In the preceding article we analyzed the dynamics
of political power during the 1990s. We indicated how successive elected
Prime Ministers in their pursuit of individual power and wealth, induced
a crisis of state institutions that triggered a military coup d'etat.
In this article we will examine the impact of misgovernance during the
1990s on economic growth and poverty.
Economic Growth, Employment and Poverty
During the decade of the 1990s, political instability,
historically unprecedented corruption by the top leadership, and the worsening
law and order situation perhaps had a significant adverse effect on private
investment and GDP growth. Yet these factors merely accentuated the tendency
for declining growth that was rooted in structural factors, which were
manifest even in the 1980s. The failure of successive governments in this
period to address the deteriorating infrastructure and the emerging financial
crisis further exacerbated the unfavourable environment for investment.
For example, total investment (as a percentage of GDP) declined from 17.9%
in the period 1988-92 to 16.4% in the period 1993-1997.
The sharp decline in GDP growth for such a protracted
period in the 1990s though unprecedented in Pakistan's history, had nevertheless
been predicted. In my book (Strategic Issues in Pakistan's Economic Policy)
in 1987, I argued that the high growth experience of the preceding three
decades may not be sustainable in the next decade due to structural constraints
rooted in the deteriorating infrastructure, low savings rates and slow
export growth: "
.if present trends continue, we may be
faced with the stark possibility that high GDP growth may not be sustainable
over the next five years
.." (Emphasis added).
While GDP growth declined during the 1990s (from 6.3%
in the 1980s to 4.2% in the 1990s), employment growth has continued to
remain at a low level of 2.4% since the 1980s. This indicates that the
employment problem persisted during the 1990s. At the same time the growth
of labour productivity declined, which would be expected to push real
wages downwards. The available evidence shows that this is indeed what
happened in the 1990s. Nomaan Majid in his ILO study suggests that real
wages of casual hired labour (which is the predominant form of hired labour
in Pakistan) declined in both agriculture and industry, during the 1990s.
Employment elasticity is the additional employment
generated by a marginal increase in output. An important indicator of
the structural decline in the capacity to generate employment, is the
declining employment elasticity of GDP growth during the 1990s. The evidence
shows that the employment elasticity in the manufacturing sector declined
sharply from 0.17 in the 1980s to minus 0.10 in the 1990s, while in agriculture
it declined only slightly. This trend when combined with the evidence
of declining output growth in these two sectors, is suggestive of the
emerging crisis of employment and poverty during the 1990s.
A second important dimension of the dynamics of poverty
creation in this period was located in the increased fluctuations in agricultural
output which was pointed out in my ILO study in March 1999. The study
indicates that under conditions of declining input productivity, when
higher input/acre is required to maintain yields, the subsistence farmers
with fewer resources are likely to suffer a greater than average decline
in yields compared to large farmers. At the same time, due to lack of
savings to fall back on, they are relatively more vulnerable to bad harvests
under conditions of unstable growth. Consequently, slower and more unstable
growth during the 1990s could be expected to be accompanied by growing
poverty and inequality. The evidence shows that this is precisely what
happened during the 1990s: The ratio between the income share of the highest
20% and the lowest 20% income groups of the population which was 5.5 in
1986-87, increased to 7.1 in 1996-97. Similarly the percentage of the
population below the poverty line (calorific intake basis) was 17.3% in
1987-88, and increased to 32% in 1999-2000.
Individuals, Institutions and the Economic Crisis
In this series of articles we have traced through
various political regimes, the dynamic interaction between the processes
of deterioration in the institutions of governance on the one hand and
the structure of the economy on the other. The purpose was to understand
the systemic tendency for increasing poverty, loan dependence and slow
The Ayub regime was characterized by denial of political rights to the
people and economic policies that induced acute social and regional economic
disparities. The resultant political tensions exploded into a civil war
and the emergence of independent Bangladesh. We saw how the mechanisms
of rural poverty observable to-day, were rooted in the increased peasant
dependence on the landlord, and asymmetric markets for inputs and outputs
that resulted from a particular form of agricultural growth during the
Ayub period. The analysis also showed how the tendency for the economy's
loan dependence so manifest to-day, may have originated in the policies
of the Ayub regime. The government by providing state subsidies locked
the economy into an industrial structure which was dominated by low value
added industries, incapable of generating adequate foreign exchange for
The structural constraints to fiscal space were exacerbated as successive
governments engaged in financial profligacy, and allocation of state resources
based on considerations of political patronage rather than economic efficiency.
Nationalization of industries during the Z.A. Bhutto period enlarged the
domain of power and patronage for the regime. However the consequent growing
losses of nationalized units laid the basis of subsequent fiscal haemorrhaging
of the government. The sharply rising budget deficits during the Z.A.
Bhutto period were accentuated by a huge increase in expenditures on the
State apparatus as part of his attempt to build a personalized domain
of power within the State structure.
General Zia ul Haq sought to establish dictatorial rule by means of an
obscurantist and retrogressive version of religious fundamentalism. State
resources were used for the first time to foster armed groups of religious
extremists and to finance religious seminaries (madrassas) many of which,
systematically indoctrinated young minds to hate and kill. The politics
of the Zia period therefore laid the basis of the emergence of armed militant
groups in society and sectarian violence which was to undermine the process
of investment and growth as much as the institutions of governance. During
the Zia regime State funds were directed to establishing a theocratic
State instead of urgently needed investment in the maintenance of the
irrigation system and technical training of the human resource base. Consequently,
when the cushion of foreign financial assistance was withdrawn after the
Afghan war, investment and growth declined, budget deficits increased
sharply, and poverty intensified.
The decade of the 1990s was marked by democratically elected leaders seeking
to build authoritarian domains within the State structure and using political
power for personal financial gain. The massive misappropriation of State
funds during this period accentuated the fiscal crisis. The widespread
corruption during this period was an important factor in not only reducing
private sector investment, but also reducing the productivity of capital,
thereby sharply slowing down GDP growth. During this period the structure
of GDP growth also underwent further adverse changes as both capital and
labour productivity fell sharply, together with declining employment elasticities.
A reduction in capital productivity led to slower growth, while reduction
in labour productivity led to falling real wages. As both GDP growth and
real wages fell, poverty tended to increase. Thus bad governance and associated
adverse changes in the structure of the economy, in this period, laid
the basis for a rapid increase in poverty and unemployment.
In Pakistan's history, from the outset, the military as an institution
was relatively more developed than civilian political institutions. Therefore
an abiding feature of Pakistan's pursuit of democracy was contention for
a share of power between the military and civilian politicians. Achieving
and the legitimizing the pre-eminence of a civilian democratic order within
the power structure required that elected governments had to deliver on
three counts: (i) Improve the economic conditions of the majority of the
people. (ii) Provide security of life and rule of law so that citizens
would have a stake in the system. (iii) Strengthen democratic institutions.
The fact that successive elected governments failed to deliver on these
counts, led to a constriction of the space for democracy. Now once again,
the wheel has come full circle: The prospect of an elected government
functioning in the shadow of military power. (This time however military
power has been institutionalized within the political system). Will the
future be different from the past? Unless we learn from history, we are
likely to repeat it.