President Ayub Khan presiding over the inaugural meeting of the Economic Council which was held in Karachi on July 1, 1959. (Courtesy: Ayub Khan Archives/ Tahir Ayub)
President Ayub Khan presiding over the inaugural meeting of the Economic Council which was held in Karachi on July 1, 1959. (Courtesy: Ayub Khan Archives/ Tahir Ayub)

THE initial economic conditions in Pakistan, what was back then West Pakistan, were very difficult. Per capita income was low, mortality rates were high and there was a big wave of migration of Muslims from India. However, despite the initial handicaps the country has made considerable progress in the last 75 years (Table 1).

It is indeed remarkable that the per capita income was only $87 at the time of partition, with the exchange rate at close to Rs3 per US dollar. The per capita income stands at $1,797 now, with an annual average rate of increase of over 4pc. Pakistan in 2011 moved up from low-income status to the group of lower middle-income countries (LMICs).

There have been big changes in the structure of the economy over the last 75 years. Pakistan was initially a predominantly agricultural country, with over 53pc of the GDP coming from agriculture. The largest output was of major crops, like wheat, cotton and rice, and livestock, with a share in the national economy of almost 28pc.

Industrial development was very much at its initial stages, with a share in the economy of less than 10pc. The contribution of manufacturing was less than 8pc. The industrial sector now has a share of close to 20pc. Service activities have also expanded at a relatively rapid rate. The share of these activities has increased to 58pc of the economy from 37pc in 1950. Sectors like wholesale and retail trade, transport and communications, finance and insurance have been among the fastest growing sectors in the economy.

Dr Hafeez Pasha believes that Pakistan witnessed strong economic growth earlier but failed to address the larger question of inequality. He argues, however, that with respect to unemployment and corruption, Pakistan has done relatively well compared to India and Bangladesh.

The overall decade-wise annual GDP growth rate based on the State Bank of Pakistan (SBP) data is impressive (Figure 1).

High-growth decades

There have been two decades — the 1960s and the 1980s — when Pakistan achieved exceptionally high GDP growth rates of 6.8pc and 6.5pc respectively. The 1960s saw the emergence of unbridled capitalism with extraordinary support to private investment in the manufacturing sector, leading to emergence of the textile industry and exports.

However, it culminated in large income inequality and the rise of the ‘22 families’. More emphasis on the development of West Pakistan led to the movement for the separation of East Pakistan. Foreign aid to Pakistan, mostly in the form of grants, was at its highest level in the 1960s at over 10pc of the GDP which facilitated a relatively high level of investment.

The decade of the 1970s saw initially the loss of East Pakistan and the creation of Bangladesh. There was a shift towards socialism and the emergence of a large number of state enterprises, either through nationalisation or new investment. However, the process of nationalisation led to big retreat of the private sector and the GDP growth rate floundered.

The GDP growth rate was also above 6pc in the 1980s. The agricultural sector grew rapidly with expansion in water availability after the commissioning of the Tarbela Dam. Also, Pakistan’s support to the United States in the war in Afghanistan against the Soviet occupation led to large inflows of foreign assistance.

The 1990s saw the return to democracy in Pakistan. However, there was a rapid turnover of governments and fall in the rate of investment. Nevertheless, by the end of the decade, the country became self-sufficient in wheat production due to pro-agricultural policies. Also, 1998 saw the emergence of Pakistan as an atomic power.

The year 1999 saw a return to military power, which lasted till 2008. Once again Pakistan become a client state supporting the US in the war against the Afghan Taliban following the happenings of 9/11. The resulting large inflow of aid and foreign investment enabled the economy to grow at an exceptionally high growth rate, for example, at 8.6pc in 2004-05.

Frustrated growth

Thereafter, the process of growth has been initially frustrated by the peak in global commodity prices in 2008 and subsequently by the emergence of high and increasing levels of power loadshedding and rampant acts of terrorism. More recently, the Covid pandemic retarded growth, and the country actually saw negative GDP growth in 2019-20. Subsequently we saw an upsurge in commodity prices once again due to the Russia-Ukraine war.

Nevertheless, it must be recognised that the long-term growth rate has averaged almost 5pc, which has contributed to a real per capita income growth rate of above 2.5pc. This has resulted in a relatively fast pace of poverty reduction.

There is a view that Pakistan has been unable to achieve a higher rate of growth due to the relative absence of export-led growth (Table 2). Out of the seven decades, the growth rate of exports has been higher than the growth rate of imports in the 1950s, the 1980s and the 1990s. However, the last two decades have seen a major widening of the trade deficit, especially from 2000 to 2010. The truly exceptional performance was in the 1970s when cotton and textile exports rose by over 17pc annually. This was also the period that saw a quantum depreciation of the exchange rate.

The rate of inflation, as per the estimates of the SBP, has also varied over the decades (Figure 2). The highest rate of inflation, which reached double digits at 10pc, was in the 1970s. This was primarily due to the quantum depreciation of the rupee by over 130pc in May 1972, in an effort to divert sales to the former East Pakistan to international markets.

Fortunately, soon after partition the rate of inflation remained low at below 3pc in the first two decades. More recently, due to both rising commodity prices and devaluation of the rupee, the rate of increase in the Consumer Price Index (CPI) has exceeded 13pc.

Relative performance

Turning to the relative economic performance of the three countries of the subcontinent — Bangladesh, India and Pakistan — the annual decade-wise GDP growth rates, based on the database of the World Bank, tell their own story (Table 3).

The perhaps unexpected finding is that the long-term growth rate of the three countries is almost the same at just under 5pc. Pakistan performed exceptionally well in the 1960s and the 1980s, as highlighted earlier. India was plagued by the so-called ‘Hindu growth rate’ up to the end of the 1980s. In the 1990s, there was a comprehensive package of reforms towards economic liberalisation and there was an upsurge in the growth rate thereafter. Bangladesh started slowly, but gathered momentum with export-led growth, largely of garments, in each decade. In the last decade, it had a higher growth rate than the other two countries.

The per capita income of the three countries in purchasing power parity (PPP) terms at recent rate of US$ (mid-June) is available on from 1990 onwards, while data for earlier years is not available (Table 4). The performance of Pakistan was distinctly better till the end of the 1980s.

Pakistan had a per capita income 59pc above that of India and 96pc above Bangladesh in 1990. The higher per capita income was maintained up to 2000 with respect to India, and up to 2010 with respect to Bangladesh. Now India has a 37pc and Bangladesh has a 14pc higher per capita income than Pakistan. However, following the recent rebasing of Pakistan’s GDP from 2005-06 to 2015-16, the per capita income in 2020 is $5,477, which is 1.6pc higher than that of Bangladesh.

Poverty levels

The next set of findings further highlights the better position of Pakistan. The first indicator is the incidence of poverty as estimated by the World Bank (Figure 3), with the poverty line of $3.20, according to 2011 PPP.

The big surprise is the much higher incidence of poverty in India of 61.7pc, compared to 52.3pc in Bangladesh and much less in Pakistan at 35.5pc. India has experienced much less inclusive growth. This is attributable to the caste system, marginalisation of minorities and very large disparities between rural and urban areas, and among the various states in that country.

The World Development Indicators database of the World Bank also highlights that Pakistan had a lower adjusted unemployment rate, as estimated by the International Labour Organisation (ILO), at 4.3pc in 2019, compared to 4.4pc in Bangladesh and 5.3pc in India.

There is also evidence that Pakistan was able to manage the economy better than India and Bangladesh in the aftermath of Covid. The incidence of the pandemic-related deaths was the highest in India, according to the World Health Organisation (WHO) at 404 deaths per one million persons, compared to 178 in Bangladesh and 135 in Pakistan. Also, the fall in the GDP growth rate in 2020 was the largest in India at 10.3 percentage points, compared to 4.7 in Bangladesh and 4.1 in Pakistan.

We come now to a comparison of the economic status of Muslims in India with those in Pakistan. The Muslim population in India is estimated at 213 million, 8pc less than the number of Muslims in Pakistan. The concentration of Indian Muslims is in four states, namely Uttar Pradesh, West Bengal, Bihar and Assam. These states are relatively underdeveloped with lower per capita income compared to the national average per capita income level of India.

For example, Uttar Pradesh has a per capita income only 50pc of the national average. The corresponding percentages for the other three states range from 51pc to 81pc of the national average. Therefore, the dominant majority of Muslims live in the relatively underdeveloped regions of India.

The Justice Sachar Report of 2006, Social, Economic and Educational Status of the Muslims of India, also highlights that in a typical state the per capita consumption expenditure of Muslims is on average 17pc lower than that of Hindus. Also, the incidence of poverty is much higher among the Muslims. Overall, it appears that currently the average living standard of Muslims of India is almost 24pc lower than that of the Muslims in Pakistan. Given the growing discrimination in India against Muslims, this gap will become larger with time. Surely, the creation of Pakistan has been much better for the Muslims of the subcontinent.

Finally, there is one indicator in which Pakistan has performed worse in an unambiguous manner since 2000 compared to India and Bangladesh. This is in the domain of the Human Development Index (HDI) of the United Nations Development Programme (UNDP) (Figure 4). Since 2000, Pakistan has had a significantly lower HDI and a smaller growth rate in the Index. Analysis of the components of the HDI reveals that the relatively low index value is the largest in education, measured by the literacy rate and the years completed of education by the adult population. The basic reason is that given a large hostile neighbour, Pakistan has had to divert more public resources away from education and health to defence spending.

However, Pakistan has a better ranking than Bangladesh in the Corruption Perception Index of Transparency International (TI) and a higher ranking than both Bangladesh and India in the Environment Protection Index of Yale University. In the light of the foregoing, there is need to highlight that since independence Pakistan has performed well in the first four decades compared to India and in the 1970s and the 1980s in relation to Bangladesh. However, the economic performance slowed down and weakened from the 1990s onwards, but even now Pakistan has a lower incidence of unemployment and poverty than the other two countries in the subcontinent.

It is unfortunate that in its 75th year, Pakistan is facing an incipient financial crisis. There is need of a firm resolve to improve the economic situation and to strive hard to reach upper-middle income status as a country by the centenary in 2047.

The author is professor emeritus at the Beaconhouse National University.
He has been a former UN assistant secretary-general and a federal minister.

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