Trade and industrialization policies for an accelerated development in Pakistan.
James, William E. ; Naya, Seiji
Pakistan achieved high rates of economic growth from the mid-1970s.
Growth was facilitated by the external circumstances that relaxed the
balance-of-payments constraints. However, growth was not accompanied by
an improved social development. Moreover, as the external circumstances
worsened, the underlying macroeconomic imbalances emerged and the growth
slowed down. The paper assesses how the domestic and international
economic policies might be adjusted to attain a more sustainable pattern
of development.
I. INTRODUCTION
Pakistan sustained an exceptionally high real rate of economic
growth for more than a decade. Between 1977 and 1987, real gross
domestic product (GDP) nearly doubled. Pakistan's real GDP growth
among low-income countries in the 1980s was second only to that of
China. (1) Substantial structural change accompanied the high economic
growth (Tabel 1). The share of the industrial sector in GDP grew sharply
while that of agriculture declined (Table 2).
The recent period of high growth was preceded by a time of economic
difficulty and relative stagnation. (2) Pakistan had to adjust to a
number of severe shocks during the early to mid-1970s. Among these were
the 1971 conflict that ended with the secession of East Pakistan (now
Bangladesh). Erratic government policies and a wave of nationalizations
led to a period of sporadic and, on average, low economic growth. The
lower growth was most pronounced in the manufacturing sector as private
industrialists reduced investment. High inflation and exchange rate
uncertainty were exacerbated by external events including the 1973-74
oil shock and the subsequent severe world recession.
In part, the high growth that occurred in the late 1970s could be
attributed to recovery from the recession and the economy's
adjustment to the traumas of the early 1970s. (3) However, the fact that
rapid real GDP gains were sustained year after year into the late 1980s
indicates that a fundamental acceleration in trend growth occurred in
the late 1970s.
The improvement in growth performance has been associated with
higher manufacturing and agricultural growth (Table 1). Increasingly,
the orientation of the trade, the exchange rate, and the industrial
policies has been to exports and competitive markets. Regulatory
restrictions on business have been relaxed and an expanded role given
the private sector. These positive changes may help explain the high
growth rate from 1977-87. The assessment of how much the partial
liberation of policies influenced productivity and growth is tempered by
the realization that a number of special circumstances also influenced
the outcome. For example, a sharp increase of workers' remittances
from the Middle East after 1979 and large inflows of foreign aid in
response to the invasion of Afghanistan allowed the economy to grow at a
faster rate than warranted by the domestic savings rate. After a decade
of growth averaging almost 7 percent between 1987 and 1990, real growth
of GDP fell to an average of about 5 percent, indicating that some of
the favourable factors for growth have receded. At the same time, a
number of rather serious macroeconomic imbalances have arisen, and these
demand corrective measures that could further reduce growth. These
include wide deficits in the budget and trade accounts, the low and
declining saving rate, rising inflation, and an increasing debt service
burden.
Between 1981 and 1988, Pakistan's population grew by 20
million. Rapid growth in the labour force will be a fact of life for the
foreseeable future. Pressures and social tensions arising from this and
wide inequalities in income and wealth, as well as regional and
rural-urban inequalities, are alarming. These problems will have to be
addressed if Pakistan is to complete its ascent from poverty to
middle-income status by the turn of the century.
The purpose of this paper is to examine how Pakistan might
establish a firm base on which to build a more equitable and sustainable
process of growth. In doing so, our central argument is that further and
more thorough liberalization of trade as well as regulatory and
investment policies can spur employment-oriented growth, and
simultaneously reduce macroeconomic structural imbalances. In doing so,
we examine how partial liberalization has influenced growth and
macroeconomic balance. An assessment of why policies of an illiberal nature have persisted is made in order to broaden understanding of the
conditions necessary for a more thorough opening up of the economy.
II. MACROECONOMIC AND STRUCTURAL IMBALANCES
Over the entire time span that we are considering, problems
characteristic of low-income developing countries have persisted in
Pakistan. A low rate of domestic savings is particularly noticeable.
Between 1977 and 1987, the resource gap measuring the difference
between capital formation and domestic savings, on average, has exceeded
11 percent of GDP (Table 3). This difference is not a typical for
low-income South Asian countries; however, it is alarming that the
domestic savings rate has stagnated or even fallen despite the
accelerated growth in GDP. The gross national savings (GNS) rate, which
includes the savings out of remitted incomes, is much higher than the
gross domestic savings rate in the 1980s. Even if GNS is used, a
substantial resource gap averaging 5 percent of GDP remains.
An important part of the government's growth strategy was an
effort to increase investment efficiency. Raising the investment ratio
through the encouragement of the private sector became a major component
of the high growth strategy adopted by the government after 1977. A
continued high level of public investment was to complement the private
investment expansion. The government investment programme would
concentrate on infrastructure, private investment on productive
sectors--agriculture, industry, and services The government was
successful in raising the share of private investment in total between
1978 and 1988 from 30 percent to 50 percent (Table 4). Yet, the growth
of total investment has been so slow that between 1978 and 1988 the
investment rate fell slightly as a percentage of GDP. A remarkable
feature of the high growth since the late 1970s is that it has been
accomplished with relatively low investment levels. (4)
The government's fiscal deficit has been the principal
macroeconomic problem area for Pakistan for many years. The
government's current expenditures rose at an average rate of 20
percent between 1980 and 1988. Consequently, the current expenditures
reached as high as 19 percent of GDP, while the revenues were static
[ADB (1989); pp. 128-132]. The dissaving by government reached--1.6
percent of GDP in 1988. In contrast to current expenditures, government
capital outlays have fallen as a proportion to GDP. Clearly, the
government is losing the battle for resources. The percentage of the
overall deficit to GDP was 9 percent during the period 1972-77 as
compared to 7 percent during 1978-85. However, the deficit kept
increasing after 1981, and 1985 was marked with a dramatic change in
which the deficit was Rs 10 billion higher than that 1984. By 1988, the
budget deficit had risen to 8.6 percent of GDP. The main weaknesses in
the government budget were underscored by budgetary outcomes of recent
years.
First, the tax structure has been inelastic with respect to the
levels of economic activity. There is excessive reliance on indirect
taxation. Taxes on imports accounted for 33 percent of total revenue in
1985, an increase from the early 1970s [Harold et al. (1988), p. 45]. On
the whole, foreign trade taxes (including export taxes) comprised 45
percent of revenue [ADB (1988), p. 130]. In recent years, the tax-GDP
ratio has been kept at about 13 percent but only by recourse to ad hoc surcharges on imports and through capturing windfall gains from the
decline in world petroleum prices after 1986. Indirect taxes, including
excise, sales, and duties, made up 85 percent of tax revenue [ADB
(1989), p. 131]. Non-tax revenue was only a one-fifth of current revenue
and showed no tendency to increase. Direct tax revenues have increased
at a slower rate than overall revenues and accounted for less than 15
percent of total revenues.
Secondly subsidies have risen rapidly, going from 3.5 percent to
7.5 percent of central government current expenditures between 1982 and
1988 [IMF (1990), p. 4]. Although massive subsidies appeared in 1980,
there had been considerable progress in reducing or holding down
subsidies through 1982. Total subsidies increased in 1983 and began
accelerating in 1984. The main government subsidies were given to
consumers of wheat and edible oils, as well as to exporters and
fertilizer users. Increased costs of wheat and edible oil imports were
not passed on to consumers, resulting in a large increase in subsidies
in recent years.
Thirdly, low public savings led to increasing reliance on domestic
bank borrowing and bond issues. The government offered generous returns
for those willing to finance its short-term borrowings. But this has
made interest payments a large autonomous item in expenditure. In 1985,
government borrowing from "captive" domestic banks financed
almost 50 percent of the deficit, which compared to an average of 29
percent over the previous five years. For 1986, the government budgeted
an increase of 52 percent in nonbank borrowing and 58 percent in
external borrowing over 1985 levels in order to avoid more domestic bank
borrowing. But such a shifting of the sources of borrowing is less an
issue than the problem of rapidly rising government indebtedness.
Illustrative of the problem is a rise in interest payments from 1
percent of GDP in 1981 to 3 percent in 1988 [ADB (1989), p. 130].
The above suggests that reforms are needed to increase the revenue
and reduce the expenditures. However, the structure of government
expenditure may show little room for the government to cut expenditure.
A large portion of the expenditure is for defense and interest
payments--which together accounted for over half of government current
expenditure. Development expenditures, including investment and spending
on social and economic services declined from 8 percent of GDP in the
early 1980s to under 7 percent of GDP in 1988, and this share could
hardly be any further reduced. Consequently, the improvement of
budgetary deficits from the expenditure side will rely heavily on
reducing subsidies and improving performance of public enterprises.
One of the unfortunate consequences of weakness in government
ability to mobilize funds is deterioration of basic social services and
a running down of infrastructure. Local and provincial governments,
starved of resources and burdened by other priorities, were unable to
provide adequate basic government services and infrastructure. The
central government, by attempting to govern activities better left to
private initiative, weakened its ability to deliver the basic elements
of public security and public goods necessary to a functioning economy.
With deficits in the current budget and in the capital budget; and
with private domestic savings inadequate to finance both private
investment and the budget shortfall; deficits in the trade balance
arose. The deficit in foreign trade in goods and services was extremely
large in the 1980s. However, the trade deficit was offset by large and
increasing remittances from Pakistani workers in the Middle East.
Remittances reached a peak of almost $ 3 billion in 1983 (Table 5),
helping to offset a trade imbalance and resulting in a small $ 25
million current account surplus (Table 6). Remittances averaged about 9
percent of GDP in the 1980s. On average, however, deficits in the
current account in the balance of payments were quite large, exceeding $
1 billion in the period 1984-87; and after improving in 1987, again
rising to over $ 1 billion in 1988 (Table 6).
These remaining deficits were filled by foreign capital inflows
chiefly in the form of concessional bilateral and multilateral aid. The
size of foreign assistance loans and grants, while substantial, did not
rise much after the initial increase that occurred at the time of the
Soviet occupation of Afghanistan in 1979 and 1980. Moreover, because of
repayments on previous loans, net inflows from official sources are far
less than the gross aid inflows. (5) Direct and portfolio investment in
Pakistan remained quite small; though after 1984, these sources for
foreign funds increased somewhat.
The external payments position of Pakistan is under pressure from a
number of forces. These include rising debt servicing obligations. The
total external debt of Pakistan rose from $ 5.6 billion in 1975, to $
9.5 billion in 1980, to $ 13.6 billion in 1986, and reached $ 20 billion
in 1989 [ADB (1989), p. 129]. Debt service payments as a percentage of
exports reached over 30 percent in 1988. (6) Capital flight has also
become more pronounced in recent years as government instability and
uncertainties facing private business have worsened.
Another cause of balance-of-payments pressure arises paradoxically
from the oil price bust of the 1980s. Pakistan benefits from lower oil
prices in its merchandise trade, but the gain in lower oil prices must
be weighed against possible losses from declining workers'
remittances as labour demand declines in the oil-exporting nations. In
Pakistan's case, cheaper oil reduced the import bill by about $ 500
million between 1985 and 1988 [IMF (1989), p. 409]. However, remittances
fell by over $ 660 million; hence the net effect appears to be negative
by a wide margin! Remittances fell below $ 2 billion in 1988 for the
first time since 1980 (Table 5).
The pressures on Pakistan's balance of payments have been
manifesting themselves in the country's official reserves position
for the past few years. Official international reserves have declined
markedly in recent years, and have fallen even more relative to the
imports. According to the [IMF (1990), p. 4], gross official reserves
were about two months of the following year's imports in 1986, but
averaged less than three weeks of the 1989 imports in 1988.
The prospects for increases in foreign assistance on concessional
terms from official sources--particularly bilateral--are clouded by
several factors including the Soviet withdrawal from Afghanistan and the
end of the Gulf War between Iran and Iraq. While it is difficult to
speculate on future aid programmes, clearly there is not much scope for
U.S. assistance to increase the aid; and, given the changing external
conditions, there is even less strategic reason for a large U.S. aid
programme. (7) Pakistan is likely to receive funds under harder
concessional terms than in the past, and this trend is already manifest.
Given the climate of political instability inside the country, it also
appears unlikely that private investment will rise to fill the gap.
Hence, no alternative to Pakistan seems available but to attempt to
improve on its domestic savings effort for internal balance, and to
boost exports to improve the external balance. Otherwise, the imports
and growth will have to be cut sharply.
III. ACCELERATED GROWTH: 1977-87
What factors underlie the more rapid growth that transpired after
1977 and lasted well into the 1980s? There was a marked increase in
growth of agricultural and industrial sector real GDP, though services
growth remained about the same (Table 1).
Inflation has been substantially lower in the high growth period
than previously. The average annual rate of increase in consumer prices
went down from over 14 percent in the period 1971-77 to under 8 percent
in 1978-87. (8) The improvement was partly a result of more stable
prices of essential imports but also reflected the strong agricultural
performance that helped keep domestic prices more stable.
Clearly, the acceleration of industrial growth was assisted by the
stronger agricultural performance--though it is not at all clear that
linkages worked well in the other direction. The rise in agricultural
production seems to have been caused by favourable weather conditions in
most years (1984 and 1987 being exceptions). There is little evidence of
a sustained rise in productivity in agriculture, particularly in
foodgrains [ADB (1989), p. 132]. Rather rainfall adequacy allowed a
greater barani area to be cropped. In contrast, cotton production almost
doubled between 1984 and 1988 in response to the strong external demand
and improved yields. Sugar production also rose in response to
deregulation. Sustaining further growth from a higher production level
could prove to be difficult.
Agri-based industries, including rice, sugar, leather and hides,
and cotton textiles, account for over 40 percent of manufacturing
value-added and over 50 percent of merchandise exports [ADB (1989), p.
131]. The diversification of exports from agriculture to
labour-intensive industries has been rather slow and is still limited in
scope.
In the following section, our focus is on trade and industrial
patterns and policies in the 1980s. We examine recent performance in
light of the incentive structure and external conditions.
IV. TRADE AND INDUSTRIALIZATION IN PAKISTAN IN THE 1980s
According to the factor proportions theory of international trade,
a priori, one would expect a labour-surplus, agrarian country like
Pakistan to specialize in the production and export of labour-intensive
and agri-based goods. Given the scarcity of domestic savings, it would
tend to import goods intensive in various forms of capital--both
physical and human. In fact, this pattern appears to more or less fit
Pakistan's foreign trade. (9)
Pakistan's export performance during the period 1971-77 was
relatively poor. The share of non-traditional (mainly labour-intensive)
exports was stagnant. Manufactured exports between 1970 and 1985, in
nominal terms, averaged only 10 percent per annum growth; or less than
half the average for all developing countries. (10) During much of the
1970s--a period of relatively robust growth in world trade compared to
the 1980s--trade and industrial policies in Pakistan were erratic. After
1977, efforts were made to rationalize policies to some degree in order
to establish more effective incentives to exports, substitute domestic
production for imports, and promote efficiency in stimulating industrial
growth. Perhaps the most significant change was the adoption of more
flexible and aggressive exchange rate management beginning in the early
1980s.
Before examining the effects of these reforms on trade and
industrialization, we attempt to briefly summarize the structure of
protection embodied in trade, industrial, and exchange rate policies at
the beginning of the 1980s (presumably after the
"recovery-led" type growth we alluded to on page 1 had taken
its course). Several studies exist that evaluate the structure of
protection and the effects of various promotion policies on
Pakistan's industries. (11)
Comparatively, Pakistan's domestic market has been heavily
protected. Among Asian developing countries in the early 1980s, Pakistan
had one of the highest average tariff levels. (12) (See Table 7). Not
only were tariffs high, but imports were all subject to quantitative
restrictions. Nevertheless, over time, it appears the overall level of
protection in Pakistan has been reduced. (13)
One of the most significant features of trade protection and
industrial promotion policies in Pakistan is the unevenness of
incentives across activities and even within industries according to
size or location of firms. This unevenness is amply demonstrated by
studies of "effective protection" and industrial policies.
These irregularities arise for a variety of reasons--including
variations in tariffs, differences in treatment of import licences,
varying rates of indirect taxes (including excises and export duties),
and subsidies and differences in access to the government bureaucracy
itself. The variations in rates of protection often produce unintended,
even bizarre, results. (14) Examples are: high protection of inefficient
industries; negative protection of efficient and export-oriented
industries; encouragement of capital-intensive, large-scale firms; and
discouragement of efficient and small- and medium-scale enterprises.
The existing studies indicate that protection in Pakistan in the
early 1980s was strongly biased against export activities in which the
country had comparative advantage. (15) By 1981, some estimated the
rupee was overvalued by as much as 20 percent vis-a-vis the dollar. (16)
The exchange overvaluation, coupled with the high average tariffs,
restrictive quota licences on imports, and deployment of indirect taxes
on imports and exports (some partially offset by duty drawbacks and
subsidies), created a strong overall bias in favour of
import-substituting industries and gave encouragement to firms to
produce for domestic (protected) markets over all foreign markets.
The system of protection also had negative effects on employment
and distribution by unduly favouring investment in large inward-looking
industries.
The adoption of discretionary controls over imports reflected the
evolution of bureaucratic management of the economy. The controls over
foreign trade were justified by periodic balance of payments crises that
often originated from external sources. Examples include the cessation
of the Korean War boom in exports, the separation of East Pakistan and
creation of Bangladesh, the oil shocks of 1973 and 1979, and now, the
collapse of the economic boom in the Middle East. In a sense, the import
quotas and bans in addition to tariff restrictions were necessitated by
efforts to overcome short-term disturbances and crises manifested in
foreign exchange shortfalls. The pernicious longer term consequences of
discretionary trade controls were rarely considered. The objectives of
protecting domestic industries in sectors with comparative advantage,
and thereby eventually attaining a stronger export- and import-competing
industrial base, were undermined. The businesses that received the
licences for imports and allocations of foreign exchange concentrated on
collecting rents resulting from excess demand and cultivating
bureaucrats rather than efforts to increase efficiency in their plants
so that they could compete in external markets. The administrators, for
their part, had little way of knowing which new businesses should
receive protection on the basis that they had potential to become
competitive. The resulting structure of protection tended to provide
wide variances in the degree of protection. It also tended to favour
established, large-scale businesses over newcomers. These features have
delayed the diversification of exports and have hamstrung the
development of labour-intensive manufacturing activities with export
potential. In turn, these problems themselves led to efforts to reform
and liberalize trade policies, starting in the early 1980s. Those
advocating liberalization have had to contend with arguments that
Pakistan's exports were price inelastic, that foreign markets were
closed or would not welcome goods from Pakistan, and that surging
imports would harm domestic industries and draw down precious foreign
exchange reserves. Resistance to liberalization predictably has been
strong enough to somewhat delay and weaken reforms.
V. TRADE LIBERALIZATION IN PAKISTAN
The general problem of liberalization can be simply expressed as
one of revising the incentives so that it is roughly equally profitable
to produce goods for domestic and foreign markets. Conceptually, if we
ignore for the time-being nontradables and international transactions
other than trade, a uniform tariff on all imports and a matching subsidy
on all exports would cancel each other out. The trade regime would be
completely neutral and, all other things equal, there would be no change
in the equilibrium exchange rate.
A basically neutral trade regime was put into place in Taiwan and
Korea in the mid-to-late 1960s, with spectacular results. (17) The
movement towards a neutral trade policy regime may involve varying
degrees of intervention. It does not at all imply that "free
trade" is practiced or even necessarily that all quantitative
restrictions are removed.
One often encounters the view that policy interventions to restrict
imports and expand exports are "doubly protectionist". In
fact, interventions to subsidize exports are not additive to import
controls or tariffs, rather they are offsetting. (18) However, the
manner in which a country moves towards a more neutral posture certainty
matters. For example, a country that maintains high import protection
faces the problem of providing sufficiently large export subsidies to
offset the negative effects on its competitive position. Leaving aside
questions of administration, large subsidies can lead to budgetary
deficits. Fiscal deficits may be met either through domestic financing
that can have crowding-out or inflationary effects, or can lead to
increased foreign borrowing and indebtedness. (19) In the case of
inflation, aggressive exchange rate policy may be necessary to avoid
real appreciation.
The alternative of reducing and rationalizing tariff and non tariff
import protection seems preferable on economic grounds. Cutting export
taxes and import duties can also have fiscal effects--but these could be
offset by introducing broad-based consumption or income taxes. Reducing
the number of items that are under restrictive licencing (shifting to
tariff-based protection) could offset any revenue losses.
Opening up Pakistan's economy to foreign trade and investment
has been, at best, a gradual process. Moreover, liberalization measures
have not been introduced as part of a well thought out programme but
rather piecemeal often under the prodding of external donors. Despite
this haphazard approach, it appears the sum of the changes introduced
has been substantial.
Since the early 1980s, Pakistan has broadly followed a combination
of policies to move toward a more neutral trade regime. Despite the
partial nature of trade liberalization in Pakistan, the trend has been
comparatively clear in the 1980s vis-a-vis the previous decade. The
average level of tariffs and the dispersion has been reduced. By the
late 1980s, the tariff level averaged 30 percent compared to 70 percent
in 1979. (20) The reduction in import controls has also been noticeable.
Export incentives have also improved. Among these have been aggressive,
flexible exchange rate management. From 1981 to 1989, the rupee has
depreciated against the SDR by 135 percent [IMF; IFS (1989), pp. 408-9].
(21) Imports have been liberalized by expanding the open general licence
for imported equipment and industrial raw materials. Export subsidies
have included not only duty drawbacks but also export credit facilities.
The procedures for collecting rebates for exporters were streamlined and
focused on nontraditional (new manufactured) exports.
Exporters of manufactured goods are allowed to import items that
are otherwise banned or restricted on a cash basis under the Raw
Material Replenishment (RMR) scheme. Under RMR, licences to import are
automatically issued at predetermined values on submission of export
documents. Exporters are also eligible for an income and profits tax reduction of 55 percent. The effective corporate tax rate paid by
exporters is 25 percent compared to the 55 percent rate of those
producing for the domestic market.
The use of the flexible exchange rate policy lessened the need to
provide export subsidies to traditional exporters. Since adopting the
more flexible exchange rate policy, the government has eliminated export
rebates for cotton and woolen yarn, and reduced rebates on cloth from 10
to 5 percent, and from 12.5 to 7.5 percent on other textile items,
carpets, and leather goods. A greater inflow of remittances than
otherwise also resulted from the flexible exchange rate policy.
The internationalization of a significant part of Pakistan's
labour force through participation in overseas (or over land!) contract
labour has had a strong influence on the overall direction of the
economy. The demonstration effect of labourers returning from working in
countries where automobiles, VCRs, and other imported consumer durables are readily available has created strong demand for import
liberalization in Pakistan. In order to afford a greater influx of
imported consumer goods without extreme pressures on the balance of
payments, Pakistan has faced the need to expand exports more rapidly. In
doing so, further liberalization has been required to make imported
inputs more readily available to exporters. Consequently, more and more
items have been liberalized and are readily importable without special
licences.
The World Bank has estimated that the share of industries where
imports have been liberalized in the sense of being on the free list or
under Open General Licence (OGL) has expanded from only one-third in
1980 to two-thirds or more. The level of tariffs on various major
commodity imports is shown in Table 9. Tariffs above 50 percent are
imposed on only about one-fifth of total imports.
In addition to trade policy changes, there has been an increasing
emphasis on the role of private business and investment in Pakistan. The
share of private investment in total capital formation has risen fairly
steadily in the 1980s compared to the 1970s (Table 4). Within the
industrial sector itself, private investment has become of overwhelming
importance during the sixth plan period, reaching 83 percent of total
industrial investment in 1988. (22) The government has also begun to
introduce a programme to privatize a number of state-owned enterprises.
The effects of these changes on Pakistan's trade and industrial
composition and growth appear to be significant.
VI. RECENT TRADE AND INDUSTRIAL PERFORMANCE
The direction and composition of Pakistan's trade is
undergoing remarkable change. Total exports grew by 60 percent in
nominal terms between 1980 and 1987, despite an absolute decline in the
value of primary commodity exports (Table 8). The export of manufactured
goods has grown in rapid fashion, reflecting improved incentives and
increasing ability of Pakistani manufacturers to compete in foreign
markets. The changing composition of exports also reflects increased
processing of cotton into yarn, cloth and rising exports of basic
manufactured goods like garments and miscellaneous manufactured goods.
Export growth in real terms has been maintained at over 9 percent per
annum, even after 1987 (Table 9). So despite the overall slowdown in
real GDP growth, exports have performed creditably.
The changes in the direction of trade have been equally dramatic as
in the composition. Between 1980 and 1988, exports from Pakistan to the
industrial nations of Japan, the United States, and the EC have made a
substantial jump (Table 10). At the same time, exports to developing
regions, particularly the Middle East, have slumped. This reflects not
only the reversal of the fortunes of oil-rich MENA (Middle East and
North African) countries, but also the improved export performance of
Pakistan's industry. Notably, exports to Korea and Taiwan have also
shown a rising trend in terms of share of total exports. Import patterns
are somewhat similar to changes in the direction of exports. One
difference is that the U.S. share in Pakistan's imports declined
slightly between 1980 and 1988, and the share of Asia-Pacific developing
countries (including the newly-industrializing economies and China) rose
to almost 20 percent.
Japan surpassed the United States as Pakistan's number one
trade partner in 1986, whith two-way trade of $ 1.2 billion. A major
past distinction between the United States and Japan is that U.S.
imports were mainly manufactured cloth and textile products, while
Japan's imports were mainly raw cotton. This pattern has been
changed by the realignment of the yen. Pakistan is now taking advantage
of its increased price competitiveness in labour-intensive manufactured
goods to expand the share of processed products in its exports to Japan.
Pakistan's trade with the East Asian NICs, ASEAN, China, and
other South Asian countries increased gradually, though around a
fluctuating trend. Trade with neighbouring member states of the South
Asian Association for Regional Cooperation (SAARC) has not risen much.
Greater trade with India (now very small) could change this picture
rapidly.
Export performance has been sustained despite withdrawal of export
rebates after the 1986 budget [Hamid et al. (1988), p. 4]. The exchange
rate policy has been sufficient to maintain export incentives along with
the more liberal import policy.
Industrial sector growth has slowed since 1987 (Table 1). The
growth of large-scale industry has become sluggish. In contrast small-
and medium-scale industrial firms have been more buoyant. The latter
tend to be more export-oriented than large-scale enterprises. Import
liberalization and management of the exchange rate to maintain export
competitiveness seems to have helped manufacturing growth up to 1988.
Thereafter, manufacturing growth has plunged--particularly in the
large-scale sector--but also in general [Government of Pakistan (Various
Issues)]. Positive trends in terms of improved distribution of growth
between large- and small-and medium-scale industry and greater export
orientation have been threatened by adverse developments, including
ethnic violence and instability in the industrial centre of Karachi
[Naqvi and Khan (1989)].
The slowdown in manufacturing growth is likely to cut export growth
as well. A number of serious obstacles and challenges are emerging that
could short-circuit the growth process. Furthermore, continued failure
to redress pressing social problems of education, health, and employment
could lead to eruptions that would curtail investment. We briefly
consider these issues in the concluding section.
VII. CONCLUSION
Pakistan's impressive growth over the past decade has failed
to lead to mass prosperity, indeed the benefits it has produced are not
likely to he sustained without major changes in economic fundamentals.
Yet, policy changes of a sensitive political nature may not only be
difficult to put in place, they might upset a delicate political
equilibrium. An optimistic scenario would identify Pakistan as a
fast-growing country that could emerge from low income status within the
next decade. Such a scenario is hard to reconcile with basic facts of a
literacy rate of but 25 percent, a domestic saving rate of 10 percent, a
chronically low tax base on which to improve basic government services
and infrastructure, and exports of about $ 40 per capita. Meanwhile,
population growth exceeds 3 percent per annum and labour force additions
are of staggering magnitude.
Declining opportunities for employment in the Middle East and
reduced or at best stagnant flows of foreign aid, coupled with a rising
debt burden, will make for difficult choices. The government will need
to either improve on its tax and nontax revenue base or limit
expenditures. Introducing taxes on agricultural incomes and generally
improving enforcement of tax laws will be essential. Additional user
charges and elimination of subsidies on inputs will help as well. Many
of the 180-plus state-owned enterprises are a chronic problem. Getting
them to become self-financing or selling them to private owners would
alleviate pressures on the budget. Raising domestic savings will require
improvements in the government-dominated financial sector. These basic
domestic policy issues and the need to rapidly upgrade government
services in order to improve human resource development will be the
dominant policy concerns over the next few years.
Externally-oriented reforms can also proceed, but only to the
extent domestic imbalances are corrected. It has been demonstrated that
Pakistan's manufactured exports are very responsive to policy
liberalization and this provides some basis for optimism. Still, the
economy could be opened to a much greater degree to foreign investors.
This would serve to hold down general obligation debt and would
introduce a new element of dynamism and competition into leading
sectors. Maintenance of export incentives and competitiveness through
active exchange rate policies and non-inflationary monetary-fiscal
policies will be essential to a sustainable balance of payments.
Speaking more generally, improvements in delivery of basic
government services at the local and provincial levels and improvement
of institutions for administration of contracts, security of properly
rights, and even-handed enforcement of laws and regulations are clearly
the preconditions for Pakistan to achieve a more equitable pattern of
development.
Authors' Note: We wish to thank Subroto Roy, Saba Gul Khattak,
and an anonymous referee for their comments and suggestions. Any errors
are our responsibility. The views expressed herein do not necessarily
reflect those of the institution with which we are affiliated.
REFERENCES
Adams, J., and Sabiha Iqbal (1983) Exports Politics and Economic
Development: Pakistan 1970-82. Boulder, CO: Westview Press.
Asian Development Bank (1989) Asian Development Outlook 1989.
Manila: ADB 129-131.
Asian Development Bank (1989a) Key Indicators of Developing Member
Countries of ADB. Manila: ADB 240-3.
Guisinger, S., and C. W. Scully (1989) The Timing and Sequencing of
a Trade Liberalization Policy: The Case of Pakistan. London: Basil
Blackwood.
Harold, et al. (1988) Financing Public Sector Development
Expenditure in Selected Countries: Pakistan. Manila: Asian Development
Bank 37.
International Monetary Fund (IMF) (Various Issues). International
Financial Statistics. Washington, D. C.: IMF.
International Monetary Fund (IMF) (1990) IMF Survey. Washington, D.
C.: IMF. 2
James, William E., Seiji Naya and Gerald M. Meier (1989) Asian
Development: Economic Success and Policy Lessons. Madison, WI:
University of Wisconsin Press 37.
Lee, Jungsoo (1983) The External Debt-servicing Capacity of Asian
Developing Countries. Asian Development Review 1:2.
Meier, Gerald M. (1980) International Economics. New York: Oxford
University Press 320-3.
Myers, Ramon H. (1986) The Economic Development of the Republic of
China on Taiwan: 1965-1981. In L. Lau (ed)Models of Development. San
Francisco, CA: International Center for Economic Growth 13-64.
Naqvi, Syed Nawab Haider, and Khwaja Sarmad (1984) Pakistan's
Economy Through the Seventies. Islamabad: Pakistan Institute of
Development Economics p. 13n.
Naqvi, Syed Nawab Haider, et al. (1983) The Structure of Protection
in Pakistan 1980-81. Islamabad: Pakistan Institute of Development
Economics.
Naqvi, Syed Nawab Haider and Ashfaque H. Khan (1989) Inflation and
Growth: An Analysis of Recent Trends in Pakistan. Islamabad: Pakistan
Institute of Development Economics.
Pakistan, Government of (Various Issues) Pakistan Economic Survey.
Islamabad: Economic Advisor's Wing, Finance Division.
Scitovsky, Tibor (1986) Economic Development in Taiwan and South
Korea. In L. Lau (ed) Models of Development. San Francisco, CA:
International Center for Economic Growth 135-95.
The Dawn (1981) Highly Ill-advised. In the editorial column,
Monday, February 23.
United Nations Conference on Trade and Development (1986) Handbook
on International Trade and Development Statistics. New York: United
Nations.
Westphal, L. W. (1978) The Republic of Korea's Experience with
Export-Led Industrial Development. World Development March. 347-82.
World Bank (1989) World Development Report. New York: Oxford
University Press.
(1) Data from World Development Report 1989 (World Bank, New York:
Oxford University Press), Table 2 statistical appendix, p. 166. Average
real growth of GDP in 1980-87 for 37 low income economies (those with
per capita incomes under $ 460 in 1987) was 1.7 percent (excluding China
and India). China, with 10.4 percent, has the highest growth rate among
all low income countries and Pakistan ranked second with 6.6 percent
growth over the period.
(2) Long-term trend growth in Pakistan (1965-80) has been just over
5 percent per annum (World Bank, World Development Report 1989, p. 166).
However, between 1970 and 1977, real GDP growth averaged only 4.6
percent compared to 6.7 percent between 1977 and 1987 (see Table 1).
(3) See, for example, Syed Nawab Haider Naqvi and Khwaja Sarmad,
Pakistan's Economy Through the Seventies. (Islamabad: Pakistan
Institute of Development Economics, 1984), p. 13n.
(4) Jungsoo Lee, "The External Debt-servicing Capacity of
Asian Developing Countries". Asian Development Review, Vol. 1, No.
2, 1983. Lee finds the incremental capital-output ratio in Pakistan fell
from 2.6 in 1966-75 to 2.2 between 1976-82.
(5) International Monetary Fund (IMF), International Financial
Statistics (IFS) (Washington, D. C.: IMF), various issues. Interest and
loan payments are included in debit on other goods, services, and income
in the balance of payments. The debit figure rises steadily from $ 1.4
billion in 1982 to $ 2.4 billion in 1988 (IFS December 1988a, p. 410).
(6) IMF Survey (Washington, D. C.), January 8, 1990, p. 2. Debt
service payments were 23 percent of current receipts in 1983-84.
(7) Sweeping changes in Eastern Europe are likely to place new
demands on limited U.S. aid funds. In addition there is concern in the
U.S. Congress over the nuclear proliferation issue in South Asia.
(8) See Pakistan Economic Survey 1986-87 and various issues.
Consumer price inflation has accelerated from 3.6 percent in 1986 to
10.4 percent in 1988 (Naqvi and Khan 1989, p. 9).
(9) Agri-based goods and labour-intensive manufactured goods are
prominent in exports. Besides petroleum, transport equipment, machinery,
and chemicals are the principal imports. See Asian Development Bank
(ADB), Key Indicators of Developing Member Countries of ADB (Manila:
ADB), July 1989a, pp. 240-3.
(10) United Nations Conference on Trade and Development, Handbook
on International Trade and Development Statistics (New York, NY: UN,
1986).
(11) See S. Guisinger and C. W. Scully, The Timing and Sequencing
of a Trade Liberalization Policy: The Case of Pakistan (London: Basil
Blackwood, 1989); Syed Nawab Haider Naqvi, et al. The Structure of
Protection in Pakistan 1980-81 (Islamabad: Pakistan Institute of
Development Economics, 1983); and J. Adams and Sabiha Iqbal, Exports,
Politics and Economic Development: Pakistan 1970-82 (Boulder, CO:
Westview Press, 1983).
(12) See William E. James, Seiji Naya, and Gerald M. Meier, Asian
Development: Economic Success and Policy Lessons (Madison, WI:
University of Wisconsin Press, 1989), p. 37.
(13) Naqvi, et al. op. cit. Vol. II, p. 6, points out that the
effective protection rate averaged 271 percent in 1963-64, 125 percent
in 1968-69, and 60 percent in 1980-81. Hamid, et al., Financing Public
Sector Development Expenditure in Selected Countries: Pakistan (Manila:
Arian Development Bank, 1988), p. 37, state that overall, import duties
averaged only about 30 percent by 1986.
(14) See Naqvi et al., Vol. I, p. 38. Hamid, et al., p. 37, also
point out the structure of protection is plagued by wide variations that
foster industrial inefficiencies.
(15) This is major conclusion of Guisinger and Scully, op. cit.
(16) See "Highly Ill-Advised" in the editorial column of
The Dawn, Monday, February 23, 1981.
(17) See James, Naya, and Meier, op. cit. Also Ramon H. Myers,
"The Economic Development of the Republic of China on Taiwan:
1965-1981," in L. Lau, ed., Models of Development (San Francisco,
CA: International Center for Economic Growth, 1986), pp. 13-64.
(18) See G. M. Meier, International Economics (New York, NY: Oxford
University Press, 1980), pp. 320-3. Also L. W. Westphal, "The
Republic of Korea's Experience with Export-Led Industrial
Development," World Development, March 1978, pp. 347-82.
(19) The Republic of Korea adopted a policy regime of offsetting
import protection by subsidizing exports. The subsidization mechanism
was mainly the provision of cheap credit through the national banking
system. The government borrowed funds extensively from abroad to finance
the programme. Because inflation rates were quite high during the 1970s
in Korea, devaluation was required from lime to time to keep export
Prices competitive and profitable. Korea's approach led to massive
external debt by the early 1980s. It then shifted to a policy of
reducing import protection and this reduced pressures to directly
subsidize exports. Inflation subsided and deficits declined, but a large
external debt remained. Taiwan by contrast, relied on reducing import
protection and keeping inflation low (hence preventing the real exchange
rate from appreciating) to promote exports. It avoided the large
indebtedness as a result. See Tibor Scitovsky, "Economic
Development in Taiwan and South Korea," in L. Lau, ed., op. cit.,
pp. 135-95.
(20) Data from James, Naya, and Meier, op. cit., p. 37 and Harold,
et al., pp. 36-7. Guisinger and Scully, op. cit., estimate that nominal
protection, including non tariff barriers fell from 77 percent in 1980
to 66 percent in 1987.
(21) Asian Development Bank, Asian Development Outlook 1989, p.
131, reports that the real exchange rate depreciated 25 percent between
1985 and 1989.
(22) Asian Development Bank, Asian Development Outlook 1989
(Manila: ADB), pp. 129-30.
William E. James and Seiji Naya *
* The authors are affiliated, respectively, with the Resource
Systems Institute, East-West Center, and the Department of Economics,
University of Hawaii, USA.
Table 1
Annual Growth of Real GDP and its Sectors
(Compounded Rate)
1971-77 1977-87 1987-88
Real GDP 4.6 6.7 5.4
Sectors
Agriculture 2.3 3.7 4.5
Industry 4.9 9.0 6.3
Manufacturing 4.0 9.1 7.5
Services 6.3 7.4 5.3
Sources: Asian Development Bank, Key Indicators
of Developing Member Countries of ADB.
April 1985 and July 1989.
Table 2
Structure of GDP (a)
(Percentage of Total GDP at Current Market Prices)
Year Agriculture Industry Other
1960 46 16 38
1970 37 22 41
1977 32 22 45
1986 23 29 48
Sources: Asian Development Bank, Key Indicators of
Developing Member Countries of ADB,
April 1984 and July 1989.
World Bank, computer data tapes 1988.
Note: (a) West Pakistan only in 1960 and 1970.
Table 3
Domestic Savings and Investment
of Pakistan, 1971-1988
(Percentage of GDP)
Gross Gross
Domestic Domestic Resource
Year Saving Investment Gap
1971 13 16 -3
1972 13 14 -2
1973 14 13 1
1974 10 13 -4
1975 7 16 -9
1976 11 19 -8
1977 11 19 -9
1978 9 18 -9
1979 7 18 -11
1980 8 19 -11
1981 8 17 -10
1982 7 18 -11
1983 7 17 -10
1984 6 17 -11
1985 5 17 -12
1986 9 16 -7
1987 10 17 -7
1988 9 16 -8
Source: International Monetary Fund, International
Financial Statistics, Yearbook 1989.
Table 4
Government and Private Gross Fixed Investment
(Percentage of Total Investment)
Government Private
Period (%) (%)
1972-73 51.3 48.7
1973-74 64.2 35.8
1974-75 67.9 32.1
1975-76 71.5 28.5
1976-77 70.5 29.5
1977-78 69.8 30.2
1978-79 69.5 30.5
1979-80 68.0 32.0
1980-81 63.7 36.3
1981-82 64.8 35.2
1982-83 63.6 36.4
1983-84 (a) 62.2 37.8
1985-86 54.4 45.6
1986-87 55.7 44.3
1987-88 53.5 46.5
1988-89 49.7 50.3
Sources: Syed Nawab Haider Naqvi and
Ashfaque H. Khan, Pakistan's Economy:
Past Performance and Future Outlook.
Pakistan, Ten Years of Pakistan in
Statistics: 1972-1982.
Note: (a) Provisional.
Table 5 Workers' Remittances in Pakistan
US $
Year Millions
1976 410
1977 866
1978 1,303
1979 1,495
1980 2,038
1981 2,056
1982 2,580
1983 2,925
1984 2,567
1985 2,526
1986 2,443
1987 2,172
1988 1,860
Sources: International Monetary Fund,
Balance of Payments Statistics,
Yearbook 1985 through 1988 and October 1989.
Table 6
Current Account Balance and Merchandise
Trade Balance
Current
Account Trade
Balance Balance
Year (US $ m) (US $ m)
1970 -667 -538
1971 -482 -420
1972 -241 -233
1973 -68 -101
1974 -917 -888
1975 -1,049 -1,157
1976 -780 -1,025
1977 -734 -1,366
1978 -719 -1,824
1979 -1,114 -2,341
1980 -921 -2,876
1981 -914 -2,926
1982 -802 -3,403
1983 25 -2,715
1984 -1,195 -3,753
1985 -1,080 -3,230
1986 -645 -2,780
1987 -562 -2,316
1988 -1,403 -2,607
Sources: International Monetary Fund,
International Financial Statistics,
Yearbook 1989 and January 1990.
Table 7
Summary of Tariff Structure, 1985-86
Percentage
Duty Range Major Items of Imports
0% to less Wheat 2.0
than 10% Vegetable Oil 9.1
Crude Petroleum 17.0
Petroleum Product 1.3
Fertilizer 3.6
Jute Fiber 0.9
Aircrafts/Parts 2.5
Insecticides 1.4
Medicaments 1.7
39.5
10% to 50% Tea 4.2
Tallow 1.1
Organic Chemical 2.7
Machinery (Mechanical) 12.8
Machinery (Electrical) 4.6
Paper 2.0
Miscellaneous
Chemical Products 2.0
Others 2.2
31.6
50% to 100% Artificial Resin 2.0
Rubber 1.3
Continuous Fiber 1.8
Discontinuous Fiber 1.4
Iron and Steel 4.6
Vehicles 7.4
Optical-medical Equipment 1.6
Others 1.8
21.9
Over 100% Betel Nuts and Betel Leaves 0.5
Others 0.1
0.6
Source: Naved Hamid and Ehsan ul Haque,
Tariff Structure: A Need for Reform 1986.
Table 8
Composition of Pakistan's Exports
(Percentage of Total Exports)
1971 1977 1980 1987
Total Exports (US $ m) 666.0 1174.4 2618.4 4177.7
Primary Commodities (a) 44.4 40.2 50.9 27.9
Raw Materials (b) 31.2 10.8 27.7 14.3
Agriculture and Food (c) 13.2 29.3 23.3 13.5
Manufactured Goods (d) 55.5 58.2 48.8 71.9
Sources: United Nations, Yearbook of International
Trade Statistics, various issues.
Notes:
(a) SITC (0+1+2+3+4+67+68).
(b) SITC (2-22+3+67+68).
(c) SITC (0+1+22+4).
(d) SITC (5+6-67-68+7+8).
Table 9
Export Growth
Annual Export Growth
(Percent, Compounded Rate)
Period Nominal Real
1971-77 16.8 1.3
1977-87 13.4 9.2
1987-88 8.4 9.1
Sources: International Monetary Fund,
International Financial Statistics,
Yearbook 1989 and January 1990.
Table 10
Direction of Trade
(Percentage of Total Exports and Imports)
Total United
Year (US S m) States Japan EC
Exports
1970 723.7 11.7 5.9 25.6
1980 2617.9 5.3 7.8 19.8
1988 4509.3 11.2 11.4 30.2
Imports
1970 1102.0 28.4 10.9 29.9
1980 5349.5 14.1 10.3 21.9
1988 6588.6 13.0 14.7 25.9
Asia-
Pacific Middle Rest of
Year (a) East the World
Exports
1970 12.2 8.0 36.6
1980 25.6 24.8 16.8
1988 23.1 11.1 13.0
Imports
1970 4.6 5.8 20.4
1980 14.4 29.1 10.3
1988 19.4 15.3 11.6
Sources: International Monetary Fund, Direction of Trade
Statistics, Yearbook 1989 and computer data tapes.
Republic of China, Ministry of Finance, Department of
Statistics, Monthly Statistics of Exports and Imports,
Taiwan Area, The Republic of China. No. 224 (April
1988) and No. 236 (April 1989).
Note: (a) Includes, NIEs, ASEAN-4, South Asia, and
the Pacific Islands.