Earlier, the economic history of Pakistan showed a remarkable picture of growth and other socio-economic indicators, which can be considered as an economic miracle. The growth in economic indicators since 1947 to the late 1960s was much better as compared to other Asian economies, including India. In those days, India was considered as a slow growth economy with an annualised growth rate of less than 3 percent.
In those days a derogatory and controversial expression - Hindu rate of growth- was introduced in economic journalism. This expression was used to refer to the low annual growth rate of the Indian economy before 1991, which stagnated around 3.0 percent from the 1950s to the 1980s, while per capita income in India averaged at 1.3 percent. At the same time, Pakistan grew by 5 percent annually. The term 'Hindu Rate of Growth' was coined by Indian economist Raj Krishna. The term suggests that the low growth rate of India, a country with high Hindu population was in a sharp contrast to high growth rates in other non-Hindu Asian countries.
This term, popularised by Robert McNamara, was used disparagingly and has connotations that refer to the supposed Hindu outlook of fatalism and contentedness. However, a noted journalist, Arun Shourie, has argued the so-called Hindu rate of growth was a result of socialist policies implemented by staunch secular governments and had nothing to do with Hinduism.
It is unfortunate that after showing a remarkable growth, the economy of Pakistan has entered the continuous declining regimes, where no policy reforms or planning strategies are showing their impacts to bring economy at the earlier track of fast growth. Pakistan economy had gone into shock in the 1970s where structural changes due to separation of East Pakistan changed the economic fundamentals not only at the monetary and fiscal fronts but trade patterns have also since then changed as economy of Pakistan emerged as a textile economy where more than 65 percent of the export receipts are based on the textile sector products. It is obvious that this situation led to a strong dependency on cotton crop.
At an initial stage, this dependency was an outcome of the East Pakistan's separation tragedy; later on, it became a permanent and inseparable part of Pakistan's international trade because economic planners failed to create diversity in exports by merging Pakistan economy in the knowledge based regime. Here, it is important to mention that in the present globalisation regime, the share of resource based products is declining drastically, which has reached about 5 percent of the total global trade. Sometimes, in history, this share was more than 70 percent; but today's global economy does not depend on natural resources. Now, human resource is the most important ingredient of the exports. Now, the share of knowledge-based products and high tech are rapidly increasing in the global trade.
Today's Pakistan is entirely different form its early 20 years, where Pakistan was a leading country in South Asia and India was not in competition with Pakistan. The more recent history has shown a more deteriorated picture. It is notable that all the indicators in the last three years of the last decade show a severe deterioration. According to government's own statistics, no significant improvement has been observed in unemployment, while, the CPI-based inflation has increased. It is more important that increase in the CPI-based inflation is less than the sensitive prices index (SPI) based inflation, which has shown that the rate of inflation for the basic commodities has reached even 26 percent. It is a clear indicator that the nature of present inflation is entirely different form the history of inflation in Pakistan.
At present, poor class is directly suffering from inflationary policies. Interest rate hike, increasing indirect taxes and removal of subsidies and administratively hike in the prices of services, being provided by the public sector enterprises, are the major causes of inflation. It is obvious that these causes of inflation directly belong to policy measures; they are not based on market dynamics or international recession. A decline in the GDP growth rate and investment-to-GDP ratio has reflected their impacts in the decline and heavy volatility in stock market index. Though, the government has shown its revised estimates of GDP growth rate and, according to the revised growth rate, GDP has grown by 4.1 percent in 2009-10. This revision has several question marks and majority of independent economists does not buy the revision methodology.
Another notable phenomenon is low tax-to GDP ratio in Pakistan, which has not been improved even after the several times increase in the tax base and tax rates. It is astonishing that Pakistan is a country where tax rate is one of the highest in the world and these taxes are being paid by salaried persons, businesses and corporate sector. Such a fiscal policy hampers the corporate sector and capital market. A low tax-to-GDP ratio, despite highest tax rates, reflects a dichotomy in the economy where a large segment of society and wealth accumulators do not participate in the tax payments. Tax rates are higher in Pakistan but overall tax collection is lower in terms of tax-to-GDP ratio. It is obvious that this ratio will remain low unless all segments of society pay their taxes in accordance with their earnings.
It has been observed over the last decade that the share of defence expenditures in the economy has declined significantly, while increasing ratio of trade deficit is a drastic indicator. It indicates a serious flaw in policy. The increasing trade deficit reflects the higher gap between imports and exports, which is an ultimate consequence of the energy shortage, uncompetitive prices of raw material and overheads, high interest rates and heavy burden of taxes.
A comparison of the present decade with two pervious decades shows that unemployment is increasing while growth rate is declining, external debts are increasing by accelerated rate of growth, tax-to-GDP ratio is declining, investment-to-GDP- ratio is not being improved, defence expenditures are significantly declining, trade deficit is increasing, and development expenditures in terms of their GDP ratio are rapidly declining. All these indicators require urgent and serious attention of the policy-makers and planning authorities.
To achieve the high target of exports and export led growth, the development of human resources is a necessary condition. Unfortunately, Pakistan's position has deteriorated in the human development and knowledge creating activities. According to World Economic Forum (WEF), Pakistan's competitiveness ranking has dropped to 103 in 2010 from 98 in the early years of the decade. The ranking of Pakistan has drastically deteriorated in the corporate governance, financial markets development, corruption, and law and order situation. These are the indicators of the causes of economic deterioration in Pakistan.
Although, a number of government representatives and public sector economists have been trying to present a positive picture of economy, a large number of experts do not observe any positive change in the socio-economic status of peoples in Pakistan in the last decade. They are agreed that the level of poverty (in terms of the percentage of poor in total population) has increased. Obviously, it is against the official statements, issued by the ruling parties which have been claiming a reduction in poverty levels during their regimes. An increasing number of mobile phone users, a quantum jump in the number of cars, an increasing sale volumes of electric appliances and consumer durables, and a robust growth in the import of luxurious items are included in the indicators of improvement in the quality of life. However, it is a common observation that indicators of severely increased poverty and unemployment are available in public domain which contradict the development and growth statistics.
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Macroeconomic Indicators (%)
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Year Unemployment Inflation GDP Investment Growth
Growth to GDP in KSE
(Real) Ratio 100
Index
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2000 6.0 3.6 3.9 17.4 44.2
2001 6.0 4.4 2.0 17.2 -10.2
2002 7.8 3.5 3.1 16.8 29.5
2003 7.8 3.1 4.7 16.9 92.2
2004 8.3 4.6 7.5 16.6 55.2
2005 7.7 9.3 9.0 19.1 41.1
2006 7.6 7.9 5.8 22.1 34.0
2007 6.2 7.8 6.8 22.5 37.8
2008 5.2 12.0 3.7 22.1 -10.7
2009 5.2 20.8 1.2 19.0 -41.3
2010 5.5 11.5* 4.1* 16.6 38.6
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Trade and Public Finance (%)
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Tax to Defence Interest Development Trade
Year GDP Expenditures Expenditures Expenditures Deficit
Ratio to GDP to GDP to GDP to
Ratio Ratio Ratio GDP
Ratio
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2000 10.7 4.0 6.9 2.5 1.9
2001 10.6 3.2 6.0 2.1 1.8
2002 10.9 3.4 6.2 2.8 0.4
2003 11.5 3.3 4.8 2.2 0.5
2004 11.0 3.3 4.0 3.1 1.2
2005 10.1 3.3 3.4 3.9 4.0
2006 10.6 3.2 3.4 4.8 6.5
2007 10.2 2.8 4.4 4.9 6.6
2008 10.6 2.7 5.1 4.4 9.1
2009 9.5 2.6 5.2 3.8 7.8
2010 10.9 2.3 4.5 4.1 5.2
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External Debt and Cost of Debt
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Year External Debt Debt serving
Outstanding Serving as % of
Debt as % of Foreign
(Million US$) Export Exchange
Receipts Earnings
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2000-01 25608 21.3 13.7
2001-02 27215 13.2 7.8
2002-03 28301 12.2 6.5
2003-04 28900 24.0 13.6
2004-05 30813 10.2 5.5
2005-06 32407 9.6 5.1
2006-07 35182 9.3 4.9
2007-08 39530 8.6 4.8
2008-09 41612 15.1 8.2
2009-10 41839* 13.3 7.0
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Comparisons over the Decades
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Economic Indicators 1980s 1990s 2000s
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Unemployment (%) 1.4 5.7 6.8
Inflation (%) 7.2 9.7 7.7
GDP Growth (%) - Real 6.5 4.6 4.8
Investment-GDP Ratio (%) 18.7 18.3 19.0
Growth in KSE 100 Index 0.1 4.1 27.2
Tax-GDP Ratio (%) 13.8 13.4 10.6
Defence Expenditure-GDP Ratio (%) 6.5 5.6 3.2
Interest Expenditure-GDP Ratio (%) 3.8 6.8 4.9
Development Expenditure-GDP Ratio (%) 7.3 4.7 3.5
Trade Deficit-GDP Ratio 8.9 4.4 4.0
Addition in External Debt (Million US $) 6706 10137 16231
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