Economy is a fascinating subject. You can use the same data and statistics to prove or disprove a point. And if you indulge in selective use of these data, you can succeed in conjuring up a picture of the economy entirely unrelated to the ground realities. This has been happening in this country over the last at least 44 years or since 1958 to be precise. The fiction of high growth during the Ayub era has been repeated so many times without being challenged that now even those who created this fiction have come to believe in it.

The fact of the matter is, it was during this period that due to the wrong economic policies of the then official economic managers our comparative advantage —the agriculture sector—was totally destroyed and Pakistan became a net food importing country. Food grains imported free under PL480 used to be sold in the market dirt cheap rendering local agriculture production uneconomic and using the rupees thus obtained to finance the burgeoning budgets without the need to collect taxes. These were the years when we, with our own hands, destroyed the tax culture in the country and encouraged businessmen to evade taxes.

During the second five-year plan period ( 1960-65) the US provided assistance to the tune of 35 per cent of government’s development budget and 45 per cent of its import bill. Several factors had made this remarkable expansion possible. Expenditure on Indus Basin works replacement, which amounted to $1.5 billion during the 1960s alone, were financed either directly by foreign assistance or indirectly by counterpart funds generated by the sale of PL480 commodity assistance. The availability of $ 800 million of non-project assistance during 1960-65, nearly 90 per cent from the US, was the second major factor in expanding foreign flows. A key element was the multi-year agreement in October 1961 on an expanded PL 480 programme with the US, totalling $621.5 million for the remaining period of Second Plan; more than half the amount was for wheat imports and about 20 per cent was for vegetable oil imports.

The US support for Pakistan’s industrialization efforts consisted of expanded capital assistance for infrastructure development, increased technical aid to ease “ skills shortage” and PL 480 concessional sales, which generated local currency for public investment and made it easier for Pakistan to finance industrialization by keeping agriculture prices low and thereby extracting an invisible surplus from agriculture. The short term results of these efforts were surprising. The industrial sector, dominated by textiles and large-scale industry, grew at annual rates approaching 24 per cent while agriculture stagnated, barely keeping pace with population growth.

In the longer term the pace of growth in the industrial sector could not hold for obvious reasons and it too began stagnating like the agriculture sector. And as soon as the US dole stopped after the 1965 war all the shine from the Ayubian growth simply vanished swiftly and in the process not only we lost half of Pakistan but the country was facing a default situation by the end of the decade of 1960s. If the Ayubian growth had been real, we would not have had to face at least the ignominy of a default which was averted by the succeeding democratic government of ZA Bhutto by obtaining three rounds of rescheduling between 1971-73.

The second fiction that has been created by the vested interests is the so-called comparatively better growth during the martial law period of General Ziaul Haq as opposed to the shrinking growth during the decade of democracy in the 1990s. Well here is the truth about this fiction. In the period between 1979 and 1990, Pakistan had probably received economic and military assistance amounting to as much as 25 billion dollars. This includes about $900 million annually from the US, $500 million annually from Japan, $500 million annually from Western and multilateral sources, $150 million annually from China and about $500 million annually from Muslim countries.

A lot of dollars and military equipment meant for Afghan ‘Mujahideen’ and ‘Mohajirs’ was also siphoned off by the conduit en route. It is very difficult to reach even an approximate figure for the amount of money and arms that Pakistan received during this period because a lot of cash also went into the pockets of those in Pakistan who were supposed to deliver them to their final destination. And if this amount is estimated conservatively to be about $250 million annually and added to the $3 billion of remittances coming home from overseas Pakistanis annually, you reach an amount of another $25 billion bringing the grand total of most of the concessional dollars that Pakistan received during the ten years of Afghan war to about $50 billion. This is what has been reflected in the growth rates of those years and not any real progress in the real economy. That is the reason why when Zia died in the air crash in August 1988, the then finance minister Mehbubul Haq had to rush to the IMF for a paltry SBA of $250 million as the forex kitty was almost empty!

A third fiction is being attempted to be created these days, again by the vested interests that the decade of 1990s was a lost decade and in the three years of the military government the country’s economy has taken a turn for the better. Nothing can be further from the truth. And here is the truth about this latest fiction. During the so-called lost decade of the 1990s population growth rate fell below 3 per cent. There was a 28 point fall in the infant mortality rate from 116 per 1000 live

births in 1990 to 88 in 1999. The agriculture sector posted robust growth, and wheat production was in surplus which had eluded the country for several decades. The primary budget deficit was converted into a surplus. Defence expenditure was reduced to a significant extent.

A major boost was achieved in electricity production in the face of load shedding which had brought the country’s economic wheels to a halt in the late 1980s. And there was a major breakthrough in the availability of telecommunication facilities. All this was done at a time when following the application of Pressler amendment in 1990, the US had stopped all its assistance to Pakistan and the flows from multilateral aid agencies had come down to a trickle because of what in those days was called ‘donor fatigue’ and also because the concessional resources were needed more by the newly emerging independent countries in Eastern Europe after the collapse of the Soviet Union.

So, a country addicted to foreign dole during the previous two military rules was suddenly facing a forced withdrawal symptoms. The situation was further compounded when in 1998 we exploded our nuclear device and then followed it up with the Kargil adventure in 1999 and finally ended up with a military coup. So,in the late 1990s we virtually lived under all kinds of sanctions. In the absence of dole and faced with the need to service the debt incurred by the military rule of General Zia, the democratic government had to borrow at commercial rates. Again, it was during this decade that the elected governments discontinued the economically stupid practice of borrowing from the banks for the budget at 0.5 to 1.05 per cent interest rates resources which the banks were mobilizing at the rate of 18-20 per cent. With the advent of the practice of bank borrowing at market rate it was but natural for domestic debt to go through the ceiling.

The military government which came in October 1999 inherited not only the economic negatives that were accumulating over the last 44 years but also two very significant positives. One was the successful conclusion of the first round of debt rescheduling from the Paris Club which had also qualified Pakistan for the 9-month SBA which was the second most important positive. Not only this. During the decade of the 1990s, the country had recorded an annual average growth rate of 4.5 per cent without any dole as opposed to the dole loaded 6.8 per cent growth rate of 1960s and equally dole-loaded 6.5 per cent of 1980s. And as compared to this dole-less 4.5 per cent growth rate, the present government in the last three years of dole-loaded economy has not even been able to cross an average annual growth rate of 3.6 per cent.

If you take out the dole portion from this growth rate you end up with negative growth. That is the reason why most commentators use the word ‘recession’ liberally for describing the present state of the economy.In the 1980s the investment growth rate was 4.2 per cent against 12.5 per cent in the 1990s and a negative 4.9 per cent in the outgoing year (under the military regime). The growth rate in fixed investment was 3.7 per cent in the 1980s while it was 12.2 in the ‘lost decade’ and in the outgoing year (2001-02) it was negative 5.9 per cent.Public investment growth rate was 2.6 per cent in the 1980s, it was 11.4 per cent in the ‘lost decade’ and it was a negative 17.7 per cent in the year 2001-02 under Musharraf’s military regime.

This massive negative growth in investment is another and perhaps a more persuasive reason why most commentators have started using “ the word ‘ recession’ quite liberally”. All these figures mentioned above have been taken from Statistical Appendix of Economic Survey 2001-2002 compiled by none other than Dr. Ashfaque H. Khan, the author of the article ‘Why talk about recession?’ (EBR weekly Aug.5-11, 2002). And here is some more data from the same document. In the dole-loaded 1980s the total average annual investment was 18.7 per cent of the GDP, it was only fractionally below at 18.3 per cent in the decade without dole ( 1990s) and a paltry 13.9 per cent in the dole-loaded year of 2001-02.

Dr. Ashfaque has used the figure of 15.6 per cent of the last full year of democratic government against the average of 10 years of 1980s to make his point and there too he has misled the readers into thinking that in the decade of 1980s the country had achieved investment amounting to as much as 19 per cent of the GDP on an annual average whereas the Economic Survey ( 2001-02) which he himself has compiled says that the average annual investment during the 1980s was 18.7 per cent. I am sure, Dr. Ashfaque knows the difference in billions between 19 per cent of the GDP and 18.7 per cent of the GDP. The fixed investment during 1980s was 17 per cent, it was 16.6 per cent in the 1990s and 12.3 per cent in the third year of the present military government. Public investment was 9.2 per cent in 1980s, 7.5 per cent in the 1990s and 4.7 per cent in the third year of the military government. Private investment was 7.8 per cent of the GDP in the 1980s which jumped to 9.1 per cent during the dole-less period of 1990s but then went down steeply to 4.7 per cent in the dole-full year of 2001-02.

The overall budgetary deficit was 7.1 per cent during the 1980s when the government was borrowing at throwaway interest rates from the banks for budgetary purposes, it went down to 6.9 per cent of the GDP in the 1990s when the government was borrowing at the market rates and it was 7 per cent ( this figure has been quoted from the federal budget in Brief 2002-2003—page 48) during the year which is being touted by the military regime as the year when it had achieved a level of macro-economic stability as never before in Pakistan’s history. The total revenue collection in the 1980s was 17.3 per cent of the GDP, 17.1 per cent in the 1990s and 16.8 per cent in the out-going year ( this is ultimate in stagnation). The massive dole that this government has received plus the highly generous debt reprofiling obtained from the Paris Club in December 2001 (the foundation for which had already been laid by the last democratic government in January 1999) for services being rendered in the war against international terrorism and not in recognition of any significant improvement in the official management of the economy ( which otherwise would have reflected in the real economy) has helped Pakistan to record a record improvement in current account deficit.

Dole was again the reason why in the 1980s the current account deficit was controlled at 3.9 per cent of the GDP. Without dole the governments of 1990s succeeded in keeping this deficit at 4.5 per cent while the present government which also enjoys a massive debt reprofiling has been able to keep it at less than single digit. This improvement in current account deficit caused mostly by foreign dole and one shot remittances flow has helped the government to accumulate a massive forex reserves of $7 billion.

Again, without de-emphasizing the importance of such a huge amount in the forex, one would still like to insist that there is a total disconnect between the real economy and this amount of forex. That is the reason why no sane person would want the government to use this amount to kick-start the economy. As soon as that is done the entire forex would disappear. The situation reminds one of a Pakistani movie of 1960s Saath Lakh in which the groom is promised a dowry of Rs700,000 on the condition that he would not use it ( You can only see the amount and touch it, but not use it, the hero was told by his would-be father-in-law).

What then is the real worth of the massive forex reserves? The Governor of the State Bank, Dr Ishrat Husain, himself has answered this question in the concluding paragraphs of his three-part article ( Why forex reserves? Dawn, August 1,2,3 2002). he says: “ Since the alternative strategy to draw down reserves and allow the government to prime pump the domestic economy will prove short-sighted, expose Pakistan once again to the enhanced the risk of default on its external debt and liabilities in the future and generate uncertainties and turbulence in the markets, the more viable way to accelerate growth is by inducing private sector to invest.

“ This will require, in turn political stability and consensus by all political parties on a long-term economic policy vision and direction for Pakistan, a more business friendly environment, a less contentious and adversarial relationship between the bureaucracy and the businessmen, improvement in internal and external security situation (General Musharraf, the President, General Hafeez of the NAB and General Naqvi of the NRB are not listening Doctor sb.!!) and the continuation of structural reforms and governance agenda.”

But even if all these instructions of Dr. Ishrat are followed in letter and spirit by the government, the private sector would still not move because over the years it has been observed that as long as the public sector spending remains on a tight leash the private sector too goes into a shell. So, in order to induce the private sector to come out of its hibernation, the public sector would have to take the lead. For this the government would need resources which are not being generated because of the continued economic stagnation which is the result of deepening recession in the investment sector. The question to Dr. Ishrat and Dr. Ashfaque is, how long would it take for the on-going structural reforms to enable Pakistan’s economy to generate enough resources on its own to finance accelerated public sector investment in order to induce the private sector to start playing its due role of ‘engine of growth’ and take the country out of its recessionary depths which is only expanding poverty and pushing up steeply the rate of unemployment?

The reference in Dr. Ishrat’s article to the Asian crisis is totally irrelevant to Pakistani situation. In the first place Pakistan was not touched by the crisis and Dr. Ishrat knows why. Secondly, those affected by the Asian crisis are countries which export and import goods, services and money whereas Pakistan is a predominantly an importing country. So, what the so-called Asian tigers and Japan are doing today to protect themselves from a repeat of the 1997 crisis cannot be grafted on Pakistan, especially in the matter of accumulating reserves through purchases. One agrees completely with Dr.Isharat’s four reasons why a country needs to accumulate reserves. But then this does not obviate the need to debate his method of accumulating the reserves to see if it suits the economic ground realities obtaining as of today in Pakistan.