Why Pakistan is lagging behind India August 12, 2012Posted by southasiamasala in : Guest authors, Pakistan , trackback
Before the creation of Bangladesh in 1970-71 the then West Pakistan was economically more vibrant than India. There were a number of reasons for this.
It drew resources from the former East Pakistan to sustain its relatively large army. In addition during that period the Army, which even then determined whether it had direct or indirect control over the political apparatus, allowed its entrepreneurs drawn mostly from the Gujarati immigrants, a free reign and they drove economic growth. Fundamental Islam was weak and, muzzled by the army, Pakistan was politically and economically more liberal. This ensured a greater mobility of labour and capital, leading to greater efficiency in their use.
India’s economy, however, was highly regulated by the state. The government decided what should be produced and directed resources for this purpose. Economic efficiency was poor. This was reflected in the loss of competitiveness of Indian textile mills, which became ‘sick’ in the early 1980s. Even in steel production, which was a priority industry, the rate of increase was slow as it was limited to the public sector, and input of imports was difficult and low because foreign exchange was limited.
The loss of Bangladesh (but more so from 1980 onwards), brought economic change. It meant that Pakistan’s army could not be sustained at its then prevailing level. Cuts created dissatisfaction and were difficult to justify politically after its humiliation by India in the 1970 war. Its defence budget had to be bolstered after India’s explosion of a nuclear device in 1974, as Pakistan devoted resources to gain parity with India in nuclear defence technology. A redirection of defence resources from the army resulted in an alienation of the army that eventually led to the overthrow of Zulfikar Ali Bhutto’s Pakistan Peoples’ Party (PPP), the elected government.
Had economic growth lifted it would have been easier to raise defence outlays without reducing those for the army. But Bhutto embarked on a nationalisation program. He stymied Pakistan’s economic dynamism by attacking its successful entrepreneurs who slowed investment, leading to a fall in investment and growth rates. Bhutto strengthened the power of the unions, which benefitted a very small segment of the labour aristocracy but created rigidities in the labour market.
Bhutto made Islam the official religion, renamed Pakistan the Islamic Republic of Pakistan and began the process of a slow increase in the power of fundamental Islam. After his overthrow and execution, Pakistan was under the army dictator General Zia, who took several steps in order to counter the popular PPP. These included strengthening the fundamental wing of Islam, which slowed improvements in female literacy as well female involvement in the labour market, and thus reduced market mobility. He armed the Urdu-speaking migrants from India who had settled in Pakistan’s commercial capital, Karachi, part of Sind Province, the stronghold of the PPP. Known as the Muhajirs, the migrants were encouraged to attack the PPP that, under Bhutto, had committed atrocities against them. A civil war broke out in Karachi, as a consequence. In such a situation, investment began to dry up in Karachi, adversely affecting Pakistan’s overall growth rate. As economic opportunities became weaker for young entrants to the labour market, some of them turned to fundamental Islam.
After the Soviet Union invaded Afghanistan, the combination of USA and Pakistan support for the Taliban led to fundamental Islam taking deeper roots in the Pushtoon areas. Pakistan also set-up training camps for Kashmiries and encouraged them to infiltrate and create mayhem in India.
The legacy of both Taliban and Kashmiri Mujahadeen has created terror and instability in Pakistan. Putting that genie back in the bottle is difficult, but is necessary, if Pakistan is to regain its economic dynamism.
To illustrate India’s economic dynamism, it grew out of changes in economic policies after 1980, but more so after 1990. There is ample literature on this. The salient points are the relaxation of controls over private enterprise, the encouragement of IT under Rajeev Gandhi, the connectivity provided by the laying of cables connecting India with the USA, the growth of IT dynamic firms in the Silicon Valley and their links and outsourcing to India. An important point, often missed, is the impact of the 27% reservation for Other Backward Classes (OBCs) in public sector, introduced in 1990 by V.P. Singh’s Government. This reduced the opportunities for the upper castes in the public sector and they had to seek opportunities in the private sector. Opposition to the private sector was reduced as the opinion-making upper castes saw opportunities in its expansion. Since they were better educated and skilled, it also gave a productivity boost to the private sector. Public sector productivity also improved, partly because of increased competition, but mainly because sharply increased wages after 1997 meant that employment fell in the public sector. There was a lift in savings, partly because of this but mainly because of the sharply falling birth rate after 1990. Increased saving and investment ratios have lifted growth rates.
For Pakistan to get back to a higher growth trajectory government action is required. It should vigorously curb the jihadi outfits operating inside Pakistan in order to promote security inside the country, and the PPP has to work co-operatively with the Muhajirs in Karachi and Sindh generally to improve security and lift investment in this important state. The shift towards fundamental Islam, with the related worsening of female status must be reversed.
The army budget should be curbed so that more resources are available for education, to gain improvements in human capital. The status of women and their participation in education and the labour market will improve its flexibility and improve competitiveness in labour-intensive industries such as textiles and clothing. It will also lead to a sharper reduction in the birth rate, thus lifting the savings and therefore investment rate. In a more rapidly growing economy, with a curbed army budget, more resources will become available to invest in infrastructure, reducing the cost of electricity and transport to business and education.
Thus a circle of improvements in internal security, in education, including in female education, a falling birth rate, higher saving and investment rates – and consequent higher economic growth rates and improvements in infrastructure should get Pakistan on to a higher growth trajectory.