Baby Leone
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A very good read! I have summarized it because it was too long (about 9,000 words). Its half the word count now and I have highlighted and given headings to the different parts of the speech.
Pakistan from Development State to Security State
General Musharraf
You have heard for the last 5 years at least, stories of economic miracles. Why is it that this miracle has begun to evaporate overnight? What kind of miracle can it be that is not sustainable? When General Musharraf made his speech on 2nd or 3rd November 2007, one of the things he cited as a reason for taking this extreme action was that the economy was going down. This was the first time anyone from the government side had admitted that the economy was going down. Otherwise when we were saying that the economy is not doing well we got very angry responses. So now we see that there are so many problems with the economy.
Comparisons with India
Let me start very early; first of all there is a comparison with India all the time. India has a good democracy, we don’t. India has this economy, we don’t. I think this comparison is not valid. It is not valid because India and Pakistan are two different countries, were two different countries. We were administratively under British rule together, there was no border, we didn’t need passports to come; but we were different countries. Why I bring in this aspect is because it has an impact in discussing the development process in Pakistan.
British India
The first British individual to set foot on the Indian subcontinent was in 1643, it was an Englishman who came to Surat, then a river port in Gujrat state of India. Surat port has since silted up, but it was a thriving port at that time. Bombay as we know today didn’t exist. Then of course there was the history of the British coming in and the East India Company being formed and so on and so forth. The first formal British presence in India came with the establishment of Fort William in Calcutta in 1758. They also set up a Fort William College, where they enrolled Indians for education in English. So, a kind of a development process also started of English western education, technology and so on and so forth. Of course a lot of things happened afterwards, municipal corporations were set up, railways were created, government structures, modern government structures were set up, and so on and so forth.
The first British formal presence in what is now Pakistan came 85 years later, 85 years after 1758, when the British conquered Sindh in 1843.
Why I am giving these differential dates is because British presence in our part, in what is Pakistan today is less than 100 years, whereas British presence in what is India today is more than 200 years. In those 200 years, what is India today was the centre of the British Empire, in those 200 years they introduced railways, they set up industries, they set up modern governance structures, other modernizing values, democracy, etc.
What is now Pakistan was the periphery of the British Indian Empire. First of all it came, let’s say, between 85-118 years after Calcutta and because it was the periphery they didn’t take much interest. Apart from 3 or 4 towns Karachi, Lahore and Peshawar there were no municipal corporations, and these were the places where there were cantonments. And in Karachi they had a seaport and railway lines to help transport cotton. And till today there is only one railway line that runs from Peshawar to Karachi, there’s no other railway line. So this was the backyard.
1947
Why I am saying all this is because Pakistan’s development history starts in 1947. India’s development history started much before. Tata Steel Mill already existed when India became independent in 1947. As today, information technology is the benchmark of identifying a country as advanced or not advanced; 50 years earlier, the steel mill was the benchmark. Countries which had a steel mill were considered advanced countries. India already had a steel mill in 1947, in 1947 Pakistan had only 6 medium-sized manufacturing plants. There were vast tracks of the country with no electricity; Dhaka city had no electricity in 1947.
1950's
So we begin in 1947, the governments that came from 1947 onwards, lets say in the 1950s, were committed to development. Development was a major objective, they were acutely aware of the lack of industry, the lack of food production, the lack of schools, hospitals, electricity, roads, and so on and so forth. They were aware of it. The whole effort of the Government was to provide these economic assets. In conceptual terms Pakistan was a development state. The objective of the state was to promote development, that’s what it was, so it was a development state. We’ll see as we go into detail how this development state progressed over the 50’s, 60’s and 70s.
In 1977 Pakistan ceased to be a development state. From 1977 till today, Pakistan is a national security state, where national security is the main objective of the state.
As I said we started with less than a dozen manufacturing plants in Pakistan and they were also medium-sized manufacturing plants. One of them was Dalmia Cement Factory in Karachi. I remember that factory, it wasn’t functioning even when I first saw it but you could see that it was a very small old-fashioned kind of factory. The cement factories now are very technologically advanced but that was the kind of industrialization Pakistan had then. After we became independent, Pakistan was importing everything: toothpaste, toothbrushes, shoes, matchboxes, just about everything was being imported because we produced nothing. Even most food items were imported because we grew little. I remember in 1968, West Pakistan was not producing bananas; we couldn’t buy bananas in Karachi. So that was where we began, but by the end of the 50’s, we were producing a large variety of agricultural and industrial consumer goods.
Now look at the political capital that was invested into development. First the government had what is known as the Colombo Plan. The process of planned development started.
Of course it was a list of projects. There was very little expertise in the country on how to do planning. Policy planning and development is not just a list of projects. Development is more of an integrated process, it’s not just a list of projects. But it began with a list of projects. Then the planning capacity was built up and we developed the first 5-year plan, and of course there was a lot of political investment in this whole activity.
By the end of the 1950s, government offices were built up. In 1947 there were no government offices in Karachi. Residential housing was created; Pir Illahi Bux Colony and PECHS in Karachi were set up in 1950. Industrial and agricultural output had risen, and in fact by the end of the 1950’s, most of the very basic consumer goods were already being produced in the country like matchboxes, toothpaste and shoes and some textile units had already come up and we were producing cloth, etc. So there was some level of development that took place and we were no longer as deficient as we were a decade ago.
1960's
Then came the 1960s. The 1960s development effort moved into a higher gear. First of all the whole experience with the first 5 year plan: making the plan and implementing it, seeing the deficiencies, the flaws, the mistakes, and learning from them. Some people were sent abroad for training and they came back. One of them was Mehboob ul Haq. You know, he had gone abroad for his PhD, he came back. So there were some trained people who were now involved in the process of preparing plans. The fundamental thing that happened was that there was a planning board in the 1950s, which used to do the planning work with a minister for planning who headed it. In the 1960s, General Ayub Khan who was the President, created a planning commission with the president as its chairman. So you can see the political importance of this commission going up. From the planning minister now the president was actually chairing it and Ayub Khan was a very active chairman.
Ayub Khan promoted development, pushed development. We saw the expansion of the economic infrastructure on a very large scale. In fact, out of the eight 5-year plans that Pakistan created only the second was successful which was in the 60s under Ayub Khan. It was successful in the sense that most infrastructure project targets were crossed. If they said we would produce 500 mw of electricity, they produced 550 mw. If they said we would create x miles of roads they created x + 1 miles. The construction of dams started. In 1960, there was an agreement with India that was called the Indus Water Treaty because of which Tarbela and Mangla dams came into being. And the whole objective of coming to an agreement with India on water was driven by economics, not by military considerations. — Because water is necessary for agriculture. Otherwise agriculture would have died in Pakistan if India had stopped the water and they have the capacity to stop the water. New canals were dug out of these dams.
Pakistan graduated by the end of the 1960’s from a mere producer of consumer goods to a producer of intermediate goods. These intermediate goods are those which are made for use in agriculture and industry itself, for example fertilizer. We don’t consume fertilizer but it is produced as an input into agriculture. These are called intermediate goods. So by the end of the 1950s Pakistan was producing a lot of consumer goods, and by the end of the 1960s we were also producing a lot of inputs that went into the manufacture of consumer goods. Previously these inputs were imported, now we began to manufacture ourselves. So, there was a marked upwards shift on the development level of the country.
1970's
Then came the 1970s. The 1970s represents the big push. Although the 1970s are very maligned but completely wrongfully. In fact, I consider the 1970s to be the golden period of Pakistan’s economic development and I’ll tell you why. Economic development has to be measured by how you are creating economic assets. In economics we call it imputed rent. So economic development has to be measured by the extent of asset creation that takes place. It is this creation of assets that gives you a flow of income in the years to come.
Asset creation started in the 1950s and accelerated in the 1960s. Several factories came into being, power stations were set up, roads were laid, Karachi Port was expanded with more berths set up. So there was this big push, acceleration of the creation of economic assets.
But the 1970s saw an even higher push. For the first time in 1970s, capital goods industries were introduced, very large projects were introduced, and the basis for future growth was created. The steel mill was set up for example. If any of you are ever interested, you can read the feasibility reports of the steel mill, you’ll actually see why it was created. The plan for the steel mill was to create an engineering hub in Dhabeji and Gharo. They are small towns near Karachi, as you go towards Thatta. That steel would be produced here and this steel would become the basis of the engineering industry that would be set up there. It didn’t happen, but that was the objective. So, in the 70’s we saw the steel mill come up. We saw Port Qasim created as an alternative port to Karachi. We had the Indus Highway constructed. A heavy mechanical complex and heavy electrical complex, both in Taxila, were created. These were complexes that could manufacture machinery.
First, in the 1950s we began to produce consumer goods, let’s say toothpaste. In the 1960s we started producing the ingredients for toothpaste and in the 1970s we started producing the machinery that would produce toothpaste. So we see the graduation that took place of our economic capacity over this period. And this is very significant because if you look at data and if you plot industrial production, you will see that there is a line which is sloping upwards gently from 1974 to 1982 and then shoots up and continues upwards gently again. What happened in 1982? The steel mill started production. So when you create an economic asset you have an intercept jump in production that provides income for years to come.
The 3-decade period of the 1950s, 1960s and 1970s is the period of the development state. The state’s objective was to develop the economy, and there was a lot of political capital invested into it. The Colombo plan, the first 5 year plan, creation of the planning commission, the second 5 year plan, the third 5 year plan, and so on and so forth. Let us see what happened to the economy: per capita income rose 10 fold; food production tripled; fibre production went up 4 fold; manufacturing output increased 40 times; electricity output increased 35 times; telephone connections per 10,000 people rose 10 times. Primary enrolment rose 5 times; but population per doctor declined 200 fold. I mean one doctor treats how many people? So what you do is you take the number of doctors divided by population so you know one doctor is treating how many people, it declined 200 fold. Population per nurse declined 24 fold and we can go on with these statistics.
Now of course for those of you who deal with numbers, if you have a low base then obviously the percentage will be very large, and this of course is the reason for this 10 fold and 40 fold increases, there were only 6 industries so if another 6 came into being there was 100 percent increase, 100% looked very impressive but it’s only 6 more factories. Nevertheless having said that you cannot deny that there were absolute increases in the economy, and this increase did not take place by itself; there was very conscious effort on the part of the state to push the economy forward.
We can see the commitment of the state to development from one example of the 1970s. We have a budget and there are 2 parts to the budget. There is a recurring expenditure which is salaries and other things that you pay out and then there is development expenditure. So there is a non-development budget, called the current budget, and a development budget which is basically money for building bridges, roads, ports, schools, hospitals, power stations and so on and so forth.
The rate of growth of development expenditure, between 1972 and 1977 was 21 percent per annum. So every year the budget went up by 21% and the GDP growth rate at that time was about 5 percent; which means that development expenditure was 4 times the GDP growth rate; which means that the surpluses that were being generated by the economy was being ploughed back into the economy to maintain the infrastructure and to expand it. This reflected the commitment of the state to development. This is what the development state is.
1977-1980's (Zia)
In 1977 the development state seized to exist. The national security state took over. Of course in the 1980s there was also very high growth rate. It picked up even higher than the 1970s. We were in the 6 % range, rather than the 5% range. But this growth happened for largely external reasons. — One being the investments that were made in the 1970’s, like the construction of the steel mill started in 1974 but it started production in 1982, so obviously growth increased in the 80’s. So a lot of the growth that was taking place in the 1980s was because of the investment that was done in the 70’s. The fruits were being plucked off the trees that were planted in the 1970s.
Secondly, there was inflow of remittances from the Middle East. The oil shock took place in 1973. That doesn’t mean that Pakistan’s remittance income started in 1973, because it took Saudi Arabia and the other gulf countries almost 4-5 years to put their institutional framework for starting development. The development process in Saudi Arabia and the rest of the Gulf States started towards the end of the 1970s. And the first remittance flow into Pakistan started coming in 1978 and peaked in 1982. So 1980s also benefited from the flow of remittances, very large remittances coming in.
Thirdly, there was foreign assistance coming in because of the Afghan War. They were historic because never before in Pakistan’s history had there been that level of foreign assistance coming in.
And fourth, the government in 1980s was borrowing heavily from banks and printing money. And of course because of the Afghan War and the favourable view America had of Pakistan, the IMF did not complain. Otherwise, IMF always shouts when you print money, but they weren’t complaining then.
Large debts were created, to the extent that if we calculate debt-to-GDP ratio, namely what percentage of your national income is indebted. In 1977 the debt GDP ratio was 24%, or 24% of our GDP or national income was indebted. In 1988 it had jumped to 48%, this was the extent of indebtedness that the Zia government led us into.
But the more significant thing about the 1980s, during the Zia regime, is that, compared to the rate of development expenditure of 21% in the 1970s, in the 1980’s it dropped to 2.7%. Which means that the surpluses that were being generated in the economy because of the output that came out of investment in the 1970s, because of the steel mill, because of remittances, because of foreign aid, even by printing money or loans was not being ploughed back into the economy. We were not reinvesting.
You see you have this beautiful building where we are sitting. It’s a very old building, built more than 50 years ago, or maybe before independence. But look at this building, it’s beautiful. It’s beautiful because money is invested in maintaining it. Capital has to be maintained. You have to incur replacement investment to maintain your infrastructure and then of course you have to invest in expanding your infrastructure and create new infrastructure.
Neither of the two was happening in the 1980s. We had a mere 2.7% growth in development expenditure. This 2.7% growth rate of expenditure was half the average GDP growth rate; whereas, in the 1970s, the rate of growth of development expenditure was 5 times the average GDP growth rate. Here it was half the GDP growth rate. So where was the money going? Money was being generated, the economy was booming, but where was the money going? The money was going into defence. Against average 6% GDP growth rate, defence expenditure during the 1980s was going up by 9%. So unlike in the first phase — 1950s, 1960s, and 1970s — where the economic surplus that was generated was ploughed back into expanding and strengthening the economy, in the 1980’s the economic surplus that was generated was ploughed into the military’s expansion rather than the economy’s expansion.
This is what I mean by the shift from the development state to the national security state. Because there was a need for the military to strengthen, because there were wars to be fought in Afghanistan, wars to be fought in Kashmir, and actually Zia’s generals were dreaming about extending the war into Central Asia, that they also should be liberated from the Russians; this of course was happening before the Soviet Union collapsed. But they were already talking about it and there were plans of taking the war from Afghanistan into Central Asia. So the whole focus of the state was not on development of the economy but on all these military adventures.
I worked in Afghanistan during the Taliban days where I came to know that Pakistan government was paying the salaries of the Taliban government. And there was great potential for Pakistan to invest in the development of Afghanistan. In fact I was proposing at that time, that Pakistan should give Afghanistan 100 million dollar export credit. That means that Afghanis can import things from Pakistan and the Pakistani companies will be paid by the government of Pakistan, and the Afghan government can pay the Government of Pakistan 25 years later, 35 years later, according to the agreement. If you like you can write it off latter on. But imagine the demand for Pakistani products that it would have generated. If Pakistani industries were to build only buildings; cement, tiles, tube lights, bathroom fittings, doors, hinges, switches, there would be a demand for all these things and their production would have picked up. And of course our economy would have done well. This was the 1990s, but they didn’t do that.
1990's
So what happened since the 1990s? When you don’t invest, everything begins to creak; the infrastructure began to crack. And in the 1990s the growth rate began to decelerate. The governments in the 1990s also could not put money into investment and the rehabilitation of infrastructure because the debts that were incurred in the 1980s matured in the 1990s. And both Benazir’s and Nawaz Sharif’s governments had no fiscal space as they had to repay Zia’s debts. Every time the economic team met, all they discussed was when was the next payment due, and where will that money come from?
The one positive thing that happened in the 1990s was that a very large power generation program was put into place: thermal power, the IPPs. It became controversial because it became a political football. But the fact is that till about 2005 the power that was being provided to Pakistan was because of these IPPs. The crisis that we have today would have arisen I think in the late 1990s if these power plants had not come in.
9/11 & 2000's
Then came 9/11. A lot of our debt is rescheduled; meaning: don’t pay now, pay 35 years later. Pakistan saved $1 billion a year in payments. Now if you have taken a loan and you are having to make payments to the bank, and because of that you’re skipping one meal a day because you don’t have the money because you have to repay your debt payment. And the bank says don’t pay me now, pay me 35 years later, not only will you have your third meal a day but you decide you will also party because you have a lot of money. This is what happened to Pakistan; suddenly there was a lot of money.
Now where did this money go? We’ve actually documented this. Year after year between 2002 and now, they always overshot current expenditure, meaning defence and government expenditure, and till 2004 failed to meet development expenditure targets. Now this is very poor economic governance.
The Musharraf regime was a continuum of the national security state. Development is still not an objective. But they needed to show that they were doing well. So what they did was that they engineered a credit-financed consumer driven growth. See what has happened.
Growth rates were very low till 2003, 34% maximum. Then came consumer financing. You could buy a house, a car, a fridge, a toaster; you could take a personal loan, even take a loan for a vacation. You can have 6 credit cards and spend, spend and spend. Obviously demand went up. When demand goes up, GDP growth rates improved, went up to 89%. But it was one-legged development, development that was standing on one leg and shaky.
Let us now examine GDP: it grew at 8.4%, but banking sector GDP grew at 30%. If in this group you are all 20 years old, and I am 50 years old, the average age will be well above 20. You remove me and your average age drops to 20. So, one sector growing at 30% pulled up the average GDP growth rate. But that was not the only sector that pulled up the average GDP growth rate. Because of consumer banking you could also buy cars, suddenly everybody was buying cars; we can see the traffic on the road because of that. The automobile industry output also went up. The automobile industry for 3 years running was growing at 40-45% per annum; that shot up the large scale-manufacturing sector from 7% to 17%.
Now of course GDP is looking very good, but it’s looking good because consumer financing allows banks to make exorbitant profits. Banks are giving money for cars, so automobile firms are making exorbitant profits. But what will happen if you remove consumer financing? Nobody will buy cars, so the automobile growth rate drops. Banks are not making the same profit, so the banking sector growth rate drops; in turn the GDP growth rate drops. So they created a bubble, which was standing on bank credit. You remove bank credit and everything else collapses. Then the other aspect of this is that by bank credit you only increase the consumption expenditure. Bank credit was not going into investment, bank credit was not going into setting up factories, and bank credit was not going into promoting exports.
That is why if you look at another few ratios that we have, one is a tax GDP ratio that out of your total national income what is the proportion of tax collected? The total tax collection in Pakistan is equal to about 10% of our GDP. That has remained constant. So if the economy is growing so fast why aren’t taxes increasing? Our export GDP ratio is constant. In fact it has slightly declined. If the economy is doing so well why aren’t we exporting more? — Because the whole stress of the growth was consumption, rather than investment or expansion of the economic infrastructure, and the failure to think of infrastructure. Imagine, Shaukat Aziz every week would say so many refrigerators have been sold! so many air conditioners have been sold and so on. He completely forgot that fridges, air conditioners and deep freezers work on electricity. Since 1999 till mid-2007, the government did not put in investment to produce even one mw of power. When this huge crisis blew up they started searching all over the world for thermal power plants. And when the government in the 1990s, the People’s Party government, made agreements with foreign power producers to provide power at 6 cents per unit there was a hue and cry. But now they have made agreements for 11 cents a unit. But we have no choice right now, we have a power shortage and just we have to pay whatever price they’re asking for otherwise there will be no power.
These are all examples of a mindset of a state that is not thinking development. If they were thinking development they wouldn’t make these blunders. They would have seen that if production is going up, then credit should go into supporting that production. What consumer financing has done is that it has increased our import bill. Cars are imported, they are assembled here. ACs are imported but only their housing is built over here. We are technologically a very deficient country. We don’t know how to make rickshaw or taxi meters; we don’t know how to produce simple office equipment. The office material that we have, the staplers, the pins, we don’t make it here, we import everything. We have made no investment in improving the technological capacity of our people.
And this whole business of privatising education. I teach in a private university. You have studied in private universities, some of you continue to study in private universities but look at the implication of this. The private sector will only respond to profit and legitimately so. If there is a private institute which charges Rs 100,000 per semester to teach you mathematics and you graduate with a math degree, you will go to Karachi University to teach and you’ll get, say, Rs 25,000 a month at the most. Who else will hire you?
So privatised education will not produce mathematicians. But if you don’t have mathematicians you won’t have scientists, and if you don’t have scientists you won’t have technologists, and that is the reason Pakistan is not producing any technology. We all use mobile phones but did we produce the technology for mobile phone? We don’t even have the capacity to repair anything that goes wrong. When there is a serious error, all the technology companies call people from abroad to fix it. To the extent that in some Pakistani factories, people are called from India to come and fix the problems. And this is the level that we have fallen to.
What we’ve done is that by producing a lot of MBA’s we are producing salesmen and salesgirls for foreign producers of technology, but we are not producing technology ourselves. We can continue like this, but if we do, we will become a satellite economy of regional powers. We will become a satellite economy of India, China and Iran. But if we want to change that then we have to dismantle the national security state and recreate the development state.
We have to recreate the era of the 1960s and the 1970s in particular. Because only by a state and functionaries of the state who are always thinking about what they have to do for the development of the country, only then can we become a viable economy. Otherwise, we are sinking. All these statistics that you see are hollow, they don’t mean anything. That is why the economic miracle of the last five years is beginning to evaporate before us. Everybody now talks about the economic crisis, even those industrialists and businessmen who were ardent supporters of General Musharraf and Shaukat Aziz. When you create something that has no basis, it cannot last; we did not create economic assets and assets created in the 1960s and 1970s are deteriorating.
Look at what is happening. A bridge is built in Karachi, General Musharraf inaugurates it, and two weeks later it collapses. I mean look at the degeneration of the institutional infrastructure. That we cannot build a bridge which the president of the country inaugurates and it collapses in 2 weeks. And this will continue to happen, this is just the beginning. Because our economy is not the objective of the state.
Now no industrialist can set up an industry without setting up his own power plant. Now we have a 15% sales tax. That’s extremely high. You can’t have industry running at 15% sales tax. Energy cost is very high, indirect taxes are very high. And then there is a very high cost of bribery, for almost everything.
You know this wheat crisis that we have today is completely manufactured. How did it happen? Wheat is harvested in March. The assessment of how much wheat there will be is done after the winter rains. And usually their assessment is correct. They’ve been doing it for half a century, so it’s correct within a certain margin. This time the Islamabad Ministry of Food announced a wheat crop before the rains. I spoke to the Director of Food in Sindh, and he said we have not sent the estimates. We don’t know from where they took it and announced it. The Letter of Credit for import of wheat had to be opened in November for the wheat ships to arrive at Karachi port in January. But the ministers were too busy trying to bail out General Musharraf from the judicial crisis he had started.
Finally, I think this is a great country and let me make this final statement. I am saying this with full authority and responsibility. Pakistan is a resource-rich country. We can become a developed country like Portugal, the least developed European country. We can become a country like Portugal in 20 years. We can have zero poverty, zero unemployment and zero illiteracy. Illiteracy we can wipe out in 5 years, it is possible because we are not an overpopulated country. We talk about a high population growth rate but we are not an overpopulated country like India or China or Bangladesh. India, given its present socio-economic structure, cannot abolish its poverty even in 50 years. India will become a big economic power but will not be able to abolish poverty. We can eradicate poverty in 20 years, we can achieve effective literacy in 5 years. All these are doable things. We can become a strong economic power in this area. We can become a respectable country. We can actually give aid to street children of Bombay. All this is possible. But we have to first become a development state ourselves. Today, we are like a factory most of whose revenue is spent on chowkidars and there is no money left to buy raw materials or spare parts. That factory will close down. Pakistan is like that factory. We have to change it. You have to change it.
Source: Transcript of Dr. Kaiser Bengali’s Lecture – Making sense of Pakistan and its Economy | Teeth Maestro
Pakistan from Development State to Security State
General Musharraf
You have heard for the last 5 years at least, stories of economic miracles. Why is it that this miracle has begun to evaporate overnight? What kind of miracle can it be that is not sustainable? When General Musharraf made his speech on 2nd or 3rd November 2007, one of the things he cited as a reason for taking this extreme action was that the economy was going down. This was the first time anyone from the government side had admitted that the economy was going down. Otherwise when we were saying that the economy is not doing well we got very angry responses. So now we see that there are so many problems with the economy.
Comparisons with India
Let me start very early; first of all there is a comparison with India all the time. India has a good democracy, we don’t. India has this economy, we don’t. I think this comparison is not valid. It is not valid because India and Pakistan are two different countries, were two different countries. We were administratively under British rule together, there was no border, we didn’t need passports to come; but we were different countries. Why I bring in this aspect is because it has an impact in discussing the development process in Pakistan.
British India
The first British individual to set foot on the Indian subcontinent was in 1643, it was an Englishman who came to Surat, then a river port in Gujrat state of India. Surat port has since silted up, but it was a thriving port at that time. Bombay as we know today didn’t exist. Then of course there was the history of the British coming in and the East India Company being formed and so on and so forth. The first formal British presence in India came with the establishment of Fort William in Calcutta in 1758. They also set up a Fort William College, where they enrolled Indians for education in English. So, a kind of a development process also started of English western education, technology and so on and so forth. Of course a lot of things happened afterwards, municipal corporations were set up, railways were created, government structures, modern government structures were set up, and so on and so forth.
The first British formal presence in what is now Pakistan came 85 years later, 85 years after 1758, when the British conquered Sindh in 1843.
Why I am giving these differential dates is because British presence in our part, in what is Pakistan today is less than 100 years, whereas British presence in what is India today is more than 200 years. In those 200 years, what is India today was the centre of the British Empire, in those 200 years they introduced railways, they set up industries, they set up modern governance structures, other modernizing values, democracy, etc.
What is now Pakistan was the periphery of the British Indian Empire. First of all it came, let’s say, between 85-118 years after Calcutta and because it was the periphery they didn’t take much interest. Apart from 3 or 4 towns Karachi, Lahore and Peshawar there were no municipal corporations, and these were the places where there were cantonments. And in Karachi they had a seaport and railway lines to help transport cotton. And till today there is only one railway line that runs from Peshawar to Karachi, there’s no other railway line. So this was the backyard.
1947
Why I am saying all this is because Pakistan’s development history starts in 1947. India’s development history started much before. Tata Steel Mill already existed when India became independent in 1947. As today, information technology is the benchmark of identifying a country as advanced or not advanced; 50 years earlier, the steel mill was the benchmark. Countries which had a steel mill were considered advanced countries. India already had a steel mill in 1947, in 1947 Pakistan had only 6 medium-sized manufacturing plants. There were vast tracks of the country with no electricity; Dhaka city had no electricity in 1947.
1950's
So we begin in 1947, the governments that came from 1947 onwards, lets say in the 1950s, were committed to development. Development was a major objective, they were acutely aware of the lack of industry, the lack of food production, the lack of schools, hospitals, electricity, roads, and so on and so forth. They were aware of it. The whole effort of the Government was to provide these economic assets. In conceptual terms Pakistan was a development state. The objective of the state was to promote development, that’s what it was, so it was a development state. We’ll see as we go into detail how this development state progressed over the 50’s, 60’s and 70s.
In 1977 Pakistan ceased to be a development state. From 1977 till today, Pakistan is a national security state, where national security is the main objective of the state.
As I said we started with less than a dozen manufacturing plants in Pakistan and they were also medium-sized manufacturing plants. One of them was Dalmia Cement Factory in Karachi. I remember that factory, it wasn’t functioning even when I first saw it but you could see that it was a very small old-fashioned kind of factory. The cement factories now are very technologically advanced but that was the kind of industrialization Pakistan had then. After we became independent, Pakistan was importing everything: toothpaste, toothbrushes, shoes, matchboxes, just about everything was being imported because we produced nothing. Even most food items were imported because we grew little. I remember in 1968, West Pakistan was not producing bananas; we couldn’t buy bananas in Karachi. So that was where we began, but by the end of the 50’s, we were producing a large variety of agricultural and industrial consumer goods.
Now look at the political capital that was invested into development. First the government had what is known as the Colombo Plan. The process of planned development started.
Of course it was a list of projects. There was very little expertise in the country on how to do planning. Policy planning and development is not just a list of projects. Development is more of an integrated process, it’s not just a list of projects. But it began with a list of projects. Then the planning capacity was built up and we developed the first 5-year plan, and of course there was a lot of political investment in this whole activity.
By the end of the 1950s, government offices were built up. In 1947 there were no government offices in Karachi. Residential housing was created; Pir Illahi Bux Colony and PECHS in Karachi were set up in 1950. Industrial and agricultural output had risen, and in fact by the end of the 1950’s, most of the very basic consumer goods were already being produced in the country like matchboxes, toothpaste and shoes and some textile units had already come up and we were producing cloth, etc. So there was some level of development that took place and we were no longer as deficient as we were a decade ago.
1960's
Then came the 1960s. The 1960s development effort moved into a higher gear. First of all the whole experience with the first 5 year plan: making the plan and implementing it, seeing the deficiencies, the flaws, the mistakes, and learning from them. Some people were sent abroad for training and they came back. One of them was Mehboob ul Haq. You know, he had gone abroad for his PhD, he came back. So there were some trained people who were now involved in the process of preparing plans. The fundamental thing that happened was that there was a planning board in the 1950s, which used to do the planning work with a minister for planning who headed it. In the 1960s, General Ayub Khan who was the President, created a planning commission with the president as its chairman. So you can see the political importance of this commission going up. From the planning minister now the president was actually chairing it and Ayub Khan was a very active chairman.
Ayub Khan promoted development, pushed development. We saw the expansion of the economic infrastructure on a very large scale. In fact, out of the eight 5-year plans that Pakistan created only the second was successful which was in the 60s under Ayub Khan. It was successful in the sense that most infrastructure project targets were crossed. If they said we would produce 500 mw of electricity, they produced 550 mw. If they said we would create x miles of roads they created x + 1 miles. The construction of dams started. In 1960, there was an agreement with India that was called the Indus Water Treaty because of which Tarbela and Mangla dams came into being. And the whole objective of coming to an agreement with India on water was driven by economics, not by military considerations. — Because water is necessary for agriculture. Otherwise agriculture would have died in Pakistan if India had stopped the water and they have the capacity to stop the water. New canals were dug out of these dams.
Pakistan graduated by the end of the 1960’s from a mere producer of consumer goods to a producer of intermediate goods. These intermediate goods are those which are made for use in agriculture and industry itself, for example fertilizer. We don’t consume fertilizer but it is produced as an input into agriculture. These are called intermediate goods. So by the end of the 1950s Pakistan was producing a lot of consumer goods, and by the end of the 1960s we were also producing a lot of inputs that went into the manufacture of consumer goods. Previously these inputs were imported, now we began to manufacture ourselves. So, there was a marked upwards shift on the development level of the country.
1970's
Then came the 1970s. The 1970s represents the big push. Although the 1970s are very maligned but completely wrongfully. In fact, I consider the 1970s to be the golden period of Pakistan’s economic development and I’ll tell you why. Economic development has to be measured by how you are creating economic assets. In economics we call it imputed rent. So economic development has to be measured by the extent of asset creation that takes place. It is this creation of assets that gives you a flow of income in the years to come.
Asset creation started in the 1950s and accelerated in the 1960s. Several factories came into being, power stations were set up, roads were laid, Karachi Port was expanded with more berths set up. So there was this big push, acceleration of the creation of economic assets.
But the 1970s saw an even higher push. For the first time in 1970s, capital goods industries were introduced, very large projects were introduced, and the basis for future growth was created. The steel mill was set up for example. If any of you are ever interested, you can read the feasibility reports of the steel mill, you’ll actually see why it was created. The plan for the steel mill was to create an engineering hub in Dhabeji and Gharo. They are small towns near Karachi, as you go towards Thatta. That steel would be produced here and this steel would become the basis of the engineering industry that would be set up there. It didn’t happen, but that was the objective. So, in the 70’s we saw the steel mill come up. We saw Port Qasim created as an alternative port to Karachi. We had the Indus Highway constructed. A heavy mechanical complex and heavy electrical complex, both in Taxila, were created. These were complexes that could manufacture machinery.
First, in the 1950s we began to produce consumer goods, let’s say toothpaste. In the 1960s we started producing the ingredients for toothpaste and in the 1970s we started producing the machinery that would produce toothpaste. So we see the graduation that took place of our economic capacity over this period. And this is very significant because if you look at data and if you plot industrial production, you will see that there is a line which is sloping upwards gently from 1974 to 1982 and then shoots up and continues upwards gently again. What happened in 1982? The steel mill started production. So when you create an economic asset you have an intercept jump in production that provides income for years to come.
The 3-decade period of the 1950s, 1960s and 1970s is the period of the development state. The state’s objective was to develop the economy, and there was a lot of political capital invested into it. The Colombo plan, the first 5 year plan, creation of the planning commission, the second 5 year plan, the third 5 year plan, and so on and so forth. Let us see what happened to the economy: per capita income rose 10 fold; food production tripled; fibre production went up 4 fold; manufacturing output increased 40 times; electricity output increased 35 times; telephone connections per 10,000 people rose 10 times. Primary enrolment rose 5 times; but population per doctor declined 200 fold. I mean one doctor treats how many people? So what you do is you take the number of doctors divided by population so you know one doctor is treating how many people, it declined 200 fold. Population per nurse declined 24 fold and we can go on with these statistics.
Now of course for those of you who deal with numbers, if you have a low base then obviously the percentage will be very large, and this of course is the reason for this 10 fold and 40 fold increases, there were only 6 industries so if another 6 came into being there was 100 percent increase, 100% looked very impressive but it’s only 6 more factories. Nevertheless having said that you cannot deny that there were absolute increases in the economy, and this increase did not take place by itself; there was very conscious effort on the part of the state to push the economy forward.
We can see the commitment of the state to development from one example of the 1970s. We have a budget and there are 2 parts to the budget. There is a recurring expenditure which is salaries and other things that you pay out and then there is development expenditure. So there is a non-development budget, called the current budget, and a development budget which is basically money for building bridges, roads, ports, schools, hospitals, power stations and so on and so forth.
The rate of growth of development expenditure, between 1972 and 1977 was 21 percent per annum. So every year the budget went up by 21% and the GDP growth rate at that time was about 5 percent; which means that development expenditure was 4 times the GDP growth rate; which means that the surpluses that were being generated by the economy was being ploughed back into the economy to maintain the infrastructure and to expand it. This reflected the commitment of the state to development. This is what the development state is.
1977-1980's (Zia)
In 1977 the development state seized to exist. The national security state took over. Of course in the 1980s there was also very high growth rate. It picked up even higher than the 1970s. We were in the 6 % range, rather than the 5% range. But this growth happened for largely external reasons. — One being the investments that were made in the 1970’s, like the construction of the steel mill started in 1974 but it started production in 1982, so obviously growth increased in the 80’s. So a lot of the growth that was taking place in the 1980s was because of the investment that was done in the 70’s. The fruits were being plucked off the trees that were planted in the 1970s.
Secondly, there was inflow of remittances from the Middle East. The oil shock took place in 1973. That doesn’t mean that Pakistan’s remittance income started in 1973, because it took Saudi Arabia and the other gulf countries almost 4-5 years to put their institutional framework for starting development. The development process in Saudi Arabia and the rest of the Gulf States started towards the end of the 1970s. And the first remittance flow into Pakistan started coming in 1978 and peaked in 1982. So 1980s also benefited from the flow of remittances, very large remittances coming in.
Thirdly, there was foreign assistance coming in because of the Afghan War. They were historic because never before in Pakistan’s history had there been that level of foreign assistance coming in.
And fourth, the government in 1980s was borrowing heavily from banks and printing money. And of course because of the Afghan War and the favourable view America had of Pakistan, the IMF did not complain. Otherwise, IMF always shouts when you print money, but they weren’t complaining then.
Large debts were created, to the extent that if we calculate debt-to-GDP ratio, namely what percentage of your national income is indebted. In 1977 the debt GDP ratio was 24%, or 24% of our GDP or national income was indebted. In 1988 it had jumped to 48%, this was the extent of indebtedness that the Zia government led us into.
But the more significant thing about the 1980s, during the Zia regime, is that, compared to the rate of development expenditure of 21% in the 1970s, in the 1980’s it dropped to 2.7%. Which means that the surpluses that were being generated in the economy because of the output that came out of investment in the 1970s, because of the steel mill, because of remittances, because of foreign aid, even by printing money or loans was not being ploughed back into the economy. We were not reinvesting.
You see you have this beautiful building where we are sitting. It’s a very old building, built more than 50 years ago, or maybe before independence. But look at this building, it’s beautiful. It’s beautiful because money is invested in maintaining it. Capital has to be maintained. You have to incur replacement investment to maintain your infrastructure and then of course you have to invest in expanding your infrastructure and create new infrastructure.
Neither of the two was happening in the 1980s. We had a mere 2.7% growth in development expenditure. This 2.7% growth rate of expenditure was half the average GDP growth rate; whereas, in the 1970s, the rate of growth of development expenditure was 5 times the average GDP growth rate. Here it was half the GDP growth rate. So where was the money going? Money was being generated, the economy was booming, but where was the money going? The money was going into defence. Against average 6% GDP growth rate, defence expenditure during the 1980s was going up by 9%. So unlike in the first phase — 1950s, 1960s, and 1970s — where the economic surplus that was generated was ploughed back into expanding and strengthening the economy, in the 1980’s the economic surplus that was generated was ploughed into the military’s expansion rather than the economy’s expansion.
This is what I mean by the shift from the development state to the national security state. Because there was a need for the military to strengthen, because there were wars to be fought in Afghanistan, wars to be fought in Kashmir, and actually Zia’s generals were dreaming about extending the war into Central Asia, that they also should be liberated from the Russians; this of course was happening before the Soviet Union collapsed. But they were already talking about it and there were plans of taking the war from Afghanistan into Central Asia. So the whole focus of the state was not on development of the economy but on all these military adventures.
I worked in Afghanistan during the Taliban days where I came to know that Pakistan government was paying the salaries of the Taliban government. And there was great potential for Pakistan to invest in the development of Afghanistan. In fact I was proposing at that time, that Pakistan should give Afghanistan 100 million dollar export credit. That means that Afghanis can import things from Pakistan and the Pakistani companies will be paid by the government of Pakistan, and the Afghan government can pay the Government of Pakistan 25 years later, 35 years later, according to the agreement. If you like you can write it off latter on. But imagine the demand for Pakistani products that it would have generated. If Pakistani industries were to build only buildings; cement, tiles, tube lights, bathroom fittings, doors, hinges, switches, there would be a demand for all these things and their production would have picked up. And of course our economy would have done well. This was the 1990s, but they didn’t do that.
1990's
So what happened since the 1990s? When you don’t invest, everything begins to creak; the infrastructure began to crack. And in the 1990s the growth rate began to decelerate. The governments in the 1990s also could not put money into investment and the rehabilitation of infrastructure because the debts that were incurred in the 1980s matured in the 1990s. And both Benazir’s and Nawaz Sharif’s governments had no fiscal space as they had to repay Zia’s debts. Every time the economic team met, all they discussed was when was the next payment due, and where will that money come from?
The one positive thing that happened in the 1990s was that a very large power generation program was put into place: thermal power, the IPPs. It became controversial because it became a political football. But the fact is that till about 2005 the power that was being provided to Pakistan was because of these IPPs. The crisis that we have today would have arisen I think in the late 1990s if these power plants had not come in.
9/11 & 2000's
Then came 9/11. A lot of our debt is rescheduled; meaning: don’t pay now, pay 35 years later. Pakistan saved $1 billion a year in payments. Now if you have taken a loan and you are having to make payments to the bank, and because of that you’re skipping one meal a day because you don’t have the money because you have to repay your debt payment. And the bank says don’t pay me now, pay me 35 years later, not only will you have your third meal a day but you decide you will also party because you have a lot of money. This is what happened to Pakistan; suddenly there was a lot of money.
Now where did this money go? We’ve actually documented this. Year after year between 2002 and now, they always overshot current expenditure, meaning defence and government expenditure, and till 2004 failed to meet development expenditure targets. Now this is very poor economic governance.
The Musharraf regime was a continuum of the national security state. Development is still not an objective. But they needed to show that they were doing well. So what they did was that they engineered a credit-financed consumer driven growth. See what has happened.
Growth rates were very low till 2003, 34% maximum. Then came consumer financing. You could buy a house, a car, a fridge, a toaster; you could take a personal loan, even take a loan for a vacation. You can have 6 credit cards and spend, spend and spend. Obviously demand went up. When demand goes up, GDP growth rates improved, went up to 89%. But it was one-legged development, development that was standing on one leg and shaky.
Let us now examine GDP: it grew at 8.4%, but banking sector GDP grew at 30%. If in this group you are all 20 years old, and I am 50 years old, the average age will be well above 20. You remove me and your average age drops to 20. So, one sector growing at 30% pulled up the average GDP growth rate. But that was not the only sector that pulled up the average GDP growth rate. Because of consumer banking you could also buy cars, suddenly everybody was buying cars; we can see the traffic on the road because of that. The automobile industry output also went up. The automobile industry for 3 years running was growing at 40-45% per annum; that shot up the large scale-manufacturing sector from 7% to 17%.
Now of course GDP is looking very good, but it’s looking good because consumer financing allows banks to make exorbitant profits. Banks are giving money for cars, so automobile firms are making exorbitant profits. But what will happen if you remove consumer financing? Nobody will buy cars, so the automobile growth rate drops. Banks are not making the same profit, so the banking sector growth rate drops; in turn the GDP growth rate drops. So they created a bubble, which was standing on bank credit. You remove bank credit and everything else collapses. Then the other aspect of this is that by bank credit you only increase the consumption expenditure. Bank credit was not going into investment, bank credit was not going into setting up factories, and bank credit was not going into promoting exports.
That is why if you look at another few ratios that we have, one is a tax GDP ratio that out of your total national income what is the proportion of tax collected? The total tax collection in Pakistan is equal to about 10% of our GDP. That has remained constant. So if the economy is growing so fast why aren’t taxes increasing? Our export GDP ratio is constant. In fact it has slightly declined. If the economy is doing so well why aren’t we exporting more? — Because the whole stress of the growth was consumption, rather than investment or expansion of the economic infrastructure, and the failure to think of infrastructure. Imagine, Shaukat Aziz every week would say so many refrigerators have been sold! so many air conditioners have been sold and so on. He completely forgot that fridges, air conditioners and deep freezers work on electricity. Since 1999 till mid-2007, the government did not put in investment to produce even one mw of power. When this huge crisis blew up they started searching all over the world for thermal power plants. And when the government in the 1990s, the People’s Party government, made agreements with foreign power producers to provide power at 6 cents per unit there was a hue and cry. But now they have made agreements for 11 cents a unit. But we have no choice right now, we have a power shortage and just we have to pay whatever price they’re asking for otherwise there will be no power.
These are all examples of a mindset of a state that is not thinking development. If they were thinking development they wouldn’t make these blunders. They would have seen that if production is going up, then credit should go into supporting that production. What consumer financing has done is that it has increased our import bill. Cars are imported, they are assembled here. ACs are imported but only their housing is built over here. We are technologically a very deficient country. We don’t know how to make rickshaw or taxi meters; we don’t know how to produce simple office equipment. The office material that we have, the staplers, the pins, we don’t make it here, we import everything. We have made no investment in improving the technological capacity of our people.
And this whole business of privatising education. I teach in a private university. You have studied in private universities, some of you continue to study in private universities but look at the implication of this. The private sector will only respond to profit and legitimately so. If there is a private institute which charges Rs 100,000 per semester to teach you mathematics and you graduate with a math degree, you will go to Karachi University to teach and you’ll get, say, Rs 25,000 a month at the most. Who else will hire you?
So privatised education will not produce mathematicians. But if you don’t have mathematicians you won’t have scientists, and if you don’t have scientists you won’t have technologists, and that is the reason Pakistan is not producing any technology. We all use mobile phones but did we produce the technology for mobile phone? We don’t even have the capacity to repair anything that goes wrong. When there is a serious error, all the technology companies call people from abroad to fix it. To the extent that in some Pakistani factories, people are called from India to come and fix the problems. And this is the level that we have fallen to.
What we’ve done is that by producing a lot of MBA’s we are producing salesmen and salesgirls for foreign producers of technology, but we are not producing technology ourselves. We can continue like this, but if we do, we will become a satellite economy of regional powers. We will become a satellite economy of India, China and Iran. But if we want to change that then we have to dismantle the national security state and recreate the development state.
We have to recreate the era of the 1960s and the 1970s in particular. Because only by a state and functionaries of the state who are always thinking about what they have to do for the development of the country, only then can we become a viable economy. Otherwise, we are sinking. All these statistics that you see are hollow, they don’t mean anything. That is why the economic miracle of the last five years is beginning to evaporate before us. Everybody now talks about the economic crisis, even those industrialists and businessmen who were ardent supporters of General Musharraf and Shaukat Aziz. When you create something that has no basis, it cannot last; we did not create economic assets and assets created in the 1960s and 1970s are deteriorating.
Look at what is happening. A bridge is built in Karachi, General Musharraf inaugurates it, and two weeks later it collapses. I mean look at the degeneration of the institutional infrastructure. That we cannot build a bridge which the president of the country inaugurates and it collapses in 2 weeks. And this will continue to happen, this is just the beginning. Because our economy is not the objective of the state.
Now no industrialist can set up an industry without setting up his own power plant. Now we have a 15% sales tax. That’s extremely high. You can’t have industry running at 15% sales tax. Energy cost is very high, indirect taxes are very high. And then there is a very high cost of bribery, for almost everything.
You know this wheat crisis that we have today is completely manufactured. How did it happen? Wheat is harvested in March. The assessment of how much wheat there will be is done after the winter rains. And usually their assessment is correct. They’ve been doing it for half a century, so it’s correct within a certain margin. This time the Islamabad Ministry of Food announced a wheat crop before the rains. I spoke to the Director of Food in Sindh, and he said we have not sent the estimates. We don’t know from where they took it and announced it. The Letter of Credit for import of wheat had to be opened in November for the wheat ships to arrive at Karachi port in January. But the ministers were too busy trying to bail out General Musharraf from the judicial crisis he had started.
Finally, I think this is a great country and let me make this final statement. I am saying this with full authority and responsibility. Pakistan is a resource-rich country. We can become a developed country like Portugal, the least developed European country. We can become a country like Portugal in 20 years. We can have zero poverty, zero unemployment and zero illiteracy. Illiteracy we can wipe out in 5 years, it is possible because we are not an overpopulated country. We talk about a high population growth rate but we are not an overpopulated country like India or China or Bangladesh. India, given its present socio-economic structure, cannot abolish its poverty even in 50 years. India will become a big economic power but will not be able to abolish poverty. We can eradicate poverty in 20 years, we can achieve effective literacy in 5 years. All these are doable things. We can become a strong economic power in this area. We can become a respectable country. We can actually give aid to street children of Bombay. All this is possible. But we have to first become a development state ourselves. Today, we are like a factory most of whose revenue is spent on chowkidars and there is no money left to buy raw materials or spare parts. That factory will close down. Pakistan is like that factory. We have to change it. You have to change it.
Source: Transcript of Dr. Kaiser Bengali’s Lecture – Making sense of Pakistan and its Economy | Teeth Maestro
