ISSUES IN PAKISTANS ECONOMY A POLITICAL ECONOMY PERSPECTIVE THIRD EDITION S. AKBAR ZAIDI OXFORD UNIVERSITY PRESS

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 Preface to the second edition Capitalist Development 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 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 2.2 the Consolidation of British Rule The Impact of British Colonialism 17 Part 2: Industry and Trade 109 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 00

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

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

x Contents 14.3.1 Summary 410 14.3.2 Further Reading 411 Chapter 15 Monetary Policy, Savings, and Inflation 423 15.1 Monetary Policy and Monetary 423 Management in Pakistan 15.2 Money Supply and Monetary Expansion 432 15.3 Inflation and its Ganses 432 15.4 The Low Savings Rate 439 15.5 Summary and Further Reading 444 15.5.1 Summary 444 15.5.2 Further Reading 444 Part 6: Neo-liberalism, Stabilization, and 457 Macroeconomics: From ESAFs to PRSPs to SBAs 1988 to the present Chapter 16 Structural Adjustment Programmes: 458 Composition and Effects 16.1 The Development and Export of 459 Development Thinking 16.2 From Structural Adjustment Loans to 460 Structural Adjustment Programmes 16.3 Structural Adjustment Programmes: 465 Composition 16.4 Structural Adjustment Programmes: 467 Implementation and Effects 16.5 Economic Liberalization and Openness: 469 Some Questionable Assertions 16.5.1 The Contextuality of Policy 471 16.5.2 International Capital and the 473 Loss of National Autonomy 16.6 Summary and Further Reading 473 16.6.1 Summary 473 16.6.2 Further Reading 475 Chapter 17 The IMF and Structural Adjustment 483 Programmes in Pakistan 17.1 History 483 17.2 Implementation of the Structural 488 Adjustment Programmes in Pakistan: An Examination of the 1988 Programme 17.2.1 Fiscal Policy 488 17.2.2 Trade 489 17.2.3 Financial Sector 489 17.3 Was the 1988 Structural Adjustment 489 Programme a Success? Achievements and Failures 17.3.1 Fiscal Policy 490 17.3.2 Trade and Balance of Payments 490 17.3.3 Financial Sector 491 17.3.4 Liberalization and Privatization 491 17.3.5 Other Areas 491 17.4 The World Bank/IMF's Overall 492 Evaluation of the 1988 Structural Adjustment Programme 17.5 The 2008 Stand-By Agreement 494 17.6 The Political Economy of Structural 498 Adjustment Programme: in Pakistan 17.6.1 Pakistan s Dependencc on 500 Washington, or are Governments Autonomous? 17.6.2 Did Pakistan Need to Go to the 502 IMF in the 1990s? 17.6.3 Why Does Pakistan Accept 504 IMF Programmes? 17.7 Summary and Further Reading 509 17.7.1 Summary 509 17.7.2 Further Reading 510 Chapter 18 Macroeconomic Developments: 518 1998-2013 18.1 Before and After May 1998 518 18.2 11 September 2001: The Day the World 522 Changed 18.3 What Happened to the Debt Crisis? 524 18.4 The Growing Forex Reserves 528 18.5 Did the Economy Turnaround? 532 18.6 Musharraf and After: 2004-2008 535 18.7 The Pakistan People's Party s Economic 538 Policies 2008-2013: Bad Luck or Bad Management? 18.8 Summary and Further Reading 544 18.8.1 Summary 544 18.8.2 Further Reading 545 Part 7: The Social Sectors: Institutions 555 and Governance Chapter 19 The Social Sectors I: International 556 Comparisons, Education, Population, Urbanization, and Housing 19.1 Somc International and Regional 556 Comparisons 19.2 The Impact of Economic Growth 2002-07 559 19.2.1 Finally on Track? 560 19.3 Education 561 19.3.1 Statistics 561 19.3.2 The Issues 563 19.3.3 Summarizing the Issues in 566 Education 19.4 Population Weifare and Family Flanning: 568 The Demographic Transition 19.4.1 The Evolution of the Population 568 Wellare Programme 19.4.2 Knowledge and Usage 569 19.4.3 Some Issues 570 19.4.4 Pakistan s Demography: 571 Dividend or Disaster? 19.5 Urbanization and Housing 573 19.5.1 The Extent of Urbanization 573 19.5.2 Rethinking Urban and Rural 575 19.5.3 Housing in Cities 579 19.5.4 The Demand for Low Income 580 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 24.6.2 Further Reading 750 Chapter 25 War, Destruction, and Aid 753 25.1 The Costs of the War on Terror 753 25.2 War and Aid: Who Benefits from US Aid 754 to Pakistan? 25.2.1 Fifty Years of Aid to Pakistan 754 1950-2002 25.3 The Complicated Issues of US Aid 758 after 9/11 25.3.1 The Purpose of Aid 758 25.3.2 Has the Purpose of Aid Seen 758 Achieved? 25.3.3 Economic and Humanitarian 760 Aid and Assistance 25.4 The Consequences of Aid 761 25.5 The Nature of Recent US Aid to Pakistan 763 25.6 Who Benefits from US Aid to Pakistan? 768 25.7 Summary and Further Reading 769 25.7.1 Summary 769 25.7.2 Further Reading 769 Chapter 26 Political Economics: Class, State, 782 Power, and Transition 26.1 Civilian Bureaucracy and 783 Industrialization: 1947-58 26.2 Civil and Military Bureaucratic 784 Capitalism: 1958-71 26.3 A Shift in Emphasis: 1971-77 785 26.4 A Military State and the Middle Classes: 785 1977-88 26.5 Elections Without Democracy: 1988-99 787 26.6 The Return of the Military: 1999 Onwards 788 26.7 Issues in Pakistan's Political Economy 789 26.7.1 Pakistan's Middle Classes 789 26.7.2 The Pakistan) Military's 790 Economic Interests and Their Consequences 26.7.3 Pakistan's Praetorian Democracy 791 and Technocrats as Apologists 26.7.4 Pakistan's State and Society: 791 Croups, Fractions, and Influence 26.7.5 Urbanism as a Way of Life 795 26.7.6 Is Pakistan a Failed State? 797 26.8 Summary and Further Reading 798 26.8.1 Summary 798 26.8.2 Further Reading 798 Chapter 27 A New Political Economy? 803 27.1 Transitions 803 27.1.1 The View in Mid-2011: Was 803 Pakistan Near Collapse? 27.1.2. The Old and the New in Naya 807 Pakistan: Elections 2013 27.2 The Changing Character of the 810 Pakistan! State 27.2.1 Theorizing the Pakistan! State 810 27.3 A State Without Power? The 812 Fracturization of Power in Pakistan 27.4 Conclusions 816 Selected Bibliography 821 828