Introduction

Pakistan is attempting to overcome a multifaceted crisis of a stagnating economy, growing poverty, intensifying social polarization and weakening institutions. In pursuing this endeavour of national reconstruction it may be useful to present a historical analysis of the relationship between the policies of individual leaders, the process of institutional decay and the emergence of an economic structure characterized by growing poverty and loan dependence.

In this the first of a series of four articles we will briefly examine the political and economic policies of the Ayub regime that eroded Pakistan's nascent democratic institutions and created explosive regional and class tensions by marginalizing the majority of the population from the political and economic processes. We will indicate how an economic structure emerged in this period that was to lock Pakistan's economy into a narrow and inefficient industrial base, slow export growth and increasing loan dependence in the next four decades.

Ayub's Coup d'etat and the Constitutional Crisis

The Constituent Assembly in 1954 made the first attempt to give a constitution to the nation. The failure of this attempt signifies the conflict between the greed for personal power of individual leaders and the imperatives of strengthening institutions: a conflict of interest that was to underlie the process of institutional decay in the next five decades. Allen McGrath in his book shows how on October 28, 1954, the Constituent Assembly was scheduled to formally vote on the published draft of Pakistan's first constitution, a draft that had been approved in the previous session of the Constituent Assembly. On this fateful day Governor General Ghulam Mohammad who felt that the draft constitution did not suit his power interests, ordered the police to bar members of the Constituent Assembly from entering their meeting room in Karachi. The passage of the first constitution thus aborted, and a weakened form of parliamentary democracy was restructured from the remnants of the first Constituent Assembly until it was terminated by Ayub Khan's coup d'etat in 1958.

The significance of this conflict between individuals and institutions was to resonate through Pakistan's subsequent history. It was summed up in a prescient remark by Lawrence Ziring: "Once the first constitution is destroyed, it is doubtful that any succeeding one, no matter how successfully drafted will ever be truly accepted. A tradition which makes it possible for new leaders to replace old documents with others which appear preferable to them not only denies constitutionalism but makes reference to it little more than a sham".

1. Dictatorship, Institutional Decay and Popular Revolt

The fatal flaw of Ayub Khan's political system was that while its support was drawn from a relatively narrow social stratum through state patronage, it did not have an institutional mechanism for accommodating opposition. Power was concentrated in the hands of Ayub Khan who relied on the bureaucracy for running both economic and political affairs. As Shahid Javed Burki has argued, the central and provisional legislatures were severely constrained by the narrow scope for parliamentary legislation. The President could also veto any legislation without the legislatures having the power to "over-ride" his veto.

The system of "Basic Democracy" consisted of elected union councilors (called "Basic Democrats") from 80,000 constituencies who formed a safe electoral college for electing the President, and were provided access over state resources. The candidates for election to the position of "basic democrats" (B.Ds.) were selected by the bureaucracy which also disbursed state resources to elected B.Ds. for a variety of social and economic functions at the local level. Thus "Basic Democrats" provided the bureaucracy an institutional mechanism for a patron-client relationship with sections of the rural elite.

While the legislatures were subject to Presidential veto, dissent from individuals and institutions in civil society was suppressed by a series of administrative measures. For example in April 1959 a Martial Law Ordinance was promulgated under which the government could take over any newspaper which in the "opinion of the government" contained material that threatened national security. The government then proceeded to take over the Pakistan Times and Imroze which were two of the most influential English and Urdu daily newspapers respectively. Subsequently control over the press was institutionalized through the establishment of an official body called the National Press Trust. Individuals in academic institutions were prevented from publishing or even verbally expressing dissenting opinions in public. The judiciary which was the last remaining institution, which could provide a check over governmental authority, was also brought under administrative control. This was done by means of the "Law Reforms" which gave the government control over judicial appointments, and subjected judges to political scrutiny.

In a culturally diverse society when the people of Bengal, Sindh and Baluchistan were not significantly represented within state institutions, and when political and cultural expression was suppressed, the tendency for the assertion of linguistic or ethnic identities was intensified. This was reinforced by the growing regional economic inequalities so that by the late 1960s political pressures on the State began to explode: in East Pakistan in the form of the assertion of Bengali nationalism and in West Pakistan in the form of mass street demonstrations against Ayub Khan's repressive rule and the industrial and feudal elite that benefited from it.

2. Economic Growth, Social Polarization and the Roots of the Financial Crisis

Following the Korean boom in 1953, the government introduced a policy framework for inducing the large profits of traders in jute and raw cotton sector to flow into the manufacturing sector. This was done through a highly regulated policy framework for import substitution industrialization in the consumer goods sector. The policy combined an over valued exchange rate, with tariff protection for manufacturers of consumer goods together and direct import controls on competing imports. Dr. A.R. Kemal has estimated that the average rate of effective protection was as high as 271% in 1963-64, and fell to 125% in 1968-69. This enabled the emerging industrial elite to make large profits from the domestic market without the competitive pressure to achieve higher levels of efficiency and an export capability.

During the 1960s import substitution industrial growth in the consumer goods sector, was more systematically encouraged by the government. Apart from other incentives the most important was the Bonus Voucher Scheme. This enabled exports of certain manufactured goods to receive in addition to the rupee revenue of their exports, bonus vouchers equivalent to a specified percentage of the foreign exchange earned. The vouchers could be sold in the market (to potential importers) for a price usually 150 to 180 percent above the face value. Thus the exporter not only earned the rupee revenues from exports but also an additional premium through sale of the bonus vouchers.

The Bonus Voucher Scheme essentially constituted a mechanism for enabling domestic manufacturers to earn large rupee profits on exports which brought no gain to the economy in terms of foreign exchange. Soligo and Stern estimated that during the 1960s, Pakistan's main industries (when input costs and output values are both measured in dollar terms) were producing negative value added.

Sikander Rahim in a recent paper has argued that the phenomenon of negative value added in industry was an important reason why during the 1960s, inspite of import substitution and large export volumes, foreign exchange shortages persisted. He suggests that this set the "mould" for Pakistan's narrow export base (concentration on low value added end of textiles) and the debt problem, that remains till to-day.

In a broader perspective, it can be argued that the government through a range of protection measures and concessions in the 1960's, enabled the emerging industrial elite to make large rupee profits from domestic and export sales, without the market pressures to diversify into high value added industries or to achieve international competitiveness. Thus the experience of the 1960s is illustrative of the nature of both government and the economic elite. In the pursuit of securing its power base, the government by means of subsidies, manipulation of tariffs and the exchange rate mechanism, transferred rents to the industrial elite. This reinforced the tradition bound propensity of the economic elite for risk aversion, lack of innovative dynamism and dependence on governmental patronage.

These tendencies persisted in varying degrees for the next four decades. Yet they were at an economic cost that became a growing burden on an increasingly fragile economy.

The government during the 1960s adopted a deliberate policy of concentrating national income in the hands of the upper income groups. The economic basis of this policy was the assumption that the rich save a larger proportion of their income and hence a higher national savings rate could be achieved with an unequal distribution of income (the target savings rate being 25% of GDP). In practice while the policy of distributing incomes in favour of the economic elite succeeded, the assumption that it would raise domestic savings over time failed to materialize. Keith Griffin points out for example that 15% of the resources annually generated in the rural sector were transferred to the urban industrialists and 63 to 85 percent of these transferred resources went into increased urban consumption. Far from raising the domestic savings rate to 25%, the actual savings rate never rose above 12%.

The failure of the economic elite to save out of their increased income resulted during the 1960s, in a sharp increase in the requirement of foreign aid. According to official figures, gross foreign aid inflows increased from US $ 373 million in 1950-55 to US $ 2,701 million in 1965-70. The rapid increase in foreign aid was accompanied by a change in its composition from grants to higher interest loans. Consequently the debt servicing burden rose dramatically. Debt servicing as a percentage of foreign exchange earnings was 4.2% in 1960-61 and increased to 34.5% by 1971-72. The magnitude of this figure did not fall for the next three decades and by the year 2000, it was even higher at 40%.

Given the policy of re-distributing incomes in favour of the rich, it is not surprising that by the end of the 1960s a small group of families with inter-locking directorates dominated industry, banking and insurance in Pakistan. In terms of value added 46% of the value added in the large scale manufacturing sector originated in firms controlled by only 43 families.

During the process of rapid economic growth of the 1960s, while an exclusive and highly monopolistic class was amassing wealth, the majority of Pakistan's population was suffering an absolute decline in its living standards. For example, the per capita consumption of foodgrain of the poorest 60 percent of Pakistan's urban population declined from an index of 100 in 1963-64 to 96.1 in 1969-70. The decline was even greater over the same period in the case of the poorest 60 percent of rural population. In their case, per capita consumption of foodgrain declined from an index of 100 in 1963-64 to only 91 in 1969-70. There was an even larger decline in the real wages in the industry. For example, Griffin suggests that in the decade and a half ending in 1967, real wages in the industry declined by 25 percent. S.M. Naseem, in an ILO study has estimated that in 1971-72, poverty in the rural sector was so acute that 82 percent of rural households could not afford to provide even 2,100 calories per day per family member.

In an economy where there were significant differences in the infrastructure facilities available in the different provinces, there was a tendency for investment based on private profitability to be concentrated in the relatively developed regions. Consequently regional disparities would tend to widen over time. This is in fact what happened in the case of Pakistan. The Punjab and the Sind provinces, which had relatively more developed infrastructure, attracted a larger proportion of industrial investment than the other provinces. In Sind, however, the growth in income was mainly in Karachi and Hyderabad. Thus, economic disparities widened not only between East and West Pakistan, but also between the provinces within West Pakistan.

During the 1960s, the factor which accelerated the growth of regional income disparities within what is Pakistan today was the differential impact of agricultural growth associated with the so-called 'Green Revolution'. The yield increase associated with the adoption of high yield varieties of foodgrain required irrigation, and as it happened, the Punjab and the Sind had a relatively larger proportion of their area under irrigation. Therefore (as Naved Hamid and I, in our paper have shown) they experienced a much faster growth in their incomes, compared to the Baluchistan and the North West Frontier Province.

In a situation where each of the provinces of Pakistan had a distinct culture and language, the systematic growth of regional economic disparities created acute political tensions. This required a genuinely federal democratic structure with decentralization of political power at the provincial level. Only such a polity and large federal expenditures for the development of the under-developed regions could ensure the unity of the country. In the absence of such a polity, the growing economic disparities between provinces created explosive political tensions.

The failure to conduct an effective land reform in Pakistan had resulted in a continued concentration of landownership in the hands of a few big landlords. Thus, in 1972, 30 percent of total farm area was owned by large landowners (owning 150 acres and above). The overall picture of Pakistan's agrarian structure has been that these large landowners have rented out most of their land to small and medium-sized tenants (i.e., tenants operating below twenty-five acres).

In my doctoral thesis, I have shown that given this agrarian structure, when the 'Green Revolution' technology became available in the late 1960s the larger landowners found it profitable to resume some of their rented out land for self-cultivation on large farms using hired labour and capital investment. Consequently there was a growing economic polarization of rural society. While the landlords' incomes increased, those of the poor peasantry declined relatively, as they faced a reduction in their operated farm area and in many cases growing landlessness. (During the period 1960 to 1978 my estimates show that as many as 0.8 million tenants became landless wage labourers).

Thus the "commercialization of agriculture" in a situation where landlords and the local power structure controlled markets for inputs and outputs, brought new mechanisms for the reproduction of rural poverty, even though overall agricultural growth accelerated. The high rate of agricultural growth of the Ayub period could not be sustained in subsequent years. Yet the mechanisms of reproducing rural poverty that had emerged in this period, persisted over the next four decades.

CONCLUSION

The Ayub period is seen by some as Pakistan's golden age. It is true that during this period high GDP growth rates were achieved. Yet it is equally true as we have argued in this article that the pursuit of personalized power and flawed economic policies of the Ayub regime resulted in establishing the roots of economic inequality, loan dependence and explosive political tensions.