Understanding Pakistan Project

Athar Osama August 20th, 2007

By: Athar Osama*

In the last episode of this series, we looked at Pakistan under Ayub Khan’s “Presidential” Democracy during the second part (1962-65) of his three-part 11-year tenure at the helm of the affairs. Prior to that, we had also looked the early-years of the Martial Law regime that, owing to the intensity of its policy activism, saw some dramatic changes in a whole array of policy domains. In this episode we dig deeper into two key areas policy change in Ayub Era, namely, economic and foreign policy.

(Figure -Right: Ayub Khan’s “Talent Cabinet” which was responsible for much of the regime’s policies during the 1960s. Notice: Zulfikar Ali Bhutto–who was a portege of Ayub Khan–and is known to have called the latter “daddy” on occasions.)

During the early-to-mid 1960s, Pakistan saw what appeared to be dramatic advancements in its economic affairs. In the 1960s, Pakistan’s economic progress is known to have been an envy of a number of Asian countries. It was also during this era that Pakistan’s economic planning processes, institutions, and documents—particularly the Second Five-Year Plan—are known to have been adopted by countries like South Korea who themselves where trying to chart a development trajectory for themselves. This recognition aside, Ayub’s economic policies are perhaps one of the most misunderstood aspects of this 11-year rule. While there is little disagreement on the growth rates that Pakistan experienced in GDP, industry, and agriculture during Ayub Khan’s era, what experts tend to disagree upon is how that growth occurred and what were its implications on Pakistan’s economy and society (Zaidi, 1999, p. 97). We look at Ayub’s industrial and agricultural policies, in particular, to see how they fared and why.

On the foreign policy front too, Ayub Government found itself in the midst of some truly significant changes and events and the actions it took—or failed to take—had serious repercussions for Pakistan. In fact many have argued that the 1965 War between India and Pakistan which, in many ways, Ayub and his advisors—Foreign Minister Zulfiqar Ali Bhutto, being the main protagonist—brought upon themselves marked the beginning of the end of Ayub’s Era. Before we look into that next week, we will examine how we got there. But first, a closer look at Ayub’s economic “miracle”…

Trade and Industrial Policy and Development in the Sixties

Pakistan had inherited an industrial base that was at a very nascent stage of its development. In its statement of industrial policy in 1948, the Government of Pakistan stated that:

“The most striking feature of Pakistan’s present economy is the marked contrast between its vast natural resources and its extreme industrial backwardness. A country producing nearly 75% of the world’s production of jute does not possess even a single jute mill…” (quoted in Zaidi, 1999, p. 91)

The successive governments throughout the 1950s adopted trade and tariff policies that facilitated rapid industrialization in the country with Pakistan’s industry growing at one of the highest rates of any country in the world between 1949 and 1954 (ibid). Large scale manufacturing for instance grew an unprecedented rate of 23.6% per annum during 1949 and 1954 and again at a slower—but still impressive—rate of 9.3% between 1955 and 1960 (ibid).

Although starting virtually from scratch, these high initial growth rates are somewhat to be expected, yet given the circumstances of those times and the prevailing political climate within the country, these are still quite impressive. One of the main beneficiaries of this initial growth was the private sector. Zaidi (1999, p.95) notes, for instance, that the average return on private investment in the first half of the 1950s was of the order of 50-100% dropping to 20-50% during the second half of that decade. The following table illustrates some of these growth rates across various sectors of the economy:

Annual Growth Rates of Various Sectors of the Economy 1958-1970 (% per annum)

Year          Agri       Manufacturing       Banking         Public Admin       Services        GDP
                                Large      Small        & Insurance   & Defense  

1958/9      4.0       5.6           2.3            12.9                9.8                        4.0                  5.5
1959/60   0.3       2.7            2.3            22.1                -2.7                      3.8                  0.9
1960/1     -0.2      20.3         2.9            10.0               1.3                        4.7                  4.9
1961/2       6.2      19.9         2.9             8.5                 3.9                        4.0                  6.0

 1962/3       5.2     15.7          2.9             11.5               2.8                        4.2                   7.2
1963/4       2.5     15.5          2.9             8.9                 9.7                        4.0                  6.5
1964/5       5.2     13.0          2.9            37.9               17.8                       7.0                  9.4
1965/6       0.5     10.8          2.9           10.9                56.5                      1.1                   7.6
1966/7       5.5      6.7            2.9           12.7                -14.4                     4.3                   3.1
1967/8       11.7     7.6           2.9            11.8                -2.5                      4.0                   6.8
1968/9       4.5      10.6         2.9            8.5                   5.0                      3.9                   6.5
1969/70     9.5      13.9         3.0           19.4                  3.6                      6.8                   9.8

1958-64     3.0     13.3        2.7          12.3                  4.1                     4.1                  5.2
1965-70     6.2     10.4        2.9          16.9                 11.0                   4.5                  7.2

(Source: Government of Pakistan, Economic Survey, 1984-5, Islamabad, 1985 quoted in Zaidi 1991, p. 98)

When Ayub Khan into power, Pakistan had already experienced an initial burst of industrial activity but that the effect of this initial impetus was beginning to wear off a bit. Ayub government adopted a series of policies aimed at reinvigorating the economic, industrial, and agricultural sectors.

Ayub Khan’s industrial policy was basically hinged upon trade liberalization and using the import liberalization schemes such as the Export Bonus Scheme (EBS) to guide and shape business investment. The Ayub Government further liberalized trade in 1961 by starting an Open General License (OGL) scheme which allowed new traders to enter into the field as well (Zaidi, 1999, p. 98).  The government allocated considerable foreign exchange to the OGL scheme and a number of new traders made significant profits. The “Free List” under the OGL was later expanded from 4 items to fifty items by 1964.

The use of tariffs and licensing schemes as signaling devices by the governments to tell businessmen what to do is well-established in economic literature. Zaidi (1999, p. 98), for example, notes the clear bias against production of machinery and equipment locally, as import duty on these items was the lowest—perhaps, in the view of the government, to encourage rapid industrialization at home. However, these policies also had the opposite effect of not allowing indigenization of the industry. 

We have already discussed the EBS in some detail in an earlier episode but suffice it to say that it was designed to provide an incentive for Pakistan’s industry to export manufactured products rather than raw materials. The export of raw jute, for instance, fell from 60% of total exports in 1958 to 20% in 1968/9 while exports of cotton and jute textiles increased from 8.3% to 35% during the same period. Export of other manufactures also increased ten-fold from 2 to 20% (Zaidi, 1999, p. 99). In 1965 Pakistan’s manufactured exports were greater than those of South Korea, Turkey, Thailand, and Indonesia combined! (ibid).

The impact of EBS and import licensing liberalization strategy on industrial development has been termed “dramatic” by some observers (Zaidi, 1999, p. 99) yet others have raised questions about the nature and long-term sustainability of this scheme as well as its ultimate effects on the society and the economy. There is considerable consensus among relevant experts that the government was able to pursue such a generous import policy due to the availability of foreign aid which increased from 2.5% of GNP in the mid-1950s to about 7% of GDP in mid-1960s (ibid). An Asian Development Bank (ADB) study of economic conditions in Pakistan notes that “the import liberalization which took place in the first half of the 1960s would have been impossible without this large increase in aid”. Gustav Papanek, in his Pakistan’s Development: Social Goals and Private Incentives (1967), also acknowledged that “foreign aid contributed significantly to Pakistan’s growth from late 1950s; without it, the rapid increase in development in the 1960s could not have been possible”. Rashid Amjad, in his Private Industrial Investment in Pakistan 1960-70, notes that:

“…[the] economic system which operated in Pakistan in the sixties was quite different from that suggested by earlier writers. It bore little resemblance to classical nineteenth century capitalism…the system that operated in Pakistan came very close to what we can term a “foreign Aid Dependent Regime” in which the mechanics of industrial growth were in one way or the other made dependent on foreign aid inflows…once these aid flows slowed down…the system…found it difficult to sustain the earlier growth it had generated”  (Amjad, 1982, p. 10)

These observations are borne out in actual experience as well for immediately following the 1965 India-Pakistan War when the foreign aid dried up considerably, the government was unable to continue its import liberalization policies and the free list was curtailed considerably. In short, once the aid stopped, so did the economy.

Beyond the obvious and undisputed growth rates (documented above), there are also considerably divergent views about the overall impact of the Export Bonus Scheme and other instruments of public policy—such as tariffs and import licensing—used during this period. Stephen Lewis, in his Pakistan: Industrial and Trade Policies, for instance, notes that in sharp contrast to the 1950s, none of the growth in the industry in the 1960s was due to import substitution (Lewis, 1970). Meekal Ahmed, in a Doctoral thesis done at Oxford, demonstrates that the growth was much higher in the first half of the 1960s than in the second half and that it was much higher for investment and intermediate goods than for consumer goods (Meekal Ahmed, 1980). Asad Sayeed, in his doctoral thesis at Cambridge, goes a step further and proves that these policies also encouraged growth in total factor productivity and were thus quite efficient (Sayeed, 1995).

Rate of Growth in Manufacturing Output 1960-70 (% per annum)

Industries                              1960-65         1965-70        1960-70

Total Manufacturing            16.0             10.0                 12.0
Consumer Goods                    10.6              9.0                  10.0
Food                                              9.2                 11.3                 11.0
Beverages                                     16.5               6.1                  11.0
Tobacco                                        17.3               10.4                 15.0
Textile                                          5.9                 8.7                   7.0
Footwear                                      8.1                 4.6                   6.0
Woodwork                                   12.7                5.4                   9.0
Furniture                                     17.0               4.0                   11.0
Printing                                        9.4                 8.1                    9.0
Miscellaneous                             19.3                7.0                    13.0

Intermediate Goods            12.0              8.0                    9.0
Paper                                            7.2                11.2                    8.0
Leather                                        15.7               9.6                     12.0
Rubber                                         17.2               8.5                     13.0
Chemicals                                     20.3             15.9                    18.0
Petroleum                                    49.3              7.4                      27.0

Investment Goods                20.0            8.0                     13.0
Non-metals                                 11.5              8.0                      9.0
Basic metals                                12.0              9.8                      10.0
Metal products                           21.8               7.0                     14.0
Machinery                                   23.4              7.0                     15.0
Electrical machinery                  24.8              5.7                     16.0
Transport Eqpt.                          26.9              7.5                     19.0

(Source: Ahmed, Meekal, in Sayeed, Asad (1995)

Other observers have emphasized some of the negative effects of these industrial policies. The most noteworthy of these claimed ill-effects are the economic disparity that it caused. While a small group of monopoly houses had already begun to emerge during the 1950s, Ayub’s economic-industrial policies further exacerbated this trend. Papanek, for instance, notes that in the 1950s, there were 3000 individual firms in Pakistan, but majority of the wealth was concentrated in a very small group of business units. Seven firms or individuals, for instance, owned 25% of all private industrial assets in United Pakistan and twenty-four units represented nearly 50% of all private industrial assets (Papanek, 1967).  By the end of the Ayub era in 1970, there were 44 monopoly houses that controlled 77% of the gross fixed assets of all manufacturing companies on the Karachi Stock Exchange. These houses owned 7 of the 17 banks in the country thus being responsible for 60 of total deposits and 50% of total loans and advances. A similar prevailed in insurance and other services sectors (Amjad, 1982).

Among the main instruments that Ayub had used to promote this type of industrialization was the Pakistan Industrial Development Corporation (PIDC), Pakistan Industrial Credit and Investment Corporation (PICIC) and Pakistan Industrial Finance Corporation (PIFCO). PIDC is known to have helped create a number of industries in the 1960s and while an exhaustive overview of PIDC’s role is beyond the scope of this work, it is safe to say that these were either then handed over to the private sector at throw-away prices or have remained within the public-sector as inefficient and ailing entities. Between 1958 and 1970, 65% of all industrial loans given away by PICIC were made to 37 monopoly houses of which the largest 13 got 70% (Zaidi, 1999, p. 102).

(Figure - Right: The Chairmen of Pakistan Industrial Development Corporation - PIDC - One of the policy instruments of Ayub’s Era. Source: Flikr.com: Dr. G. N. Kazi’s Collection on Pakistan

Ayub’s regime was essentially formalizing what Papanek describes as the “social utility of greed” to drive the country’s economic development. This is also referred to as Doctrine of Functional Inequality which, simply defined, is the idea that it is not sufficient alone that economic growth takes place within the private sector but that is OK to increase inequality within the society as a result. The traditional conservative mantra believes that economic growth and prosperity trickles down to those in the lower strata of the society. There is little evidence to suggest that it happened in Pakistan but considerable evidence to point out that these growing economic disparities between various strata of the society and between the two regions of the country seriously undermined national interest.

We will return to this theme when we examine the causes and events surrounding the fall of Dhaka but for now it is sufficient to say that Ayub’s economic and industrial policies did contribute to it.

The Green Revolution and Impacts

While industry had experienced considerable growth during the early 1950s, agriculture had largely lagged behind. The annual growth rate in agriculture between 1949 and 1958 was a mere 1.43% per annum—falling behind even the population growth of that time (Zaidi, 1999, p. 28). During this time, Pakistan not only experienced a severe drought—partly due to wrong-minded agricultural and water policies—but also experienced several years of negative growth rate in agricultural output (1950/1, 1953/4, and 1959/60).

Throughout the 1950s, agriculture suffered because the ruling elite of the time thought that rapid industrialization was a more urgent and desirable objective. Observers have claimed that during this period there was a net transfer of resources from agriculture to industry in the sense that policies were pursued that not only made more available to industrialization but promoted industry at the expense of agriculture. Stephen Lewis, for examples, goes to the extent of saying that the early industrial development of Pakistan was financed by the agriculture sector. (Lewis 1970 quoted in Husain, 1999, p.  51)

Gustav Papanek, a Harvard Economist who was an advisor to the Government of Pakistan during the 1950s, in his Pakistan’s Development: Social Goals and Private Incentives, has noted that:

“Agriculture was the sick man of economic development In Pakistan during the 1950s. A stagnant agriculture in a predominantly agricultural economic meant a slowly growing economy.” (Papanek, 1967, p.64)

Ayub Khan’s regime—to its credit—recognized the importance of a stable and growing to Pakistan’s economy. Following upon that insight, it engineered some of the best—although still quite unpredictable—growth rates in Pakistan’s agriculture sector. Between 1959 and 1964, agriculture grew at an average growth rate of 3.7% per annum only to be overshadowed by an even more impressive 6.3% per annum between 1965 and 1970. In fact, between 1966/7 and 1967/8, the years when the Green Revolution is supposed to have been at its peak, the agriculture sector grew at an average of 11.7 %, (Zaidi, 1999, p. 29). During the decade of the green revolution, for instance, wheat production increased by 91%, rice output by 147%, and sugar cane production by a similar margin (Husain, 1999, p. 53).

The Green Revolution took place in Pakistan in two stages. The first stage (1960-1964/5) was mainly driven by improvements in water provision and irrigation. While this was definitely aided by Ayub’s success in resolving Pakistan’s water security issues with India through the signing of the Indus Water Treaty under the guarantee of the World Bank in 1960, the primarily vehicle for this increase in irrigation were the tube-wells. The second stage of the green revolution (1964/5 to 1969/70) comprised the introduction of scientific farming, including high yielding variety (HYV) of seeds, chemical fertilizers, and pesticides followed by mechanization—mainly tractorization—of Pakistan’s agriculture.

Between 1960/1 and 1964/5, about 25,000 new tube-wells were installed in Pakistan at the cost of around Rs. 5,000-12,000 per tube-well (Zaidi, 1999, p.29). This doubled the farm area irrigated by tube-wells in the country. During this timeframe, the availability of irrigation water increased from 82 to 117 MAF (or million acre feet) or a jump of over 43% within a decade (Husain, 1999, p.52). There are studies that indicate at least half of the growth in Pakistan’s agriculture sector during the decade may be attributable to the increase in irrigation and the availability of water through tube-wells.

In the second half of the 1960s, two near high yield varieties of crops were introduced in Pakistan, namely, the Mexi-Pak wheat (developed at International Wheat and Maize Institute in Mexico) and IRRI rice (developed an International Rice Research Institute at the Philippines). The introduction of these varieties were in a sense facilitated by better availability of water since these required considerably more water than the breeds that they replaced. This further provided in impetus for more tube-wells. The number of tube-wells in the country increased from 34,000 in 1964/5 to 79,000 in 1969/70 (Zaidi, 1999, p. 29) thus increasing the area cultivated by tube-wells by six-fold between 1959 and 1969. More than half of this area was cultivated by the HYV seeds. Fertilizer consumption also jumped 150% between 1965/6 and 1970/1. The final ingredient of the technology package that made the green revolution what it was tractorization of the economy. In 1959 there were 2,000 tractors in the country. By 1968, this number had gone up 8,000 percent to 18,909 (Zaidi, 1999, p. 30).

While from a purely production and output standpoint, the green revolution was an unqualified success, it also contributed significantly to the social and regional disparities with the country. Taking tube-wells, for example, it is claimed that more than 91% of the 76,000 tube-wells in Pakistan in 1968 were in the province of Punjab alone (Zaidi, 1999, p. 30). Other provinces—for technical and not necessarily prejudiced reasons—received very little share of this development. Even in Punjab, these tube-wells were restricted to handful of districts while the rest of the province hardly benefited (ibid). Also, as Mahmood Hassan Khan, in his Public Policy and the Rural Economy of Pakistan, notes a vast majority of these tube-wells were installed by richer farmers owning larger farms. It notes that 75% of the tube-wells were owned by farms greater than 25 acres and less than 4% by those smaller than 13 acres (Khan, 1986, p. 447).

With tractors as well, these economic disparities are quite stark. A 1966 World Bank study finds a predominance of large tractors in Pakistan—more than 86% of imported tractors were more than 35 horsepower and most of these were owned by farms of greater than 100 acres of land (Zaidi, 1999, p. 30).  Carl Gotsch reported in a 1970 study that 58% of all tractors were located in three divisions of Punjab (Lahore, Multan, and Bahawalpur) while 38% of all tractors imported by he entire country were located in Multan division. In addition, these disparities added on top of each other as 75% of all tractors were owned by farms that had also sunk tube-wells (Zaidi, 1999, p.30).

The evidence is compelling and overwhelming. Hamza Alavi, in his “The Rural Elite and Agricultural Development in Pakistan”, notes:

“…Because private tube-well development is closely relative to concentration of land in large farms, the “Green Revolution” had tended not only to intensify already large disparities in income and wealth of the different strata of rural population but, by the same token, it also widened the disparities between different regions” (Alavi, 1986, p. 37)

The poor farmers of Pakistan—or even Punjab clearly did not get the direct benefits of the green revolution. Behind the green revolution, therefore, was essentially an “elite farmer strategy” in quite similar manner as behind the industrial development was an elite industrialist strategy (Zaidi, 1999, p. 31). Notwithstanding the above data, however, there is some debate and disagreement between experts claiming that the green revolution a new breed of dynamic, middle class farmers who were capitalists to start with and who later came to assert more political power as well (e.g. Shahid Javed Burki) and those that believe that it was the large landlord—already with already entrenched power—and not the middle-class farmer who engineered and benefited from this revolution (e.g. Hamza Alavi and Akmal Husain).

Regardless of how one sees it, however, the “Decade of Development” or the “Controversial Sixties”, there is unquestionable evidence of an increase in disparities between social classes and between regions of the country. True, that bulk of agricultural development could only have happened in areas where conditions (most notably land and climate) were suitable to it. However, a wise set of economic policies would have compensated those regions that couldn’t participate in this development in other areas of economic development. We know, with the benefit of hindsight, that this didn’t happen (e.g. in the case of East Pakistan).

It is not clear to us, as of now, if there was a conscious decision on the part of the President and his economic advisors to disregard the distributional effects of his economic policies in order to achieve rapid industrial and agricultural growth or whether these effects were not foreseen, ex-ante, by these wise men from Pakistan and abroad. What we do know, though, is that this growing economic disparity ultimately generated socio-economic and political tensions that brought the Ayub Government down and changed the face of the country itself. We will examine these events and their causes in a later episode.

* This episode draws heavily upon S. Akbar Zaidi’s Issues in Pakistan’s Economy, Oxford University Press, 1999

• Ayub Khan , Industry , Agriculture , Economics , Inter-Provincial Relations , 1962-1965 , East Pakistan , History in a Nutshell