POLITICAL INSTABILITY AND ECONOMIC GROWTH IN PAKISTAN

Insistent demands of higher standards of living have put pressures on governments throughout the world for faster rates of economic growth. In any economy political stability is a key element towards economic growth and therefore the two exist together. Economic growth is basically an increase in the productive potential of an economy either due to an increase in resources or due to increase in the productivity of resources. It is shown by an outward shift in the production possibility curve (PPC). This leads to a higher standard of living in the country. A country is said to be politically stable when it is operated by politicians elected by the citizens of that country through votes. Generally a country without a democratic government is said to be politically instable.

Overview of Political Instability in Pakistan

Pakistan has always struggled with democracy since its independence in 1947. During a checkered fifty-seven years of political life, there have been many changes in the government, ranging from democracy to dictatorships. The people of Pakistan have seen dismissals of democratically elected governments and the abrogation of the constitution. This has been a persistent problem, especially in the post-1988 period after democracy was restored in the country following eleven years of martial law under General Zia-ul-Haq. Pakistan has undergone these political crises because of two factors, both related to an ongoing tug-of-war between politicians and the military over ultimate control of the government. On one hand, politicians have always blamed the military for its extraconstitutional role in politics. On the other hand, the military has blamed politicians for their misgovernance and corruption, justifying their martial rule as a means to rectify the situation. It must be noted here that most of the civilian governments in Pakistan were dismissed on charges of corruption. There have also been confrontations between successive presidents and prime ministers over control of the government. The constitution of the country was amended many times, sometimes by the prime minister and at other times by the president, in order to shift the spectrum of power towards themselves. The most infamous example is the controversial 8th amendment introduced by General Zia-ul-Haq in 1985. When Zia-ul-Haq assumed power as military dictator, he amended the constitution of 1973, which declares Pakistan a parliamentary democracy in which the president would only be a titular head of state. While Zia-ul-Haq tried to establish his authority over the prime minister through the amendment. Nawaz Sharif discarded the 8th amendment when he was elected prime

minister in 1997. He introduced the 13th amendment, through which he divested the president of his powers to arbitrarily dismiss the prime minister. After the dismissal of Nawaz Sharifs government in October 1999, the military government of General Musharraf again amended the constitution under the Legal Framework Order (LFO), restoring the power of the president to dismiss the prime minister. The armys role in politics was further embedded under the LFO with the establishment of the National Security Council (NSC), the highest decision making body in the country. The NSC, headed by the president, with the prime minister and the three armed services chiefs as members, was supposed to make the most important internal and external decisions in the country during times of peace and war. General Musharraf retained power as the president under the controversial referendum held in July 2002. Parliamentary elections followed in October 2002, in which a democratic government under the Pakistan Muslim League Quaid-i-Azam (PML-Q) was established. After the elections, the oppositioncomprised of the Pakistan Peoples Party Parliamentarians (PPPP), Pakistan Muslim League-Nawaz (PML-N) and Muthida Mujalisa-Amal (MMA)gave stiff resistance to General Musharraf, charging that he had assumed power for himself. Finally, on December 29, 2003, the parliament resolved the constitutional issue with the passage of the 17th amendment in the constitution. Under the amendment, the parliament has validated all the actions taken by General Musharraf since October 1999 and has elected him as president until 2008. The 17th amendment has, once again, made the president powerful as compared to the prime minister, giving the former the powers to dismiss the parliament and prime minister arbitrarily. General Musharraf retired from the army and was elected as president by the previous parliament after which the parliament was dismissed and elections were held. The table below gives an overview of the governments in Pakistan. The table gives a fair idea about the number of times Pakistan has had a military rule. 1953 - 1955 1956 - 1958 1958 - 1969 1969 - 1971 1971 - 1977 1977 - 1988 1988 - 1990 1990 - 1993 1993 - 1996 1997 - 1999 1999 - to date Mohammad Ali Bogra Chaudary Mohammad Ali General Mohammad Ayub Khan General Yahya Khan Zulfiqar Ali Bhutto General Zia- ul- Haq Benazir Bhutto (PPP) Nawaz Sharif (Muslim League) Benazir Bhutto (PPP) Nawaz Sharif (Muslim League) General Pervaiz Musharaf

Economic overview
The factor that determines the future of the country is its economy. Pakistan has been struggling on the economic front since 1990. It has been unable to achieve macroeconomic stability due to a variety of factors. All of the usual indicators of macroeconomic stability have shown poor performance in the recent past, making the country dependent upon external financial resources. Thus, Pakistan is spending a large amount of its resources for non-development purposes. The nation accumulated most of its debt during the 1990s, compelling the country to allocate a major portion of its budget to debt service. The total external debt of Pakistan (including foreign exchange liabilities) more than doubled from less than $10 billion in 1980 to $20 billion in 1990. It subsequently more than doubled again to $42 billion in May 1998. The 1990s is considered a lost decade in the economic history of Pakistan, because major damage was done to the countrys economic development during this period. The trade balance remained in deficit, with foreign direct investment on the decline in the country as a result of the policies pursued by the government. Institutions of governance failed in delivering goods and services to people, with poverty reaching the alarming level of 32 percent. PAKISTAN, is now a rapidly developing nation, has a diverse economy that include textiles, chemicals, food processing, agriculture and other industries. The economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with neighboring India. However, IMF-approved government policies, bolstered by foreign investment and renewed access to global markets, have generated solid macroeconomic recovery in the last few years. Substantial macroeconomic reforms since 2000, most notably at privatizing the banking sector have helped the economy. However much of this success owes to the forgein assistance given to Pakistan as an ally in the war on terrorism.

Economy after 9/11

In 2000, the government made significant macroeconomic reforms: Privatizing Pakistan's state-subsidized utilities, reforming the banking sector, instituting a world-class anti-money laundering law, cracking down on piracy of intellectual property, and moving to quickly resolving investor disputes. although After September 11, 2001, and Pakistan's proclaimed commitment to fighting terror, many international sanctions, particularly those imposed by the United States, were lifted. Pakistan's economic prospects began to increase significantly due to unprecedented inflows of foreign assistance at the end of 2001. Economic sanctions were withdrawn, grant

assistance of about $1 billion was received from the U.S. and another $1 billion of bilateral debt was waived off. But the most favorable development was that workers remittances, which used to be channeled through informal sources, began flowing through the official inter-bank foreign exchange market. This diversion of worker remittances to the official economy certainly helped build up the reserves to an exceptional level, and contributed to exchange rate stability and its appreciation besides providing liquidity to the money market. In the absence of September 11 it would have taken longer to reach these targets. Foreign exchange reserves and exports grew to record levels after a sharp decline. The International Monetary Fund lauded Pakistan for its commitment in meeting lender requirements for a $1.3 billion IMF Poverty Reduction and Growth Facility loan, which it completed in 2004, forgoing the final permitted tranche. The Government of Pakistan has been successful in issuing sovereign bonds, and has issued $600 million in Islamic bonds, putting Pakistan back on the investment map. However until after elections Pakistan's search for additional foreign direct investment has been hampered by concerns about the security situation, domestic and regional political uncertainties, and questions about judicial transparency. On the other hand our exports, which were suppressed after September 11, would have been much higher than what they are today. Buyers stopped visiting Pakistan, insurance premiums went sky high, freight rates to and from Pakistan escalated sharply.The domestic security situation worsened as terrorists retaliated against the action taken by the government. Thus, the costs incurred by Pakistan for its participation in the war. U.S. assistance has played a key role in moving Pakistan's economy from the brink of collapse to setting record high levels of foreign reserves and exports, dramatically lowering levels of solid debt. Also, despite the earthquake in 2005, GDP growth remained strong at 6.6% in fiscal year 2005/2006 and the figure increased to 7% in 2007. In 2002, the United States led Paris Club efforts to reschedule Pakistan's debt on generous terms, and in April 2003 the United States reduced Pakistan's bilateral official debt by $1 billion. In 2004, approximately $500 million more in bilateral debt was granted. Low levels of spending in the social services and high population growth have contributed to persistent poverty and unequal income distribution. The trends of resources being devoted to socioeconomic development and infrastructure projects have been improving since 2002, although expenditures remain below global averages. Pakistan's extreme poverty and underdevelopment are key concerns, especially in rural areas.

Economic growth: an analysis

Today Pakistan is no doubt one of the fastest growing economies of the South Asian region, accelerating at 7 percent in real GDP terms. In larger Asia, Pakistan stands with the likes of Singapore, Honk Kong and China which are the contemporary economic giants and have followed a growth pattern much similar to that of Pakistan this year. In 2005, the World Bank named Pakistan the top reformer in its region and in the top 10 reformers globally. However before being very confident and optimistic about this figure, we should understand that the growth figure of 7 percent does not mean much in itself. It is important to know the actual economic story behind this figure. The key questions that need to be answered are that whether the benefits of growth are distributed fairly among different strata of the society. The true picture of the economy would then be clear. Pakistan is witnessing steep inflationary trends this fiscal year. Inflation in year 2007 was about 8.8%. Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 before easing to 8.9% in 2006. The central bank is pursuing tighter monetary policy while trying to preserve growth. Foreign exchange reserves are bolstered by steady worker remittances, but a growing current account deficit being about a negative trade balance of 15.2 billion dollars- driven by a widening trade gap as import growth outstrips export expansion - could draw down reserves and dampen GDP growth in the medium term. As far as interest rates are concerned, the lending rate has been on a constant rise as compared to the deposit rate, which is relatively stagnant. The interest rate spread between lending rate and deposit rate has picked up since July2004. This is not so good news for the common man in Pakistan especially when one looks at the food inflation which is constantly increasing. The sluggish performance of deposit rates amid steep rise in CPI means that consumer savings are being eroded. The major brunt has again been born by small deposit holders who comprise mainly of senior citizens or lower and middle income groups. Taking into account current inflation rates, it seems Pakistani economy is entrapped in a financial bubble and excess money is circulating in the hands of the few urban elite. This has artificially boosted the overall demand in the economy enabling the country to follow a higher than expected growth pattern. In short 7 percent growth doesnt tell much about the plight of the common man in Pakistan. It has not only failed to trickle down to the poor, but it might have worsen the plight of the common Pakistani as we have seen in case of the growing financial sector and a consequent price hike

Comparison of GDP between military and democratic governments

Pakistan Economy has been just like a see-saw up till now where growth rates are going up and down due to inconsistency in policies and political instability. According to the economic study of Pakistan, the GNP growth during the Ayub Khans era, 1958-1969 was 6.7%. This is far more positive comparing it to the previous decade where GNP grew 3.1 %. Considering the Zulfiqar Ali Bhuttos time, 1971-1977 the growth rate fell down and the GNP grew at the rate of 4.4%. Again there came a good rise and economy progressed in his time during 1977-1988. GNP growth during his years was 6.4 %. From 1988 to 1996 Benazir Bhutto and Nawaz Sharif twice became Prime Ministers and there average growth was 4.3% which shows a fall again. Under President Musharraf Pakistans economy rose again and presently Pakistans economic growth is advancing at 7% in FY07. As you can see, under military, there has been high economic growth. Ayub Khans era was the golden time in economic progress and there is no denying that fact. Ayub years was in no small part due to the sharp stepping up of the rate of investment, especially public investment in the 1950's. This means the money that the government was investing in the economy. This included electricity generation, communication, ports and the building of dams and barrages, the lifeline of an agricultural country. Bhutto is considered to be anti-business, he his responsible for the setback to economy through large level nationalization. East Pakistan Separation was also one of the main reasons of slowing down of growth. Zia period got good results due to large investments. These investments owed to the American assistance provided. Growth in the period since 1988 suffered again due to lack of focus on governance and increase in corruption.

Why have growth levels been high in military governments?

First, the elected governments, except that of Mr. Z.A. Bhutto, had short survival rates and none of them could complete their term of office. During 1947-1958, we witnessed seven changes in the office of the prime minister. The same trend was repeated in the 1988-99 period when four elected and four caretaker prime ministers were installed in quick succession. This lack of continuity in policies and management and the uncertainty created by the ever-shifting leadership at the top affected investment adversely in the two periods of 1950s and 1990s and a reversal of high growth observed in the 1960s and 1980s. Second, , the Bhutto government which was the only democratic government that completed its full term and served the country for almost six years reversed the predominant paradigm of liberal economy and nationalized banks, insurance, large scale manufacturing industries, educational institutions, etc. This caused a serious setback to an economy that was advancing rapidly and whose manufactured exports in 1969 exceeded the combined exports of Thailand, Indonesia, Malaysia and the Philippines. The aftermath of nationalization had its debilitating effects for a long period of time. Thirdly, as military governments are not constraint by any of the difficulties faced by democratic governments they are able to carry out the many structural reforms that are

difficult for the democratic leadership. Examples such as Korea under Park, Chile under Pinochet, Indonesia under Suharto, Singapore under Lee Kwan Yew have been able to implement reforms in a better way. These countries today are operating under the democratic governments. Likewise Pakistan has been able to perform in a Better manner under dictators. Fourthly, till now there has been no democratic leader in Pakistan who has solely worked for the country. All in power try to fulfill there own interests and do not take any politically unpopular decisions - which may be beneficial for the country- as compared with authoritarian regimes. However this is not an argument in favor military regimes, its just an analysis made. Democracy, which requires consensus and compromise, may slow down the pace of change and cause setbacks and reversals from the path of reforms but there is greater legitimacy, broader support and better prospects of sustainability under a democratic form of government as it is built upon participation and reconciliation of differences among various interest groups. Another important reason has been that the democratic governments in Pakistan do not continue the Policies of the previous governments. As a result the resources used in these uncompleted projects are wasted because usually the projects of the previous governments are abandoned as a political revenge without even looking at the fact that if complete these projects could have helped in the development of the economy.

Conclusion
Elections have been finally held on 18th February. The people of Pakistan have given their votes in favor of democracy and are now expecting a lot from the new government. After eight years of dictatorship Pakistan finally has the government of their choice. The new elected parties have given their manifestos and now they must work to fulfill their promises. It would not be an easy task for them to lessen the problems such as inflation, unemployment and terrorism etc. However the effect of the decrease of one would in effect decrease the other problems. As the whole nation is looking forward to new reforms. They should not abandon the development projects of the previous government instead should take them a step further. We as a group think that it is important that this government should complete its tenure of five years so that a foundation of democracy is laid. As in democracy new governments bring in new mandates therefore they discard all the policies of the previous governments. It is important that the new government adopts the positive policies of the previous governments and complete the projects started by them so that the resources already in use are no wasted. It is important that the political parties forget their internal disputes and work together for the betterment of Pakistan.