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Economy, Economic Development

Pakistani currency, structural adjustment programs, defense expenditures, agricultural tax, Direct foreign investment

After East Pakistan seceded to become the independent nation of Bangladesh in December 1971, the elected government of Zulfikar Ali Bhutto tried to pick up the pieces of a truncated Pakistan. It devised economic policies that led to a drastic devaluation of the Pakistani currency, thereby boosting agricultural exports. To ease unemployment pressure the government encouraged the export of Pakistani labor to the Middle East. It also embarked on the nationalization of industries, banks, and agriculture-based industries. This expansion of the public sector ultimately shook private-sector confidence so that investment plummeted. The annual growth rate declined, averaging between 2.7 percent and 3.7 percent during most of the 1970s.

During the 1980s the countryís economy grew an average rate of 6 percent annually. This high growth rate was largely created by three factors: aid from the United States, the influx of foreign exchange from Pakistanis working abroad, and high crop yields. First, Pakistan received an average of $600 million per year in economic and military aid from the United States from 1981 to 1989, largely because of Pakistanís support for anti-Soviet forces in the Afghan-Soviet War. (During this decade Pakistan was the third-largest recipient of U.S. aid, after Israel and Egypt.) Second, Pakistan received $2.5 billion in remittances from Pakistanis working abroad in the Persian Gulf States and other countries. Third, good weather conditions produced bumper cotton and wheat crops.

At the same time, the government did little to devise policies to boost the confidence of private investors or promote the welfare of Pakistani citizens. The negative fallout of the Afghan war on Pakistan was an expansion of the black market (the illicit sale of commodities) and the proliferation of portable weapons and violence. Despite the high economic growth rate, the economy remained largely agricultural, and socioeconomic disparities between the rich and poor widened. Also during the 1980s, the military regime increased defense spending to such an extent that the fiscal deficit rose to 10 percent of the GDP. In addition, public debt ballooned from less than 40 percent of the GDP to more than 80 percent. The debt trap that Pakistan finds itself in today originated during this decade.

The economy of Pakistan slowed to an average annual growth of 3.8 percent during the 1990s. Factors contributing to the sluggish growth included corruption and mismanagement at the highest levels of government and the rise of ethnic and sectarian violence in Karachi and other urban centers. These factors shook investor confidence.

The economic performance of the 1990s was also related to the structural adjustment programs (SAPs) of the World Bank and the International Monetary Fund (IMF). Loans from these international lending agencies were subject to conditions on Pakistanís national economic policies. Pakistan received its first formal loan in 1988. In Pakistan the primary focus of the IMF-sponsored program was to lower the budget and current-account deficits. These objectives were to be achieved by reducing public expenditures and broadening the tax base. In addition, in 1992-1993 the IMF further insisted that Pakistan reduce defense expenditures, impose an agricultural tax, and improve methods of tax collection. These reforms were never fully implemented, however, and the IMF-sponsored program did not achieve the desired result. Inflation rose from 8 percent in the 1980s to 11 percent in the 1990s, although a nominal reduction in the budget deficit was visible. Direct foreign investment did not improve and the export sector remained sluggish.

A high-powered Privatization Commission was created in 1990 to encourage privatization of public-sector industries, economic deregulation, and other reforms designed to boost confidence in the principles of a free-market economy. However, the commission was slow to implement its privatization program.



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