Musharraf Era 1999 2008

Musharraf Era: 1999-2008

By Shahid Memon
15623 – MBA (R)
Seminar in Economic Policies

Contents
Musharraf Era: 1999-2008 1
Introduction 3
ECONOMIC INDICATORS 1999-2008 4
Economic Growth 4
Investment 4
Unemployment & Poverty 5
Inflation 5
Deficit and Debt 5
External Sector 5
Stock Market 5
SOCIAL SECTOR 6
Education 6
Higher Education 6
Health 6
DEVELOPMENT STRATEGIES: KEY FEATURES 7
Macro stability: Delicately Balanced? 7
The New Development Strategy 8
(i) A more active role of the public sector in economic development while accepting the dominance of the private sector as the main engine of economic growth 8
(ii) The mega projects for infrastructure development 8
(iii) Emphasis on higher education 9
(v) Investing in the development of new technologies: Developing a knowledge 9 economy 9
(vi) Devolution 10
Will it Deliver? 10
Measuring Success against Key Performance Indicators 11
Conclusions 12

Introduction

The turnaround in the macro fundamentals of the Pakistan economy by the Musharraf government, reflected in the restoration of the fiscal balance, external credibility and the rekindling of economic growth, has been the focus of much attention, even though more recently some of the macro variables are coming under renewed pressure. The team of economic managers that have overseen these developments have been credited with this turnaround and even though they would be reluctant to admit, an element of luck, post 9/11, certainly helped tilt the balance. Attracting somewhat less attention, but with the potential of having even a greater impact on Pakistan’s future economic development has been some important changes initiated in the country’s overall development strategy. These changes are reflected in the restoration of the size of the public sector development plan, after a sharp decline in the 1990s1 and some distinct shifts in the pattern of public expenditure. These changes must be seen together with the dominant role assigned to the private sector in this strategy as the main engine of economic development. These changes, if implemented and sustained as planned, it is being claimed have the potential of moving the economy on to a high growth trajectory and transforming its structure closer to a middle-income semi-industrialized economy over the next decade.

Improvements in the macro economy have clearly contributed to bringing about these changes in the development strategy including by creating the fiscal space to finance higher levels of public sector development expenditures. Macro stability has also restored donor confidence which together with the post 9/11 debt relief and increase in remittances has resulted in larger external resource inflows. There is, however, an importance difference. While the set of policy measures adopted for restoring the macroeconomic fundamentals followed to a significant degree the standard IMF-World Bank deflationary package, the new development strategy appears to be very much “home brewed”.

What are the main elements of what future economic historians may well dub as the “Musharraf Development Strategy”3? Also, more importantly what are the chances of its success? Even answering the first question is not straightforward as it is not always clear cut when and to what extent one set of policy measures give way to another and even when there is a distinct change of direction to what extent is it really “new”. More difficult is the answer to the second question of whether a strategy has been successful, not least, as there are many possible indicators of success. The economic impact of a strategy, especially the long gestation infrastructure projects, may be felt much later, even in many cases after the government which had started them has long gone. Also, and more importantly, though the strategy may deliver in terms of somewhat narrow economic indicators, it may still well be rejected by the people who may judge it by another set of broader socio-economic indicators, as was as seen at the end of the Ayub period in the sixties.

With these qualifications the approach taken in the paper is as follows. First we spell out what are seen to be the distinguishing features of this strategy in relation to the more immediate past. In terms of answering the question will it deliver, the approach taken is to first judge the strategy on its own terms i.e. the goals it has set for itself including identifying if are there contradictions in the achievement of these different goals. The second is to judge its performance in terms of some key indicators which are now generally accepted in judging development performance, namely, the impact economic growth has had on poverty, distribution of income and wealth, real wages, and generation of new job opportunities. Clearly this list is far from exhaustive and clear-cut or recent data may not be available in all cases. But it does reflect some of the key indicators by which the people of Pakistan have historically judged past governments.

The Situation on 12th October 1999, when Mr. Musharraf took over was that Pakistan faced:
Economic bankruptcy.
International isolation.
The Country was referred to as a ‘failed state’.
Political instability and chequered political history of previous governments. Opposition never allowed an elected government to complete term and derailed the process / institutions.
ECONOMIC INDICATORS 1999-2008

Economic Growth

Salvaged a near bankrupt economy and transformed it into the four fastest growing economies in the Asian region along with China, India and Vietnam.
Pakistan’s economy grew at an average rate of 7.0 percent per annum.
The performance of large-scale manufacturing was unparalleled in the country’s history. It grew at an average rate of 11 percent per annum.
Services sector grew at an average rate of 6.0 percent per annum.
Because of strong economic policies, Goldman Sachs a global investment bank, included Pakistan in the category of new emerging market (Next – 11) destined to play a major role in the world economic setting.
Goldman Sachs extended their coverage from BRICs (Brazil, Russia, India and China) to eleven emerging economic powers including Pakistan, Korea, Mexico, Vietnam, Turkey etc.
Pakistan’s per capita income doubled (from $ 526 in 1999-2000 to $1085 in 2007-08). In other words, the average income of Pakistani people more than doubled.
The size of the economy more than doubled (from $74 billion in 1999-2000 to $170 billion in 2007-08) as well.

Investment

Succeeded in turning around the economy with the help of Pakistan’s private sector. Constant engagement built the confidence of the private sector on economic management.
Investment as a result rose from 17.4 percent to 22.9 percent of GDP – an increase of 5.5percent of GDP in seven/eight years is unparalleled in recent times in Pakistan.
Foreign Investment surged from $0.5 billion to $8.5 billion – a 17 fold increase in 8 years which reflected the growing confidence of foreign investors in Pakistan.

Unemployment & Poverty

The government succeeded in creating 13.5 million new jobs and accordingly reduced the unemployment rate from 8.3 percent to 5.2 percent.
Strong economic growth succeeded not only in creating new jobs but reducing poverty. That is, poverty reduced to one-half. The number of people living below the poverty declined from 34.5 percent in 2000-01 to 17.2 percent in 2007/08.
Income inequality also started narrowing after 2005-06.

Inflation

Inflation averaged 5.5 percent during 2000-2007.

Deficit and Debt

Tax collection by the Federal Board of Revenue (FBR) tripled – increasing from Rs 308 billion to Rs.1025 billion.
Overall budget deficit as percentage of GDP reduced to almost one half. Budget deficit averaged over 7.0 percent of GDP during the 1980s and 1990s but was reduced to an average of 4.0 percent of GDP, thus reflecting financial discipline.
The country’s debt burden reduced to one – half. National (Public) debt was over 100 percent of GDP by end of the 1990s but reduced to 55 percent by 2007.
In the words of the IMF “The large and sustained decline in the external debt to –GDP –ratio was one of Pakistan’s most remarkable macroeconomic achievements of recent years”.
Debt servicing used to consume 64 percent total revenue in 1998-99. By maintaining financial discipline and reducing budget deficit, we succeeded in bringing it down to 25 percent only. In other words, the resources saved from debt servicing were diverted towards development program.

External Sector

Both exports and imports grew at higher double –digit-levels.
Foreign exchange reserves increased from $500 million to over $16 billion – a sixteen fold increase in reserves.
Exchange rate remained stable as a result of the build up of foreign exchange reserves.
Remittances continued to grow from less than $1.0 billion to over $6.0 billion.
Pakistan’s international credit rating continued to improve from selective default to B+.
Pakistan was taken out of the IMF program in December 2004.
We re-entered the international bond and equity markets by floating Eurobonds and Global Depository Receipts (GDR). We also succeeded in floating a 30 year Eurobond which showed the confidence of the global investors in Pakistan.
We pursued a successful privatization program for state-owned enterprises (SOEs).

Stock Market

Karachi Stock Exchange emerged as one of the best stock exchange, in emerging economies. The Karachi Stock Exchange Index surged more than 11 times – rising from 1189 in October, 1999 to 13998 in November 2007. This represented the growing confidence of the private sector (both domestic and foreign) on economic management.

SOCIAL SECTOR

Education

Overall Literacy Rate increased from 45% to 55% during 2000-01 to 2006-07.
Male literacy rate increased from 58% to 67%.
Female literacy rate increased from 32% to 42%.
Gross enrolment at primary level (5-9 years) increased from 72% to 91% – an increase of 19 percentage points.

Higher Education

The state of higher education in Pakistan was in a pathetic condition. We had 48 universities; the number of Ph.Ds and engineers per million population was only 112 –about one – third of the minimum standards prescribed by UNESCO. We had only 2600 science Ph.Ds and the country was producing barely 50-60 per annum.
A multi – pronged strategy, including the establishment of Higher Education Commission (HEC) was launched.
We provided substantial resources to higher education. The development budget for higher education increased from Rs. 500 million to Rs. 14 billion in 2006-07.
Number of universities increased to 130 in 2006-07 from 48 in 1998-99.
Number of students enrolled in universities increased from 276 thousands to 948 thousands – more than three fold increase in enrolment in universities.
Number of Ph.Ds produced by Pakistani universities increased sharply to 624 from as low as 50 – 60 per annum.
There were 3800 students sent abroad for higher education (Ph.D) in foreign universities, of which, 303 have completed their degrees.
3508 students enrolled in Ph.D Programs in Pakistani universities, of which 336 have completed their programs.

Health

Various Health indicators also improved. For example, children aged 12-23 months immunized increased from 53% in 2000-01 to 76% in 2006-07.
Life expectancy increased from 63 years in 2000 to 66.5 years by 2008.
Infant mortality rate declined from 83.3 per 1000 infants in 2000 to 65 by 2008.
Social Sector and Poverty – Related Expenditures Increased from Rs. 167 billion (3.8% of GDP) to Rs. 500 billion (5.7 % of GDP).

DEVELOPMENT STRATEGIES: KEY FEATURES

Let us spell out the six distinguishing features of this new development strategy which to varying but still significant degree represents a shift from the strategy followed in the recent past:

First, while accepting the primacy of the private sector, is the reestablishment and recognition of the role of the government in significantly influencing and financing, through both internal and external funding, the country’s overall development strategy. This is reflected in both the drawing up of a medium and long term development framework and an almost doubling of the annual public sector development programme (PSDP) from around Rs. 115 billion in FY 2001 to Rs. 260 billion in FY 2006. As envisaged in the Medium Term Development Framework (MTDF) the size of the PSDP is to reach Rs. 605 billion in FY 2010.

Second, the launching of a number of mega infrastructure projects with a distinct thrust in the harnessing, storing and efficient delivery of much needed water resources for the agriculture sector, building needed energy sources, developing new ports (Gwadar), highways (eg. Makran coastal highway) and the development of backward regions (Baluchistan).

Third, is a major shift towards investing public sector resources in higher education especially in sciences and engineering subjects and encouraging private sector participation in the growth of this sector.

Fourth, is building the capacity, by developing needed human resources and supporting infrastructure, to acquire access to cutting edge new technologies especially information and communications technology and even space technology to bridge the technology-gap which had opened up between Pakistan and many of the fast growing developing economies (including India).

Fifth, to shift and diversify the production base of the national economy towards higher value-added goods especially in the manufacturing sector.

Sixth, is the decentralization and devolution of decision making and use of public sector funds increasingly to the local level?

Macro stability: Delicately Balanced?

From a situation of impeding default on foreign loans and an unsustainable fiscal and balance of payments deficit only a few years earlier, Pakistan had by FY 2005 come out of the debt trap, the balance of payments had turned surplus, and the fiscal deficit reduced to around 3 per cent of GDP from well over 5 per cent in FY 2000. In addition average interest rates fell from 14.6 per cent in FY 2000 to 6.2 per cent in FY 2005. Most important of all real GDP growth accelerated to over 8 per cent in FY 2005 after falling to an all-time low in FY 2001 to 1.8 per cent from around 4.2 per cent in FY1999. While growth in FY 2006 had declined to nearer 6.5 per cent it was still high as compared to the 1990s.

A four-fold increase in remittances post 9/11 from around US $ 1 billion in FY 2001 to around US $ 4 billion between FY 2002 and FY 2005 and a further increase in FY 2006 to US $4.6 billion has clearly played a part in this macro turnaround. The former State Bank Governor, Ishrat Hussain has, while acknowledging its contribution does make the valid point that “while the favourable external environment has definitely helped and reinforced the thrust of the economic policies and reforms, its impact would have been short lived and transitory in the absence of the reforms and policies and improvements in governance that have been undertaken during the last five and a half years”.
The New Development Strategy

(i) A more active role of the public sector in economic development while accepting the dominance of the private sector as the main engine of economic growth

The MTDF 2005-10 spells out the nuts and bolts of the new development strategy but does not sufficiently capture or highlight the important changes in relation to the more recent past. One such important change is a more active role of the public sector within a development planning framework in influencing the growth path of the economy though it should not as mentioned earlier deter from the predominant role the private sector is assigned in this strategy – captured in the often repeated slogan of “deregulation, liberalization and privatization”.13 Growth and confidence of the private sector has been built-up by speeding up the process of privatization especially in the banking sector, improving the regulatory framework and creating an enabling environment to encourage domestic and foreign investment, and a more liberal trade regime for imports of machinery and other inputs.

As to a more active role of the state in economic development this is now regaining ground after the “retreat” from the so called “Washington Consensus” which propagated that the role of the state should be limited to only facilitating market forces and leaving development almost solely to the private sector. The Sach’s Report (2005) on Investing in Development – A Practical Plan to Achieve the Millennium Development Goals strongly argues for developing countries to invest in essential infrastructure development if they are to be in a position to take advantage of opportunities of trade and investment opening up in the global economy.

(ii) The mega projects for infrastructure development

As the Government itself claims “economic growth through massive infrastructure projects has been one of the pillars of the Government economic strategy”. Starting in FY 2002 a number of mega infrastructure projects were started covering hydropower (Ghazi Brotha Hydropower project), dam and canals ( Gomal, Mirani, rising of Mangla, Sabakzai,, Sutpara, first phase of Greater Thal and kachhi and Rainee canals), ports (Gwader) and highways to ensure regional connectivity (Coastal Highway). Many of these projects will be completed during 2005-10.
The rational to develop the country’s water resources was always very clear given the pressing needs of the agricultural economy and the sharp drop over the years in the per capita availability of water. The real challenge now is to build a consensus on the much needed large water reservoirs that are so urgently needed. Some funds have been earmarked in the MTDF 2005-10 to initiate work on the mega dams and necessary financing if consensus is reached on them is expected to be raised through donor funding, banking channels or government guarantees.

Similarly a highway network being developed which will open up neglected and backward regions and would link up Pakistan with the Central Asian economies including through the building of the Gwader port. The extent of returns on these investments would depend to a large measure on trends in growth and stability in the region. Private foreign investment flowing into Gwader will have to compete with the other Gulf states. But the latter are now becoming more costly in terms of services they offer, somewhat similar to the transition Singapore, the model on which they are built, went through about twenty years ago. If Gwader can offer storage and other services at much cheaper rates then its Gulf competitors it will well justify the investment made in economic terms without deterring from its strategic significance.

(iii) Emphasis on higher education

There has been an unfortunate neglect of higher education throughout the last fifty years. The marked deterioration in the structure of governance and delivery of public services are a clear reflection of this neglect. As the Lakha Task Force report on Higher Education stated, “Pakistan’s higher education, above 12 class, is proving unable to provide the skills necessary, in the quantities necessary, to achieve the dual objectives of nation building and global competitiveness”.

The increased emphasis on higher education is reflected in the increase in resources allocated to the Higher Education Commission for the development of higher education in the MTDF 2005-10. The resources earmarked are to increase from Rs. 11.7 billion in FY 2006 to Rs. 28 billion in FY 2010, amounting to Rs. 95 billion over the five year period. In addition Rs. 40 billion is expected to come from the private sector.

(v) Investing in the development of new technologies: Developing a knowledge economy On the need to invest in the development of new technologies there is again a compelling case Pakistan, for example, missed out in the first phase of the global software boom of which India took full advantage earning as much as $ 10 billion in exports annually over the last decade. To develop a competitive ICT sector requires the supply of relevant skills, which the education system with its new emphasis on science and technology should now hopefully be able to do, together with proper pricing of ICT inputs and outputs and the development of up-to-date infrastructure for which resources are again being made available. The economy as a whole and especially manufacturing and the financial sector can benefit in terms of both efficiency and productivity from the use of ICT. Pakistan’s exports from software and related services are still negligible (around US $ 700 million expected in FY 2007) but a major jump over the next few years is foreseen. If this does not take place there would be need to carefully review the current strategy.

The thrust in ICT development must be seen as part of a concerted effort to convert Pakistan into a knowledge economy which would increases its capacity to compete in the global economy by raising the knowledge and competitiveness of its agriculture, manufacturing and services sector. There is a significant overall increase in resources allocated in the MTDF 2005-10 for science and technology development, technical and vocational education and for investment in research and development.

(vi) Devolution

On devolution the changes that have been introduced in the structure of local government are indeed far reaching with much greater powers being given to elected local leaders that were earlier exercised by the civil bureaucracy. The expressed aim of the Government is to increase citizen participation in local decision-making, strengthen accountability and thereby improving service delivery. These changes it is hoped would accelerate efforts at poverty reduction.

It is still too early to judge the effectiveness of this change and whether it has led to improvements in the delivery of basic services at the local level. A feeling often expressed, but not backed with any real analysis, is that this new system has not yet taken any firm roots and that the on-going “pangs of change” is adversely affecting local governance and creating hardship for ordinary people. Yet, there is much to commend in the devolution plan including the voice it gives to women and other marginalized groups in local decision making. But it will take time to take root and here the key would be to be realistic rather than dogmatic, learning from what works and what does not, while not losing sight of the overall objective which is to ensure a radical power shift towards local self-government.

Will it Deliver?

On its own terms the success of the development strategy to a large measure will depend on its effective implementation especially putting in place the large infrastructure projects and then completing them in time and in a cost effective manner. That said what are the areas of weaknesses which may threaten its sustainability and derail it?

Let us first turn to what appear to be some of the inherent contradictions in the goals of the strategy.

The first contradiction which strikes one is the emphasis in the strategy of investing in mega infrastructure long gestation projects to be implemented mainly by the central government and of the on-going attempts to shift power and resource use to the local level. In the MTDF 2005-10 this dichotomy emerges clearly when one sees the very low levels of development expenditure, less than three per cent of the total, being allocated to local governments.

There would also appear to be contradiction, at least in the short and even medium term, in allocating a large bulk of the resources to large long gestation infrastructure projects which in most cases tend to be capital-intensive and the more immediate aim of generating employment and reducing poverty. Again this issue needs more careful analysis but it is one which needs to be addressed especially by examining the flexibility in the MTDF to be able to divert resources to more employment-intensive projects if poverty trends and labour market pressures so dictate.

There is also the question of the absorptive capacity of the economy to undertake, over broadly the same time span, a very large number of mega infrastructure projects both in terms of existing availability of skills and management capacity. Again this would need careful analysis but some of the project launched such as the linking of Gwadar through a highway network is already falling far behind. Also as mentioned earlier the success of Gwadar would depend on its capacity to be able to be competitive in terms of terminal and other services offered and the early signs are that this could be a formidable task.

Measuring Success against Key Performance Indicators

Let us start with the macro management of the economy as it has had a critical impact on poverty, job generation and availability of services especially for the poor.

The earlier squeeze on the economy during 1999 to around 2003 led to an increase in poverty levels and a rise in unemployment. More prudent macroeconomic management and asking for more leeway from the IMF could have resulted in less hardship during this period. If there was a possibility of getting better terms from the IMF and moving out of the IMF programme earlier than was done, as some have argued, then this would erode some of the shine from the achievement of the country’s financial managers credited with the macro turnaround of the economy.

The other shortcoming in macroeconomic management which could have a far reaching socio-political impact was that in jump starting the economy through an expansionary monetary policy, the economic and financial managers went far beyond what prudent economic policies would have dictated and this resulted in double digit inflation. This inflation, which has hit hard both low and middle income families, has generated a lot of resentment and which has clearly dampened enthusiasm for some of the real economic achievements of the regime amongst the large bulk of the population.

Another point which has generated a lot of controversy is the impact of economic growth on poverty levels during this period. According to the official figures there has been a decline from 34.5 per cent in FY 2001 to 23.9 per cent in FY 2005.The World Bank has supported the claim of a decline although using different price deflators they suggest that the decline is around 5 percentage points i.e. to 29.2 per cent in FY 2005. It has also been said that in viewing this decline it should be kept in mind that FY 2001 was a drought year and FY 2005 the country had a bumper harvest.

Concern is also being expressed, although this is not backed with hard evidence, that there is emerging concentration of economic power and monopoly profits are being reaped in certain sectors (cement, sugar, automobiles) of the economy through possible collusion between the major producers. The State Bank needs to carefully monitor that where large industrial houses control directly both banks and industrial interests this linkage is not being misused in terms of use of finances from their own banks and for keeping out potential users of these funds. The Monopoly Control Authority (now renamed the Competition Development Authority) also needs to play a more active role in ensuring against and penalizing price collusion as seems to have been in evidence recently in price increases of cement and sugar.

Conclusions

The people of Pakistan must be the ultimate judge of whether the Musharraf development strategy has delivered or not and they will have a chance this election year, 2007, to give their verdict. The main element of this strategy and tried to identify its strength, contradictions and weaknesses. On the positives, to use an often repeated term these days in the economic debate, the revival of economic growth, growing confidence of the private sector in attracting larger amounts of both domestic and foreign investment and the development of a more strategic and effective policy framework to guide public sector investment programme, clearly stand out. Economic growth has also arrested the increasing trend in unemployment with unemployment falling but has not yet translated itself into increase in real wages for most workers or improved conditions of work.

On the negatives has been the high rate of inflation badly hurting lower and lower middle income groups. The lack of impact of economic growth is significantly reducing poverty. Again, not a clear cut negative, but an area of concern is that economic growth has been mainly consumption-led benefiting mainly the middle- and upper income groups and the distribution of income has marginally worsened. The consumption led nature of the boom has also raised questions on its sustainability. Again there is concern, although no hard studies are available, of concentration in the ownership of economic assets and collusion and other restrictive practices leading to shortages and resulting high prices of selected goods where production is concentrated including cement and sugar.