Review of the previous lecture Advocates of active monetary and fiscal policy view the economy as inherently unstable and believe policy can be used to offset this inherent instability. Critics of active policy emphasize that policy affects the economy with a lag and our ability to forecast future economic conditions is poor, both of which can lead to policy being destabilizing. Advocates of rules for monetary policy argue that discretionary policy can suffer from incompetence, abuse of power, and time inconsistency. Critics of rules for monetary policy argue that discretionary policy is more flexible in responding to economic circumstances.

Review of the previous lecture Advocates of a zero-inflation target emphasize that inflation has many costs and few if any benefits. Critics of a zero-inflation target claim that moderate inflation imposes only small costs on society, whereas the recession necessary to reduce inflation is quite costly. Advocates of reducing the government debt argue that the debt imposes a burden on future generations by raising their taxes and lowering their incomes. Critics of reducing the government debt argue that the debt is only one small piece of fiscal policy.

Review of the previous lecture Advocates of tax incentives for saving point out that our society discourages saving in many ways such as taxing income from capital and reducing benefits for those who have accumulated wealth. Critics of tax incentives argue that many proposed changes to stimulate saving would primarily benefit the wealthy and also might have only a small effect on private saving.

Lecture 29 Overview of Pakistan Economy Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400

Lecture Outline 1.Economic eras 2.Structural Changes In Pakistan

65 years of development Laying the Foundations: Features –Predominantly agrarian, undeveloped and newly independent nation –Little industry, few services and no infrastructure –Adverse international conditions and precarious domestic situation –Attempts of bureaucracy to keep Pakistan on its feet –Lack of capital –Trade surplus

The Decade of Development: Achievements –Considerable economic growth and development –Significant leaps were made in industrial and agriculture production –Model Capitalist Economy –High growth rate in manufacturing sector –Increase in exports –Progress in agriculture sector

Policy Failures –Increased disparities in incomes –Concentration of economic prosperity –Social sectors were neglected –Little or no increase in real wages –Trade was highly controlled and closed –Distortion of local markets b/c of overvaluation of exchange rate The Decade of Development:

The bad Luck Years: Achievements –Foundations for future growth and development –Basic industries were setup –Base for a capital goods industry –Middle East boom –Illiberal economic policies –Foreign exchange earnings doubled because of devaluation

Failures –Events beyond control affected economic program of this era –Downward trend in growth –Nationalization –Cotton crops failure and floods affected Pakistan’s exports –Crisis in balance of payments –Devaluation of Pakistani rupee The bad Luck Years:

The second Military Government Achievements –Liberal economic policies –Higher industrial growth –Second economic revolution because of remittances from the Middle East and aid from abroad –Emergence of middle class

Policy Failures –Martial rule inflicted deep rooted damage to Pakistani society –Drugs and arms culture in Pakistan –Confusion of policies –Underutilization of resources (foreign aid and remittances) The second Military Government

The Era of Structural Adjustment: Achievements –Return of democracy –Era of structural adjustment –Economic liberalization and stabilization –Privatization –Reduction in tariff rates to increase exports

Policy Failures –Macro economic crisis –High taxation –Low spending in social sectors –Trade reforms resulted in deindustrialization –Continuous devaluation in the Pakistani rupee –Increased in the administrated prices of utilities –High inflation rate –Unemployment –Privatization without proper policy –Loss of sovereignty for the Pakistani state and its people The Era of Structural Adjustment:

Economic Situation: Features –Acceleration in economic growth –Increase in industrial production –Rise in exports earnings –Strong upsurge in investment –Pre-payment of high cost external debt –Increase in foreign exchange reserve –Strategic re-entry into the international capital markets –Increase in spending on Education –Increase in FDI

The economy picked up further in FY2005, -with GDP growth coming in at over 8.4% for the first time in 8 years. - With sound macroeconomic fundamentals achieved and key sectors strengthened by reforms implemented in the 4-5 years, - the economy was well positioned to sustain 7% or more growth in the medium term. ADB’s Asian Development Outlook – 2005

Sect oral Contribution to the GDP growth (%points) Sector Agricult ure Industr y Manufa cturing Service s Real GDP (FC)

Structural Changes In Pakistan Structural Change –Modern economics has given clear evidence that changes in levels of some basic magnitudes are generally associated with changes in composition, which imply STRUCTURAL CHANGE

Reasons of Structural Changes To modernize the economy To industrialize the economy To pace capital accumulation in the economy

Main Sources of Structural Changes Growth of population (natural or immigrant) Application of technical and mechanized processes of production which change quantity of output per unit of input Technical progress which generates a continuous growth of real per capita incomes which implies a growth of demand for goods and services

Structural Changes Pakistan today is less than half of the country it was in The contribution made by East Pakistan to Pakistan’s society and economy was huge. Pakistan is basically an agricultural country is no longer true. The services sector has replaced agriculture as the dominant sector of the economy, contributing almost half of GDP. Process and extent of Urbanization In 1951 only 17% of West Pakistan lived in areas designated as Urban; today estimate suggest that above 40* live in cities and towns. Emergence and consolidation of middle class The nature of exports from Pakistan has also changed dramatically. Feudalism in Pakistan died a very long time ago.

Pakistan: basic indicators, Population (millions) Contribution to GDP by sector(%) i. Agriculture ii. Manufacturing iii. Others

An Economic and Social Agenda For Improvement Restore confidence Initiate and sustain technological change Foster stability and trust in social and cultural relationship

Recommended Books Ishrat Husain, “Pakistan: The economy of an elitist state”, Oxford University Press. Zaidi, S. Akbar,(1999),“Issues in Pakistan Economy”, Oxford University Press. Saeed, K. Amjad,(2007)“Economy of Pakistan, Institute of Business Management, Lahore. Economics Survey of Pakistan (Latest Issues), Economic Advisor’s Wing, Ministry of Finance, Government of Pakistan