Instability & its impact on economy

Posted on 2013-09-24 13:05:15

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Salman Azad Khan

Pakistan is among few countries of the world where political instability badly
damaged the economic growth despite tremendous resources. This paper focuses on
the interplay of political decisions and national economic growth in Pakistan. The
primary aim of the study is to give a discursive historical analysis of political
instability in Pakistan and how it worsened the economic growth. The study finds
that the economic mismanagement is the result of lack of vision, will and capability
of the political leadership in Pakistan.
Another conclusion this study draws that the military regimes performed better than
civilian governments. The study conclude that nature of Pakistani federation and its
tug of war for power with federating units lead to uneven development in Pakistan
which messed up the commercial cities of Pakistan because of population influx.
The relationship between politics and economy remained a favorite subject of
economists. Pakistans history reveals strong correlation between the two. Although
with the changing pattern of politics and governments, the relationship never
remained on the same pace. The topic of this research focuses on the assumption
that political instability deeply causes the uneven economic growth. The causes and
impact of the interplay of politics in economy in Pakistan are briefly discussed.
The politics in Pakistan has dominated economic decision-making in the country. In
sixty five years of history, Pakistan experienced military and civil rules. However,
during the civil rule, military remained a major stakeholder in the decision-making.
Pakistans army has stake in the economic development of the country. As Siddiqa
(2000) argues the Pakistan military as a major stakeholder in the economy has
gradually moved from the traditional paradigm of claiming the states resources
from the national budget to a situation where it has built stakes in all segments of
the economy such as agriculture, service and manufacturing industries. Pakistan
army controls about 23% assets of the corporate sector with two foundations, the
Fauji Foundation and the Army Welfare Trust, representing two of the largest
conglomerates in the economy (Siddiqa, 2000). Military has far greater power to
influence in the political and economic decision making. This seems interesting and
ironic at the same time that Pakistans economy always improved during military
rule. Pakistans economic growth remained unprecedented during Ayub Khan and
Pervaiz Mushurrafs period. Pakistans manufacturing, industrial and agricultural
sectors performed robustly and data show that the fiscal gap has been reduced
during military rule. Mega projects and infrastructural development and capital
investment touched highest during military regimes. Another interesting observation
is that the people of Pakistan always welcomed military interventions in the history
of Pakistan. Probably they had seen some remedy from the gross mismanagement
of economy, bad governance and rampant corruption of civil governments. Pakistan
Army has an instrumental role in the olitical process and its continuous intervention
in the politics of Pakistan made it an inevitable institution of the state (Jalal, 1990).
The nature of Pakistani society is also one of the major determinants of politico-
economic trends. Elite, middle, lower middle and socially excluded classes in
Pakistan are divided on sharp lines among themselves. Zaidi (1999) views middle
class as change agent in Pakistan. He is of the opinion that the middle-class
revolution underway in Pakistan has taken place side by side with the failure of
governance. Middle class attributed this failure to the elite class of Pakistan.
In this elite class the representative of feudal and industrialist class form the nexus
that developed close bond with Pakistan army. Middle class in Pakistan does have
sense of economic agenda but they could not find way to the corridors of power in
Pakistan (Zaidi, 1999). These classes are further confined into ethnic and bradari
levels. Pakistans ethnic diversity proved to be detrimental to national economy. The
data show that states efficiently operating institutions eliminate the negative effects
of ethnic diversity, but it did not happen in Pakistan.
The reason is that the federating units have turned into ethnic-centered entities in
Pakistan conflicting with each other. Social classes found ethnic diversity a useful
tool for promoting their self-interests.
In a multi-ethnic society, the perception of exclusion or non-participation in the
decision-making process leads to suspicion, lack of trust, and non-cooperation on
the part of the minority ethnic groups, and this perception is promoted by the elite
belonging to the various ethnic groups for their own self-interest. This is exactly
what happened in Pakistan during the periods of military. Have a look on economic
side of Pakistan. A closer analysis, though, reveals that the roles of the market and
state that are essential elements for the success of market-friendly strategy of
development leading to equity and sustainability have in fact been reversed in the
case of Pakistan. Large scale private entrepreneurs in Pakistan have been protected
from the forces of market competition and have been provided ample rent-seeking
opportunities by government policies. Number of studies has documented the
evidence of high rates of effective protection, negative value added at world prices,
and high domestic resources costs.
Another observation about Pakistans economy is that the development was not
holistic. There is big gap between developed and under developed areas. Besides
that, the economic managers of the country did not pay attention to the pattern of
growth which was as important as was the speed of growth. It is proven elsewhere
that the sectorial and regional pattern of development strategies have a great
influence on income distribution and poverty reduction. If public policies favor labor-
intensive activities such as labor-intensive exports, small-scale industries, and
agriculture, and assist the development of neglected, highly-populated regions,
poverty is reduced faster than otherwise (Khan, 1999). Poverty reduction is
correlated with agricultural growth rates. Institutions responsible for economic
growth take balance initiative between urban economy and ruler economy that
ensures greater equality in wealth, human capital, and political power.
Close scrutiny of PRSP papers clearly indicate political influence on economic
decision-making specially in reducing the poverty. In Pakistan, as discussed above,
the major stakeholders of economy in Pakistan are Army, industrialists and feudal,
who are also parliamentarians, exercise stakes more than the state itself. Political
economy, therefore, provides a framework of analysis to the state and civil society.
The perspective of political economy of state (particularly, of developing neo-
colonies) is predicated upon two critical and interrelated themes, the problem of
development and state structure. The debate between two schools of thoughts that
is Marxist and liberal corporatism offers historical and political justification for their
preferred solutions. Pakistan by and large is the case of liberal corporatism. A
misdirected Marxist model adopted in certain sectors of economy and state structure
during Zulfiqar Ali Bhuttos period that utterly failed.
Liberal corporatism is an attractive alternative to the pluralistic model that clearly
suggests the role and importance of the state.But Pakistan is different case because
of political instability that badly affects the line and length of the economy of this
country.
This research is about to explore the impact of political instability on Pakistans
economy.
The recent increase in power and gas tariffs is likely to put an additional burden
on the industrial sector and squeeze the gross margins of industries. The local manufacturers
forecast more industrial closures and job losses over the next one year

By Mian Aqeeluddin

Before the global recession took place, there was considerable amount of investment in
Pakistan as it had a liberal investment policy. However, nowadays the investment scenario
has drastically changed with Pakistan losing its attraction to foreign, as well as domestic
investors, due to the rising costs of doing business. There are a number of factors due to
which investors hesitate to invest in Pakistan, global recession being one of them. The other
main reasons consist of political instability, deteriorating law and order situation, high
interest rates, and frequent power and gas outages. The recent increase in power and gas
tariffs is likely to put an additional burden on the countrys industrial sector and squeeze the
gross margins of industries. The local manufacturers forecast more job losses over the next
one year.

In Pakistan lack of capital is a major obstacle in the way of establishment of heavy industries.
The Pakistani society is mostly consumer oriented so the savings rate is hardly 13 to 14 per
cent, which is very low. On the other hand, banks follow stern conditions and tiresome
procedures while advancing loans to consumers. Mostly bank loans are granted to affluent
persons while the smaller businessmen are dejected in a number of ways, for example, by
charging higher interest rates. Pakistan is perhaps one of the few countries in the Asian region
where the interest rates are very high. The country lags behind its neighbours in economic
development and exports due to high interest rates and energy crisis. As compared to the 12.5
per cent interest rate in Pakistan, Indias current interest rate is at 4.7 per cent, Japan 0.1 per
cent and China 5.31 per cent, thus one can clearly see the difference.

The State Bank of Pakistan (SBP)s high policy rate has not only added to the rising business
costs, but has also enlarged the size of non- performing loans (NPS) to almost Rs13,448
million (as recorded on 30th October 2009). The effect of the high interest rates resulted in
losses for a number of industrial units.

Terrorism is yet another reason causing huge losses to the industrialised and trading sectors.
The army is attacking the northwestern strongholds of the militants, who have responded with
suicide bombings in towns and cities. The marble industry in the Frontier province and the
tribal areas is severely hit by the ongoing militancy. All Pakistan Marble Mining Processing
Industry and Exporters Association (APMMPIEA) revealed that 300 marble units have
closed down and 250 more are on the verge of closure. The industry is said to have shed over
50,000 jobs already.

The rising political obstacles in the country are having a negative impact on the economy and
stock business. President Asif Ali Zardari is under criticism from opposition parties after the
Supreme Court struck down a reprieve that had protected the increasingly unpopular leader
and several of his political allies from corruption charges. The ambiguity regarding
corruption cases against some sitting ministers, advisors and members of parliament has
created uncertainty among the businessmen. Pakistan witnessed many obstacles since the
February 18th polls that took place in the year 2008, including restoration of deposed
Supreme Court judges and the frequent clashes that occurred between the coalition
government and former President Pervez Musharraf. After Musharrafs exit in August 2008,
the differences between Pakistan Peoples Party (PPP) and Pakistan Muslim League-Nawaz
(PML-N), the two major political parties of the nation widened.

Under the IMF demand, the government decided to increase the power tariff by 18 per cent in
two phases this year, i.e. 12 per cent in January and six per cent in April. The move will bring
the already poor performing industries to suffer more. The high tariff and excessive power
shortages have enhanced the cost of doing business and badly affected the industrial
production and trading activities in the country. The countrys export oriented industry is
unable to ensure timely deliveries to its foreign buyers. The loss of export orders has now
become a routine, and a large number of importers from US and European Union countries
have switched their orders to other regional countries.

Cost of doing business in Pakistan has been increased further by poor infrastructure.
Transport depends on CNG and oil; both prices have recently risen to a higher level. Pakistan
is producing about 20 per cent of its oil requirement. But due to failing efforts to find new
reserves and its lavish consumption, this percentage seems to fall in the coming years.

The trivial viewpoint that a higher tax rate will generate more tax revenue holds not much
logic in the age of diversified business environment. Prevailing business tax rate of 35 per
cent is excessively high. A high tax rate essentially gives a way to tax evasion and contracts
business activities in the country. Tax exemption provided to the elite section of the society is
unfair and needs to be removed or scaled down.

In Pakistan, practices such as red tapism and the long awaited departmental procedures are
big barriers in doing business. Licenses, NICs, gas, electricity and water connections etc
cannot be achieved easily. The investors have to face the insulting behaviour of the
bureaucrats. Red-Tapism, corruption and malpractices have been successful in preventing
easy entry of foreign investors, and those succeeding, their effective participation in
economic activities. In fact, retaining investors has never been observed as an area deserving
attention of the concerned departments officials. Many hurdles have been linked with five
broad groups ranging from purchasing of land and site development to financial and
executive regulations, along with taxation related matters. Investors, who are able to start up
their businesses in less than eighteen months time period are considered lucky and termed
as enterprising or having the right connections. But, in any case they also have to live up
with administrative procedures taking up about fifteen per cent of their revenues.

Our country is being governed for the last 10 years by bankers with supreme authority and
they take measures which are only beneficial to the banking industry. The banking spread in
the country (highest in the world) is 7.8 per cent and needs to be cut down by two per cent
atleast. This will save us from the control of financial institutions like the IMF, World Bank
and the Asian Development Bank (ADB). The interest rate should be brought down to a
single digit. The gross domestic product (GDP) growth has declined due to an economic
slowdown following the tight monetary policy. The high interest rates is the main reason
behind the fall in the countrys industrial output. The downfall in auto, textile, electronic,
petroleum, and other key sectors adversely affected the performance of large scale
manufacturing (LSM) in the country. We have no competitive edge, as our exporters are
facing a lot of difficulties due to high cost of production. Cutting interest rates to a single
digit will produce multiple benefits for the economy, as it will lower the cost of doing
business, give a strong boost to business and industrial activities, provide easy credit and
loaning facilities to trade and industry, promote better investment and exports, and generate
more tax revenue for the government. Sadly, studies highlighting the major problems and
suggesting corrective measures have been falling on deaf ears