Issues in Pakistan Economy - ECO610 Definitive Study Notes

Statistical comparisons reveal a profound divergence in economic trajectories between Pakistan and other nations that were once at similar developmental stages. In $1960$, South Korea was economically comparable to Pakistan. However, by the contemporary era, South Korea’s Gross National Product (GNP) per capita has surged to a level $18$ times higher than that of Pakistan. Structural transformation refers to the systematic reallocation of resources from traditional, subsistence-based sectors like agriculture toward more modern, high-productivity sectors such as manufacturing and services. At the time of independence in $1947$, West Pakistan was geographically six times larger than East Pakistan, yet 55 ext{ ext{%}} of the total population resided in the East. The sectoral contribution to GDP in $1949$ was dominated by agriculture at 53 ext{ ext{%}}, with a labor force involvement of 65 ext{ ext{%}}. Manufacturing accounted for only 7.8 ext{ ext{%}}, trade for 11.9 ext{ ext{%}}, and other sectors for 27 ext{ ext{%}}. By $2017$, agriculture's contribution fell to 19.5 ext{ ext{%}} (with 42.3 ext{ ext{%}} of the labor force), while the industrial sector rose to 20.88 ext{ ext{%}} and services expanded to dominate at 59.59 ext{ ext{%}}.

The foundation era from $1947$ to $1958$ was characterized by an undeveloped nation struggling with millions of refugees and a lack of industrial infrastructure. The government launched the Colombo Plan in $1951$ with a budget of $Rs. ext{ }2600 ext{ million}$ to provide basic necessities. Policy successes included a ban on imports of cotton textiles and luxury goods to spur domestic growth, leading to a manufacturing growth rate of 34 ext{ ext{%}} between $1952$ and $1954$, aided by the Korean War boom ($1950-1953$). However, agricultural growth declined during the latter half of this decade, and persistent deficits marked the $1950 ext{s}$.

The ‘Decade of Development’ ($1958-1968$) under General Ayub Khan is referred to as a golden period, witnessing high growth in manufacturing and a 5 ext{ ext{%}} annual progress rate in agriculture due to technological breakthroughs. Key milestones included the Indus Water Treaty and significant American aid. Despite this, the era faced criticism for increasing income inequality, notably concentrated within just $22$ families. The momentum was disrupted by the $1965$ war, increasing defense spending and reducing foreign aid.

The ‘Bad Luck Years’ ($1971-1977$) followed the loss of East Pakistan, involving radical shifts toward nationalization of industries, banking, and education. Significant external shocks, like the $1973$ oil price hike and floods in $1973$ and $1974$, led to severe inflation. The rupee was devalued by 131 ext{ ext{%}} to boost trade, leading to widening fiscal deficits and plummeting private sector investment.

The second military regime ($1977-1988$) under General Zia-ul-Haq reversed trends, focusing on deregulation and Islamic interest-free banking, with GDP growth rising from 4.9 ext{ ext{%}} to 6.6 ext{ ext{%}}, aided by the Afghan War and foreign remittances. The period from $1988$ to $1999$ marked the era of Structural Adjustment under democratically elected governments, characterized by political instability and corruption, leading to public debt reaching 102 ext{ ext{%}} of GDP.

The subsequent military regime ($1999-2007$) saw a temporary revival with increased FDI and stock exchange performance, termed the second golden era. However, since $2007$, the democratic transition has faced recurring energy crises, rising foreign debt, and the implementation of the China-Pakistan Economic Corridor (CPEC) to modernize infrastructure and energy transportation with a focus on generation capacity of up to $33000 ext{ MW}$.