The “Elegance” of Smoke Screens

By Misbah Azam, Ph.D.

In its recent article, a renowned newspaper, The Economist, wrote about the current economic performance of Pakistan.  The paper writes, “Those in search of a thriving stock market, a stable currency and low inflation would not normally pitch up in Pakistan. It is more readily thought of as a pit of instability than as a source of opportunity. Yet Pakistan is enjoying a rare period of optimism about its economy”. The paper further writes, “Visitors to Pakistan are surprised to discover a strong business culture and good roads as the country is mid-table in the World Bank’s ease-of-doing-business rankings, well above India”.  The paper gave lots of credit to the current oil price decline but it also gave some credit to the Nawaz Sharif economic policies.  The paper notes, “The government of Nawaz Sharif takes some credit for the economy’s new stability. It has stuck to an IMF program agreed to in 2013, a few months after it came to power in Pakistan’s first-ever handover from one civilian government to another. Foreign-exchange reserves have more than doubled, to $17.7 billion. Electricity tariffs have been raised, and some unpaid bills collected, easing the cash burden on hard-pressed distribution companies. Tax receipts have risen, albeit from pitiful levels, in response to efforts to broaden the base and cut exemptions. The revenue agency has sent over 150,000 tax notices to non-payers. More retailers are being drawn into the indirect-tax net. A draft budget aims to bring the budget deficit below 4% of GDP in 2015-16, from a peak of over 8%”.

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During the 68 years of Pakistan’s history, for 32 years Pakistan was under the direct military rule and remaining time it was governed by a fragile democracies and bureaucracy.  During the intermittent periods of democracy, the military took a position of a de-facto ruler and a king maker.  During the 32 years of direct military rule the economy grew at an average rate of 6.3% per year, however, for the remaining years the economic performance was less impressive when the GDP increased less than 5% annually. The question arises; does that mean the Generals are the better managers of the economy?  This is a myth which is widely projected by the apologists of military rules and dictatorship; however, this difficult question can be addressed to some extent by closely looking at the performance of economy fewer than four Generals ruled directly for 32 years of Pakistan’s history.

The main goal of this article is to look into this myth by taking General Musharraf’s 9 years of rule as a test case and have the reader decide how to score it.  By looking at different aspects, one may conclude that while the economy did perform well under General Musharraf, it was not due to great economic management and any deep structural changes brought about by the regime.  There are some important questions which must be raised when one begins to assess the performance of the economy under the military, here are some:

1)     Were the people better off after nine years of military rule compared to their situation when the military returned to power?

2)     Had the economy, as a result of the policies adopted during those years, proceeded on a trajectory of reasonably high level of growth on which it could remain, no matter what happened to the flow of foreign assistance?

3)     What kind of structural changes had been introduced and could those strengthen the economy over the long run?

4)     Was Pakistan after the regime ended in 2008, in a position to take advantage of the enormous change that was occurring in the global economy?

5)     Was the decision making in place during the Musharraf period such that it could factor in the wishes and aspirations of the population at large?

The Fig. 1(a) shows that the GDP growth rate was the highest – close to 8% — during the fiscal year 2004/05. The outstanding features of 2005 were that a) Pakistan was graduated from the IMF’s Poverty Reduction and Growth Facility (PRGF) program in December 2004 and b) the agricultural sector broke out of its four-year slump to record growth that exceeded the target goal, thereby contributing greatly to the high growth rate, as shown in Fig 1(b). The growth in agriculture was greatly boosted by the fact that the major crops, which account for 37.1% of agriculture value-added, recorded growth of 17.3% as per the State Bank of Pakistan annual report of fiscal year 2004/05.  This increase was due largely to favorable weather, in addition to the better machinery and agricultural chemicals available due to increased agricultural credit and the high government support price.  The trends, however, indicate the fragility of Pakistan’s economy, which is at the “generosity” of the weather.

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This fragility caused the sudden decline in the GDP growth in 2006, compared to the extraordinary growth of 2005, as shown in Fig. 1(a).  Moreover, the trade deficit in the first half of 2006 was around $5.6 billion, which was not only significantly exceeded from the $2.4 billion during the same period of the previous fiscal year, but it also outpaced the total trade deficit of the previous fiscal year. It’s true that the oil price hikes in the international markets and the disaster caused by the earthquake of October 2005 in northern areas of Pakistan and Kashmir, aggravated the predicament to respond with combative policy measures, but due to the current account deficit continued, an inflationary pressure came on the economy (Fig. 2).  During the FY2007-08 — the GDP breakdown by sectors — agriculture grew by 1.5% while the service sector grew by colossal 8.2%.  Finance & Insurance, part of the service sector, grew by a whopping 17%.  The small 1.5% growth in agriculture sector shows that the regime hardly implemented any policies make the agriculture sector more competitive. The Consumer Price Index (CPI) – a measure of changes in the price level of a market basket of consumer goods and services purchased by households — trends for the FY2004-05 are shown in Fig. 3(a) and the general trend from 2001 to 2009 is shown in Fig. 3(b).

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By definition, the GDP growth rate is defined as the average growth in its components. During the FY2004-05 when the GDP growth was exceeding the 8% (Fig. 1(a)), the banking sector – one of the components — growth rate was 29% and automobile sector – another component — was close to 45%, which made the average of the total GDP growth very high. From 2002 onward, the State Bank of Pakistan allowed the consumer financing which enabled common people to get loans for houses, cars, household appliances even personal loans for their children’s weddings and extravagant vacations. The banks made enormous profits – which is the components of GDP — out of consumers’ credits.  Since the large part of credit goes to buy cars and motorcycles so the automobile production went up to 40-45%.  In reality – in some of the famous economists’ view — the economic growth during that time period  was a “single-legged” growth and that one leg was consumer financing, and if the consumer financing was removed, everything would have collapsed.  The “remarkable economy” myth was largely good for headlines.

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The consumer financing, which was allowed by the State Bank in 2002, started pumping money in the economy which increased the buying power of the consumers.  The trend of the inflation rate, as shown in Fig. 2, for the first two years, was low because of the excess manufacturing capacity which enabled the factories to start operating with 2 and even 3 shifts to increase the supply in the market. However, when the supply reached to the levels of industry maximum manufacturing capacity but demand of the consumers continued to grow because of the excess usage of credits cards for the shopping and even eating out, the inflation started to soar, because the supply was constant but demand continued to increase.

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The increasing demand, with the limited manufacturing capacity in industry, hiked the requirements of the import of foreign good. A sharp rise in imports and somewhat stagnant exports trends, as shown in Fig. 4, were observed, beginning from FY2003-04. Pakistani consumers began importing mobile phones, cars – and consequently the petroleum products – of billions of dollars.  By the end of Musharraf’s regime the inflation rose to over 11% (Fig. 2), imports soared but the exports became largely stagnant. That was what the Zardari government had to inherit, in a similar way Benazir Bhutto’s first government had to deal with the debt burden from Zia’s 11 years.  Asif Zardari government had to deal with the massive foreign exchange crisis created by the nine “glorious” years of Musharraf’s regime.

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According to the trend shown in Fig. 5 there was a continuous growth in the Foreign Direct Investments (FDI) until 2008, however, the FDI growth was largely in telecommunication, mobile phones and food companies.  These companies earn in Rupees but remit their profits in dollars, which caused the dollar outflow and the Reverse Remittances, which was $97M in 1999 per year went up close to a $1B by 2008.

According to the UNDP report in March 2013, the Human Development Index (HDI) list, between years 2000 and 2007, which roughly corresponds with General Pervez Musharraf’s regime, the Human Development Index rose 18.9% — an annual average of 2.7%.  However, Herald Magazine reported in December 2008 that with regards to the poverty level figures, Karamat Ali, executive director of the Pakistan Institute of Labor Education and Research, said, “In 2007, the Planning Commission’s chief economist was transferred when he refused to approve government’s claim that poverty level had been reduced by 10% (from 33% to 23%). These figures were clear manipulation as according to the latest UN assessments, poverty has intensified to the extent that in over half the country, hunger stalks one-fifth of the population and malnutrition about two-fifths”.  From 2007 to 2012 the HDI only went up by 3.4%, just under 0.7% per annum. For some unknown reasons, during the last three years of that time frame, the HDI increases crashed to as low as 0.59%, which shows the average annual increase of under 0.20% per annum.

In 2006, during a seminar at Washington DC, Former Senior Economist at the World Bank and ex-Finance Minister of Pakistan Dr. Shahid Javed Burki, told Governor of the State Bank, Dr. Ms. Shamshad Akhter that Pakistan was a “casino economy” where people come in, put money for the short term gains in the Stock Exchange and take it out and walk away.  In his view of the Musharraf’s economy, Pakistan had rising inflation, high trade deficit to a point where the balance of payments was becoming a burden on the health of economy, where number of commercial banks were exposed to a wide variety of consumer loans and had weak and rather weakening asset base and where the investments were being made in the more speculative parts of the economy.

Dr. Burki explains the myth in his book “Changing Perceptions, Altered Reality: Pakistan’s Economy Under Musharraf, 1999-2006”, “During the eleven years of the period of Ayub Khan, the GDP increased at a rate of 6.7 per cent a year. In the Ziaul Haq period, which lasted also for eleven years, the GDP grew at 6.4 per cent a year. This should not imply that the Pakistani economy does well when men in uniform are in control. What it does show is that during periods of military rule Pakistan was able to draw significant amounts of foreign capital which augmented its low rate of domestic savings, and produced reasonable amounts of investment. But during military rule the economy also became extremely dependent on external capital flows. This created enormous vulnerability”.

Describing economic growth during the dictatorship of Gen Musharraf, Dr. Burki writes, “According to one point of view in this debate, the brisk performance in 2004-5 was the consequence of the happy confluence of a number of events. Those who held that view – and I belong to that group – thought there was a low probability of that happening again.”

“Even during the alleged economic growth that took place under Gen Musharraf’s rule, not everyone gained. The poor, in particular, actually suffered more”, writes Dr. Burki.

Economists believe that during General Zia’s regime, the poor class of Pakistan fared better. Some improvements were due to his introduction of Zakat Law (Islamic mandatory charity), but the two more important reasons were the growth rates based on agriculture and the large amounts of remittances sent by Pakistani workers in the Middle East. According to Dr. Burki, “more than anything else, remittances played a significant role in reducing the level of poverty”.

The economy under Ayub Khan in particular benefited from the infrastructure left behind by the British. Despite being a young nation, Pakistan started off with world class roads and canal systems.  Some Economists believe that “Ayub Khan has been given credit for an economy that was largely a product of historical chance instead of specific policies”.

During the military dictatorships and the autocratic governments all over the world, there is an awkward sense of stability among the people and the investors, which helps the economies to perform better in the short run. In the one man rule, the decision making lies with only one person or a small group and all the political orphans around them are there to cheer lead boss’s decision. The dictatorships usually seem faster and more efficient than democracies, because the democracies can be bogged down by long-drawn out debates among deeply polarized political parties and ideologues, which don’t seem to agree on anything.  However, believing that Generals and other autocrats have some “built-in mechanism” to govern better than the democrats is rather based on ignoring some burning realities.  The apologists of Martial Law and dictatorships are, although entitled to believe that the democracy as a system is full of weaknesses, but they should present their cases without any intellectual dishonesty and reliance on myths.

  • Shahzad Farooqui

    AOA dear last niht main pak tea house giya barra ajeeb sa laga iss ka adbi status mojooda position se mamaslat show ni kar raha tha
    Bohat ziada shor
    Ajeeb qisam ke dirty type log shor (noise) kar rahay thay wasay to ap ke banday ko keh kar aya tha.
    Please iss ka tshakhus bahal karain thanks