conventions,the impartiality of the governor general,
cabinet and party
solidarity and the role of legislature as the maker and sustainer of
government—had been
destroyed or gravely weakened.
Pakistan’s ambassador to the United States, Mohammed Ali Bogra was the new
prime minister
and six of the nine ministers of the dismissed cabinet joined the new
government. Changing
political loyalty has since become one of the main causative factors of political
instability. The
seeds of separation were further sown when the Muslim League lost the
1954 provincial
elections in East Pakistan due to a growing disaffection with the ruling political elite
in West
Pakistan. This elite from the Punjab province, instead of coming to grips with the
grievances of
East Bengal, adopted a confrontational strategy to consolidate their power by
merging all four
western Pakistan provinces into one province. As a result, East Pakistanis
were antagonized
when their province, which contained the majority population, was forced to accept
parity with
newly-formed West Pakistan in the Parliament. The three smaller
consolidated provinces—
North-West Frontier Province (NWFP), Sindh and Baluchistan—also protested
Punjab’s attempt
to establish hegemony.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. GDP growth in this decade was 3 percent.
 DECADE OF 1960s:
General Ayub Khan was ready to capitalize on the existing political instability in the
country. He
had good exposure of state affairs being a close associate of Governor
General Ghulam
Muhammad. Ayub Khan had introduced number of experiments that had profound
impact on the
4
future politics of Pakistan. One of them is the shifting of capital from Karachi to
Islamabad that
was not only the physical shifting but it shifted the focus of politics from Karachi to
Punjab.
Ayub Khan introduced a new idea of controlled democracy. Basic Democracy
System was the
brainchild of Ayub Khan through which he strengthened its positionon state
functionarie. His
agricultural and industrial reforms gave big boost to economy but failed to introduce
inclusive
development. A new industrial and landed aristocracy had been patronized
and the political
trends had been changed in this period. After 1965 Pakistan-India war,
another important
political development during Ayub regime was the uprising in East Pakistan which
was totally
mishandled by ruling elites of West Pakistan. Under mounting pressure
Ayub Khan had to
handover the power to another general Yahya Khan who did not comprehend the
magnitude of
uprising in East Pakistan and Pakistan broke up just because of denial
of democracy and
administrative mismanagement.
 DECADE OF 1970s:
Zulfikar Ali Bhutto took advantage of the hatred against Ayub’s economic policies
and promised
to restore the principles of distributive justice and equity to the forefront
of Pakistan’s
development strategy under the slogan of Islamic socialism.
Democratic policies of nationalization of industries , banks , insurance companies,
educational
institutions and other organizations Bhutto , spoiled Pakistan’s journey toward
modernization
and faster economic development. This setback hit Pakistan strongly that East Asian
countries
which were lagging behind in Pakistan growth and economic indicators in the late
1960s, not
only exceeded it, but also became a huge success stories . No oil price shock of the
1970s , as
well as droughts, floods and the withdrawal of foreign aid does not help in this
case, either .
Decreased growth rate in the 1970s to 3.7 percent per year from 6 percent recorded
in the 1960s.
Increased inequality in income compared with the previous period , while inflation
accelerated ,
averaging 16 percent between 1971-1977 , and thus hurting the poor . The
performance of the
manufacturing sector on a large scale was very slow , netting a growth rate of only 3
percent ,
raised primarily through investments in large public sector .And the 1971 war in
which the
separation of East Pakistan also give a seriously stock to Pakistan’s economy.
5
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
 DECADE OF 1980s:
The overthrow of the Bhutto government by a military coup in July 1977 and the
ascendancy of
a right wing military leader, General Zia ul-Haq, halted the socialist experiment.
Political party
activity was soon banned, thereby limiting political participation to the local level
only. This
small liberty, however, could not mask the centralization of political power in the
hands of one
man.
Zia ul-Haq used religion to provide legitimacy to his takeover and subsequent rule,
asserting that
Islam should be a unifying force for overcoming ethnic, linguistic and
other propensities
prevailing in the country. Centralization and personal control over the affairs of the
state thus
became easy to manage under this paradigm. The nexus between the
military regime and
components of the religious right, such as Jamaat-e-Islami, was extended to engulf
the Islamic
militant groups that participated in the Afghan war against the Soviets. 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, colossal. The spread of
Kalashnikovs and drug
culture, ethnic and sectarian violence, the smuggling of goods and the
emergence of jihadist
parties can all be traced back to the 1980s.18Madrassahs and training camps for
militant groups
proliferated during this period. State laws were modified, new Shariah courts were
established
and the educational curriculum was revised to inculcate a more hard-line or radical
Islamic way
of life.
Economic conditions, however, did improve: 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
6
these deficits did not weaken growth immediately but had serious
repercussions 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.
 DECADE OF 1990s:
Benazir Bhutto and Nawaz Sharif then served twice as prime minister from 1988 to
1999.
Nawaz overreached himself, and the military deposed him by a bloodless coup. The
military’s
dominance will likely continue for several years, even if the forthcoming October
2002 elections
lead to the creation of a nominally civilian government under guided military
supervision.
 DECADE OF 2000:
President Musharraf(2000-2008) introduced several steps to improve the condition
economy. His
political reforms set the popular participations in the democracy in Pakistan.
Devolution of Power Plan, eighteen years voters age increase the size
of electoral college,
increase numbers for women reserve seats, new electoral constituencies and last
but not least the
opening of number of independent news channels are significant steps that paved
the way for
genuine democracy in the country. Strong and elected local government system
performed in
major districts of Pakistan.
IMPACT OF POLITICAL INSTABILITY ON PAKISTAN’S ECONOMY:
The above analysis of Pakistan’s politics reveals inconsistencies in
economic policies and
planning. These inconsistencies stem from personal interest, provincial biases,
and economic
beliefs of the leadership. Here, keeping in view the above analysis,
Pakistan’s economic
performance that directly or indirectly affected by the political decision-making in
Pakistanis
presented below
Economic Performance under political decision-making:
 DURING 1950s:
The decade of 1950s earmarked with the institutional infrastructure for
rapidindustrialization.
This included the creation of the Planning Board, Pakistan Industrial Development
Corporation
and Pakistan Industrial Credit and Investment Corporation. Despite
political instability, the
7
formative phase of Pakistan (1947-1958) established state institutions that run the
state affairs of
a nascent state.
 DURING 1960s:
Ayub Khan took over in 1958 and set the new standards of economic
growth. Ayub Khan
strongly supported public institutions and reformed agricultural and industrial sector
in Pakistan.
He improved the investment climate for the private sector and his ability to delegate
authority to
his economic managers were all responsible for the dramatic turnaround in
investment and
growth in both East and West Pakistan, in sharp contrast to the economic
stagnation in the
second half of the 1950s. However, almost single-minded focus on economic
development was
possible only because the large-scale military assistance which started in 1954 and
the continued
strong foreign policy alignment with the US reduced the gap between defense and
development.
His development process was slowed down by the escalation of tension
with India. The
economic consequences of the 1965 war were even more disastrous for Ayub Khan.
It left a deep
distrust in East Pakistan.
In economic policy terms, the major failures of the period were the perpetuation of
the industrial
and trade policies of the 1950s and an excessive reliance on external assistance.
But, overall, the
guided democracy produced healthy economy in the first half of 1960s (Noman,
1988). Despite
major economic policy failures, the Ayub era was an exceptionally
successful period of
economic management. Large investments in water and power, generally effective
use of public
resources,conservative monetary and fiscal policies, focus on family planning,
genuine attempt
to reduce regional disparity between West and East Pakistan, and forceful efforts in
support of
the spread of green revolution were all important elements of good economic
management. Ayub
khan adopted incentive to private initiative. There is some valid criticism on
economic boom
during Ayub’sregime. The 1960s represented a boom decade particularly
for manufacturing
which had a 10 per cent growth rate. However, the small base in this period and that
sustaining
such high growth rates becomes progressively more difficult. Foreign aid and
market oriented
policies gave the economy an impetus but on the other hand the nature of the crony
capitalism
practiced let to the exclusive development in the country that was pretty much
protected and
provided non-competitive and weak economic base for future. This concentration of
economic
power and the perceived injustice brought about a backlash in the form of rioting that
put an end
to the Ayub Khan period.
8
 DURING 1970s:
Zulfiqar Ali Bhutto, assumed power in 1971, attempted to de-concentrate capital and
ownership.
He nationalized all major sectors of industry, banking, and financial services in
Pakistan. The
result was disaster. But the results of this experiment were disastrous. Private
investment flows
virtually stopped, industrial growth halted in the absence of competition, over staffing
because of
political appointments. This inefficient resource use by state-owned enterprises run
by a small
group of bureaucrats led to the fiscal imbalances, weak monetary policy, and
domestic debt
burden. Meraj Mohammad Khan, a rebel PPP leader emphasized on the liquidation
of feudalism,
Bhutto was opposed to this and wanted primary emphasis placed on
controlling or fighting
capitalism because imperialism depended upon capitalism and not feudalism.
Bhutto’s apparent
support to feudal lords can only be explained in the light of the state traditions of
favoring rich
farmers through consistently increasing allocation of resources for provision of
facilities like
irrigation and power. Misdirected nationalization precipitated successive
market failures in
various ways. Persistent unemployment, less competitive enterprises, low production
and meager
foreign investment were the results of Bhutto’s nationalization policy. Bhutto’s policy
initiatives
and style of government have had extremely negative and lasting consequences for
the Pakistan
economy and have gravely hindered progress towards selfsustained and
balanced economic
growth in the country.
 DURING 1980s:
General Muhammad ZiaulHaq (1977-1988) dragged the pendulum of economy back
to market
economy. ZiaulHaq introduced key policy changes included privatization and
deregulation and
market determination of key macro prices such as interest rates and the exchange
rates. Once
again quick economic recovery resulted in the general prosperity and relatively
stable prices
made the Zia period appear to be an era of exceptional political and
economic stability in
Pakistan’s history. He used bureaucracy for economic management, and under the
able guidance
of GhulamIshaq Khan, introduced good short-term economic management
by using missed
opportunities and dealing structural issues in Pakistan. The flexible
exchange rate policy
strengthened export incentives and improved the climate for private
investment. The initial
9
reduction in budget deficits through additional taxation and efforts after 1980 to
reduce subsidies
and to bring agricultural prices in line with international prices, all helped economic
growth and
moderated the inflationary pressures. That high economic growth was partly
because of the
influence of exogenous economic developments, notably the boom in
workers remittances,
didnot detract from the steady and more or less consistent day to day management
of economic
policies during the 1980s. The point, however, is that the long period of political
stability and
sustained growth under Zia offered opportunities for tackling the difficult underlying
structural
issues which were not exploited. Zia’s death in August 1988 unleashed a
great political
instability that led tothe slow economic growth and foreign exchange crises. Pakistan
was one of
the few developing countries that had achieved an average growth rate of over 5 per
cent over a
four decade period ending 1980.
 DURING 1990s:
The 1990s proved to be a lost decade for Pakistan. Growth in per capita income
dropped to
slightly over 1 percent. Poverty resurfaced and about one third of the population
came under the
poverty line of $1 per day. Social indicators appeared worse than other countries of
the region.
The country was turned into one of the heavily indebted countries and was declared
as one of the
most corrupt country in 1996.
The decade of 1990s once again proved incapacity of our democratic government.
Civilian rules
in 1990s promoted the politics of hatred and nation once again plunged into
provincial and ethnic
conflicts. The successive governments of Benazir Bhutto and Nawaz Sharif failed to
improve the
political stability in the country and deteriorating economic conditions. These
governments had
parochial and vested interests and they hardly put serious thought to economic
uplifting in the
country. Throughout1990s democracy has been failed due to increased intervention
of agencies
and because of incompetence of the so called political leadership of the country.
Family-owned
political parties did not meet the criterion to be a political party. Their economic
management
was interrupted by the family’s influence and Pakistan earned a bad reputation in the
world.
 DURING 2000:
The political instability of the 1990s endedup with swift quo by General
PervaizMushurraf in
1999.
10
General Musharraf major steps in four areas to put the economy back on track:
1.Macroeconomic stability and the restoration of a working relationship with
international
financial institutions (IFIs).
2.Structural reforms to remove distortions in the economy.
3.Improving governance, especially economic, and reviving key national intuitions.
4.Poverty alleviation measures.
The implementation of this strategy has been broadly successful; with some se
backsbecause of
an extremely difficult environment in the first two years of the
Musharraf’sgovernment. Some
factors were beyond the reach of economic managers. For instance,
continuing economic
sanctions after Pakistan’snuclear tests in May 1998 and the imposition of new
sanctions after the
suspension of democracy. 9/11 incident brought the international hostilities to
Pakistan’s borders.
Unprecedented drought severely affected the backbone of Pakistan’s economy,
the agriculture
sector. In addition to that global recession further strained Pakistan’s
economy.
Musharraf’sgovernment took these challenges with reforming all sectors including
governance.
Along with macroeconomicstability and structural reforms government speed up the
process of
privatization and deregulation, improved financial sector and capital market.
On governance
front, government introduced devolution of power plan that gave birth of new local
government
system. The plan aims to start holistic development in all the districts and
empowered people at
the grass root level. The public participation in the development of their
areas gave a new
impetus in the masses. Big cities of Pakistan showed visible growth and
development and
accelerate urban economics. However due to strong resistance with in the
departments these
reforms were not implemented completely. The political team of Musharrafregime
went along
these developments. However few decisions taken by the government set the
downhill path that
eventually ended with commencement of new election in 2008. Removal of chief
justice, steel
mill case and right but mishandled case of Lal-masjid set
anantigovernmentmovement that
weakened the position of ruling party. The defeat of Muslim League Q was
not because of
economic policies but it was the result of mass movement against
PresidentPervezMusharraf.
Pakistan PeopleParty led coalition government took over after 2008 national
election whose
economic policies are under way. So far, there is no sign of improvement. Rather put
in this way
that there is visible sign of furtherdeterioration in economy and well as in politics.
11
CONCLUSION
Pakistan has seen twenty-four governments in the past sixty five years, including:
fifteen elected
or appointed prime ministers, five inUKterim governments and thirty-three years of
military rule
under four different leaders. Liberal economic model and socialist economic models
have been
experienced. By and large the liberal capitalist model survived successfully in
Pakistan. Pakistan
history is filled with governance failures.
Narrowly based elite and personality and family-owned political parties
advanced their
parochial interests in Pakistan.
Parliamentarians by chance, in general aimed to multiply their wealth under
state patronage.
Pakistan’s future is still under shadow of corruption, bad governance and misdirected
foreign and
economic policies. Political instability and bad management of the national economy
appear to
be manifestations of a high degree incompetence and inefficiency of the political
leadership in
the country.
Pakistan’s failure, or success, must be described in both the language of
state failure, which
various objective criteria can measure, and the failure of the idea of Pakistan, which
is a far more
subjective and contentious matter. Pakistan is unlikely to fail as a state; the
downward trend in
many indicators of state failure can be temporarily halt In the long run, however,
the lack of
economic opportunity, the booming birth rate (one of the world’s
highest), and the weak
educationalsystem could leave Pakistan with a large, young, and poorly educated
population that
has few prospects for economic advancement and that sees the promise of
Pakistan as a cruel
joke.
There are some positive signs for Pakistan to become a viable state.It’svery size (it
will soon
become the world’s fifth most populous state); its ties withmany Arab and other
Islamic states,
especially Iran; its nuclear capabilities; and its geopolitical significance can make
Pakistan an
important player not only in the region but also in international politics provided our
economy
must improve steadily. Successive Pakistani governments have used this
argument when
approaching others for support and resources. Weak credibility of the
leadership and weak
institutions in thecountry could not convince international community to support
Pakistan. China
a trusted neighbor showed its concern over the state of affairs in Pakistan. Another
dangerous
trend in Pakistan was the growing extremism and terrorism. Since the
Russian invasion in
12
Afghanistan, jihadi group mushroomed in Pakistan and their activities racked
and ruined
Pakistan. These groups and their extreme beliefs were by and large rejected by
the moderate
people of Pakistan. However, these groups have strong following in aminiscule
percentage of
Pakistan’s total population.
After 9/11 Pakistan became so vulnerable against international pressure to play the
part of front
line state in war against terror. These Jihadi groups have now turned their guns
towards Pakistan
and army is struggling to control the situation with aggravating the situation further.
Analyzing political scenario of Pakistan, my humble conclusion is that there is no true
left and
no true right in Pakistan. Pakistani society and politics in an amalgamationof
elites, pressure
groups, army, families and huge mass of deprived people, which has hardly any
parallel in the
world. In my view Pakistan has never been experienced a true
democratically elected
government in its history. The full restoration of democratic government
and the efficient
rebuilding of the Pakistani state is still a dream that has to be happened in reality.
The present government came in power through NRO and some
unrevealed international
commitment.
So in near future agenda for Pakistan is not yet seen clearly. Even the military rule
could not
even conceive a radical change in the system. Musharrafin his early years,
attempted to break the
nexus through devolution of power, civil service reforms and police
reforms and
specialpromotion of independent media has introduced healthy trends in the political
state of
affairs. But his last mistake that is NRO and tussle with judiciary made him highly
unpopular in
his last days. This is so difficult to suggest remedies andaction plan for economic
development
unless political leadership brings prerequisite cognitive change in the mindset. If
they are not
sincere with the country they will ruin themselves and their future generation.
13
REFERENCES
Alavi, H. (1972). The State in Post-Colonial Societies: Pakistan and
Bangladesh, New
LeftReview, 74(1), July-August, pp. 59-81.
Alavi, H. (1976).The Rural Elite and Agricultural Development in
Pakistan, Rural
Developmentin Bangladesh and Pakistan, edited by HamzaAlavi, Robert
Stevens and Peter
Bertocci. University of Hawaii Press, Honolulu.
Ali, A. (1996). The Political Economy of Pakistan: An Agenda for
Reforms, Royal Book
Company, Karachi, Pakistan.
Ali, K. (1982). Pakistan: The Political Economy of Rural Development, Vanguard
publications,
Lahore.
Baxter, C. (1985). Zia's Pakistan: Politics and Stability in a Frontline State. Boulder,
Colorado:
Westview Press.
Braibanti, R. (1966). Research on the Bureaucracy of Pakistan, Duke
University Common
Wealth Studies Centre, Duke University Press, Durham, N.C.
Burki,S. J. (1980). Pakistan under Bhutto, 1971-1977. The Macmillan Press, London
Callard, K. (1957). Pakistan: A Political Study, Macmillan, New York.
Duncan, E. (1989). Breaking the Curfew: A Political Journey Through Pakistan.
Michael Joseph,
London.
Government of Pakistan, (2001).Economic Survey of Pakistan, Islamabad
Government of Pakistan, (1965).3rd Five Year Plan 1965-70, Planning Commission
of Pakistan.
http://115.186.133.3/pcportal/five%20year%20plans/3rd/3fiveyearplanCh-
1editing.pdf
Hasan, P. (1998). Pakistan's Economy at the Crossroads, Oxford University Press,
Karachi.
Husain, I. (1999). Economy of an Elitist State, Oxford University Press, Karachi.
Husain, I. (2004). Economic Development in South Asia and the Impact
of
Globalization.Leading Issues Facing Pakistan’s Economy –SBP Governor’s
Speeches. July 2004,
Karachi: SBP.
Jalal, A. (1990). The State of Martial Rule: The Origins of Pakistan's
Political Economy
ofDefence, Cambridge, Cambridge University Press.
Khan, A. (1995).Hum Na Tarikhsa Kutch NaiSikha, Oxford University Press In the
face of a widening gap between revenue and expenditure, Pakistan is rightly
concerned about increasing its money flow. The national debt has already
reached a level where almost half of national revenue is consumed in paying
interest on loans, so borrowing is not an easy option. 

Issue of taxation and tax evasion:

In Pakistan, tax collection as a percentage of gross domestic product (GDP) is

considerably low when compared to similar economies. The ratio is low for both
direct and indirect taxes. In 2012-13, tax-GDP ratio for direct and indirect taxes
collected by the Federal Board of Revenue (FBR) was 3.2pc and 5.3pc, respectively.
Overall the ratio was 8.5pc.
There are numerous reasons for low tax-GDP ratio in the country. Some of them are
discussed hereunder:
1. Tax Evasion
The extent of tax evasion in Pakistan could be estimated by looking at the tax gap.
The operational definition of the tax gap is the difference between potential and
actual tax revenue, where the potential tax revenue is the amount of tax the
government would collect if every person liable to pay tax fully pays his due tax and
complies with tax law. There is an enormous revenue loss due to exemptions,
allowances and deductions from income tax, sales tax and customs duty, which was
Rs. 887.5 billion or equal to 3.9pc of GDP in fiscal year 2012-13.
Generally, the tax incentives (exemptions) are provided to the investors to boost
economic growth and create jobs. But, slow GDP expansion over the last five years
or so has demonstrated the ineffectiveness of tax incentives in accelerating the pace
of growth.
Likewise, the tax amnesty schemes, introduced from time to time, frustrate the FBR’s
efforts to curb tax evasion. These schemes adversely affect documentation, distort
uniform collection of taxes and ensure horizontal and vertical equity, violating the two
golden principles of good taxation.
Such schemes widen tax policy gap as they raise expectations of taxpayers for more
such packages in the future. Furthermore, as the amnesties provide immunity from
tax audit, they further hinder the process of tax compliance. There are more than one
form of tax evasion such as none or under-reporting of tax liability.
Inadequate staff, scarcity of physical and financial resources and/or poor working
capacity of the tax officials may result in weak enforcement. And tax-evaders exploit
weaknesses in the enforcement mechanism to their benefit.
In order to improve revenue performance, it is necessary to bridge the tax policy gap
as well as tax gap arising from weak enforcement. Minimal use of exemptions is
needed to refine the existing taxes and to provide level playing field for all sectors of
economy. At the same time, it is crucial to strengthen the current enforcement
mechanism by enhancing administrative efficiency and capability as well as
improving taxpayer compliance through taxpayer services and education.
In addition, regular and effective examination of records could be a deterrent against
tax evasion and underreporting. At the same time, appropriate training of the
relevant staff could improve recovery out of demand created from examination of
records. The effective use of relevant information could help bridge the tax gap
besides encouraging documentation.
Listening to public opinions and suggestions could improve mutual understanding
and trust between taxpayers and tax officials, and this has to be addressed at each
level of tax management.
Last but not least, it is imperative to impose stipulated penalties on taxpayers who
violate provisions of law. At the same time, strengthening the tax investigation
system is fundamental in creating deterrence against tax evasion and bridging the
tax gap.
2. The Black Economy
The unreported economy or the black or underground economy comprises those
activities that evade the payment of taxes and thus violate the fiscal rules. It includes
income which should be reported to the authorities but is not. The size and growth of
black economy adversely affects various economic and tax reform policies, the
budget deficits, debt burden, etc. Revenue loss estimated due to undocumented
economy is massive.
3. Sales Tax Frauds
The taxpayers exploit the multiple sales tax regimes to evade taxes through
fraudulent schemes. VAT/GST fraud is a matter of serious concern for the tax
administration of both developing and developed countries and Pakistan, too, is no
exception to that. It’s an issue of growing concern that has put a question mark on
the superiority of VAT over other forms of consumption taxes such as retail sales
tax.   
 
The issue of sales tax fraud in terms of size and frequency is a matter of grave
concern for the tax authorities in Pakistan. GST fraud exists in a number of forms,
some prominent of them are:
a. Registration of dummy units
In some cases, the businesses got sales tax registration by submitting documents of
employees. Under such circumstances, the actual beneficiaries of refunds or input
tax adjustments remained underground. Whenever records of such dummy units are
subjected to examination, tax demand so created could not be collected as the
amount is assessed against the poor employees rather than rich, real owner of the
business.
b. Fake import of goods declarations
There are cases wherein invoices were being issued on the strength of fake /non-
verifiable import of goods declaration (GDs) in the sales tax returns. Thus the whole
amount of input tax adjusted by the buyers proved to be illegal and recoverable. In
fact, goods were being supplied to unregistered persons and invoices generated on
the strength of fake GDs were being utilized for input tax adjustment.  
c. Flying invoices
It is found in certain cases that the registered persons supply taxable goods to
unregistered persons but succeed to obtain invoices from registered units involved in
supply of different goods. These flying invoices are being used extensively to claim
input tax or sales tax refunds.
d. Fake bank accounts
The registered persons claiming input tax on invoices more than Rs. 50,000 are
required to make payments through banking channels. The tax fraudsters opened
bank accounts sometimes in connivance with the bank officials utilizing
documents/signatures of persons other than actual beneficiaries and this enables
buyers to ensure compliance of section 73 of the Sales Tax Act 1990.
e. Suppression of taxable supplies
Sales tax is an indirect tax. The businesses are supposed to shift the burden of this
tax to final consumers of goods and services. In many cases, the registered persons,
though charge sales tax on all supplies, they don’t declare true turnover in the sales
tax returns and thus evade sales tax.  In other cases, many businesses declare
turnover just below threshold required for sales tax registration and thus continue to
operate in an undocumented economy. These businesses actually capture large
share of market due to less product prices as compared to those operating under the
sales tax net.
Solutions for taxation problem:

As Pakistan fails to collect a decent proportion of own-source revenue, it has little choice
than to take on debt or depend on more creative means, such as a recent
crowdfunding campaign, to fund public projects. 

Where does Pakistan stand?

Pakistan tax-to-GDP ratio is about 12% . In comparison, OECD countries raise taxes

equivalent to about 34% of their GDP. This limits Pakistan’s capacity to fund public
investment. Where it does collect taxes, it principally relies on indirect taxes on
goods and services, which account for 6.3% of GDP.  The other 4.2% of the GDP
that make up direct taxes are collected mainly by businesses withholding a
percentage of economic transactions for the government. Hence, they do not require
voluntary tax compliance from individuals, which, as a result, remains extremely low.

Start with improving enforcement

There is a relatively strong consensus that effective enforcement can lead to more
tax revenue. Weak enforcement ranges from a property tax collector taking a bribe to
not enforcing the tax, or a just a simple lack of capacity of the tax authority.

Improving enforcement may also result in more productive firms in Pakistan. Ilzetzki
and Lagakos (2017) created a model of Pakistan’s economy to understand the
impact that increased enforcement could have. They find that increasing
enforcement will not only allow Pakistan to raise more tax revenue from firms in the
short-run, but it would also result in higher growth by bringing these firms into the
formal sector. By formalising, they would be able to make productivity enhancing
investments and as a result be able to grow.
Enhancing enforcement requires Pakistan to do two things. First, hire better trained
staff who have access to the right technology and resources. Piracha and Moore
(2015), using a case study of Punjab, Pakistan’s largest province, find that each
property tax circle needs to collect on average about $350 a month themselves to
cover operational costs of their offices.
Furthermore, Pakistan will also have to focus on aligning the incentives of the
bureaucrats associated with tax collection, with the incentives of the government.
This is the classic principal-agent problem: politicians delegate tax collection power
to bureaucrats, but cannot monitor them perfectly. At the same time, the front-line
bureaucrat will most likely have better information. Due to this information
asymmetry, tax collectors need to be effectively incentivised to fully and fairly
enforce taxes. To this end, Khan et al. (2016) collaborated with the Punjab
government to run an experimental study by assigning different incentive schemes to
property tax collectors. They found that over two years of the study, performance
incentives encouraged tax collectors to add new properties to the tax collection
roster, significantly increasing revenue.
Information is the key

Most developing economies have large proportion of their economies based on

informal, cash-driven transactions, which means they are not captured by the tax
base. There are a few ways Pakistan can attempt to create better information.
Evidence suggests that implementation of a value added tax (VAT) helps raise more
revenue by generating a paper trail between firms through cross-reporting of
liabilities. This is evident in the paper by Pomeranz (2015) in the case of Chile.
Building on this line of thought, Pakistan’s VAT structure has certain challenges.
First, intuition suggests that VAT should be applied uniformly by a single agency. In
Pakistan, it is however split between federal and provincial governments, creating
administrative and coordination challenges.
Second, by providing extensive exemptions in the VAT, Pakistan distorts the
information trail; VAT is levied at 17% on the majority of goods, however, several
goods have a either a lower rate or are exempt. One example is the exemption of
red chillies but not green chillies.

Empower cities to tax

About 38% of Pakistanis live in cities, yet they contribute to about 55% of the GDP.
This means that if Pakistan effectively manages the tax collection in these cities,
there is further revenue potential.
Presently, Pakistan does not have financially empowered local urban governments,
instead, most urban taxes are implemented by one of Pakistan’s four provincial
governments. These provincial governments have large jurisdictions, with
populations ranging from 12 million to over 110 million. As managing cities is not the
central function of these governments, most of them have not developed effective
urban administration mechanisms.

As noted through the synthesis of research conducted by the IGC’s Cities that

Work initiative, land and physical properties are a major source of untapped revenue
for most developing country cities. Punjab, for example, despite being home to nine
cities home to over a million people, collected only Rs. 10 billion, or about 6% of its
total tax revenue, from property taxes. Other parts of Pakistan have not fared better.
Sindh, which is home to Karachi, Pakistan’s largest city, has not had a revaluation of
land and property since 2001.
Yet there is large potential to increase this. For example, an estimate from the IGC
(2011) shows that Punjab can raise Rs 25 billion in property taxes if it undertook
comprehensive reforms.
Hope for the future

Reforms passed earlier this year granted government the power to forcibly acquire
any property that a citizen holds by paying 100% over the price they have declared
in their tax returns (hence creating incentive for them to declare the true value of
property). However, it is unclear whether these reforms will be implemented in
practise.
Increasing taxation is possibly the most fundamental challenge Pakistan faces today,
not only to adequately finance public investment and services, but also to establish a
fairer society. To do so, it is useful to bridge the gap between research and
policymaking by integrating research findings into policy decisions. This article points
towards three avenues which can act as a point of departure for such a discourse.

Tax amenity schemes: Importance and impacts:

Just a couple of days after Premier Imran Khan-led government had succeeded in
reaching an accord with the International Monetary Fund to seek a $6 billion bailout
in a bid to implement its structural reform agenda over a period of around 40 months,
a “generous” tax amnesty scheme, called the Asset Declaration Scheme, has now
been approved by the Federal cabinet, though public office holders would not be
allowed to benefit from this privilege, which is basically a premium for dishonesty.

Under this scheme, assets within the country and abroad (except for real estate) can
be whitened after paying a charge of 4 per cent only, contrary to a 45 per cent levy in
India.

For people wanting to keep their whitened money abroad, a rate of six per cent
would be charged. For the declaration of real estate, its value would be considered
1.5 times more than the Federal Board of Revenue-assigned value to bring it at par
with the market rate.

The amnesty scheme also has the facility for citizens to whiten their benami
accounts and properties. It is a pity that instead of enacting concrete laws to bring
back looted money from Swiss banks and other tax havens, the ruling Pakistan
Tehreek-e-Insaaf government has thus toed the line of all its predecessors who had
come up with such initiatives, but to no avail, as all such moves have historically
failed in this part of the world.

A brief peek into the past money-whitening schemes in Pakistan:

o Pakistan had offered its first tax amnesty scheme in 1958 during the regime of
Ayub Khan, meaning thereby that not only have black economy and tax
evasion been haunting the Pakistani economy for well over six decades, loot
and plunder have also continued unabated since then.

o This 1958 initiative had brought approximately 71,000 declarations and as

many as 266,183 taxpayers had entered the fold, contributing a total of
Rs1.12 billion to the kitty. Despite this, tax collection remained at less than 10
percent of the total GDP in 1958-59.

o Over Rs142 million was collected through the 1997 tax amnesty scheme.
o The year 2000 amnesty scheme was launched under the General Musharraf-
led regime.

o During this scheme, some incumbent ministers had declared their assets.

o Approximately 79,200 declarations were filed, bringing in Rs 10 billion to the

exchequer.

o In 2001, a tax amnesty scheme called 'Investment Tax on Income,' inserted

vide section 120A of the Income Tax Ordinance, had given a similar facility to
whiten untaxed money and assets by paying just 2 per cent. The effort proved
futile as only Rs 2.5 billion was received.

o During 2008, the-then Pakistan People’s Party regime had solemnly pledged
before the Parliament that after 'Tax Investment Scheme of 2008,' it would not
introduce any more amnesty schemes---which was a lollypop for critics.

o However, the PPP government had gone on to offer the same to stock
exchange investors in April 2012 and all kinds of concessions were dished out
to tax evaders during May and June 2012 to achieve the time's budget target
of Rs1,952 billion.

o The target was missed by over Rs70 billion though.

o In 2013, the Pakistan Muslim League-Nawaz government had announced a

money-whitening scheme, dealing only with assets held within the country.

o This scheme was primarily intended for owners of imported cars who had
brought them into the country without paying due taxes.

o The 2016 scheme saw just 10,000 declarations coming forth, contributing a
mere Rs0.85 billion.

o Research further shows that in November 2016, a National Assembly panel

had approved a blanket tax amnesty scheme to whiten an estimated Rs7
trillion of black money invested in the real estate sector, despite stiff
opposition by the Federal Board of Revenue.

o Although this scheme was seen as a defeat of the Finance Ministry, which
had vowed to force people to pay their taxes on property transactions at fair
market values just five months back, the National Assembly had approved this
mega tax amnesty scheme on December 1, 2016 for the real estate sector.

o The Lower House of Parliament had approved whitening of black money

invested in this sector by paying only three per cent tax instead of recovering
taxes.

o In April 2018, the-then Pakistani Prime Minister, Shahid Khaqan Abbasi, had
given the tax dodgers a chance to come clean through what can be dubbed
 an 'extremely generous' amnesty scheme for undeclared local and foreign
assets.

o By June 30, 2018, nearly 5,000 people in Pakistan had filed returns declaring
their foreign assets and deposited approximately Rs80 billion in taxes.

o The scheme was launched by the PML (N) government and passed through
parliament in a bid to boost the national foreign exchange reserves, which
were then hovering around the USD 10 billion mark, sufficient to finance
barely two months of imports!

o As far as the 2018 tax amnesty scheme was concerned, research conducted
by the "Jang Group and Geo Television Network" shows that hints about this
initiative were actually dropped by disqualified Prime Minister Nawaz Sharif in
January 2017 during an export trophy function held under the aegis of the
Federation of Pakistan Chambers of Commerce & Industry (FPCCI).

o Nawaz Sharif had assured a galaxy of industrial magnates in Karachi that he

would talk to Ishaq Dar, his Minister for Finance, Revenue and Privatization,
for promulgating a one-time tax amnesty scheme.

o However, as luck would have it, Nawaz Sharif was disqualified on July 28,
2017 by Supreme Court of Pakistan.

o Heading a country with just 1.2 million filers, including only 0.7 million people
who are actually paying taxes, Premier Shahid Khaqan Abbasi had basically
extended the proverbial 'olive branch' to Pakistani citizens who had failed to
report their undeclared assets to the tax authorities.

o Research reveals that a lot of countries have launched such money-whitening

schemes in the past and have reaped lucrative financial dividends.

Here follow some international precedents in this context:

o In October 2016, the Indian tax amnesty had drawn $9.8billion in asset
declarations.

o An October 2, 2016 report of the "Financial Times" India had stated: "A four-
month amnesty for tax evaders in India has resulted in the declaration of
hidden assets worth nearly $10bn, the government has said, as it seeks to
fulfill an election pledge to crack down on illicit "black money." The Income
Declaration Scheme, which ran from June through September, allowed
citizens to report assets previously undeclared to the tax authorities, without
risk of prosecution. A charge of 45 per cent was to be levied on the assets
declared under the scheme — one of the most conspicuous initiatives in
Prime Minister Narendra Modi’s drive to tackle widespread corruption that is
seen as a significant drag on the economy."
o The widely-subscribed Indian media outlet had added: "Arun Jaitley, finance
minister, told reporters at the weekend that assets worth Rs652.5billion
($9.8billion) had been declared under the scheme, implying a boost to
government revenue of Rs294billion. The amnesty attracted 64,275
declarations, with the average amount declared standing at Rs10.2million.
The initiative followed a similar one launched in 1997 that yielded revenue of
Rs97.6billion, but Mr Jaitley said that the latest drive was firmer in its
treatment of evaders, arguing that the previous effort had allowed them to
make payments based on unduly low valuations of their assets."

o It is imperative to note that in 1997, after the Indian Voluntary Disclosure

Scheme was announced, the civil society had strongly objected to the same
and represented to the Government to drop the proposal. However, the
scheme was implemented.

o In India more than 15 disclosure schemes have been introduced till date.

o The "Financial Times" had maintained: “Liases Foras, a property research

company, estimated in 2014 that 30 to 40 per cent of Indian real estate
transactions involved an illicit cash payment. Firm progress in reducing tax
evasion would boost the credibility of Mr Modi’s government, which made this
a key part of its 2014 election manifesto. The US-based group Global
Financial Integrity has estimated that Indians sent $343 billion of assets
abroad illicitly between 2002 and 2011."

o Innumerable American states have had tax amnesties.

o For example, the Los Angeles administration had collected $18.6 million in its
2009 tax amnesty programme, claiming that the amount was $8.6 million
more than was expected and that businesses saved $6.7 million in penalties.
The state of Louisiana had brought in $450 million from its 2009 tax amnesty
programme, three times more than what was expected.

o On June 26, 2012, the United States Internal Revenue Service (IRS), which
the nation's tax collection agency, had said its offshore voluntary disclosure
programmes had collected more than $5 billion in back taxes, interest and
penalties from 33,000 voluntary disclosures made under the first two
programmes.

o In Canada, a tax amnesty scheme called the "Voluntary Disclosure

Programme" already exists for income tax and Excise related offences.

o The Canada Revenue Agency has given this relief for a 10-year period prior
to the date of filing and covers unfiled tax returns and unfiled information
returns such as offshore asset form. Eligible taxpayers receive full penalty
relief, and avoid any possible tax evasion prosecution.
o In Belgium, during 2004, the country's legislative house had adopted a law
allowing individuals subject to Belgian income tax to regularize the
undeclared, or untaxed, assets they held before June 1, 2003.

o In 2004, Germany had also granted a tax amnesty in connection with tax
evasion.

o The largest Islamic country, Indonesia, had netted about $9.61 billion in
March 2017.

o The country had previously given such incentives in 1964, 1984 and 2008
also.

o In 2003, South Africa had enacted the Exchange Control Amnesty and
Amendment of Taxation Laws Act, a tax amnesty.

o In 2012, the Spanish government had announced a tax evasion amnesty for
undeclared assets or those hidden in tax havens. Repatriation was allowed by
paying a 10 percent tax, with no criminal penalty.

o Italy had first introduced a tax amnesty in 2001. In 2009, the Italian tax
amnesty subjected repatriated assets to a flat tax of 5 per cent and
succeeded in whitening a huge amount. About 80 billion Euros in assets were
declared, which resulted in tax revenues of 4 Billion Euros. The Bank of Italy
had estimated that Italian citizens held around 500billion Euros in undeclared
funds outside the country.

o In 2007, a Russian tax amnesty programme had collected $130 million in the
first six months. The Russian programme, however, was not open to anyone
previously convicted of tax crimes such as tax evasion.

o On September 30, 2010, the government of Greece had granted tax amnesty
to millions of Greek citizens by paying just 55 percent of the outstanding
debts.

o In 2014, the Australian Tax Office (ATO) tax amnesty had netted billions, but
probes against rich with secret Swiss accounts were not shelved.

o On December 9, 2014, the “Sydney Morning Herald” had written: “Around

1750 Australians have declared a total of $240 million in income and $1.7
billion in assets under the amnesty and another 800 expected to make
voluntary disclosures. The biggest individual disclosure by a taxpayer was
$30 million in income $120 million in assets that had been held in
Liechtenstein and Switzerland. The smallest was a disclosure of $10,000.
Only 130 individuals made declarations about property. The vast majority of
voluntary disclosures were related to income and shares.”
o The prestigious Australian media house had maintained: “In a warning to
anyone feeling reluctant to come forward, ATO said it has an "informer" who
has already handed them a list of 122 Australians with Swiss bank accounts.
 Switzerland proved to be the most popular destination for undeclared wealth
(585 individual disclosures were made about money and assets hidden there),
followed by the UK (299 disclosures), Israel (231 disclosures), Singapore (123
disclosures), Hong Kong (115 disclosures) and Liechtenstein (43 disclosures).

Table-1. Tax Amnesties for the period of 1990 to 2018 in 24 selected countries. The program details are
obtained from different sources. 10111213

Name of
Year of tax amnesty Data Sources
Country

Argentina 1995, 2012-2014, 2016-2017 (6) (Purnomolastu, 2017), (OECD, 2015)

Australia 2007, 2009, 2014 (3) (Tofan, 2017), (OECD, 2015)

Austria 1993, 2012-2013 (3) (Purnomolastu, 2017), (OECD, 2015)

(Wikipedia), (Tofan, 2017), (OECD,

Belgium 2004, 2013 (2)
2015)

Canada 2002, 2007 (2) (Tofan, 2017)

Colombia 2015-2017 (2) footnote 14

Finland 2014 (1) (OECD, 2015)

France 2013 (1) footnote15

Germany 2004(1) (Wikipedia)

Greece 2010 (1) (Tofan, 2017), (Agbonika, 2015)

Indonesia 2008, 2017 (2) (Wikipedia)

Ireland 1993 (1) (Huda and Hernoko, 2017)

Italy 2001, 2003, 2009 (3) (Tofan, 2017), (Agbonika, 2015)

Mexico 2013 (1) (Luitel and Tosun, 2014)

Dependence on aids and loans:
Imapcts of imf on Pakistan (notes attached)

Why Pakistan go to IMF again and again:

Pakistan’s formula for economic growth is as flawed as it gets: borrow foreign

currency-denominated loans, build some large-scale infrastructure, get a minor
growth spurt in the process, and wait until this growth spurt fades so we can repeat
the process again. 

This is what the previous government did. And, the one before that. It could have
worked if, while borrowing to build infrastructure, it did not ignore the underlying
constraints to growth and productivity. Because they did not do that, Pakistan has
ended up with an increasing level of debt, a balance of payment crises, and a
government struggling to keep the growth spurt going. When these challenges
become dire — Pakistan often ends up getting a loan by the International Monetary
Fund (IMF). This time, if we’re successful in persuading them which looks to be the
case, will be the 22nd occasion we will be loaned capital by the fund since 1958. 

And, if our public discourse and policies remain the same, we will without doubt keep
knocking at IMF’s door every few years (or some other lender for that matter).The
logical argument made by analysts in Pakistan here is that the government needs to
bring meaningful reforms to our economy. So, in due course, we are in a fiscally
sound enough condition that we not require bailouts like the ones we get from the
IMF. This is a perfectly accurate demand. But, it often masks the political causes to
our economic despair. The problem with talking about the economy divorced from
politics is that we end up with superficial reforms. This is because any meaningful
reforms are impossible if the political structure does not allow them. For this to
change, our public discourse needs to take a holistic overview of our institutions.
This is a contribution to that end. 

Digging deeper
Let me explain. Take the much talked about balance of payment crisis as an
example. The most direct culprits are lack of exports and the increasing cost of
imports. Pakistan imports nearly twice as many products and services than it
exports. In turn, there are many causes for low exports, some are macroeconomic
determinants. The unsound infatuation of the previous government with an
appreciated rupee is an example of this. Dig deeper, we are exposed to the fact that
Pakistan has developed little comparative advantage over the years. Which means
that we mostly export basic textiles, cotton and rice and other related products. Most
of them are low-value items in the global value chain, so we earn little revenue from
exporting them, and are hence unable to cover our import bill.

Dig further, we find that even in products which we do export, we face structural

problems  —  such as lack of capital, whether it is human or financial. Hence,
exporters struggle to grow, move up the value chain, compete with foreign firms, and
boost productivity. But, why is this? Why does Pakistan fail to provide an
environment which is conducive to developing globally competitive enterprises? here
are many explanations here — but one persuasive thought is that our institutions do
not create the set of incentives needed for the growth of a competitive market.
instead, they encourage a reliance on state patronage even if it comes at the cost of
the larger industrial growth. 

Pakistan’s public discourse has been rather good at ignoring these underlying
causes. The result of this has been that, whenever Pakistan has found itself in such
crises, it has been able to get loans to sail, or crawl, through the crisis. But, all those
reasons why this crisis emerged in the first place will remain — waiting to fuel
another crisis down the road.It is like putting the fire out but not fixing the leaking gas
socket in the basement.

What are institutions?

A good place to start is understanding what institutions are, and how they influence
our collective behaviour. Simply put, institutions are the ‘rules of the game’ as
Douglas North popularly put it in his 1990 book. Think about cricket — we have
certain rules under which everyone plays the game. There has to be a fixed number
of players, they have a number of balls to play with, and everyone has a consensus
on how we determine which team wins.Now, apply the intuition behind this analogy
to the broader institutions which shape our daily life. Like the rules which govern the
game of cricket, we have humanly devised rules which govern our lives in a more
consequential manner. 

They can be formal which are written down, such as the laws of the land often
codified in the constitution, or informal ones widely accepted by the population, such
as kinship bonds. These institutions are important because without them, society as
we know it would collapse. But, these institutions differ from country to country, and
a persuasive strand of economic literature argues that they are the key to
understanding our development outcomes.We can also split them between
economic and political institutions. The former directly shape our economic
incentives, such as ownership rights of property, and the latter determine the political
structure, such as whether we’re a parliamentary democracy or not. As a society, we
decide which economic and political institutions to adopt, and these institutions
shape much of our behaviour through shaping our incentives. Incentives, any
economist can tell you, are fundamental to understanding any society’s prosperity or
lack thereof.

It’s not economics, stupid. It’s politics

The political institutions, I’d argue, are more important in determining our prosperity.
As Acemoglu and Robinson argue, those who control the political power determine
economic institutions. So, if political power (which in turn determines the political
institutions) is controlled by a small, extractive elite, they will set up economic
institutions which benefit them, not the majority. If the elite benefit from an economy
underpinned by clientelism and patronage rather than a well-functioning competitive
economy, they will choose the former. 

It is important to remember that there is plenty of profit in poverty. It just happens to

be controlled by few.Now, look at Pakistan. Our political economy is defined by an
embedded culture of rent-seeking and patronage. This means we have a system
which grants profits to certain players in our economy unfairly, hence undermining
the central principle of efficient market allocation — fair competition — and creating a
wrong set of incentives for businesses.
Our manufacturing sector is rife with examples of rent-seeking practices. For
example, Pakistan’s automobile sector is dominated by a handful of Japanese
manufacturers known for selling low-value cars while making a considerable
profit. Despite this, Pakistan provides them with extensive trade barriers to protect
them from foreign competition. The recent finance bill (since amended) further shows
the extent of their political patronage. This is not by accident. Because Pakistan’s
political power is controlled by an extractive elite, it has allowed for such political
institutions to emerge which permit its government to provide these rents to certain
car manufactures with immunity, even if this negatively impacts our shared
prosperity. 

Direct evidence of our political structure influencing economic outcomes comes from

a paper by Asim Ijaz Khwaja and Atif Mian. They show that politically connected
firms in Pakistan receive loans from government banks in Pakistan at lower rates
despite defaulting more than non-politically connected firms. This is evidence of
unaccountable political power translating into inefficient economic allocation.Look at
this from another angle. A large amount of economic history literature argues that
one of the many reasons why some East Asian countries prospered in the second
half of the 20th century was because of land reforms. 

By undertaking substantial land reforms, these countries were not only to increase
agricultural output but also raise living standards for their surplus labour, which, in
the long run, subsidised their move towards industrialisation.

If land reforms are important for growth, would Pakistan ever adopt them in any
meaningful way? 

Despite attempts to do so, Pakistan has not gone through significant land reforms
and over 10 million acres of land still remains under tenancy, while one estimate puts
the average farm size in Pakistan at about six acres. In South Korea, despite a
significant increase in average farm size over the recent past, it still averages at
about 3.5 acres (as of 2005).Without making a deep dive into the history or merits of
land reforms, if we agree for the sake of argument that more radical land reforms are
needed in Pakistan — can we undertake such reforms when political power and
institutions are so highly influenced by those who control large farm holdings?  In
other words, if feudal lords control the political institutions, it shouldn’t be a surprise
that economic outcomes will favour them.

To fix the economy, focus on the political discourse

What may seem to a passer-by as a country which continues to choose poorly
thought-out economic policies, sees rampant corruption and a failure to establish a
productive industrial base, are in fact symptoms of the political institutional structure
which benefits a narrow extractive governing elite at the cost of everyone else. Our
economic failure is a symptom of our collective political choices. Once we can
allocate political power more fairly, we can make better economic outcomes.
Tweaking institutions at the margins does have some impact. Hence, the IMF’s
stabilisation programme will provide some macroeconomic stability. 

The stock market might recover, the fiscal deficit might get narrower. Taxes might
increase a bit, so will inflation. And, in due course, we will issue a statement saying
goodbye to the IMF for few years. Before repeating the process again and again.
But, if the new government wants to break this cycle and make a sincere attempt at
reforming Pakistan into some sort of an egalitarian, prosperous nation, it needs to
start by looking at political power and the political institutions which rise from them,
as they are the real constraints to our growth. Even if it can make marginal changes
on the economic front, they would not unlock the kind of transformative shift we need
for widespread prosperity.

Population explosion:
Way back in 1798, Thomas Malthus was astonished to see the growing mass of
humanity and warned about its consequence. He said, “The power of population is
so superior to the power of the earth to produce subsistence for man, that
premature death must in some shape or other visit the human race.”
In a matter of a few years from the writing of these words, the global population hit
one billion, which has now reached almost 7.5 billion. 
Though this exponential growth has not created the situation that Malthus has
indicated, it nevertheless has created conditions, such as climate crisis, which has
strained the earth’s capacity to generate resources at the optimal level. According
to recent research led by the University of Washington and published in The
Lancet, the earth’s population will peak at 9.6 billion in 2064. 
The contribution of Pakistan to this population bulge will be immense, to say the
least. As per the Pakistan Bureau of Statistics sixth census report, Pakistan’s
population stands at well over 200 million — a 60% rise from the last census that
took place in 1998. This almost unchecked population growth is a governance
issue because of the strain it lays on resources leaving the government with limited
choices to produce quality human beings — a critical area for the development of a
country’s economic base. 
At 2.4%, Pakistan’s annual population growth rate is higher than many countries.
Not surprisingly we have surpassed Brazil as the fifth most populous country in the
world.
Though we take pride in the so-called youth bulge that overpopulation has
bestowed upon us, the reality is that this demographic change has led to a rise in
urban migration. Today more than 20% of Pakistanis live in 10 major cities. 
The young people unable to find job opportunities in villages and small towns are
forced to move to cities. Had the government planned to create new cities, as is the
practice throughout the developing world, we might have had fewer issues as
regards to employment opportunities, high inflation, and unplanned urbanisation. 
According to some reports, urbanisation in Pakistan is growing at an annual rate of
3%, which is the highest growth rate in South Asia. The United Nations Population
Division estimates that “by 2025 nearly half the country’s population will live in
urban areas.” Are we aware of the crisis this will generate? 
There is a direct correlation between demography and security. Historically,
population growth has been one of the destabilising factors in the least developed
countries. Young people are usually more susceptible to extreme behaviours. A
study conducted by Population Action International shows that about 80% of the
world’s civil conflicts since the 1970s have occurred in countries with young, fast-
growing populations.
Ideally, we should have used the demographic power to our advantage, but lack of
investment in education and the inability of the state to produce economic
opportunities through the development of manufacturing sector, the youth bulge
has become a liability, which can be a serious threat to the country’s security.
In a turnaround from terrorism, which until a few years back had been bleeding
Pakistan to death, a fight is still raging to reduce extremism, especially in the
matter of religion, where space for diversity is fast shrinking. But it is not just
religious fanaticism that has contributed to making the youth belligerent. Other
factors are equally responsible. According to different estimates, almost 32% of our
young generation is illiterate while a majority of others are school dropouts. Our
enrolment rate is the lowest in South Asia. We spend 2% of GDP on education,
while the quality of education has been questionable since ages now. Young
people leaving colleges are hard put to face the challenges of the globalised world. 
Attention towards this anomaly is also drawn in the State Bank of Pakistan’s third
quarterly report entitled “The State of Pakistan’s Economy — 2019-2020”. The
report reveals: “When it comes to productivity, the poor state of human capital
development is cited as one of the major binding constraints for Pakistan. With
education and training on the lower side, the existing and incoming labour force
does not have the desired level of capacity to effectively participate in economic
activities.” 
According to the State Bank estimate, 1.8 million people enter the job market
annually in Pakistan. For their absorption in the workforce, Pakistan needs an
annual economic growth rate of at least 6 to 7%. As of 2018, there were 3.8 million
people unemployed in the country. One is sure that in the aftermath of the
coronavirus-induced economic shutdown this figure must have multiplied — a scary
situation to grapple with. Many a research has identified a direct link between
religious extremism and social and economic marginalisation.
This scenario becomes more worrisome when we see the political leadership giving
patchy attention to the implications of the population explosion and its fall out. For
generations now, almost every government has issued cash-based youth
programmes, but none has prioritised the development of small and medium-sized
businesses — the real backbone of any country’s economic strength. 
We can solve this enigma in two ways. First is the traditional method of introducing
family planning interventions with a focus to accelerate women’s access to
contraceptives and to remove societal stigma the right-wing quarters have attached
to the topic of birth control. Second is by introducing human development
interventions such as: providing every child equal opportunity of getting an
education until high school; creating universal health coverage system with a focus
on prevention to mitigate environmental hazards; generating employment
opportunities through business development; and bringing more women into the
workforce. The list goes on. However, these are the bare minimum a country could
do to put its growing population to good use. Interestingly, the adoption of the
second method would automatically take care of the issue of population growth. 
Pakistan is on the verge of meeting developmental indicators of a developed
country because of CPEC. All that is needed is a vision that could transform this
project into an opportunity and turn this youth bulge from a liability to an asset. Are
we ready for the challenge?

Issue of double deficit:

Pakistani media has a knack for churning out complex and technical terminology in
order to manufacture narratives. It seems the aim is to shape public opinion on a
given subject matter to the innocent bystander that even TV anchors can easily
appear as Ivy League PhD graduates in Economics. Perhaps a part within us readily
accepts the great illusion of knowledge presented by anchors – but that’s a topic of
discussion for another time. Getting down to business – the “twin deficits” is a term
you’ve probably heard repeatedly in the media in the past few months. Economists
tend to panic when they see the twins and they rightly do so; historically, economies
have nosedived into catastrophe due to the mere existence of the twins.

But who exactly are these twins and why are we taking so much time out to discuss
them? What are the reasons for their existence in Pakistan and what can be done to
alleviate us from their presence?In economic theory, a “twin deficit” occurs due to an
existing causal relationship between two leading economic indicators that define
money movement: the “budget account deficit” and “current account deficit”.

In Latin, the word deficit means “lacking”. To simply put it, when the budget account
and current account lack in conjunction, “twin deficits” becomes a reality. The theory
goes to say that a lack of the former leads to lacking the latter.In laymen terms, the
budget account itself measures the difference between government spending and
revenue collection. The government collects money via numerous taxing methods
and other non-tax items such as receipts of domestic and international investments.

The government spending is predominately on infrastructure, development projects

and day-to-day operations of its institutions. And in some cases, in Pakistan,
spending could also mean pocketing some of that cash for goodwill (i.e.
corruption).What’s interesting is when one breaks down the budget account into two
further measures: the revenue account and the fiscal account. Both measures touch
upon different sides of the government’s earning and spending habits.In basic terms,
a deficit in the revenue account alludes to a shortfall in cash to cover day-to-day
expenses, whilst a deficit in the fiscal account alludes to the additional shortfall from
non-day-to-day expenses such as investments (example Metro Bus Project – the
money invested vs the return on investment).Hence the fiscal deficit is a true
indicator of the “financing gap” and the difference between fiscal and revenue deficit
indicates the proportion of deficit from sloppy investments.

Pakistan has naturally been a victim of a revenue deficit for decades. This is
primarily due to tax evasion, ease of corruption, money laundering and poorly
managed state institutions. Our tax base is heavily distorted as low and narrow, and
the policies of the government tend to give a discriminatory preference to certain
sectors (i.e. agriculture).There is an imbalance in direct vs indirect taxes in the
economy. In 2017, indirect taxes accounted for 80% of the total revenue share,
mostly coming from skyrocketed custom duties and excise duties. The tax system is
regressive as best described, overly burdening some sectors/income bands and
distributed unequally.

Adding to this, corruption and money laundering literally lead to a withdrawal of

money from the domestic economy into dark investment pools around the globe.
Naturally, that has led to distrust by the general population and has resulted in only
1% of the population paying taxes. State institutions are another financial
catastrophe in Pakistan – for these institutions, what you put in, you never get back.
As of March, the major public sector enterprises reported an accumulative loss of
Rs. 1.2 trillion. Likely corruption has played a vital role in this performance as well.
On top of this, leading up to the elections in 2018, Pakistan has suffered from out-of-
proportion spending on infrastructure projects initiated for none other than a political
hatch. Albeit the investments were a small portion of the total budget deficit, but
projects such as the Lahore Metro Bus was almost 50% of Punjab’s development
budget (Rs30b vs Rs62b).

Avoiding such shenanigans could have led to building seven hospitals using the
same amount of cash (Shaukat Khanum Cancer Hospital in Lahore was built for
Rs4b). And let’s not forget the more than Rs. 1 billion of yearly subsidies required to
run this state-owned bleeding juggernaut.However, how does all this lead to a deficit
in the current account? Well, the current account is a trade-related economic
indicator measuring the difference between the value of goods, capital and services
imported vs exported.

Generally, the current account deficit occurs from imports (goods and services)
exceeding exports, and foreign capital injection (foreign investments) exceeding
savings by local residents.Hence the theory goes to say that when the budget
account exhibits a deficit (say from tax cuts or over-spending on projects), the result
is an increase in overall consumption of domestic and imported goods in the
country.The increase in consumption results in a reduction in the national savings,
hence requiring the government to borrow more from abroad to continue to finance
the internal demand. When additional foreign capital injection is obtained, it is
pumped back into the economy to push consumption further.

A vicious cycle leads to these “twin deficits” which is an increase in consumption of

imports, reduction in savings and an increase in foreign capital injection single-
handedly deteriorates the current account balance. At this point, the financing gap
becomes so large that the government has no option but to adhere to austerity
measures, increase the tax net or let the currency depreciate to curb international
investments. Worse comes worst, the country starts borrowing from abroad from the
likes of “friendly neighbours” or last resort institutions like the IMF to fill the financing
gap. Historically, Pakistan has been heavily reliant on the latter.

On an interesting note, Pakistan has run a current account deficit for years in
conjunction with a budget account deficit. This is natural for an oil importing country
with a high consumption of the commodity. However, in recent years, Pakistani
exports have also taken a beating on the back of an artificially inflated PKR valuation
and due to a labyrinth of infrastructural issues challenging the exports industries.

With the budget being directed to shoddy investments with little to no return on
investment, and a high PKR valuation requirement to finance the external debt,
Pakistan has taken a path down to loss of competitiveness. Interestingly, the United
States has run a budget and current account deficit for decades. The country has
even been on the verge of default (a need to increase the debt ceiling) a number of
times in the recent past. However, the difference between Pakistan and the U.S. is
quite significant and boils down to four words: trust in the system. China, as an
example, will continue to invest trillions of dollars in U.S. Treasury Bonds (a
government financial instrument) if there is trust that the system will pay back.
Whether that is through the U.S. Government generating enough revenue or by the
Fed printing more money – it helps when your debt is denominated in your local
currency. A trade deficit really does not impact a high consumption economy with a
solid standing in the international debt markets because the money outflow from
importing eventually finds its way back as capital.

And finally, a key difference worth mentioning is that the financing gap in the U.S. is
bridged with domestic and international borrowing, almost a 50% split, making it less
reliant on arbitrary terms posed by international lenders. At the end of the day
though, it’s not all doom and gloom for us in Pakistan. The current economic state
was inevitable and is nothing new – it is history repeating itself. Circumstances may
be dire, but the core problems remain the same today as they did in previous
generations.

The Khan government needs to reform the tax system and dismantle asymmetric
policies that burden certain industries and tax bands. His cabinet needs to establish
a larger tax net, as it continues to promise, and at the end of the day build trust in the
system that the retained earnings will be reinvested to the betterment of the society.
The full swing operation on bagging corruption needs to continue to bring purity to
the system, with continued efforts on curbing money laundering. The focus on
scrutinizing the processes of public sector enterprises may help bring some
efficiencies and perhaps even profitability at some point in the coming years. With all
the above, the king of all policies will be the austerity measures. Not only will such
policies allow us to get our finances back on track but will bring self-discipline in an
already eroded system. The PM has a long way to go, but it is quite evident that the
policies are a step in the right direction.

FATF and its implications on Economy of Pakistan:

Read this article to understand working of FATF, it was not copying so I have
provided the link

Read more at:

http://timesofindia.indiatimes.com/articleshow/71617249.cms?
utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
 

Impact of COVID on developing countries / Pakistan:

The Covid-19 crisis, which first hit the developed world, is now spreading into
developing countries. Experts from the United Nations (UN), United Nations
Development Program (UNDP), and the World Health Organization (WHO) have
stressed deep concern about the long-term impact the pandemic could have on
these nations.
Developing countries tend to be poorer, working to become more advanced
economically and socially––their infrastructures aren't as established as those you
find in Europe and the US. They also rely on primary sector roles––all activities that
consist of exploiting natural resources, like agriculture, mining, and forestry––and so
they are particularly impacted by disrupted supply chains and lower demand for their
goods.

If a poorer country can't sell its resources, then a huge percentage of its national
businesses and workforces are going to feel the pinch. Therein lies the problem
when a global pandemic hits and their richer trading partners shut their borders.

As a result, developing countries could see income losses in excess of $220 billion,
according to the United Nations Development Program (UNDP).
The UNDP are putting plans in place to support them during the pandemic and
beyond it, but is it too little too late? 

Developing economies | Why will be they be especially impacted?

Developing economies are less diversified. HEC Paris professor of economics and
decision science, Tomasz Michalski, says that with increased reliance on fewer
industries––largely in manufacturing, resourcing, and tourism––developing countries
struggle to continue generating revenue in times of market volatility. For example,
with supply chains disrupted by closed borders, manufacturing companies are taking
a big hit.

Relations between international economies is something Tomasz focuses on in his

teaching, leading courses in Macroeconomics and International Economics in the
Grande Ecole and other MSc programs at HEC Paris. 
"They have limited room for monetary or fiscal policy intervention,” Tomasz (pictured)
explains. If you are wholly reliant on few industries rather than diversified across
markets, then there’s less chance you are able to guarantee liquidity––essentially
moveable cashflows that can help an economy remain reactive to the wider
macroeconomy. If you have cash to hand, then you can move your money more
quickly, investing it where it's most needed.

The impact on poorer countries right now

Already, more than 90 developing countries have approached the International

Monetary Fund (IMF) for access to its emergency funding and financial assistance.
24 of the IMF's low-income member countries are benefiting from immediate debt
relief so far. But the IMF is calling for the temporary suspension of debt payments to
banks for the poorest developing countries.

If we look at Sub-Saharan African governments as an example of how fiscal

inflexibility is damaging their economies when faced with closed borders and
disrupted supply chains, we’re seeing the impact through depressed commodity
revenues (less money for tradeable goods), a collapse in tourism, and lack of foreign
investment. 
“When you see a drop in demand as we are right now, with tourism for instance,
we’re seeing economies being brought to their knees,” independent consultant and
lecturer (currently teaching at Stanford Graduate School of Business) Giovanna
Prennushi, explains. 

The issue is more than financial. Fighting the impact of coronavirus goes beyond a
country's ability to repay debt or keep its economy moving. Healthcare systems in
the developing world often lag behind those found in developed nations, both in
terms of technology and capacity. This hampers the initial response to dealing with a
surge in patients, but also means countries may be less equipped for a second wave
of infection. 

The stress on healthcare in developing countries 

Despite all of this, what’s been surprising is that countries reporting the highest
numbers of cases and deaths are wealthier, with developing countries making up
just 2% of the global death toll (as of May 2020).  
As a former World Bank economist, with over 20 years of experience evaluating and
supporting economic development in African and South Asian countries, Giovanna
points out that the numbers being reported by developing countries likely don’t reflect
the true impact. “The caveat is that the testing done in developing countries is much,
much less than what we’ve had in developed countries or in Europe.” 
In other words, not every case is identified and reported, due to lack of resources.  
This lack of resources and disparity in available healthcare is a big problem for
developing countries, Giovanna adds. African countries, on average, have 2.2
qualified healthcare workers per 1,000 people (compared to 14 per 1,000 in Europe).
Nigeria is reported to have fewer than 500 ventilators, which are crucial to treating
the more serious cases of COVID-19.   
“One thing that’s clear is that some countries have better access and funding to top-
of-the-line healthcare than others,” Giovanna continues.  
Countries like China, who are easing out of lockdown, have begun to offer large in-
kind medical donations to less developed countries. Some have labelled this
“facemask diplomacy”.  
Many countries have turned inward during the crisis, dealing first with the stress
within their own healthcare systems before looking to assist other struggling nations.
This means developing countries are simply not being offered the same level of
support––both financially and through healthcare––than they would if this was a
crisis solely impacting the developing world.  
“I think the pandemic will continue to widen the gap,” says Giovanna, who  has been
teaching courses at Stanford that focus on reducing worldwide poverty and
addressing economic disparity between developing and developed countries. She
fears that the pandemic will undo some of the progress that's been made in recent
years. But what will this look like?

Covid-19: The future impact on developing economies

Tomasz predicts that we’re likely to see an increase in emigration from developing
countries, as laid-off workers look for jobs elsewhere––most likely in more developed
countries. That will have an impact in two ways. It would leave poorer countries with
less workers to fill essential jobs and contribute to the economy, and also put
pressure on developed countries to support the inflow of new workers.
If developing countries are losing their workforce, then economic recovery will be
slower, and the prospect of paying off debt becomes far more overwhelming.

“I expect difficulties in repaying [...] debt in the years to come,” he says. “The

situation in many countries may in fact become so dire that they may experience
widespread hunger and state failure, with a decade lost to economic growth.” 
To put it simply: if developing countries aren’t generating money, they can’t meet the
terms of loans provided by developed countries and banks––such as the US Federal
Reserve and European Central Bank. 
What can be done to help developing countries? 
The United Nations Department of Economic and Social Affairs warns that COVID-
19 threatens to undo the progress that has been made since the current Sustainable
Development Goals were introduced in 2015. These call for continued work towards
ending poverty, as well as promoting sustainability across the world.   
Developed countries continue to have a responsibility to developing countries as
Covid-19 begins to take root. The World Economic Forum is calling for an increase in
official funding assistance, broader debt relief, and the urgent establishment of an
international solidarity fund.
But developing countries can also help themselves, Tomasz argues. “What might be
needed is a sort of Marshall plan for many developing countries soon, which would
create a win-win for both developed and developing countries. 
“Such proposals were on the table even before the pandemic, concerning especially
African countries in aiding their development and halting immigration to Europe and
the U.S. But I am not optimistic.” 
One solution Tomasz suggests could be for developed countries and banks to
consider writing-off existing debts for developing countries where possible.
Developing countries shouldn’t be penalized for defaulting on payments by further
restricting their economies through new trade barriers or ‘reshoring’ resource
industries, e.g. sourcing textile materials from other countries.  
But, as Giovanna (pictured) points out, this can only be achieved if countries––both
developed and developing––work together. 
“Nobody has a crystal ball,” she admits, “but we’re all realizing the virus is here
to stay and need to adapt accordingly. It’s going to change our behaviors for quite
some time.

Why Pakistan cannot make best of its natural resources:

Outline
1-    Introduction
2-    Natural Resources and their management
3-    Richness / abundance of natural resources in Pakistan
4-    Pakistan’s natural resources and their mismanagement
a)    Energy resources
i-    Nonrenewable energy resources
a.    Oil and Gas reserves
b.    Coal reserves
ii-    Renewable energy resources
a.    Wind and solar power
b.    Hydropower
b)    Agricultural resources
i-    Irrigation Network
ii-    Fertile Land
iii-    Variety of Crops
iv-    Animal Husbandry
v-    Fishing
c)    Mineral Ore Resources
i.    Copper and gold resources.
ii.    Salt mines and other minerals
d)    Human resources
i.    Sixth Largest Population in the World
ii.    Youth comprising major chuck
5-    Factors leading to poor management / Governance
a)    Political instability/ rivalry,
b)    Lack of vision and planning,
c)    Flawed policies,
d)    Bureaucratic bottlenecks and corruption,
e)    Worsened Law and order situation,
6-    Implications of mismanagement of natural resources
7-    Way forward
8-    Conclusion

Essay
Pakistan is one of the richest countries in the world in terms of natural resources but
also one of the poorest among them in their management. The country is abundant
in the vital resources including that of energy, agriculture, minerals, population, and
geography, but unlike the developed countries, these have not been properly
exploited due to poor management. This dismayed situation is caused due to
several, both chronic and acute, flaws which have led to poor governance of country
since its inception except some brief spells of economic prosperity. Prevalent
political rivalry and instability, worsening law and order and rampant corruption have
catalyzed the situation to resource development impasse.  Contrary to economic
potential of its natural resources, Pakistan is a depending on foreign aid and debt, it
is facing deficit in trade, acute energy crisis to run industry, and water stress for
agriculture, to name a few challenges.
However, the daunting challenges and the mounting public pressure caused due to
awareness of civil society are increasingly influencing the political decision making.
Eventually, there is sign of hope for devising effective strategy to exploit the natural
resource wealth of the country for its self sufficiency and viable economic
development. It is suffice to say that the proper exploitation of this wealth would lead
to the prosperity of this nation.
Before discussing what natural resources Pakistan possesses, it is important to
understand what constitutes natural resources. These occur naturally within
environments characterised by amounts of biodiversity and geodiversity existent in
various ecosystems. Some resources like water and agriculture are essential for
survival of inhabitants while others like energy and minerals are secondary in nature
but essential for economic development. However, efficient management of these
resources is vital to achieve prosperity of nation. Natural resource management is a
discipline with a particular focus on how management affects the quality of life for
both present and future generations. It is interrelated with the concept of sustainable
development. Pakistan is blessed with huge quantity of resources but lags in
management.
Pakistan is affluent in the natural resources. It has enormous energy surplus
resource potential of both renewable and nonrenewable, which is greater than that of
oil rich countries of Gulf.
Being situated at one of the best geographic and geostrategic locations on the map
of world, Pakistan is affluent in the natural resources. It has enormous energy
surplus resource potential of both renewable and nonrenewable, which is greater
than that of oil rich countries of Gulf. Among the world’s 200 plus countries it has the
second largest salt mines, second largest coal reserves, fifth largest copper and gold
reserves, seventh largest wheat and rice production capacity. It is the sixth most
populous country in the world having large share of young population. Had these
resources been properly managed, this country would have been one of the richest
economies of world. The detailed account of the natural wealth of Pakistan shows
how such great potential has been untapped due to mismanagement.
There are plenty of nonrenewable energy resources like oil, gas and coal in
Pakistan. It has more than 436.2 million barrels of oil, according to CIA World Fact
Book, and 31.3 trillion cubic feet of proven gas reserves. The current oil production is
65,997 barrels per day while gas production is 4 billion cubic feet per day. Though it
is not enough to meet the needs, it can save considerable outflow of currency.
Moreover, there is resource potential of 27 billion Barrels of Oil and 282 TCF of gas
reserves in the country which has not been explored due to lack of vision and flawed
policies.
Pakistan has world’s second largest coal deposits of 185 billion tons. These are
estimated to be equivalent to 618 billion barrels of crude oil. This is more than twice
if we compare it with oil reserves of Saudi Arabia. If it is converted into oil by
gasification, it will generate 650 barrels of crude oil which at an average market rate
of eighty dollars per barrel, would generate 5.2 trillion dollars. But the policy making
elite of the country has not only been oblivious to the potential but also indifferent to
the slow pace of efforts to harness this source for energy production and exports.
The energy deficit is badly affecting the industry in country but no any serious
initiative is taken for electricity production from coal. China imports its 65 percent of
coal requirements but despite being ‘all weather friend’, this giant energy importing
economy does not import coal from Pakistan.
Besides, the geography of Pakistan enriches it with the renewable energy resources.
Wind and Solar energy are other unused lifelines of Pakistan. 1046 km long coastal
line gives potential of 40000 MW of electricity. The vast lands of Balochistan can be
utilized for solar electricity generation. But unfortunately these resources have barely
been used due to technological backwardness and lack of innovative policies.
The hydropower potential of the country is also enough to satisfy the needs of
energy. Only 33 percent of around 20,000 MW generation capacity is produced from
this resource which has the potential of producing 40,000 MW. No concrete steps
have been taken to harness this resource mainly because of political differences and
distrust prevailing in the country.
The lack of vision and policy planning in utilisation of water resource is also severely
affecting agriculture. Despite having one of the largest irrigation systems of the
world, Pakistan is facing water scarcity for crops. Storage capacity of water
reservoirs is quickly depleting because of annual sediment inflow and a substantial
quantum of available water is lost in seepage as the canals have not been
cemented. Out of 77 million acres cultivable area, only 55.5 million acres have been
ploughed. The country is blessed with four seasons and variety of crops but due to
lack of research the productivity remains low.
In addition, being an agricultural country it possesses tremendous scope of animal
husbandry. Pakistan’s breeds of cow like Sahiwal cow are the best breeds of world.
Due care to this area can lead to bulk of exports in dairy products. On other hand,
fishing industry has an important role to play in national economy of Pakistan. The
coast line of 814 km provides ample opportunity to enhance this industry, but poor
performance and poor presentation of our cause in WTO have put this industry at the
verge of destruction.
The minerals are also vital natural resources available in great quantity. Pakistan has
fifth largest copper and gold reserves in the world. The Riko deq project, copper and
gold reservoir, have been estimated to be worth of 260 billion dollars, which is ten
times the all financial aid received from USA in last sixty year. But instead of
exploiting own resources for economic independence, country has been dependent
on foreign aid. How rich Pakistan is, and how poor Pakistanis are! There are other
partially untapped resources of rock salts, Gypsum, lime stone, iron, marble, and
silica sand in large quantities. These resources have not been exploited due to
corruption and bottlenecks in political and bureaucratic culture.
The most important of the natural resources in this globalized world is human
resource. Pakistan is the sixth most populous country in the world having large share
of ‘young population’ i.e. 63 percent below age of 25 years, according to United
Nations Development Programme.  But the failed policies have caused mounting
unemployment of 15 percent. The resource which could be used to enhance the
economic activity is left to no use which is adding to the increase in poverty. The lack
of opportunities leading to the brain drain of talented minds has further worsened the
situation.
The above analysis reveals that Pakistan is not poor, but poorly managed country.
The factors which have caused the poor management of natural resources include
political instability, political indecision making / divergence, lack of vision and
planning, flawed policies, bureaucratic bottlenecks and corruption, lack of human
resource development, worsened law and order situation. These factors have led not
only to the poor management of natural resources but also to the poor governance of
country.
The political instability has been the main cause of such mayhem. Since the
independence, no political group in Pakistan has been given enough time to be
mature. The military interference in politics and rivalry among political stakeholders
are the key features of brief history of this country. This inconsistency has kept the
exploitation of natural wealth unattended. The divergence of opinion on construction
of water resources has deprived the country of storing the surplus water for
agriculture and electricity generation. However, this could be overcome by vision and
planning, which is a scarce commodity here. Instead of controversial big dams
several small reservoirs could be constructed, had a pragmatic approach prevailed
among the decision making machinery.
Coupled with this, the flawed policies of successive governments have caused
tremendous problems despite availability of adequate resources. The energy sector
is a vivid example of such poor management. The major chunk of the electricity is
produced through thermal generation for which almost 80 percent of oil is imported.
Whereas the second largest treasure of coal in the world is left unexplored as it
contributes only 2 percent of electricity generation. Countries like US, China and
India generate electricity by almost 60 percent from coal due to its lower cost. This
shows how other countries take cost of electricity generation into serious
consideration.
However, it would be unfair to put all the burden of poor resource management on
the political factors. The bureaucratic bottlenecks and corruption have been equally
responsible for this undesirable scenario. Several hydro power projects, Thar coal
project, and oil exploration projects are in doldrums due to bureaucratic bottlenecks.
There is no headway in solar and wind energy projects planned by Alternative
Energy Development Board. Similarly, corruption has also been extremely
detrimental. The standstill in the Riko deq project is an example of this case.
Pakistan is ranked at 34 in Corruption Perception Index 2010 by Transparency
International, which is a discouraging factor for foreign direct investment.
Pakistan has world’s second largest coal deposits of 185 billion tons. These are
estimated to be equivalent to 618 billion barrels of crude oil.
In addition, the worsened law and order situation has caused severe blow to the
economy in general and natural resource management in particular. The volatile
situation in Balochistan is harmful to the exploitation of resources. The Gawadar
port, despite being located at crucial location, has not been made fully functional.
Other projects of mineral exploration are also affected. The terrorism in the northern
areas has been harmful for the potential tourism industry.
These factors of poor management have placed Pakistan in an undesirable situation
domestically and internationally. The socio-economic situation remains gloomy as
the GDP growth rate is one of the lowest in South Asia at 2.2 percent, trade deficit is
estimated about $16 billion, inflation rate continues to be in double digits at 15
percent, population below poverty line is alarmingly around 35 percent, and
unemployment is at 15 percent.
Also, it does not enjoy a favorable position among the comity of nations. It is ranked
123rd out of 139 countries in Global Competitive Index; it is at 134th among 192 in
Human development Index by UNDP; and it occupies the critical position of 12th in
Failed States Index 2011 issued by Foreign Policy Magazine.
The country has been economically dependent on foreign aid and debt, which has
adversely affected her standing in international community. However, despite
Pakistan’s crucial role in west’s geostrategic framework and war on terror, the allies
end up donating small amounts of grants which make fractions of what could be
obtained from exploiting own natural resources. The external debts and liabilities
have nearly doubled from $ 37 billion in year 2000, to $ 59.5 billion in year 2011.
Nevertheless, the worst impact so far is the energy crises in Pakistan. There is
serious shortfall of electricity, gas and oil. Electricity demand exceeds supply and
“load shedding” is a common phenomenon. The shortfall of electricity
reaches at 4000-5000 MW which badly affected industry, eventually leading to
decreased exports and diminished economic activity.
These adverse implications, of the extremely poor management of resources, on the
economy and society in the country, warrant a serious approach and comprehensive
strategy to reverse the trend. The pragmatic approach and policy direction can help
the country to be able to rely on its own resources instead of dependency.
Pakistani leadership must focus on exploration of natural resources and their
scientific management. Properly managed natural resources can become
instrumental in national income and its growth. Extensive geological survey is
required to discover the resource potential, planning and vision is needed to explore
the proved but untapped resources and effective strategy is essential to fully exploit
the resources under use.
In order to take maximum benefits from natural resources there is the need of
technical education of people involved in resource exploitation and management.
The technical education ensures that there is minimum wastage of the resources.
Hence, such education should be made compulsory for the people in concerned
areas of activity.
On the other hand, the politicians, policy makers and all the stake holders must
adopt a rational approach not to politicize natural resources. It should be prioritized
as the vital national interest and dealt with as such. The controversies on the
management of water and mineral resources must be resolved pragmatically for best
interest of the nation.
Last but not the least, worsened law and order situation in Pakistan, which has led to
the lack of investment, must be checked. The private firms engaged in resource
exploration must be protected by the state. Ensuring the security, would attract
investment in the respective areas which would subsequently guarantee the inflow of
capital in the national economy and the resource potential could be fully exploited.
It needs not to be emphasised that Pakistan is not poor but poor management of its
natural resources has made it so. The enormous natural resources of all kinds like
energy, minerals, agriculture, and human could have made this country a wealthy
economy. Instead, there been bleak picture of economy and undesirable image
outside due to the chronic flaws in vision and policies. Thus, the daunting challenge
of poor management of natural resources direly needs to be addressed not only to
overcome the perils caused due to it but also to achieve economic self-sufficiency
and prosperity of the nation. By surpassing this challenge, Pakistan is destined to
have eminence place in the world as a stable, growing and prosperous nation.

Reasons of poor agricultural output in Pakistan:

The Agriculture sector is engaged in the game of Pakistan’s financial system since
independence. In the early times, it was considered a dominant sector however due to
some political, social, environmental and local weather stipulations its production is going
down step by step and at the time it is the second greatest sector in Pakistan.
Agriculture have great role in economic construction and prosperity. Following are some
essential contributions of agriculture;
o Contribution to National Income
o Source of Food Supply
o Pre-Requisite for Raw Material
o Provision of Surplus Food
o Shift of Manpower
o Creation of Infrastructure
o Relief from Shortage of Capital
o Helpful to Reduce Inequality
o Based on Democratic Notions
o Create Effective Demand
o Helpful in Phasing out Economic Depression
o Source of Foreign Exchange for the Country
o Contribution to Capital Formation
o Employment Opportunities for Rural People
o Extension of Market for Industrial Output
o Role in Gross Domestic Product of Pakistan
Current GDP of Pakistan is 305 billion. Contribution of main crops in agriculture
sector is about 25.6 % while contribution of major crops in GDP is about 5.4%
according to economic survey of Pakistan. Wheat contributes approximately 10.3%
in agriculture. Sugarcane is also a cash and sugar crop.
Agriculture accounts for 18.9 % of GDP and has employed bulk of the full paintings
power. Agriculture sector recorded an expansion of 3.46 percent in FY 2017 as
compared to the expansion of 0.27 percent in last 12 months. The vegetation sub
sector contains of 37.22 pc of agriculture sector and is the elemental motive force of
enlargement of the agriculture sector as well as GDP.
We know that because the government shared this number with the media after the
recent approval of the 12th five-year plan. It also envisages 4pc economic growth for
this year. In the past, policymakers had set targets of 3.8pc and 6.2pc for agriculture
and economic growth.
So, either policymakers were too optimistic at that time or the political transition has
proved to be too depressing for agriculture.
The recently released second quarterly report of the State Bank of Pakistan
(SBP) does not project a growth rate for agriculture. But it says that overall economic
growth will remain in the range of 3.5pc and 4pc. The SBP report says outputs of
three key crops cotton, rice and sugar cane  have been in decline. It casts doubt on
the likelihood of achieving the wheat target of 25.6 million tons as well. The report
informs us that all minor crops, except chickpea and sunflower, have shown a
declining trend in output.

Major Issues of Agriculture:

The sector is facing problems because of several issues such as a water shortage,
shrinking of the area under cultivation and higher costs of inputs.
Following are the main issues that causes backwardness in agriculture:
1. The farmers of our country are mostly un-educated and lack technical knowledge.
They are unable to understand the modern scientific methods of agriculture and
often remain ignorant of good means to protect and increase their yield. Their
production is therefore low.
2. The majority of our farmers are poor, and they often live in a hand to mouth
position. Most of them are always under heavy burdens of debts. So due to lack of
capital they cannot afford to purchase modern scientific implements, chemical
manures, improved types of seeds etc. Hence, they cannot attain the required
standards.
3. Most of our farmers are still stuck to the old traditions of their forefathers. The
circumstances have compelled them to use the crude implements, because due to
small holdings of land and poverty they are unable to acquire and use modern
scientific methods. That is why their standard is lower than that of cultivators in
developed countries.
4. Due to excessive use of canal water, most of our cultivated lands have become
victims of these two dangerous diseases. Every year, salinity alone, is turning about
1, 00,000 acres of arable land into marches and salt lands. Water logging is no less
injurious. On the other hand, the measures taken so far are quite inadequate for
such issues.
5. Due to our law of inheritance, our farmers command very small pieces of hands
which prove to be costly. A farmer cannot afford tractors and other machineries for a
small piece of land and their incomes are low. Hence his interest is converted to
some other sector.
6. Our farmers have to face many issues due to scarcity of water which is one our
major problems. Large tracts of land estimated to be about 22 million acres is lying
uncultivated due to shortage of water. Rainfall is uncertain and the existing irrigation
facilities in our country are quite insufficient and need to be extended.
7. The land tenure system of Pakistan has created a chain of intermediaries in
between the state and the tenants. The system, instead of being conductive to
agricultural development, stands in the way of its progress.
8. In some areas of our country, especially in hilly regions, the upper fertile soil is
being eroded by different natural agents of change. Thus, the fertility is poor, and
soils are becoming less productive.
9. The marketing facilities for agricultural products in Pakistan are still far from
satisfactory level. Our cultivators cannot get just prices for their produce due to
defective marketing organization. Moreover, the chain of middlemen between the
producers and ultimate consumers take a heavy share of their produce. Thus, the
cultivators do not take much real interest in increasing their product too.
10. Due to lack of agricultural education and methods of modern research, our
farmers cannot control the various diseases of crops and attacks of pests and
insects. The result is low yields.
11. The agricultural activities in our country are performed in rural areas, but most of
our villages have no road or railway links with our markets. So, farmers have to face
innumerable hardships to sell their products. Hence the farmers take very little
interest in their profession and production suffers.
12. The resources required for agricultural operation are land, layout, livestock, farm
equipment, seeds, fertilizers, irrigation, transport etc. For the convenient and timely
procurement of these resources the farmers must have easy access to credit. Zarai
taraqiati and commercial banks provide loans to the farmers which are insufficient.
Agriculture may not grow at a sustainable high rate unless the problem is
addressed. 
In the current environment of political confrontation and uncertainty, it seems too
difficult. With energy prices shooting up every month as old subsidies go and oil
prices rise, prices of agricultural inputs, including seeds and fertilizers, will likely
continue to increase. Currently, this is a major concern for farmers.
Water shortages may become more acute as no initiative has been taken in the past
eight months for building small dams and rainwater reservoirs.
If the country faces a super flood due to the faster melting of glaciers and increased
mercury level, as the Federal Flood Commission fears, agriculture will suffer with
more issues.
Remedies to Overcome the Issues:
The land which has been declared useless due to salinity and water-logging should
be reclaimed. Tube-wells should be installed in the affected areas to decrease the
salinity. Beds of new canals should be made of concrete to avoid water-logging.
These measures should be taken on priority basis to avoid further deterioration of
land. 
The major issues in agriculture of Pakistan is scarcity of water. Most of the land is
lying unused due to this problem. Therefore, it is necessary that the irrigation
facilities be extended for increasing agricultural output.
The agricultural yield can also be increased to a great extent by using fertilizers. The
use of artificial manure should be introduced throughout the country. Due to poverty
and illiteracy our farmers hesitate to purchase the fertilizers.
The use of better seeds, fertilizers and modern implements is not possible without
adequate credit facilities for the farmers. The government has extended the existing
credit facilities to a large extent. The commercial banks also grant loans to the
farmers, but still there is a need for more facilities as our farmers are very poor. The
farmers should be provided better quality seeds at the lowest price and at the right
time. Better seeds will ultimately give better yield.
Various plant diseases damage a large part of our crops. But our farmers have no
effective control over them. Therefore, preventive and narrative measures should be
taken throughout the country. Mechanization of agriculture refers to the use of
various equipments the different stages of cultivation. Using modern equipments
better results can be achieved in the shortest time.
Co-operative farming refers to the farming done on the basis of mutual help and co-
operation. Under this method the small holdings are consolidated. In this way the
owners of small holdings can also use fertilizers and modern equipments jointly.
After harvesting, the yield can be distributed among the owners according to their
ownership. Increase of literacy ratio in rural areas especially in agree-education is
the need of the day. The more educated the farmers will be the better will be the
results achieved. Marketing procedures should be simplified, and various marketing
facilities should be provided to the cultivators.
The rural areas of the country must be provided with road and railway links with
marketing centers and better means of transport and communication should be
provided.
Warranted Policies, Plans and Programs for Future Agriculture:
o Development and adoption of new varieties
o Better access to markets for inputs (seeds, fertilizers, farm mechanization, credit,
water) and outputs
o Improved infrastructure including storage and cooling facilities 
o Reduction in post harvest losses
o Greater investment in research, development and extension
o Improved quality and fulfillment of quarantine requirements for international
markets and competitiveness
o Greater diversification, especially minor but high value crops
o Farm input and produces pricing
o Demand related policies:
o Income, growth and development
o Education and knowledge
o Food price stabilization
o Market related policies:
o Effectiveness of markets
o Policies to insulate local markets from global markets 
o Access to local markets
Conclusion:
Being an agrarian country, agricultural sector of Pakistan’s economy is still backward. Use of
modern techniques, provision of credit facilities, basic infrastructure and agriculture
research facilities are needed to remove all the problems of agriculture sector. 

Report of dr Ishrat Hussain is added

Issues of industrialisation:

A report added