ISSUES IN

PAKISTANS

ECONOMY

A POLITICAL ECONOMY PERSPECTIVE

THIRD EDITION

S. AKBAR ZAIDI

OXFORD
UNIVERSITY PRESS
 Contents

Preface to the third edition 3.1.4 Elite Farmer Strategy and 34

Capitalist Development
Preface to the second edition
3.1.5 Social and Political Effects 34
Preface to the first edition 3.2 Land Reforms 35
List of fiaures, araphs, and maps xiii 3.2.1 The 1959 Land Reforms 37
3.2.2 The Bhutto Reforms of 1972 38
List of tables xiv 3.3 Summary and Further Reading 39
Introduction xix 3.3.1 Summary 39
3.3.2 Further Reading 39
Chapter 1 Understanding Pakistan s Structural 1
Transformation: 1947-2014 Chapter 4 The Nature and Direction of 42
i.l Structural Transformation 3 Agrarian Change
1.2 Decades and Epochs 4 4.1 Explaining the Numbers 42
1.2.1 Laying the Foundations: 1947-58 6 4.1.1 Data from the Censuses 43
1.2.2 The Decade of Development: 6 4.1.2 Changes Over Time 45
1958-68 4.2 What Do the Numbers Mean? 46
1.2.3 The Bad Luck Years: 1971-77 7 4.3 Summary and Further Reading 57
1.2.4 The Second Military Government: 7 4.3.1 Summary 57
1977-88 4.3.2 Further Reading 57
1.2.5 Neo-liberalism, Structural 8
Adjustment, and Praetorian Politics Chapter 5 Agriculture: Critical Issues 62
1.2.6 Lifestyle Liberalism, Dictatorship, 8
War, and Subjugation: 1999-2007 5.1 An Overview and Major Trends 62
1.2.7 Another Democratic Transition? 9 5.2 Agricultural Pricing Policy 68
2007 Onwards 5.3 Rural Financial Markets and 72
1.3 Transformation and Development: 9 Agricultural Credit
The Balance Sheet 5.3.1 Informal Sources of Credit 78
1.4 Conclusions II 5.3.2 Formal Sources of Credit 80
5.4 Mechanization 83
Part 1: Aqriculture 13 5.5 Agricultural Income Tax 86
5.6 The Water Crisis 88
Land Ownership, Power, and Land Reforms 89
Chapter 2 ls Pakistan Feudal? A Historical 14
Summary and Further Reading 94
00

Account of the Development of

5.8.1 Summary 94
Agriculture in Pakistan
5.8.2 Further Reading 95
2.1 The Development of Agriculture before 14
the Consolidation of British Rule Part 2: Industry and Trade 109
2.2 The Impact of British Colonialism 17
2.3 Feudal or Capitalist? 19 Chapter 6 The Process of Industrialization in 110
2.4 Populär Perceptions of Feudalism 21 Pakistan 1: 1947-77
2.5 Summary and Further Reading 24
2.5.1 Summary 24 6.1 1947-58: Exchange Rates, Trade Policies, 111
2.5.2 Further Reading 24 and Import Substituting Industrialization
6.1.1 The Impact of the Exchange Rate 112
Chapter 3 The Green Revolution and 31 6.1.2 The Trade Policy Regime 113
Land Reforms 6.1.3 The Consequences of Exchange 114
Rate and Trade Policy for
3.1 The Green Revolution 31 Industrialization
3.1.1 The Issue of the Tube wells 33 6.1.4 The End Result 115
3.1.2 Tractorization 33 6.2 1958-68: The Decade of Development 117
3.1.3 Regional and Income Disparities 33
 viii Contents

6.2.1 Trade Policy Directing 118 9.2.5 Trade Liberalization Under 214
Indus trialization Structural Adjustment: 1988
6.2.2 Foreign Aid, the Private Sector, 120 Onwards
and Inequalities 9.3 The Debate Over Efficiency and the 216
6.3 1972-77: The Bhutto Years—Bad Luck or 124 Trade Regime
Bad Management? 9.4 The Exchange Rate 219
6.3.1 Economic Policies and 125 9.5 Dealing with Globalization and 222
Performance World Trade Organization (WTO)
6.3.2 The Bad Luck Factor 126 9.5.1 Some Political Economy Issues 222
6.4 Summary and Further Reading 128 9.5.2 Globalization and WTO's Impact 224
6.4.1 Summary 128 on Pakistan
6.4.2 Further Reading 129 9.6 Summary and Further Reading 227
9.6.1 Summary 227
Chapter 7 The Process of Industrialization in 131 9.6.2 Further Reading 231
Pakistan II: 1977-2013
Part 3: Fiscal Policy 247
7.1 The ZiaYears: 1977-88 132
7.1.1 The Nature and Extent of Growth 132
7.1.2 Industrial Policy 134 Chapter 10 Resource Mobilization and the 248
7.1.3 The Public/Private Sector Divide 136 Structure of Taxation
7.1.4 Deregulation and Liberalization 137 10.1 The Structure of Government and Taxation 248
7.1.5 Causes of High Growth and the 138 10.1.1 Legislative Functions 248
Success of the Zia Regime 10.1.2 Inter-Governmental Fiscal 251
7.2 The Age of Structural Adjustment: 140 Relations Prior to 2010
1988 Onwards 10.2 The Structure of Taxation 255
7.2.1 The Principles of the Programme 140 10.2.1 Understanding Pakistan s 255
7.2.2 Assessing the Impact on the 142 Taxation Structure
Industrial Sector 10.3 Public Finance: The Basic Facts 261
7.3 Summary and Further Reading 146 10.4 Key Issues in Taxation 268
7.3.1 Summary 146 10.4.1 Federal Taxes 268
7.3.2 Further Reading 146 10.4.2 Resource Mobilization at the 276
Provincial Level
Chapter 8 Key issues in Industry in Pakistan 150 10.4.3 Local Government Revenues 283
8.1 Numbers and Trends in Industry 150 10.5 Summary and Further Reading 285
8.2 The Small-Scale Manufacturing Sector 153 10.5.1 Summary 285
8.2.1 Numbers and Characteristics 153 10.5.2 Further Reading 285
8.2.2 Emergence and Growth 155
8.2.3 Issues Affecting the 160 Chapter 11 Debt and Deficits 298
Small-Scale Sector 11-1 Does the Fiscal Deficit Matter? 298
8.3 The Textile Industry and its Crisis 163 11.1.1 Should Budgets Always be 300
8.4 Has Public Sector Industry Been a Failure? 168 Balanced?
8.5 The Privatization Process 171 11.1.2 The Problem of Measuring Deficit 300
8.6 The Debate over Efficiency in the 176 11.1.3 Fiscal Deficits, Intertemporal 501
Industrial Structure
Equity, and Distribution
8.7 The Energy Crisis 182
11.1.4 Macroeconomic linplicalions 302
8.7 Summary and Further Reading 190 11-2 Critical Concerns Regarding Pakisian's 302
8.7.1 Summary 190 Fiscal Deficit
8.7.2 Further Reading 190
11.2.1 The IMF/World Bank View of 309
Chapter 9 Balance of Payments and 199 Pakistan s Fiscal Deficit, 1980-97
Trade Regimes 11.2.2 Re-examining Critical Concerns 310
-3 The Domestie and Foreign DeLn Crises 3)0
9.1 Pakistan's Foreign Trade: Basic Facts 199 11-4 Summary and Further Reading 319
9-2 Trade Policy and Trade Regimes 205 11.4.1 Summary 319
9.2.1 The Early Years: 1947-58 205 11.4.2 Further Reading 319
9.2.2 Trade Policy and the Decade of 210
Development
9.2.3 A New Country: 1972-77 212
9.2.4 The Beginning of a Liberal 213
Trade Regime: 1977-88
 Contents ix

Part 4: Devolution and Fiscal Federalism 329 13.3 The National Finance Commission 373
Award 2010
Chapter 12 Local Government and the Political 330 13.3.1 Population Criteria 374
Economy of Decentralization 113.2 Poverty or Backwardness Criteria 377
13.3.3 Revenue Collection and 377
12.1 Local Government in Pakistan 331 Generation Criteria
12.1.1 The Basic Democracies of 331 13.3.4. Tax Collectiori and Distribution 378
the 1960s across Federating Units of
12.1.2 Local Government in the 1980s 334 Pakistan
(and 1990s): Urban Pakistan 13.3.5 Inverse Population Density 379
and the Middle Classes Criteria
12.1.3 Devolution in the New 338 13.4 Some Issues Relating to 381
Millennium Intergovernmental Fiscal Transfers and
12.2 Financing Local Government 340 the NFC 2010 Award
12.2.1 Financing Underrthe 1979 342 13.4.1 Vertical Fiscal Imbalances 381
Local Government System 13.4.2 Multiple criteria and the Way 381
12.2.2 Financing Under the 2001 343 forward
Local Government System 13.4.3 Sales Tax and Provinces 382
12.3 Three Military Rulers and Three Local 348 13.4.4 Substitution of Fiscal Effort by 382
Government Systems Sub-National Governments
12.4 Is Local Government the Answer? 350 13.4.5 Conditional versus 382
12.4.1 The Contribution of Municipal 350 Unconditional Grants
Government in Development 13.4.6 Fiscal Federalism and Poverty 383
12.4.2 Potential for Development by 350 Reduction
Local Governments 13.5 The Case of Fiscal Equalization 383
12.4.3 Is Local Government the Answer? 351 13.5.1 Fiscal Equalization Index (FEI) 383
12.5 Summary and Further Reading 351 13.5.2 Fiscal Equalization with 385
12.5.1 Summary 351 Dominance of Indirect Taxes
12.5.2 Further Reading 353 and Distribution of Resources
in Real Terms
Chapter 13 Fiscal Federalism in Pakistan: 362 13.6 The 18th Amendment: The Way Forward 386
Emerging Dynamics, Issues, and to Devolution?
Prospects 13.7 Summary and Further Reading 388
13.1 Pre-Independence Evolution and 362 13.7.1 Summary 388
Development 13.7.2 Further Readings 389
13.1.1 The Otto Niemeyer Award 1936 363
13.1.2 Post-Independence Evolution 363 Part 5: Monetary Policy and Financial and 391
and Developments—NFC Award s Capital Markets
in Retrospect
13.2 The National Finance Commission Award 363 Chapter 14 Financial and Capital Markets 392
An Introduction
14.1 The Development of the Banking Sector 393
13.2.1 The Raisman Award 1951 365
14.1.1 The First Phase: 1947-74 393
13.2.2 The National Finance 365
14.1.2 The Relationship between 394
Commission 1961-62
Economic Growth and the
13.2.3 The National Finance 367 Development of Banking
Commission Award 1964 396
14.1.3 Nationalization in the 1970s
13.2.4 The National Finance 369
14.1.4 Islamic Banking 397
Committee 1970 14.1.5 Developments since 1988 398
13.2.5 The National Finance 370 399
14.1.6 Banking Trends: 1964-2012
Commission Award 1974 401
14.1.7 Development Finance
13.2.6 The National Finance 370 Institutions (DFIs) and
Commission Awards, 1979 Non-Bank Financial Institutions
and 1985 (NBFIs)
13.2.7 The National Finance 371
14.1.8 Some Salient Issues in the 402
Commission Award 1990 Banking Sector
13.2.8 The National Finance 371
14.1.9 Excluding the Majority: Limited 405
Commission Award 1997
Access to Finance in Pakistan
13.2.9 The National Finance 372 14.2 The Equities Market 407
Commission Award 2006
14.3 Summary and Further Reading 410
x Contents

14.3.1 Summary 410 17.6 The Political Economy of Structural 498

14.3.2 Further Reading 411 Adjustment Programme: in Pakistan
17.6.1 Pakistan s Dependencc on 500
Chapter 15 Monetary Policy, Savings, and Inflation 423 Washington, or are
Governments Autonomous?
15.1 Monetary Policy and Monetary 423 17.6.2 Did Pakistan Need to Go to the 502
Management in Pakistan IMF in the 1990s?
15.2 Money Supply and Monetary Expansion 432 17.6.3 Why Does Pakistan Accept 504
15.3 Inflation and its Ganses 432 IMF Programmes?
15.4 The Low Savings Rate 439 17.7 Summary and Further Reading 509
15.5 Summary and Further Reading 444 17.7.1 Summary 509
15.5.1 Summary 444 17.7.2 Further Reading 510
15.5.2 Further Reading 444
Chapter 18 Macroeconomic Developments: 518
Part 6: Neo-liberalism, Stabilization, and 457 1998-2013
Macroeconomics: From ESAFs
to PRSPs to SBAs—1988 to 18.1 Before and After May 1998 518
the present 18.2 11 September 2001: The Day the World 522
Changed
Chapter 16 Structural Adjustment Programmes: 458 18.3 What Happened to the Debt Crisis? 524
Composition and Effects 18.4 The Growing Forex Reserves 528
18.5 Did the Economy Turnaround? 532
16.1 The Development and Export of 459 18.6 Musharraf and After: 2004-2008 535
Development Thinking 18.7 The Pakistan People's Party s Economic 538
16.2 From Structural Adjustment Loans to 460 Policies 2008-2013: Bad Luck or
Structural Adjustment Programmes Bad Management?
16.3 Structural Adjustment Programmes: 465 18.8 Summary and Further Reading 544
Composition 18.8.1 Summary 544
16.4 Structural Adjustment Programmes: 467 18.8.2 Further Reading 545
Implementation and Effects
16.5 Economic Liberalization and Openness: 469 Part 7: The Social Sectors: Institutions 555
Some Questionable Assertions
and Governance
16.5.1 The Contextuality of Policy 471
16.5.2 International Capital and the 473
Loss of National Autonomy Chapter 19 The Social Sectors I: International 556
16.6 Summary and Further Reading 473 Comparisons, Education, Population,
16.6.1 Summary 473 Urbanization, and Housing
16.6.2 Further Reading 475 19.1 Somc International and Regional 556
Comparisons
Chapter 17 The IMF and Structural Adjustment 483 19.2 The Impact of Economic Growth 2002-07 559
Programmes in Pakistan 19.2.1 Finally on Track? 560
17.1 History 483 19.3 Education 561
17.2 Implementation of the Structural 488 19.3.1 Statistics 561
Adjustment Programmes in Pakistan: 19.3.2 The Issues 563
An Examination of the 1988 Programme 19.3.3 Summarizing the Issues in 566
17.2.1 Fiscal Policy 488 Education
17.2.2 Trade 489 19.4 Population Weifare and Family Flanning: 568
17.2.3 Financial Sector 489 The Demographic Transition
17.3 Was the 1988 Structural Adjustment 489 19.4.1 The Evolution of the Population 568
Programme a Success? Achievements Wellare Programme
and Failures 19.4.2 Knowledge and Usage 569
17.3.1 Fiscal Policy 490 19.4.3 Some Issues 570
17.3.2 Trade and Balance of Payments 490 19.4.4 Pakistan s Demography: 571
17.3.3 Financial Sector 491 Dividend or Disaster?
17.3.4 Liberalization and Privatization 491 19.5 Urbanization and Housing 573
17.3.5 Other Areas 491 19.5.1 The Extent of Urbanization 573
17.4 The World Bank/IMF's Overall 492 19.5.2 Rethinking Urban and Rural 575
Evaluation of the 1988 Structural 19.5.3 Housing in Cities 579
Adjustment Programme 19.5.4 The Demand for Low Income 580
17.5 The 2008 Stand-By Agreement 494 Housing in Pakistan
 Contents xi

19.7 Summary and Further Reading 582 21.10 Summary and Further Reading : 646
19.7.1 Summary 582 21.10.1 Summary 646
19.7.2 Further Reading 582 21.10.2 Further Reading 646

Chapter 20 The Social Sectors II: MDGs, Gender, 589 Part 8: Poverty and Inequality 649
Environment, NGOs, Institutions, arid
Governance Chapter 22 Poverty: Trends, Causes, and Solutions 650
20.1 Millennium Development Goals (MDGs) 589 22.1 What Does Poverty Mean? 650
20.2 Gender Inequality and Women 591 22.2 Trends in Poverty 652
20.2.1 Statistics 591 22.3 Who Are the Poor and Where Do 656
20.2.2 Some Issues 595 They Live?
20.2.3 Finding Some Options 596 22.4 Explaining the Trends in Poverty 1960-88 658
20.3 The Environment 597 22.5 Poverty in Pakistan: 1988-2013 662
20.4 Institutiohal Issues in the Social Sector 604 22.6 Poverty Alleviation - 665
20.5 Governance, Decentralization, and 606 22.7 Poverty and Bonded Labour 669
Local Level Delivery 22.8 Can Poverty be Eliminated in Pakistan? 672
20.5.1 Government and Development 607 22.9 Summary and Further Reading 674
in Pakistan 22.9.1 Summary 674
20.6 NGOs and Community Participation 609 22.9.2 Further Reading 674
20.7 Summary and Further Reading 613
20.7.1 Summary 613 Chapter 23 Regional and Income Inequalities 687
20.7.2 Further Reading 613
23.1 Regional Inequalities: Districts and 687
Chapter 21 The Social Sectors III: The Health 624 Provinces
Sector and the Health-Poverty Nexus 23.1.1 Methodology and Results 688
23.1.2 The Issues 693
21.1 Health and Poverty 624 23.2 Regional Inequalities: Agro-Climatic Zones 699
21.2 Examining Health Data: Health Status, 625 23.3 The Case of Karachi: Economic, Social, 701
Health Spending, and the Poor and Demographic Aspects
21.2.1 Health Status 625 23.3.1 Economic and Social Aspects 703
21.2.2 Examining Health Data 626 23.3.2 Revenue Collection 705
21.2.3 Utilization of Health Facilities 629 23.3.3 An Economic Appraisal of 705
21.2.4 Health Spending and Health 630 Karachi
Expenditure 23.3.4 Implications for NFC Transfers 706
21.3 Health Outcomes and Non-Medical 631 23.3.5 Demographic Trends 707
Interventions 23.3.6 Karachi as a Province? 707
21.4 The Poor and the Socio-economic Impact 632 23.4 Income Inequalities 710
of Communicable Diseases 23.5 Conclusions 714
21.5 The Issues of Price, Cost, and Access to 633 23.6 Summary and Further Reading 714
Treatment 23.6.1 Summary 714
21.5.1 How Much Does it Cost to Cure 634 23.6.2 Further Reading 715
Tuberculosis?
21.6 The Impact of Public and Private 636 Part 9: Poiitical Economics 721
Provision of Health Care on the Poor
21.7 The Role of Government in the Control 637 Chapter 24 The Poiitical Economy of Neighbourly 722
of Communicable Diseases Relations
21.7.1 The National Health Policy 2001 638
21.7.2 The Extended Programme of 639 24.1 India and Pakistan: A Brief Comparison 724
Immunization 24.2 Theorizing Trade, War, and Peace 725
21.7.3 The National Tuberculosis 640 24.3 Trade with India 728
Control Programme 24.4 The Benefits and Constraints of Trading 734
21.7.4 The Lady Health Workers 640 with India
Programme 24.4.1 The Simple Benefits of Trade 734
21.8 Intervening in the Health-Poverty Nexus: 641 24.4.2 Complicating Simplicity: The 734
The World Health Organization Interests of the Military
Commission on Macroeconomics and 24.5 Constraints and Possibilities: A Matter 736
Health of Survival
21.9 Rethinking Intervention in the Health- 644 24.6 The Importance of Trade with India 736
Poverty Nexus: Health, or Poverty? 24.6 Summary and Further Reading 750
 xii Contents

24.6.1 Summary 750 26.5 Elections Without Democracy: 1988-99 787

24.6.2 Further Reading 750 26.6 The Return of the Military: 1999 Onwards 788
26.7 Issues in Pakistan's Political Economy 789
Chapter 25 War, Destruction, and Aid 753 26.7.1 Pakistan's Middle Classes 789
26.7.2 The Pakistan) Military's 790
25.1 The Costs of the War on Terror 753
Economic Interests and Their
25.2 War and Aid: Who Benefits from US Aid 754
Consequences
to Pakistan?
26.7.3 Pakistan's Praetorian Democracy 791
25.2.1 Fifty Years of Aid to Pakistan 754
and Technocrats as Apologists
1950-2002
26.7.4 Pakistan's State and Society: 791
25.3 The Complicated Issues of US Aid 758
after 9/11 Croups, Fractions, and Influence
25.3.1 The Purpose of Aid 758 26.7.5 Urbanism as a Way of Life 795
25.3.2 Has the Purpose of Aid Seen 758 26.7.6 Is Pakistan a Failed State? 797
Achieved? 26.8 Summary and Further Reading 798
25.3.3 Economic and Humanitarian 760 26.8.1 Summary 798
Aid and Assistance 26.8.2 Further Reading 798
25.4 The Consequences of Aid 761
25.5 The Nature of Recent US Aid to Pakistan 763 Chapter 27 A New Political Economy? 803
25.6 Who Benefits from US Aid to Pakistan? 768 27.1 Transitions 803
25.7 Summary and Further Reading 769 27.1.1 The View in Mid-2011: Was 803
25.7.1 Summary 769 Pakistan Near Collapse?
25.7.2 Further Reading 769 27.1.2. The Old and the New in Naya 807
Pakistan: Elections 2013
Chapter 26 Political Economics: Class, State, 782 27.2 The Changing Character of the 810
Power, and Transition Pakistan! State
26.1 Civilian Bureaucracy and 783 27.2.1 Theorizing the Pakistan! State 810
Industrialization: 1947-58 27.3 A State Without Power? The 812
26.2 Civil and Military Bureaucratic 784 Fracturization of Power in Pakistan
Capitalism: 1958-71 27.4 Conclusions 816
26.3 A Shift in Emphasis: 1971-77 785 Selected Bibliography 821
26.4 A Military State and the Middle Classes: 785
1977-88 828