1. PHASE IV - ZIA
Lecture 6

2. Backdrop Martial Law was imposed by General Zia-ul-Haq in 1977.
Zia took over with the declared purpose of resolving the rift between Bhutto’s Peoples Party and the combined opposition to hold free and fare elections within 90 days.
Due to Bhutto’s public popularity, Zia feared that he could return to power through free elections, therefore the elections were postponed.
Bhutto then charged with the murder was found guilty in hanged on 4th April 1979.

3. OBJECTIVES:
Zia’s attitude towards the economy can be summarized through a statement made by him:
“My instructions to Ishaq Sahib (finance minister) are quite clear:
I really don’t care what he does as long as the economy continues to run smoothly and the poor and the middle classes continue to see some hope for themselves”
Major policy: increase private investment
Conflict between private sector and civil servants

4. Economic growth averaged 6.6% per annum. During 1977-83,
Economic Performance
Economic growth averaged 6.6% per annum.
During ,
Largely driven by a rapid rise in worker remittances; reached its peak in FY83 – reaching up to 10% of GDP
During this period worker remittances were almost as important a source of foreign exchange as exports.
In 197, Pakistan’s GDP was $15 billion

5. Economic Performance Between1983-8:
GNP growth rate fell sharply
Interest payments on external debt gathered momentum
Worker remittances started declining
Workers remittances boom of the first half did not translate into a significantly higher rate of national savings and investments.
Most of the remittances were directed to consumption  helped in reducing poverty.

6. Growth Rates First Half (1977-83) Second Half (1983-8)
First Half
( )
Second Half (1983-8)
Decade Average ( )
Agriculture
4.2
3.5
3.9
Manufacturing
10.2
8.2
9.2
Other
8.6
7.0
7.9
GDP
6.7
6.2
6.6
GNP per capita
4.4
1.9
3.3

7. Agriculture Objectives were : Growth rate of 6% (5th plan)
Increase in exports of wheat
Increase in production of rice and oilseed
Increase in productivity of cotton and sugar cane
Diversification of agriculture sector
Improved seeds (6th plan)
Water management
Mechanization

8. Agriculture Objectives were achieved using the following policies :
More extensive cropping programme
New breeding programmes for new varieties
Ensuring timely supplies of inputs at reasonable prices
Farmer training/education programmes
Better credit facilities

9. Performance of Agriculture
The agricultural growth increased to 4% in from 2% in
Agricultural growth remained ahead of the population growth resulting in per capita increase
Performance below own targets (4% rather than 6%)*
Wheat and cotton production rose
Domestic fertilizer production of nitrogenous fertilizer nearly tripled during the first half of 80’s.
Agricultural growth also benefited from strong growth in live stock; grew annually by 5.5% in the 80’s
Expansion was mainly due to the past investments coupled.
Ignoring soil erosion, education, R&D.
The high burden of fertilizer and wheat subsidies on the budget finally led to a review of agricultural policies in the early 80’s and a substantial upward adjustment of both fertilizer and wheat prices.

10. Industrial Policy Framework
Significant improvement in industrial policy framework during Zia’s period:
Greater emphasis on private sector
Greater import liberalization of industrial raw materials
Strengthening of incentives manufactured exports
Nationalization reverted
Policies: fiscal incentives: Specific and general
Specific :exemptions on import duty of raw material and machinery, tax holidays for first five years of operation and General: Rebates on corporate taxes
Yet Pakistan’s performance relative to other East Asian countries such as China Thailand, Malaysia, Korea etc was lagging.
Specific incentives are given to promote specific industry or area

11. Industry Result: higher capital to labor ratio
Private sector investment in manufacturing grew by 9.5% per annum during
The revival of private industrial sector was particularly important for addition to capacity in traditional industries such as cotton textiles
Over 60% of the increase in real value of exports over the decade was attributable to cotton, cotton textiles and garment exports.
(what about Pakistan?)

12. Trade Policy: Export promotion
Result:
Over 60% of the increase in real value of exports over the decade was attributable to cotton, cotton textiles and garment exports.
Eg: Manufactured exports increased four fold during 1983; from 1.3 to $ 5.6 billion.
distortionary impact- increase in exports at higher cost

13. Trade Policy: Import liberalization
Increase in number of goods on free list
Positive list to negative list
Decline in quantative restrictions
Move towards tariffs
Result: Importers had access to :
Reduced red tape, quotas and time delays

14. Export and Industrial Growth
Industrial growth was impressive as Manufacturing sector growth over averaged over 9% as compared to 3.7% in
Large scale manufacturing grew even faster than small scale
The main reasons behind this rapid growth in industry were:
Reaped the benefits of large public sector investments during Bhutto’s time
Resulted in major increases in steel, cement, fertilizer and vehicle production.
Improved incentives for manufactured exports due to:
Introduction of a flexible exchange rate policy after 1982,
Increasing rates of rebate of custom duty and sales tax for exports.
Improvement in investment climate for the private sector by
Providing guarantees against future nationalization,
Clearer demarcation of activities between the public and the private sector
Additional tax concessions.

15. Some Structural Weaknesses
1. Slow Growth in Investment
High economic growth during the Zia period was not accompanied by a rapid rise in investment.
It was inadequate in relation to both current needs and future requirements.
Serious shortages on infrastructure, especially in the energy, transport, and urban development sectors.
Equally serious was the neglect of investment in human resources.

16. Some Structural Weaknesses
2. Inelasticity of the Tax System
The inelasticity of the system witnessed during the 1960’s and 1970’s persisted in the 1980’s.
Substantial additional taxation undertaken in and yielded only marginal improvements
Direct taxes continued to account for a small fraction of total revenue

17. Some Structural Weaknesses
3.Rising Debt Burden
Interest payments had become the fastest growing element in government expenditures during ,
Interest payments rose from 1.9% of GDP in to 4.9% of GDP in

18. Public sector investment
Stagnation in the infrastructure development
No new investments
Finished off projects started by Bhutto
Massive energy shortages

19. Real Growth in Public Spending (per cent per annum)
Defence
9.2
1.6
Development
3.2
-2.8
Interest
15.8
7.9
Other
9.1
4.1
Total
8.0
2.8

20. Social Progress
The increased demand for services in rural areas following rising incomes generated pressures for rapid rural electrification and rural roads,
Rural electrification spending was 52% higher than original allocations while spending on rural roads exceeded targets by 29%.
Substantial economic growth and relatively low inflation during the Zia period did translate into broad based income growth

21. Social Progress Modest improvements in health & education Education:
Primary school enrolment during increased at an annual rate of 4% only moderately faster than the growth rate of the population.
Total public spending on education increased to 2.7% of GNP by from 2% of GNP in
Health:
Progress in increasing access of the population to basic health services was slow.
Only modest gains were made in reducing infant mortality and increasing life expectancy.

22. Zia years There were four factors which helped Zia prolong his rule:
Efforts to Islamize society to strengthen his political support.
Soviet occupation of Afghanistan and Zia’s highly successful efforts to mobilize and co ordinate considerable external assistance
Zia extended the role of the army in governance through extensive use of military intelligence
Economy under Zia enjoyed a high and sustained rate of growth.
Economy expanded to nearly 6.6% per annum
Inflation tended to decline during
There was a broad sharing of the benefits of growth.
Real wages increased, poverty declined
Much of his rule still has a strong impact on the economic and judicial developments in Pakistan

23. Management of the economy
Growing dependence on foreign loans and decreasing ability to repay
Increase in consumption
Electricity shortages
Textile sector growth: but Yarns production increased with fall in cloth

24. Islamization of the Economy
Announcement of a plan for the implementation of an Islamic economic system in February 1980.
Institutionalization of zakat
Introduction of interest free banking
The aim was to free the economic order from exploitation and provide equal socio economic opportunities for the needy.
Under the Zakat Ordinance, most financial assets in the banking system and saving instruments were made subject to 2.5% deduction annually on account of zakat.

25. Islamization of the Economy
By , zakat collections deducted at source were Rs.1.9 billion and had risen further to Rs.2.6 billion by
Benefits of the zakat ordinance were minimal - Even assuming that all the benefits were to the lowest 20% income households and that the administration expenses were minimal, the zakat donation would have augmented the income of this group by only 2%.