PHASE III - BHUTTO

1972-77
Lecture 5

Hamna Ahmed

BHUTTOS EXPERIMENT WITH

SOCIALISM

The early 1970s were the most traumatic and turbulent years of Pakistans
political and economic history.

The political impasse resulted in the ill-considered military action in East

Pakistan in March Pakistans military defeat, and the creation of an
independent state of Bangladesh in December 1971.

In West Pakistan Bhutto was brought into power by Pakistan's military and was
President till 1977.

Glaring Feature of Bhuttos era:

Large scale nationalization of industry, insurance and banking, extending the state
control of the modern sector significantly.

Took full control of countrys educational system by nationalizing private

educational establishments.

BHUTTOS EXPERIMENT WITH

SOCIALISM

Major Issues:

Dealing with economic consequences of the separation of East

Pakistan
The large and unexpected oil shocks in 1973
Poor agricultural performance in the same year due to adverse
weather conditions, both draught and floods which caused the
economic growth to slow down, inflation accelerated and
macroeconomic imbalances widened.

The large scale inflows of foreign capital and remittances after 1973
cushioned the impact of the steep rise in the oil import bill.

Macroeconomic Management

During the five years of Bhutto's government;

1973-77;
Average

annual growth rate of economy = 4.9%

This followed the virtual stagnation of GDP at
1.7% annual growth in the transition years
1970-2.

With the deteriorating economic and political

relations with East Pakistan and eventual
breakup of the country, the slow down of

Foreign Trade Adjustment

The separation of East Pakistan did not lead to a major decline in
Pakistans exports and there were three principal reasons for
this:
1. Exports of primary products from West Pakistan, such as cotton
and rice which constitute of about half of the inter-wing trade in
the 60s were sold below the international prices to East Pakistan
because of national policies which depressed the effective real
exchange rate.

2. The real devaluation of the exchange rate in May 1972 facilitated

the shifts to international markets.
3. The boom in the international economy and commodity markets
in 1972-3 increased the demand for Pakistans exports.

Pattern of growth

The major sources of growth during the period were:

Construction,
Public administration,
Defense
Service sector.

Rapid growth in investment The construction boom

Between 1972-73 and 1976-77:

Real investment expanded by 50%

Rate of investment as per GDP increased from less than 13%
to over 19% over the four year period.

Boom in worker remittances Expansion of the service

sector

Oil price shocks

External payment position worsened due to rise

of international oil prices at the end of 1973
because of OPEC)

At the peak of oil prices in 1972, Pakistans oil

import bill was over 6% of GDP.
For Pakistan official grants and loans from Middle
Eastern oil exporting countries also increased, so
the financing of the enlarged deficit did not pose
major problems.

External debt problem

Pakistan had to face rising debt servicing burden of the existing debt in
the 70s.

As political crises began in 1971 and as the economy stumbled,

Pakistan found itself unable to meet debt service obligations.

After separation of East Pakistan 1971, debt crises deepened as the

issues relating to Pakistan's debt liability as distinct from that of
Bangladeshs needed to be resolved.

The seriousness of the problem can be judged from the fact that the
debt service payments due in 1971-2 would have absorbed over 40%
of Pakistans foreign exchange earnings during that year.

The fresh assistance from abroad relatively neutralized the effect of oil
increases.

Foreign assistance

Western industrial nations and multilateral banks resumed new

assistance on substantial scale in 1974-5.

This combined with assistance from OPEC countries resulted in

foreign assistance commitments and disbursements reaching the
record of average level over US $1.2 bill annually during the years
1974-5 to 1976-8.

Aid disbursements during mid 1970s were at a level far above that
reached during the Third Year Plan even after allowing for
international inflation.

Large foreign assistance also meant that the immediate impact of the
oil shock on the balance of payments of the economy was greatly
neutralized

Budget deficits

Government deficits which had increased in 1970-2 due to difficult

economic and political conditions and military operations in East Pakistan
showed further explosive growth during the Bhutto years.

The budget deficit averaged over 8% of GDP compare with fiscal deficits of
2-3% of GDP in the 50s and 4-5% in the 60s.

Government began to borrow on large scale for current expenditures.

The high rising burden of defense expenditure was a root cause of fiscal
imbalance.

The decision to increase defense expenditure following the separation of

East Pakistan was an important political decision made for the demoralized
Pakistan army

Tax policy

The government was not able to use the tax policy as an effective
instrument of resource mobilization.

Initially there was quantum jump in corporate tax collections.

Profits of nationalized enterprises fell off rather quickly as inefficiencies

crept in and growth slowed down.

Collection from incomes and corporate tax during the 70s did not
exceed 1% of GDP.
The essential inelasticity of tax system remained intact with its heavy
dependence on indirect taxes and especially certain duties.

Inflationary Pressure

The growing fiscal deficit, combined with imported inflation

resulting from higher international oil prices, had serious
inflationary consequences.

The devaluation of May 1972; from Rs.4.76 per dollar, to

Rs.11 per US dollar also contributed to price pressures,

On the economic front, the rapid rise in price level quickly

dissipated any gains from exchange rate adjustments and
reduced the competitiveness of exports in absence of
further devaluation

Energy Subsidy

It was the lack of suitable price adjustment in energy, which did the most harm in economic
terms, through direct subsidies from the budget for energy

Between 1973 and 1976, import cost of petroleum had increased by 300%.

Gas prices were kept low to promote the use of an indigenous but unfortunately scarce
source of energy.

As a result of subsidy on energy prices, energy consumption growth remained high,

incentives for increased production especially for oil and gas were not strong, and
dependence on imported energy remained high.

In 1970 energy consumption expanded 30% faster than growth in GNP with obvious adverse
consequences for the balance of payments.

Reduced income from gas and electricity sales reduced the capability of WAPDA, KESC and
Sui Gas to finance expansion from internal resource

Wheat Subsidy

In line with the slogan; roti, kapra aur makan, a wheat subsidy was given
throughout the 1970s; The wheat subsidy at 1.6% of GDP was at its highest level
in 1978-79

The wheat procurement price was increased only gradually to around Rs.1 per
kilo in 1975-6 from Rs.0.5 per kilo in 1969-70.

The efforts to keep wheat prices relatively low provided strong incentives for raw
cotton.

The ratio of cotton to wheat prices generally was far more favorable during the
70s than in 60s.

In order to compensate farmers for wheat prices, which were well below
international prices through out the 70s, the government continued to provide
large direct subsidies on fertilizers and pesticides and equipment for plant

Wheat Subsidy

Increase in fertilizer subsidies in the mid 70s was the result of both rising
fertilizer imports and exceptionally high international prices of fertilizers.
Producers prices were kept below international level after allowing for
reasonable efforts to mitigate large fluctuations; this triggered the need to
maintain input prices at low level.
The burden of both direct and indirect subsidies was felt ultimately on the budget
and since the large budgetary deficits were financed during 70s at the margin by
borrowing from banking system, the consumer paid the price through a higher
level of domestic inflation.

Extending the Role of the State

The structural reforms undertaken during the Bhutto period

further enlarged the considerable role of the state in the
economy.

Public control of industry expanded considerably and

banking and insurance totally nationalized, but there was
also a massive expansion in public investment in
infrastructure.

By the end of the Bhutto period, the public sector

accounted for more than 70% of the expenditure on capital
formation.

Public Investments

The extension of the role of the public sector was not confined
to nationalization and increased public sector investment in
industry.

There was a massive increase in other areas of public

investment as the total public sector development spending
increased from 4.7% of GDP in 1971-72 to 11.7% of GDP in
1976-77.

The share of public investment in gross domestic fixed capital

formation had grown from 49% in 1969-70 to nearly 70% in
1976-77.

A number of factors contributed to the increase in public

investment apart from investment in industry, including the steel
mill.

Public Investments

A number of factors contributed to the increase in public

investment apart from investment in industry, including the steel
mill.

Expenditure on Tar Bella Dam remained sizeable because of

technical problems and partly because of the decision to
increase the hydro power generation capacity of the dam.

About 10% of the development spending was on Tarbella Dam

and other Indus Basin works.

The government increased spending on agriculture and on

infrastructure on power, roads, education and health.

An important motivation in quickening the pace of public

investment was to spread the benefits to the people and to the
less developed provinces

Nationalization

The government took over the management and control of thirty-one

industrial units in January 1972 in ten basic industry groups including iron
and steel, heavy engineering, motor vehicles, heavy chemicals and
cement.

In March 1972, the government over took the management and control of
thirty-two life insurance companies.

Cotton export and cooking oil industries were nationalized during 1973.

The Pakistani banks were not nationalized till 1974.

Nationalization

The final wave of nationalization during the Bhutto period came in July
1976 when government unexpectedly took over about three thousand
cotton ginning factories, rice and flour mills with a total turnover of Rs.14
billion and employing 3,000 persons.

The nationalization of heavy industries, insurance and banking were part of

the relatively well thought out actions to curb the power of 22 families,

Whereas the decision to nationalize cotton export trade, edible oil industry
and agro processing units were largely ad hoc, responding either to
economic or political pressures.

The nationalization of thirty-one units in the industrial sector in January

1972 affected less than 20% of the value added of the large scalemanufacturing sector.

Labor Policy

Comprehensive labor policy announced in February 1972

measures to improve the income and the bargaining position of labor.

procedures for speedy and just settlement of disputes, a fair share in
profits and participation in the management of industry, bounces, and
better housing, health and education facilities.

This extended the benefits of reforms to another 1.2 mill workers but
elicited a strong negative reaction from the large number of small
businesses which became a subject to a whole new set of
regulations.

The new labor policy added about 12% to the cost of labor and thus
met resistance even by the managers of state enterprises.

Labor policy combined with uncertainty about the attitude of the

government towards the private sector acted as a strong
disincentive to further investment in large-scale industry in the

Social Services - Education

New educational policy- March 1972,
Outlined an ambitious program of educational
development including:
Free and universal education up to class VIII,
Strengthening of technical education
An educational program for women in the rural areas.

The immediate focus was the nationalization of private

educational institutions.

Take over of private educational institutions adversely

affected the development of basic education as well as
the quality of education.

Social Services - Education

Only about one third of the education

expenditures were directed at the primary level.

Total government expenditures on education

increased from Rs.0.8 million in 1971-2 to Rs.2.8
million in 1976-7 which represented an increase
in real terms of around 50% over the period.

Female education at the primary level did

relatively well in the Bhuttos period as females
accounted for 36% of growth in the primary
school enrollment and 55% of growth in teachers
during 1972-7.

Social Services - Health

Health policy - 1972

Extension of health facilities to rural areas

Expansion of medical education
Shift to the production of generic drugs to avoid the soaring prices of brand named
medicines.

The central piece of the scheme was the Basic Health Unit, which was to serve
between 8000 and 15000 people as a sub unit of a larger rural health center.

In northern areas of Pakistan people were trained as health guards who were
to provide basic medical facilities.

As a proportion of GDP the growth in health sector was from 0.4% in 1971-2 to
0.8% in 1976-7.

Number of basic health units increased from 249 in 1971 to 786 in 1977 and
the number of rural health centers increased from 87 to 256 over the period
and 1900 health guards were trained.

Reaching the poor

Food, clothing and shelter for the poor were a key slogan of the founders
of the PPP and it was this platform which had brought Bhutto to power.
Large parts of Bhuttos economic and social program labor policy,
educational reform, sharp expansion in public development spending,
credit policies for small farmers and businessmen were aimed at improving
the lots of the poor.

While there was a defined reduction in absolute poverty after 1971-72 a

good deal of it was concentrated in the period after 1976.

Between 1976-79 worker remittances, a major source of poverty reduction

increased from US $ 562 million to US $ 1749 million.

Slow economic growth, high level of inflation and not very effective social
policies and spending frustrated distribution goals even though they were
pursued quite aggressively.