| Presented by: Rao Aziz Std Id# 2008-1-02-9290 Presented to: Sir M. Ashraf Janjua IoBM| Seminar in Economic Policy Zia Era 1977-88| Table of Contents The reversal of state role under Islamic Capitalization3 Factors helping Zia to prolong his Regime3 Macroeconomic Performance under Zia Era4 Investment and savings4 Agriculture sector Policies5 Industrial Sector5 Price trends6 Soviet Union Invasion Helps Pakistan6 Riba Elimination7 REREGULATION AND LIBERALIZATION7 Devaluation to support Export8 Foreign Remittances8
Balance of Payment9 CRITICISIMS12 Appendix13 ————————————————- ————————————————- ————————————————- ————————————————- ————————————————- ————————————————- ————————————————- ————————————————- Zia ul Haque period 1977-88 The reversal of state role under Islamic Capitalization
The focus of economic policy under Zia regime (1977-88) was an attempt at market- friendly deregulation and liberalization of economy besides, besides promoting healthy relation ship between public and private sector. The main aim of Zia policy is to encourage private sector investment through trade and industrial policies. Economic policies provided additional export incentives, focused on the need of flexible exchange rate management and improve the climate for private sector both in agriculture and industry by removing political uncertainty and reducing the role of state in price fixing.
Factors helping Zia to prolong his Regime There are number of internal and external factors that prolong and benefited Zia regime a. His efforts to Islamize the society b. Soviet union invasion to Afghanistan c. Completion of predecessor project like Terbela, fertilizers and cement plant. d. Record increase in worker remittances e. Privatization Cotton ginning , rice husking and flour mills were denationalized in 1977. the government issued “Transfer of Managed Establishment order” allowing denationalization of units specially in manufacturing area and make it part of policy in fifth five year plan (1978-83).
Although the process of deregulation of markets and production continued over the years so massive that it takes a lot of time to restore but the banking, insurance remained under state control. The establishment order give confidence and faith back to investors and they were also given tax relief and nationalized industry was handed over back to previous owners with proprietary rights and also other regulation like increase in investment and size of industrial unit were removed and this has given a sharp rise in private sector investment which grew by 90% in 1980s as compared to 25% in 1976-77. Yarn production nd export were profitable to private sector but despite supported by large subsidies the benefits to the country was limited because of technology. The regulation made it possible for the industry to have raw cotton for yarn industry below the international levels. Zia government want to sell the share of government hold enterprises but wanted to keep the owner rights with them and theses units were highly over valued and were also the sick units which were making losses and adding in the deficits and they were also over staffed. Another hindrance was the high protection rates enjoyed by the nationalized industry which was 66%in 1980-81.
Macroeconomic Performance under Zia Era The Zia era was characterized by comparative macroeconomic stability and revival in private investment which encourage the industry and agriculture to rise. The agriculture sector which suffered badly in Bhutto’s era started to improvement and rose from 2. 1% to 4% in Zia regime. And this recovery was an important factor in reinforcing overall growth. The manufacturing sector also showed immense growth of 9. 2% in Zia regime as compared to sharp decline in Bhutto’s era to 3. 8% but despite of improvement it was unable to rise to the level of 60’s (13. %). The per capita income which was 1. 3% per annum during Bhutto’s period rose steadily and reaches the mark of 3. 5% during the Zia era. Investment and savings (Annual percentage change) June-July1977-78| GDP(FC)7. 8| Agriculture sector3. 5| Industrial sector9. 5| Of which manufacturing10. 2| Services sector10. 3| Per capita GDP4. 6| 1978-79| 5. 6| 3. 4| 7. 6| 8| 6. 2| 2. 4| 1979-80| 6. 9| 5. 9| 10. 8| 10. 3| 5. 9| 3. 7| 1980-81| 6. 2| 3. 9| 9. 3| 10. 6| 6. 3| 1. 8| 1981-82| 7. 6| 4. 7| 10. 7| 13. 8| 7. 9| 4. 5| 1982-83| 6. 8| 4. 4| 4. 9| 7| 9. 2| 3. 8| 1983-84| 4| -4. | 7. 1| 7. 9| 7. 9| 1. 1| 1984-85| 8. 7| 10. 9| 7. 8| 8. 1| 7. 9| 5. 8| 1985-86| 6. 4| 5. 9| 8. 1| 7. 5| 5. 8| 3. 6| 1986-87| 5. 8| 3. 3| 8. 6| 7. 5| 5. 9| 3. 1| 1987-88| 6. 4| 2. 7| 9. 8| 10| 6. 8| 3. 7| avg| 6. 6| 4| 8. 6| 9. 2| 7. 3| 3. 5| The data reveal that on an annual average basis GTI as a ratio of GNP (mp) is higher (17. 2%) as compared to Bhutto’s (15. 7%) but still extremely low as compared to the developing countries of South East Asia and Far East this boost was mainly because of rose in private sector investment. National savings also increased from 9% to 13. % but level of investment remained relatively low because of continued foreign savings. This was also because during the Zia era the remittances from the worker were high and they added 2 percentage points to the national savings rate. An annual average growth rate of 6. 6% during Zia period was not accompanied by a commensurate rise in investment. It appears that not withstanding the capital intensive steel mill but it was due to efficient use of capital in short and effective projects. Revival of private sector and completion of big project started in Bhutto’s period but start there operation in Zia regime. Agriculture sector Policies
Zia government denationalized the agro base industry including rice mills flour and cotton ginning factories deregulated the sugar and pesticide industry and allowed voluntary procurement of wheat and later on trading were also liberalized the removal of Rice Export corporation of Pakistan and Cotton Export Corporation monopolies facilitated the entry of private sector into the market of agro based commodities. After completion of Terbela Dam the 10 million Acre land become cultivable. The National Agriculture institute development provides more improved and better quality of cotton seeds boosting the cotton crop in 1980s.
Livestock output also increased considerably. The subsidies on fertilizers and pesticides were removed because the prices of agriculture to rise and become more market oriented. Increase in agricultural credit largely addressed the credit need f the farmers. Industrial Sector Price trends The inflation which was in double digit in Bhutto’s era averaging 18% improved to the single digit immediately after Zia takeover and remained around 6% for most of the period except for the three years 1980-82 where it ranges between 12. 4% and 10. 7%. he inflationary gap also narrowed down from 14. 2% to 9. 7% during 1977-88 and the main reason was larger proportions of budget deficits being financed by the non bank borrowing. End of june| CPI| monetary Gr| GDP gr (fc)| inflationary Gap| | | | | | 1977-78| 7. 8| 23| 7. 8| 15. 2| 1978-79| 6. 6| 23. 5| 5. 6| 17. 9| 1979-80| 10. 7| 17. 6| 6. 9| 10. 7| 1980-81| 12. 4| 13. 2| 6. 2| 7| 1981-82| 11. 1| 11. 4| 7. 6| 3. 8| 1982-83| 4. 7| 25. 3| 6. 8| 18. 5| 1983-84| 7. 3| 11. 8| 4| 7. 8| 1984-85| 5. 7| 12. 6| 8. 7| 3. 9| 1985-86| 4. 4| 14. 8| 6. 4| 8. 4| 1986-87| 3. | 13. 7| 5. 8| 7. 9| 1987-88| 6. 3| 12. 3| 6. 4| 5. 9| Average| 7. 3| 16. 3| 6. 6| 9. 7| Soviet Union Invasion Helps Pakistan A number of United States laws, amendments to the Foreign Assistance Act of 1961, applied to Pakistan and its program of nuclear weapons development. The 1976 Symington Amendment stipulated that economic assistance be terminated to any country that imported uranium enrichment technology. The Glenn Amendment of 1977 similarly called for an end to aid to countries that imported reprocessing technology–Pakistan had from France.
United States economic assistance, except for food aid, was terminated under the Symington Amendment in April 1979. In 1985 the Solarz Amendment was added to prohibit aid to countries that attempt to import nuclear commodities from the United States. In the same year, the Pressler Amendment was passed; referring specifically to Pakistan, it said that if that nation possessed a nuclear device, aid would be suspended. Many of these amendments could be waived if the president declared that it was in the national interests of the United States to continue assistance.
The Soviet Union invaded Afghanistan in December 1979, causing a sudden reversal of United States policy. Carter, who had described Pakistan as a “frontline state” in the Cold War, offered US$400 million in military and economic aid to Pakistan– an amount that Zia spurned and contemptuously termed “peanuts. ” When the Ronald Reagan administration took office in January 1981, the level of assistance increased substantially. Presidential waivers for several of the amendments were required. The initial package from the United States was for US$3. billion over six years, equally divided between economic and military assistance. A separate arrangement was made for the purchase of forty F-16 fighter aircraft. In 1986 a follow-on program of assistance over a further period of six years was announced at a total of more than US$4 billion, of which 57 percent was economic aid and the rest military aid. Riba Elimination Islamization of the economy was another policy innovation of the Zia government. In 1977 Zia asked a group of Islamic scholars to recommend measures for an Islamic economic system.
In June 1980, the Zakat and Ushr Ordinance was promulgated. Zakat is a traditional annual levy, usually 2. 5 percent, on wealth to help the needy. Ushr is a 5 percent tax on the produce of land, allowing some deductions for the costs of production, to be paid in cash by the landowner or leaseholder. Ushr replaced the former land tax levied by the provinces. Self-assessment by farmers is checked by local groups if a farmer fails to file or makes a very low estimate. Proceeds of ushr go to zakat committees to help local needy people. REREGULATION AND LIBERALIZATION
Amongst the more important initiatives in pursuit of deregulation and liberalization in this period were an increase in the investment sanction limit; drastic reduction in the list of specified industries; reduction of tariffs on a number of raw materials, intermediate and capital goods; introduction of a three year liberal trade policy and upgrading of an Industrial Incentives Reform Cell (IIRC) into a tariff commission in 1989 to make recommendations on fiscal anomalies and effective protection. A series of measures introduced to deregulate industrial operations in the cement, oil seeds and fertilize industries.
Private investment permitted in cement production and state owned enterprises substantially reduced and cement imports permitted. A similar package of de regulation and reform was adopted for the oil seeds sector and a major divesture programe was initiated by the public ghee corporation. Devaluation to support Export Along with these measures, important steps were taken to liberalize and encourage foreign trade. Prior to 1983, imports were either considered to be “free” or “tied” and goods that were neither of the two lists were banned.
In 1983 this system was changed and a negative list was introduced, where everything not on that list was now importable. Perhaps the most important and far reaching economic decision taken by the government was to remove the fixed peg of the Rupee to Dollar by introducing a managed float of the currency in 1982. As a result between 1982 and 1987-88 the Rupee was devalued by 38. 5% with an average devaluation of 7. 7% per annum. The biggest impact was expected to come in export performance. Conventional wisdom has it that Pakistan’s export performance has been sluggish because of an overvalued exchange rate.
Correcting for the exchange was seen as the most important step in devising an incentive structure geared towards exports. Devaluation was also expected to perform an important export substitutive function. Devaluation will enhance prices of imported capital and intermediate goods. The World Bank, not surprisingly, was particularly happy with the results of the deregulation and liberalization policies of the sixth plan. It calculated that the private sector’s share in total fixed investment increased from 38 percent in FY83 to 42 percent in FY88 and in the manufacturing sector its share in investment rose from 51 percent to 83 percent.
Foreign Remittances One positive development in the aftermath of the oil prices boom was that remittances increased sharply, accelerating from their value of about $250 million in FY73 to peak at about $3 billion in FY83. The steady rise in remittances over this period largely reflected an increase in remittances from the Middle East (Chart 1. 1). Thus, although it caused the import bill to swell, the oil price hike and the resulting Middle East boom also benefited Pakistan over time from increased worker remittances as well as a higher demand for Pakistani exports from the Middle East.
This partially compensated for the loss of East Pakistan’s exports. Balance of Payment The Zia period also marked the beginnings of a move towards greater trade liberalization with the lifting of some bans and other restrictions. Many of the NTBs, which had been imposed following the oil price shocks and foreign exchange scarcity, were removed. The ‘free list’ of imports was enhanced from 438 to 529 items between 1977 and 1983 (Zaidi, 2005). However, owing to the second oil price shock in 1979, which sharply increased imports again, some of the import liberalization was reversed.
This was done by raising the margin requirement for import Letters of Credit (LCs) and constraining the licensing procedures of imports (Husain, 1999). Measures were also taken to try to boost exports, such as export rebates, income tax facilities and concessionary credit for exporters. The above developments led to an increase in both exports and imports from 1977 to 1982. Between FY77 and FY82, exports increased105 percent from about $1. 1 billion to $2. 3 billion and imports increased about 140 percent from $2. 4 billion to $5. 8 billion.
However, with import growth outpacing export growth, the trade deficit widened, raising from an already high 7 percent of GDP to 11. 3 percent of GDP (Table 1. 2). 10 the deteriorating BoPs position was reaching unsustainable proportions and this put pressure on the currency. However, probably because devaluation would prove to be unpopular, the authorities decided to experiment with a more flexible exchange rate regime – in 1982 they abandoned the peg to the dollar which had been in place since 1972 in favor of a managed floating exchange rate system.
The rationale seemed to be that this would allow the overvalued currency to adjust more gradually as opposed to a sudden one-time adjustment. Indeed, after this regime change, the Pakistani Rupee depreciated against the US Dollar and the Japanese Yen – and later after 1985, against the British Pound Sterling as well (Chart 1. 2). The BoPs situation stabilized with the depreciation of the currency together with Pakistan attracting a large inflow of foreign aid after becoming a front line state, following the Soviet invasion of Afghanistan.
The momentum in foreign remittances that had been triggered by the oil boom of the 1970s in the Middle East was also carried forward by the Soviet invasion of Afghanistan, as evidenced by an increase in net private transfers as a fraction of GDP in the early 1980s (Table 1. 2). Despite some moves toward greater trade liberalization during the Zia regime, the World Bank (WB) noted in 1988, that the trade regime “still seems to be biased in favor of import substituting production. Domestic markets are insulated from foreign competition through NTBs and high tariff rates” (World Bank, 1988).
As can be seen from Table 1. 3, import tax incidence by various categories of imports (import duties as a fraction of import values) peaked in FY84 (FY83 for the consumer goods category), with an average incidence of more than 52 percent in FY84. Subsequently though, import tax incidence did fall on balance over the next few years. However, in the 1970s and much of the 1980s when tariff rates were quite high, concessions were granted through Statutory Regulatory Orders (SROs). SROs exempted certain industries and even specific firms from import duties.
Their use meant that although tariff rates were high, the dutiable or full duty component of imports was not as high. But it has been argued that SROs were complex, non-transparent, discriminatory and discretionary (Schuler, 2004). They increased the level of distortions in the economy and quickly became another instrument for rent-seeking. CRITICISIMS Although the growth figures are very impressive there has been a very different picture if we see the productivity growth figures.
The aggregate of total factor productivity is 0. 3 percent per annum which is low as compared to the 5 percent growth in the 1960s. TFP contribution to overall growth during the decade has been low. As much as 82. 3 percent of the overall growth was due to the growth in the capital stock, 14. 5 percent to labor and only 3. 17 percent to TFP growth. There had been very little growth in employment in almost all industries between 1975 and 1986, and that the growth in labor productivity has also fallen in many industries.
Although the wearing apparel industry experienced the greatest increase in employment, it also saw output fall by nearly 19 percent. The decade of 1980s has been a period of relatively high growth in manufacturing value added; the growth in manufacturing employment has remained insignificant. This partly represents more an increase in capital industry than labor absorption during the period of accelerated expansion. The 1977-88 periods is unique in Pakistan’s economic history for exhibiting high output growth without corresponding improvements in the efficiency of factor use in the manufacturing sector.
Much of this growth in output was financed by foreign remittances and aid flows coming into the country. We also saw that policies were not altered even when it was abundantly clear that they were harmful for growth and productivity. In particular the existence of negative ERPs (effective rates of protection) for certain industries, the regulatory regime of the period and the lack of incentives for the value addition in the textile sector were identified as important policy errors. Appendix