PHASE III - BHUTTO 1972-77

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PHASE III - BHUTTO1972-77
Lecture 5

• Hamna Ahmed

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BHUTTOS EXPERIMENT WITH SOCIALISM

• The early 1970s were the most traumatic and
  turbulent years of Pakistans political and
  economic history.
• The political impasse resulted in the
  ill-considered military action in East Pakistan
  in March ?Pakistans military defeat, and the
  creation of an independent state of Bangladesh in
  December 1971.
• In West Pakistan Bhutto was brought into power by
  Pakistan's military and was President till 1977.
• Glaring Feature of Bhuttos era
• Large scale nationalization of industry,
  insurance and banking, extending the state
  control of the modern sector significantly.
• Took full control of countrys educational system
  by nationalizing private educational
  establishments.

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BHUTTOS EXPERIMENT WITH SOCIALISM

• Major Issues
• Dealing with economic consequences of the
  separation of East Pakistan
• The large and unexpected oil shocks in 1973
• Poor agricultural performance in the same year
  due to adverse weather conditions, both draught
  and floods which caused the economic growth to
  slow down, inflation accelerated and
  macroeconomic imbalances widened.
• The large scale inflows of foreign capital and
  remittances after 1973 cushioned the impact of
  the steep rise in the oil import bill.

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Macroeconomic Management

• During the five years of Bhutto's government
  1973-77
• Average annual growth rate of economy 4.9
• This followed the virtual stagnation of GDP at
  1.7 annual growth in the transition years
  1970-2.
• With the deteriorating economic and political
  relations with East Pakistan and eventual breakup
  of the country, the slow down of growth was
  inevitable.

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Foreign Trade Adjustment

• The separation of East Pakistan did not lead to a
  major decline in Pakistans exports and there
  were three principal reasons for this
• 1. Exports of primary products from West
  Pakistan, such as cotton and rice which
  constitute of about half of the inter-wing trade
  in the 60s were sold below the international
  prices to East Pakistan because of national
  policies which depressed the effective real
  exchange rate.
• 2. The real devaluation of the exchange rate in
  May 1972 facilitated the shifts to international
  markets.
• 3. The boom in the international economy and
  commodity markets in 1972-3 increased the demand
  for Pakistans exports.

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Pattern of growth

• The major sources of growth during the period
  were
• Construction,
• Public administration,
• Defense
• Service sector.
• Rapid growth in investment ? The construction
  boom
• Between 1972-73 and 1976-77
• Real investment expanded by 50
• Rate of investment as per GDP increased from less
  than 13 to over 19 over the four year period.
• Boom in worker remittances ? Expansion of the
  service sector

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Oil price shocks

• External payment position worsened due to rise of
  international oil prices at the end of 1973
  because of OPEC)
• At the peak of oil prices in 1972, Pakistans oil
  import bill was over 6 of GDP.
• For Pakistan official grants and loans from
  Middle Eastern oil exporting countries also
  increased, so the financing of the enlarged
  deficit did not pose major problems.

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External debt problem

• Pakistan had to face rising debt servicing burden
  of the existing debt in the 70s.
• As political crises began in 1971 and as the
  economy stumbled, Pakistan found itself unable to
  meet debt service obligations.
• After separation of East Pakistan 1971, debt
  crises deepened as the issues relating to
  Pakistan's debt liability as distinct from that
  of Bangladeshs needed to be resolved.
• The seriousness of the problem can be judged from
  the fact that the debt service payments due in
  1971-2 would have absorbed over 40 of Pakistans
  foreign exchange earnings during that year.
• The fresh assistance from abroad relatively
  neutralized the effect of oil increases.

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Foreign assistance

• Western industrial nations and multilateral banks
  resumed new assistance on substantial scale in
  1974-5.
• This combined with assistance from OPEC countries
  resulted in foreign assistance commitments and
  disbursements reaching the record of average
  level over US 1.2 bill annually during the years
  1974-5 to 1976-8.
• Aid disbursements during mid 1970s were at a
  level far above that reached during the Third
  Year Plan even after allowing for international
  inflation.
• Large foreign assistance also meant that the
  immediate impact of the oil shock on the balance
  of payments of the economy was greatly neutralized

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Budget deficits

• Government deficits which had increased in 1970-2
  due to difficult economic and political
  conditions and military operations in East
  Pakistan showed further explosive growth during
  the Bhutto years.
• The budget deficit averaged over 8 of GDP
  compare with fiscal deficits of 2-3 of GDP in
  the 50s and 4-5 in the 60s.
• Government began to borrow on large scale for
  current expenditures.
• The high rising burden of defense expenditure was
  a root cause of fiscal imbalance.
• The decision to increase defense expenditure
  following the separation of East Pakistan was an
  important political decision made for the
  demoralized Pakistan army

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Tax policy

• The government was not able to use the tax policy
  as an effective instrument of resource
  mobilization.
• Initially there was quantum jump in corporate tax
  collections.
• Profits of nationalized enterprises fell off
  rather quickly as inefficiencies crept in and
  growth slowed down.
• Collection from incomes and corporate tax during
  the 70s did not exceed 1 of GDP.
• The essential inelasticity of tax system remained
  intact with its heavy dependence on indirect
  taxes and especially certain duties.

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Inflationary Pressure

• The growing fiscal deficit, combined with
  imported inflation resulting from higher
  international oil prices, had serious
  inflationary consequences.
• The devaluation of May 1972 from Rs.4.76 per
  dollar, to Rs.11 per US dollar also contributed
  to price pressures,
• On the economic front, the rapid rise in price
  level quickly dissipated any gains from exchange
  rate adjustments and reduced the competitiveness
  of exports in absence of further devaluation

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Energy Subsidy

• It was the lack of suitable price adjustment in
  energy, which did the most harm in economic
  terms, through direct subsidies from the budget
  for energy
• Between 1973 and 1976, import cost of petroleum
  had increased by 300.
• Gas prices were kept low to promote the use of an
  indigenous but unfortunately scarce source of
  energy.
• As a result of subsidy on energy prices, energy
  consumption growth remained high, incentives for
  increased production especially for oil and gas
  were not strong, and dependence on imported
  energy remained high.
• In 1970 energy consumption expanded 30 faster
  than growth in GNP with obvious adverse
  consequences for the balance of payments.
• Reduced income from gas and electricity sales
  reduced the capability of WAPDA, KESC and Sui Gas
  to finance expansion from internal resource

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Wheat Subsidy

• In line with the slogan roti, kapra aur makan, a
  wheat subsidy was given throughout the 1970s The
  wheat subsidy at 1.6 of GDP was at its highest
  level in 1978-79
• The wheat procurement price was increased only
  gradually to around Rs.1 per kilo in 1975-6 from
  Rs.0.5 per kilo in 1969-70.
• The efforts to keep wheat prices relatively low
  provided strong incentives for raw cotton.
• The ratio of cotton to wheat prices generally was
  far more favorable during the 70s than in 60s.
• In order to compensate farmers for wheat prices,
  which were well below international prices
  through out the 70s, the government continued to
  provide large direct subsidies on fertilizers and
  pesticides and equipment for plant protection.

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Wheat Subsidy

• Increase in fertilizer subsidies in the mid 70s
  was the result of both rising fertilizer imports
  and exceptionally high international prices of
  fertilizers.
• Producers prices were kept below international
  level after allowing for reasonable efforts to
  mitigate large fluctuations this triggered the
  need to maintain input prices at low level.
• The burden of both direct and indirect subsidies
  was felt ultimately on the budget and since the
  large budgetary deficits were financed during
  70s at the margin by borrowing from banking
  system, the consumer paid the price through a
  higher level of domestic inflation.

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Extending the Role of the State

• The structural reforms undertaken during the
  Bhutto period further enlarged the considerable
  role of the state in the economy.
• Public control of industry expanded considerably
  and banking and insurance totally nationalized,
  but there was also a massive expansion in public
  investment in infrastructure.
• By the end of the Bhutto period, the public
  sector accounted for more than 70 of the
  expenditure on capital formation.

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Public Investments

• The extension of the role of the public sector
  was not confined to nationalization and increased
  public sector investment in industry.
• There was a massive increase in other areas of
  public investment as the total public sector
  development spending increased from 4.7 of GDP
  in 1971-72 to 11.7 of GDP in 1976-77.
• The share of public investment in gross domestic
  fixed capital formation had grown from 49 in
  1969-70 to nearly 70 in 1976-77.
• A number of factors contributed to the increase
  in public investment apart from investment in
  industry, including the steel mill.

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Public Investments

• A number of factors contributed to the increase
  in public investment apart from investment in
  industry, including the steel mill.
• Expenditure on Tar Bella Dam remained sizeable
  because of technical problems and partly because
  of the decision to increase the hydro power
  generation capacity of the dam.
• About 10 of the development spending was on
  Tarbella Dam and other Indus Basin works.
• The government increased spending on agriculture
  and on infrastructure on power, roads, education
  and health.
• An important motivation in quickening the pace of
  public investment was to spread the benefits to
  the people and to the less developed provinces

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Nationalization

• The government took over the management and
  control of thirty-one industrial units in January
  1972 in ten basic industry groups including iron
  and steel, heavy engineering, motor vehicles,
  heavy chemicals and cement.
• In March 1972, the government over took the
  management and control of thirty-two life
  insurance companies.
• Cotton export and cooking oil industries were
  nationalized during 1973.
• The Pakistani banks were not nationalized till
  1974.

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Nationalization

• The final wave of nationalization during the
  Bhutto period came in July 1976 when government
  unexpectedly took over about three thousand
  cotton ginning factories, rice and flour mills
  with a total turnover of Rs.14 billion and
  employing 3,000 persons.
• The nationalization of heavy industries,
  insurance and banking were part of the relatively
  well thought out actions to curb the power of 22
  families,
• Whereas the decision to nationalize cotton export
  trade, edible oil industry and agro processing
  units were largely ad hoc, responding either to
  economic or political pressures.
• The nationalization of thirty-one units in the
  industrial sector in January 1972 affected less
  than 20 of the value added of the large
  scale-manufacturing sector.

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Labor Policy

• Comprehensive labor policy announced in February
  1972
• measures to improve the income and the bargaining
  position of labor.
• procedures for speedy and just settlement of
  disputes, a fair share in profits and
  participation in the management of industry,
  bounces, and better housing, health and education
  facilities.
• This extended the benefits of reforms to another
  1.2 mill workers but elicited a strong negative
  reaction from the large number of small
  businesses which became a subject to a whole new
  set of regulations.
• The new labor policy added about 12 to the cost
  of labor and thus met resistance even by the
  managers of state enterprises.
• Labor policy combined with uncertainty about the
  attitude of the government towards the private
  sector acted as a strong disincentive to further
  investment in large-scale industry in the private
  sector

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Social Services - Education

• New educational policy- March 1972,
• Outlined an ambitious program of educational
  development including
• Free and universal education up to class VIII,
• Strengthening of technical education
• An educational program for women in the rural
  areas.
• The immediate focus was the nationalization of
  private educational institutions.
• Take over of private educational institutions
  adversely affected the development of basic
  education as well as the quality of education.

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Social Services - Education

• Only about one third of the education
  expenditures were directed at the primary level.
• Total government expenditures on education
  increased from Rs.0.8 million in 1971-2 to Rs.2.8
  million in 1976-7 which represented an increase
  in real terms of around 50 over the period.
• Female education at the primary level did
  relatively well in the Bhuttos period as females
  accounted for 36 of growth in the primary
  school enrollment and 55 of growth in teachers
  during 1972-7.

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Social Services - Health

• Health policy - 1972
• Extension of health facilities to rural areas
• Expansion of medical education
• Shift to the production of generic drugs to avoid
  the soaring prices of brand named medicines.
• The central piece of the scheme was the Basic
  Health Unit, which was to serve between 8000 and
  15000 people as a sub unit of a larger rural
  health center.
• In northern areas of Pakistan people were trained
  as health guards who were to provide basic
  medical facilities.
• As a proportion of GDP the growth in health
  sector was from 0.4 in 1971-2 to 0.8 in 1976-7.
• Number of basic health units increased from 249
  in 1971 to 786 in 1977 and the number of rural
  health centers increased from 87 to 256 over the
  period and 1900 health guards were trained.

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Reaching the poor

• Food, clothing and shelter for the poor were a
  key slogan of the founders of the PPP and it was
  this platform which had brought Bhutto to power.
• Large parts of Bhuttos economic and social
  program labor policy, educational reform, sharp
  expansion in public development spending, credit
  policies for small farmers and businessmen were
  aimed at improving the lots of the poor.
• While there was a defined reduction in absolute
  poverty after 1971-72 a good deal of it was
  concentrated in the period after 1976.
• Between 1976-79 worker remittances, a major
  source of poverty reduction increased from US
  562 million to US 1749 million.
• Slow economic growth, high level of inflation and
  not very effective social policies and spending
  frustrated distribution goals even though they
  were pursued quite aggressively.