Lecture 11: Economic System of Pakistan (Part 1) PDF

Week 9 ECONOMIC SYSTEM OF PAKISTAN (PART 1) Economic System of Pakistan  Definition of economy, types of economy  Nature of Pakistan’s economy-Mixed  A historical over view of Pakistan’s economy  GDP, budget, expenditure, income, taxes, fiscal deficit Economic Terminology Gross dome...

Week 9 ECONOMIC SYSTEM OF PAKISTAN (PART 1) Economic System of Pakistan  Definition of economy, types of economy  Nature of Pakistan’s economy-Mixed  A historical over view of Pakistan’s economy  GDP, budget, expenditure, income, taxes, fiscal deficit Economic Terminology Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country's economic health. A budget is the sum of finances allocated for a particular purpose and the summary of intended expenditures along with proposals for how to meet them. Expenditure is an outflow of money, or any form of fortune in general, to another person or group to pay for an item or service, or for a category of costs. Income is money what an individual or business receives in exchange for providing labor, producing a good or service, or through investing capital. Individuals most often earn income through wages or salary. Businesses earn income from selling goods or services above their cost of production. A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending. A fiscal deficit is a shortfall in a government's income compared with its spending. The government that has a fiscal deficit is spending beyond its means. Introduction An economy is a complex structure of consumers and producers which have beneficial role for each other. Pakistan’s economy is of mixed type, which has three major sectors i.e. agriculture, industry and services. The contribution of these sectors into the economy is given as agriculture contributing 21% of the GDP; industrial share is 20.9% while services sector share is 57.7% of the GDP. The trade account remained in deficit during most of the years in history and is still in the same condition due to more dependence on imports. If we look at the historical performance of the Pakistan economy, then it is observed that after the 1980s Pakistan economic growth has been continuously decreasing except in the era of General Pervaiz Musharaf with slightly improvement in the 2000s decade. Abundance of natural resources, human capital, excellent geographical location and hardworking masses are the strengths of Pakistan economy. Low literacy rate and ignorance, shortage of capital, no regard for rule of law and institutions, inefficient and ritual – ridden social system and corrupt political What is Economy? An economy is a complex structure of interdependent producers and consumers having a beneficial role for each other. Different types of economies work globally with their pros and cons. According to the Cambridge Dictionary, “The system of trade and industry by which the wealth of a country is made and used.” According to Oxford Dictionary, “The state of a country or region in terms of the production and consumption of goods and services and the supply of money.” Types of Economies 1. Free market economy/ Capitalist economy 2. Command economy/ Socialist economy 3. Free and command economy/ Mixed economy The Pakistan’s economy had witnessed relatively free market system at one time (mostly in democratic government periods like 1988 to 1999 and 2008 to on till now) and command at the time of 1971 to 1977 and all dictatorship eras. https://www.researchgate.net/publication/321037817_Introduction_to_the_Economy_of_Pakistan 1. Free-Market Economies Observed mostly in capitalist economies of democratic states, wherein the firms and individuals decide & pursue their own economic interests. Exchange of goods occurs in a competitive environment which brings a fair price in market for goods and services. The examples include Europe, North America and Tiger nations (South Korea, Taiwan, Singapore and Hong Kong). 2. Command Economy The production and consumption activities are controlled by government of the state, so these are planned, controlled and managed centrally. Major decisions are taken by the central government. Usually these economies exist in communist or authoritarian states. The examples of such economies are Russia and China which have their own success and failure stories. 3. Free and Command Economy/ Mixed Economy This type of economy blends the elements of both free-market and command economy to present a better way to cope with new emerging economic issues. Now a day, even in the free market economies, state does play a restrictive role in correcting the economic problems like monetary and fiscal policy. Other interventions include fixation of prices, subsidies and tariff policies. Due to these factors, most of the world economies are now mixed economies. Examples are USA, China, India, Pakistan. https://www.youtube.com/watch?v=enIH4Jjz8Xg  Historical over view of Pakistan’s Economy The over-time review of the economy is divided into various phases and discussed below: Fifties Era: 1947 to 1958 The era marked the government of Liaquat Ali Khan and initiation of first Five years plan. There was currency war between Pakistan and India that was the highlight of this era in 1949. In 1950 the relations were restored, and trade resumed. In 1953 the plan collapsed altogether due to lack of funds. Flood in 1951-52 and 1952-53 hinder the progress of the nation. In 1955 revived the plan and published in 1956. Growth Era-1958 to 1969 : The second decade of Pakistan’s history remained under the dictatorial regime of Field Marshal Ayub Khan, whose broad-mindedness and liberalism were manifested clearly in the official religious policy. All through 60's Pakistan kept up the normal GDP development rate of just about 7%. Political security, liberalization of speculation controls and abundant accessibility of remote trade during this time were key variables affecting a proclaimed quickening in the pace of private project. All out water and power interests in West Pakistan amid the 1960's surpassed US $2.5 billion and represented more than half of aggregate open area spending. During the second decade, it became crystal clear that consistent growth in the economy strongly depends on the integrated growth of industrial and agriculture sector. Nationalization and Command Economy Era-1971 to 1977: Premier Z.A Bhutto started many socialist economic reforms, soon after assuming the office, to improve the growth of Pakistan’s economy. The main step in bringing these reforms was the initiation of nationalism process. Firstly, the nationalization policy was introduced over large firms and afterwards all private banks, small manufacturing units and colleges were nationalized within two years and no compensation was paid to the people who owned them. Though this policy was aimed at uplifting the poor ones but soon these reforms turned unfruitful. The other main areas of reforms were the Labor, Land, Banking system and Finance corporations. Bhutto made some ineffective land reforms to eliminate the inequalities and to curb feudalism. These reforms failed due to several inherent weaknesses like no … The Revivalist Eighties: 1978 to 1988: During Zia-ul-Haq’s period, the economic growth rate averaged at 6.6% per annum. The remittances increased substantially but were not translated into saving and investment. Agricultural growth rate increased in comparison to previous years but remained low during Zia’s period. The manufacturing sector grew at a faster pace than the previous period at an impressive rate of 9% at an average due to large public sector investment that started in Bhutto’s era. As part of Islamization policy, Zia announced a plan for introduction of Islamic economic system. The establishment of zakat institution and introduction of interest free banking system were the main reforms. But these reforms did not offer much advantage to the economy. The Muddling Nineties-1988 to 1999: After the death of General Zia in 1988, The period is marked as the return toward democracy after about ten years of dictatorship. During next 10 years, Pakistan had four general elections. Benazir Bhutto, and Nawaz Sharif both came to power twice after one and other but none completed their full elected tenure. The role of international actors in Pakistan’s politics and economy became evident in this era as the economy of Pakistan has remained under the clutches of IMF and World Bank since 1988 causing a loss of economic sovereignty of Pakistan. In this epoch, the main focus was on curtailing the fiscal deficit. The tax burden increased on the consumers in the form of sales taxes and other indirect taxes. Privatization was also initiated and devaluation was witnessed of Pakistani rupee in that period. Due to these policies, the economic development was badly influenced at macro level during 1990s. The causes of high inflation in that era were the high level of taxation, growth in administered prices and devaluation of Pakistani rupee. The industry was badly influenced by opening the economy internationally without any protective measures which increased unemployment rate in Pakistan in 1990s. … The Reforming Era-1999 to 2007: General Pervaiz Musharraf got into power after suspending the constitution of 1973 and ousted Nawaz Sharif government on 12 October 1999 and nominated himself as Chief Executive of the country. Musharraf era’s economic growth was robust like the previous autocratic rules. The average rate of GDP growth during this era was 5.3%. Musharraf’s liberal economic policies attracted many international investors to invest in Pakistan. His policies re-established the investors’ confidence in Pakistan economy and FDI increased to incredible levels. This investment showed a fair growth in different sectors of Pakistan economy. Musharraf’s policy of import led growth created economic bubble in the Pakistan’s economy. The massive inflow of imports in telecommunication sector and auto sector put strain on the supply side of the economy. As the supply of electricity was not increased with the pace of change in demand for energy, it created the energy crisis which is, in its worst form, hitting the economy even in the present. … Privatization Era-2008 to 2013 In this era, Pakistan’s economy saw many swings under PPP government. The economic situation called for difficult decision at micro and macro level. As a result of bold decisions, the stock markets reached to newer heights. Macroeconomic stabilization programme was also launched in consultation with IMF in this era. During the era of Zardari, tight monetary policy was adopted in order to address the problem of inflation and many other measures were taken to curtail the fiscal deficit problem in Pakistan. As a result of all these far-sighted policies, inflation decreased to almost half in 2009, fiscal deficit was brought down to 4.3% of GDP, current account balance declined to 5.3% of GDP and foreign exchange reserves have crossed $13 billion. The decrease in fiscal deficit was mainly due to cut in oil subsidies and developmental spending. Revenue collection remained low during Zardari’s era. Conclusion…