BHUTTO’s Economic Policies

(PHASE III – 1972-77)

Lecture 8
 BHUTTO’S EXPERIMENT WITH SOCIALISM

• After the separation of East Pakistan, Bhutto was brought into power by Pakistan's
military and was President till 1977.

• Bhutto undertook large scale nationalization of industry, insurance and banking,

extending the state control to different sectors of economy.

• Bhutto’s government also took full control of country’s educational system by

nationalizing private educational establishments.
Macroeconomic Management

• There was a virtual stagnation of GDP at less than 1.7% annual growth in
the transition years 1971-72.

• During the five years of Bhutto's government the annual growth rate of
economy averaged 4.9%.
Pattern of growth

• The major sources of growth during Bhutto’s regime were construction,

public administration, defense and services sector.

• Real investment expanded by 50% between 1972-77 and the rate of

investment as per GDP recovered from a low of less than 13% to over 19%
over the period of four years.
Foreign Trade
• The separation of East Pakistan did not lead to a major decline in Pakistan’s
exports.

• Three principal reasons :

o Exports of primary products from West Pakistan, such as cotton and rice were sold
below the international prices.
o The real devaluation of the exchange rate in May 1972 facilitated the exports in
international markets.
o The boom in the international economy and commodity markets in 1972-3 increased
the demand for Pakistan’s exports.
Oil price shocks
• External payment position worsened due to rise of international oil
prices at the end of 1973.

• Pakistan’s oil import bill was over 6% of GDP during 1972.

• However the official grants and loans from Middle Eastern oil exporting
countries increased, so the financing of the enlarged deficit did not pose
major problems.
External debt problem
• Pakistan had to face rising debt servicing burden because of the existing
debt of 70s.

o As political crises began in 1971 and economy stumbled, Pakistan found itself
unable to meet debt service obligations. After separation of East Pakistan 1971,
debt crises deepened.

o 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 Pakistan’s foreign
exchange earnings of that year.

o The fresh assistance from abroad relatively neutralized the situation.

Foreign assistance

• Western industrial nations, OPEC countries and multilateral banks resumed the
assistance for Pakistan on substantial scale in 1974-5.

• The average level of foreign assistance commitments and disbursements reached a peak,
over 1.2 bill US dollars annually between 1974-78.

• Because of this large foreign assistance, the oil shock on the balance of payments was
greatly neutralized.
Budget deficits

• Budget deficits showed explosive growth during Bhutto’s regime.

• It averaged over 8% of GDP (compared with fiscal deficits of 2-3% of GDP in the
50’s and 4-5% in the 60s).

• Government also began to incur large deficits on Revenue Account and

between 1972-77; government revenue account deficit was close to 2% of GDP.

• The rising burden of defense expenditure was a root cause of fiscal imbalance.
Tax policy

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

• Collection from income and corporate tax during the 70’s 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 inflation resulted from higher
international oil prices, had serious inflationary consequences.

• The devaluation of May 1972 also contributed to price pressures, as it raised

domestic agricultural prices.

• On the economic front, the rapid rise in price level quickly dissipated any gains
from exchange rate adjustments.
Exchange Rate and Trade Policy
• The major trade and exchange rate decisions taken by Bhutto government
are as follows:
o The serious distortion caused by the system of multiple exchange rates which prevailed since January
1959 were finally recognized when the government decided to devalue the rupee from Rs.4.76 per
dollar, to Rs.11 per US dollar in May 1972.
o The Export Bonus Scheme was also abolished at the same time.
o There was a sharp increase in reliance on foreign trade taxes following the 1972 devaluation.
o Custom revenues as percentage of GDP increased from 2.7 in 1971-2 to 5.2% in 1973-4 and
remained high during the subsequent years.
o Though initially export taxation was relatively heavy, by 1976-7 most export duties had been
removed
o The bulk of custom revenues in the mid 70’s came from imports.
o The average rate of import tariff on durable imports was close to 50%.
Energy Price subsidy

• Subsidy was given on energy prices, energy consumption growth remained high.

• Incentives for domestic energy production, especially for oil and gas were not
convincing, thus the dependence on imported energy remained high.

• Reduced income from gas and electricity sales reduced the capability of WAPDA,
KESC and Sui Gas to finance expansion from internal resource
Wheat Subsidy
• Initially the government was slow to adjust wheat procurement prices but later
on these price were increased to around Rs.1 per kilo from Rs.0.5 per kilo in
1969-70.

• The efforts to keep wheat prices relatively low provided strong incentives for the
production of raw cotton.

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

• The Pakistani banks were not nationalized till 1974.

• Cotton export and cooking oil industries were nationalized during 1973.
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.

• However the decision to nationalize cotton export trade, edible oil industry and
agro processing units were largely ad hoc, responding either to economic or to
political pressures.
Labor Policy
• Comprehensive labor policy announced in February 1972

o Measures to improve the income and the bargaining position of labor.

o Procedures for speedy 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 from the large number of small businesses which became a
subject to a whole new set of regulations.

• Labor policy combined with uncertainty about the attitude of the government
towards the private sector acted as strong disincentive to investment in large-
scale industry in the private sector.
 Public Investments

• There was a massive increase in 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

grew from 49% in 1969-70 to nearly 70% in 1976-77.
Social Services - Education

• New educational policy of March 1972 outlined an ambitious program of

educational development including:

o Free and universal education up to class VIII,

o Strengthening of technical education
o An educational program for women in the rural areas

• The immediate focus was the nationalization of private educational

institutions
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.

• Female education at the primary level did relatively well in the Bhutto’s
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

o Extension of health facilities to rural areas

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

• 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 centre 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 Bhutto’s economic and social program land reforms, labor policy,
educational reform, sharp expansion in public development spending, credit policies for
small farmers and businessmen were aimed at improving the conditions poor.

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

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

from 562 million US dollars to 1749 million US dollars.