Macro economic policies and

reforms of
ZULFIQAR ALI BHUTTO (1971-1977)

INTRODUCTION

In-equal distribution of wealth under Ayub

reason behind success of Bhutto

Socialist Ideology and emphasis on removal

the inequalities and grievances of the
urban/rural poor

Huge support of poor and low income class

Believed in State-led growth

REFORMS
A series of reforms were introduced to achieve the objectives as
given in partys manifesto:

Land reforms
Labor reforms
Industrial & corporate reforms
Economic reforms order
Banking reforms
Health reforms
Law reforms
Civil service reforms

PPP MANIFESTO IN 1967:

Our religion is Islam and democracy is our policy
Roti, Kapra and Makaan for everyone in the country (Basic necessity)
Nationalization of direct public related companies

LAND REFORMS
Land reforms were introduced to:

Break unfair concentration of wealth,

Reduce income disparities,
Increase production, and
Reduce unemployment

According to Bhutto, to destroy the feudal

landowners was a national necessity;
We will not allow a few individuals to hold
sway over enormous tracts of land.

LAND REFORMS- main features

o The individual holdings were restricted to 150 acres
of irrigated and 300 acres of un-irrigated land
o Orchards, livestock and game farms were no longer
exempted
o Land resumed from landowners under 1959 reforms
would not receive any compensation, and this land
was to be distributed free to landless tenants
o Landowners were allowed to retain an additional 50
acres above the ceiling if they invested in tractors
and tube wells

LAND REFORMS- main features

o All those peasants who had acquired land under
the 1959 reforms and had their dues outstanding,
had their dues being written of
o The loophole of defining land ownership by the
individual rather than the family was retained
o Agricultural development bank of Pakistan( ADBP)
became symptomatic of injustice and unequal
treatment
o Large direct subsides on fertilizers, pesticides and
equipment to small farmers were given
o Reform was violated due to leakage in
implementation & breaching the law by influential
land lords

LAND REFORMSoutcomes
The Bhutto reforms sufered from the same irregularities in
their implementation as the 1959 land reforms
The area resumed under the 1959 reforms was 2.8 million
acres, which is more than double the area under the 1972
reforms which was around 1.25 million acres.
Only 50,548 persons benefited from the redistribution of
308,390 acres during 1972-8.
Only 1% of the landless tenants and small owners benefited
by these measures.
Made little value to move towards Social Justice because
both in conception & implementation, these were dictated by
political motives of the party in power.

LAND REFORMS-discrepancies
HOLDING CONCEALED
Land records in Pakistan are maintained village wised
and do not reveal ownership extending to more than
one village. Concealment of parts of holdings in more
than one village, district or province is, therefore, not
difficult.
FAVORITISM
Gross favoritism was shown by former minister to a
number of persons in high positions through devious
ways ranging from acts having some semblance of a
lawful order to down right arbitrary orders with no
justification, factual or implied, in law

LAND REFORMS-discrepancies
LAW CIRCUMVENTED
The owners also tried their own to circumvent the law. One
clear device adopted by some influential owners was to first
surrender the excess land in their possession without demur
and then manipulate to have it allotted in the name of their
own relations, friends or servants misrepresenting them as
tenants
and thus continue to enjoy its possession and
produce.
FORGERIES
Attempts were made by some of the land owners at the time
of filling their ownership returns to tamper with the revenue
records by showing in them gifts to heirs with retrospective
efects or other fictitious transactions

LABOR REFORMS
Labor reforms were introduced by the
Government in February 1972
It guaranteed to workers:
Speedy and just settlement of disputes
Fair share in profits
Participation in management of industry
Bonuses
Better Housing , Health and Medical
facilities
Labor laws applicable to organization of
10 employees extended to the
enterprise employing 5 persons

LABOR REFORMS main features

Union
Power
was
increased
with
the
establishment of work councils and special
labor courts for settlement of Industrial
disputes.
Workers lot was to be improved by increasing
Profit-sharing Arrangements in larger industries
from 2 to 4 percent.
Employers were also called on to provide cheap
Housing and Education to matriculation level
for at least one child of every worker.
The state also held out the promise of Old Age
Pensions and Insurance Against Injury.

LABOR REFORMS- consequences

These reforms provided relief to labor but
production didnt increase.
Due to the reforms workers indulged in a series of
strikes and lock-in which hit production in the
poorly managed newly nationalized heavy industries.
Labor could not digest the newly imposed labor
laws.
The erosion of business confidence hit
investment which declined across industrial sector
leading to rising unemployment.
The new labor policy led to indiscipline and
militancy, which hurt the development of modern
industry.

INDUSTRIAL & CORPORATE

REFORMS
Ten basic industries were immediately taken
by the Government.
Industries include:
a)
b)
c)
d)
e)
f)
g)
h)
i)

Iron & steel

Basic metal industries
Heavy engineering
Heavy electrical industries
Petro-chemical industries
Cement industries
Public utilities & power generation
Transmission and distribution
Gas & oil refineries

ECONOMIC REFORMS
ORDER

Promulgated in Jan 1972 removed the BoD

& managing Agencies of 20 big industries.
Later 11 industrial units were also added
To manage and control the taken over
units, Board of Industrial Management was
constituted, which implemented the policy
directives of the Government and had
successfully put these industries on an
even keel.

BANKING REFORMS
The primary aim was to subject the
commercial banks to a elaborate system
of social control.
They aimed at bringing about equitable
distribution of bank credit and also ensure
greater social accountability
National Credit Consultative Committee
was formed which formulated Rs. 1,560m
bank credit plan for the private sector

HEALTH REFORMS
The most neglected sector
No health scheme could succeed because the
common man did not have the means to meet the
cost of drugs
To achieve this goal Drug act, 1972, was enacted
which prohibited the manufacture and import of
any drugs under brand names shift to generic
drugs to avoid soaring prices of brand named
medicines
The migration of doctors and nurses accelerated
the decline in the physician population, which
adversely influenced efectiveness of health
expenditure.

LAW REFORMS
Mr. Zulfiqar Ali Bhutto announced the
separation of the judiciary from the
executives
Under these reforms the legal procedures
had been simplified, rights and duties
have been clearly defined and criminal
litigation made more liberal which meet
the long felt needs and cherished desires
of the people.

CIVIL SERVICE REFORMS

Bhutto specifically targeted the powerful and
privileged Civil Service of Pakistan (CSP) and
introduced measures of Administrative Reform
with the declared purpose of limiting the power
of the bureaucracy.
The 1973 reforms included:

Unification of grading structure,

Abolition of classes among servants,
promotions, job evaluation,
Introduction of private sector individuals
in specified fields, and
A Common Training Program (CTP) for all
federal services.

CIVIL SERVICE REFORMS- outcomes

These reforms had positive and negative
impact on the civil services of Pakistan.
The negative impact is the
implementation of economic reforms without
relying and involving bureaucrats caused civil
service least interested in giving its best to
the regime. Hence, there always remain a
gulf between Bhuttos vision and actual
outcome.
The positive impact was the supremacy of
the elected institution over the un-elected
institution- the army and the bureaucracy

CIVIL SERVICE REFORMS

Over all the negative impact looms larger:

Violation of merit,
Lateral entry
Dismissal of civil servants without due legal
process,
Unwarranted political interference in
postings and transfers.

SOCIAL REFORMS
Bhuttos socialistic reforms extended to
the areas of education and health, with
great implications for masses.
Bhutto nationalized all the educational
institutions which adversely afected the
quality of education.
There was hardly any increase in the
proportion of national resources allocated
to education.

Macro economic policies and

economic indicators

ECONOMIC GROWTH
During the five year period, economic growth as
measured by the data on GDP was 4.16% per annum
This included the good performance in the 1st year of
Bhutto Government, which was actually because of
rebound in the economic activity after the war year.
Population increase was 3% during this period while the
per capita income growth was less than 1% per annum
Average annual growth rate of agriculture during the
period was 2.4% which can be attributed to the floods
and drought with major crops , livestock accountable
for it and positive contributors were minor crops and
forestry

ECONOMIC GROWTH
The aim was to shift the policy of the
government from encouragement of private
enterprise to nationalization of commanding
heights of the economy and widening income
inequalities
External sector which were beyond the
control of the authorities causing the overall
economic growth to slow down
Decrease in average annual growth rate of
industry was due to the nationalization of
the economy and the poor and
inexperienced management

ANNUAL GROWTH RATES FROM

1971-1977
Annual Growth Rate, 1971-77, at 1959/60 Factor Cost (% per annum)

Year

197172
197273
197374
197475
197576
197677
19711977

Agricultur
e

Manufacturing

Wholesa
le and
Retail
Trade

Banking and
Insurance

Public
Administration
and Defence

Services

GDP

Large
Scale

Small
Scale

3.5

-6.8

7.2

-0.5

0.8

6.8

5.1

1.2

1.7

11.9

7.3

6.7

29.1

14.1

5.2

7.2

4.2

7.5

7.3

14.9

6.4

14.8

5.4

7.7

-2.1

-1.7

7.3

3.2

14.4

33.2

5.7

3.9

4.5

-0.5

7.3

1.8

3.3

-3

5.7

3.3

2.5

-0.2

7.3

-0.3

8.2

7.3

3.2

2.9

2.4

1.7

7.3

4.3

10.4

12.2

5.1

4.4

INDUSTRIAL SECTOR

Private sector confidence

totally eroded
Flight of capital
Dramatic shift in mix of
private and public investment
Negative impact on growth
and efficiency of
manufacturing sector
Overstaffing, inefficient
management appointees
resulting in losses
Absence of accountability
& answerability
Inefficiency & Corruption
Rising Oil prices also afected
industry
Sharp decline in investment
in large scale sector and shift
towards small scale sector

Performance of Large Scale and Small Scale Sector growth

1 4 .00%
1 2 .00%
1 0.00%
8.00%
6 .00%
4 .00%
2 .00%
0.00%
1 9 58-6 4

1 9 6 5-7 0
Large Scale

1 9 7 1 -7 7

Sm all Scale

Period

Large
Scale

Small Scale

1958-64
1965-70
1971-77

13.30%
10.40%
1.70%

2.70%
2.90%
7.30%

REASONS OF LOW GROWTH RATE

o Firstly, there was lack of private sector investment
accruing out of nationalization of various economic
segments
o Larger expenditure on infrastructure was politically
motivated
o The investment in Large Scale Industry was
particularly discouraged due to uncertainty of
Government towards private sector and fear of takeovers
o Concentration of public sector investment in the
unproductive sectors of defense and
administration
o Economically inefficient investment decisions in the
public sector industries based on political
considerations

INVESTMENT & SAVING POLICIES

The Bhutto government increased the level of
investment, private and public, in the economy from less
than Rs. 7,000m in 1971-72 to more than Rs.17,000m in
1974-75.
Gross total investment during Bhuttos period amounted
to 15.7% per annum
National savings during the same period averaged only
9.3% of current GNP while Foreign Savings 6.4%.
Factors Afecting Saving Rate:

Deterioration in external terms of trade,

Worsening fiscal situation,
Reduced incentives for the private sector investment, and
Uncertainty about the future
Workers remittances acted as positive contributor

INFLATION
The price level during Bhuttos era
skyrocketed, with an annual average
increase of 18% in CPI, on the contrary, the
60s saw the rate of inflation maintained at
an avg of 3%
The average increase in the consumer price
indices in the Asian countries was 11.6%
during 1972-77, while in Pakistan it was
18%
The high rate of inflation in Pakistan had an
adverse impact on the competitiveness of
its exports

REASONS FOR HIGH INFLATION

Due to domestic economic policies

Increase in petroleum prices in October 1973
Hike in world inflation
Devaluation of Pakistani Rupee by 56.7% ( The
exchange rate went from Rs. 4.76 to a dollar to
Rs. 11 per US $)
Monetary Expansion
Increase in Import Tarifs
Cost push inflation- rather than tackling with the
excessive monetary expansion, successive upward
adjustments in wages and salaries were there to
minimize social discontent
Increased fertilizer import prices

INFLATION
AnnualInflation Rate in Pakistan
35

29.98

30

26.7 3

25
20
15

11.66

9.7

10
5.7 1
5

9.24

4.69

0
197 0-7 1

197 1-7 2

197 2-7 3

197 3-7 4

Years

CPI

1973
1974
1975
1976
1977
Average

9.70%
30%
26.70%
11.70%
11.80%
17.98%

197 4-7 5

197 5-7 6

Monetary
Growth
22.70%
13.30%
7.80%
25.90%
24.30%
18.80%

197 6-7 7

6.89

197 7 -7 8

GDP
Growth
6.70%
7%
3.30%
3.40%
2.80%
4.64%

8.39

197 8-7 9

10.44

197 9-80

Inflationary
Gap
16%
6.30%
4.50%
22.50%
21.50%
14.16%

STEPS TO OVERCOME INFLATION

Indirect subsidies were provided on energy
products
Agriculture: Direct subsidies were mainly
provided to farmers for use fertilizer, pesticides &
equipment for plant protection
Wheat: Under the wheat pricing policy, the
government guaranteed a procurement price of
wheat to the grower.

But the efect of these subsidies was diluted

because of the fall in tax revenue, especially on
petroleum products.
Burden of subsidies ultimately on the budget!!

 Balance of payments difficulties was one of the major difficulties during

Bhutto years
Increased the demand for imports due to establishment of new industries

(in mlns)

1971

1977

Exports

$591

$1141

Imports

$638

$2325

Though exports doubled but imports increased fourfold

Increased debt servicing due to budget and BOP financing from external
sources

BALANCE OF PAYMENT
BoP deficit on current account jumped
from $100.8 million in 1972-73 to $
902.5 million in 1976-77
Cumulative current account deficit for
the 5 year period (1972-1977) was
$3.4 billion
Reason was rising debt burden and
dependence on external loans

BALANCE OF PAYMENT
Outstanding external debt of the
country rose from $3.1 billion in 1971
to $6.3 billion in 1977
Bhutto governments failure to
mobilize domestic resources for
investment
Thus, the amount of net external
borrowing in 5 years of PPP rule was
equal to the total borrowing in the
previous 25 years

PRIVATE SECTOR

Due to nationalization
the result was a drop of
nearly 50 percent in
private investment
Depend more on public
sector
Confidence eroded
Total investment
decreasing from 51.3%
in the Ayub years to
33.8% in the Bhutto
period.

PUBLIC SECTOR

Expanded greatly
Plants and additional
public companies were
created
Managers and
technicians were scarce
Set high minimum
wages- increase in
payroll cost
Corruption in the sector
Lack of accountability,
mismanagement and
bad governance
prevailed

DEVALUATION OF RUPEE

The devaluation was the only means of

encouraging exports after loss of the East
Pakistan Market
New exchange rate served as an incentive
to remit their earnings to Pakistan through
proper banking channels rather than hyundi
In May 1972, PPP government abolished the
multiple exchange rate system and the
Pakistani Rupee was devalued by 56.7%
(The exchange rate went from Rs. 4.76 to a
dollar to Rs. 11 per US $).

DEVALUATION OF RUPEE
ARGUMENT IN SUPPORT

To
improve
the
agricultural terms of
trade
To
boost
exports
because of loss of
East
Pakistans
market

CRTICISIM
Unjustified devaluation on
such a high scale because
domestic
production
of
exportable goods couldnt
be increased rapidly due to
the loss of East Pakistan
Devaluation increased the
cost of investment by about
131%
Internal
price
structure
adversely afected as it
raised overall cost structure
& accelerated inflationary
pressures on the economy.

DEVALUATION OF RUPEE- impact

Tarifs on imports were increased to
discourage importing
Pakistan found new markets for its
commodity exports mainly sugar,
rice and cotton.
This export boom was short lived due
to hike in oil prices in 1974 and a
sequence of bad crops

MONETARY POLICY
OBJECTIVES
Monetary policy during this period was characterized by:
Creation of National Credit Consultative Council (NCCC) and Annual
Credit Plan, 1972
Regimes of credit ceilings with efect from October 1973
Directed, concessionary and mandatory credit targets
Targets for fixed investment and exports
Control on bank deposits and lending rates

It was realized in 1972 on the basis of past experience that

use would need to be made of more direct methods of
controlling the volume, the cost and allocation of credit in the
economy.
Hence a regime of credit ceilings was introduced in October
1973. In addition, the State Bank prescribed for commercial
banks annual mandatory targets for production loans, tobacco
marketing and loans both for production and development for
small farmers.
Simultaneously there were protected targets for fixed
investments and refinancing of loans under locally
manufactured machinery (LMM) and agro based activities.

MONETARY POLICY
OBJECTIVES
Interest Rate Policy
Up to 1972 the main thrust of the State Bank policy was
based on the belief that any increase in the interest rate
would adversely afect the investment activity
The Bank Rate was changed twice during this period i.e.
from 4 to 5% on 6th June, 1965 as a part of containing credit
expansion in the private sector and from 5 to 6% after
devaluation of the rupee on 11th May, 1972 as a follow up
measure to protect the benefits of devaluation
During the two turbulent years, 1970-71 and 1971-72,
prices came under pressure as a combined result of
demand pressure stemming from turbulent conditions and
decline in growth rate to 1.2% during 1970-71 which rose
marginally to 2.3% during 1971-72

MONETARY POLICY
The average annual monetary growth rate 197277 was 18.2%
The State Bank raised the bank rates gradually
from 5% to 10% during 1972 to 1977, also the
interest on bank advances and bank deposits were
adjusted upward
National Credit Consultative Council was formed in
1972 whose function was to examine the overall
credit situation in the country and indicate the
credit limits for the public and private enterprises
Extensive political intervention in management of
monetary policy

FACTORS RESPONSIBLE FOR MONETARY POLICY

Domestic factors

High monetary expansion

was due to high PSE
borrowings and financing
of the governments deficit
transaction
Consumer price index shot
up to a 18% thus sending
the dream manifesto of
basic necessities for all,
down the drain.

Non domestic factors

The international
uncontrollable factor
responsible was the prices
of petroleum and other
imports
Rupee was devalued and
the exchange rate went
from Rs. 4.76 to a dollar to
Rs. 11 per US $

FISCAL POLICY
Overall deteriorating fiscal position, fiscal
deficit increased at an average rate of
8.4% for the five years
During the period of 1973-77 the overall
expenditures increased, averaging at
28.9% then the average GDP of 2.5%
The main reason for the increasing deficit
is the increase in development
expenditure, which rose from 6.6% of
current GDP in 1972-73 to 10.5% of it in
1976-77

FISCAL POLICY
Year

GDP (mp) mn

Revenue

Current
1972-73

1973-74

1974-75

1975-76

1976-77

Avg.

Overall Deficit

Expenditure

Development

Total

67492

9763

9477

4474

13951

-4188

23.4 %

21.3 %

20.1 %

86.4 %

35.5 %

6.2 %

88102

14166

13637

6494

20131

-5965

30.5

45.1

43.9

45.1

44.3

6.8

111183

17426

18745

10434

29179

-11753

26.2

23.0

37.5

60.7

44.9

10.6

130364

19849

18925

13404

32329

-12480

17.3

13.9

1.0

28.5

10.8

9.6

149748

22324

19213

15958

35171

-12847

14.9

12.5

1.5

19.1

8.8

8.6

22.5 %

23.2 %

20.8 %

48.0 %

28.9 %

8.4 %

REASONS OF FISCAL DEFICIT

The increase in development expenditure
large part of investment made in infrastructure and
development projects
Public debt Increasing dependence on external
commercial loans. By June 1977, public debt had
risen to the level of Rs. 97.1 billion
Tax Policy The government failed to utilize tax
policy as an efective tool for resource mobilization.
(A significant reduction in share of Direct Tax)
Defense Expenditure increased to 6.7% of GDP
(1974-75) vs. 2.7% (1965)
Nationalization scheme

BAD LUCK FACTORS

CONCLUSION
Reforms were theoretically good but implemented as worst as
possible
Corruption, mismanagement, political interference is the key
factor of Bhutto reform
However, some external uncontrollable Bad Luck Factors
adversely afected the economy:
Increase in oil prices (1974 onwards)
Huge failure of cotton crop
Worst floods in Pakistans History (1976-77)
Unavailability of loans,
Suspension of foreign aid,
Higher taxes,
Higher inflation,
And fiscal deficit,
Increasing dependency on export and imports and on declining revenues

The end