Reformers and jihadis
THE year 1990 was a turning point in Pakistan’s history in more ways than one. The Asghar Khan case has highlighted the lies that turned the 1990s into a political train wreck, and the heightened role that money came to play in politics.
But 1990 is also the year when Pakistan’s reforms began, and the slow, reluctant process through which this country had to adapt to a world of globalised capital flows got under way.
A number of important changes were kicked off in that year whose consequences are with us even today. The largest share of government revenues, for instance, used to come from taxing foreign trade in those days, and with free trade becoming the new norm around the world this had to change. In 1988, 42 per cent of all tax revenues came from international trade taxes.
So in Pakistan, between the years 1988 and 1993, the critical watershed years when structural reforms began to be undertaken, in the area of trade alone maximum tariffs were brought down from 225 per cent in 1988 to 90 per cent by 1993.
In time this would come down to 30 or 35 per cent, excluding the automobile sector, but the sharpest reductions were brought about in the early years, and they had a profound impact on government revenues.
High import duties and tariffs were a legacy of the 1960s when Pakistan belonged to that club of countries which pursued an import substitution industrialisation strategy, seeking to do as much of their manufacturing for themselves as they could.
Suppressing foreign trade was a key plank in this strategy, and diverting all incomes into an endless cycle of reinvestment was its cornerstone. Tax policy was made with an eye to “penalise those incomes which seek to leave the investment stream”, in the words of Mahbubul Haq.
But that changed with the Sixth Five-Year Plan, drafted under the last days of the Junejo government, which sought for the first time to reorient Pakistan towards an export-led strategy of economic development. The Sixth Plan eventually turned into the adjustment programme that Pakistan signed with the IMF in 1988, which was the facility that ushered the country into an era of globalised capital flows.
Tax policy was now going to be made with an eye to penalising consumption, with the burden of taxation to be carried by those who consumed more. Starting in 1989, sales tax coverage of domestic industrial production was increased from 15 to 30 per cent in one year, and exemptions on standard custom duties were removed, although some crept back in later.
The IMF programme signed in 1988 envisioned steady revenue growth until 1991, when the move to a comprehensive general sales tax was supposed to be finalised.
The biggest burden of this adjustment was borne by the first Benazir government. “The encouraging trend established during the first two years of … the programme in reducing the fiscal deficit (to 6.5 per cent of GDP in 1989) was not sustained and the deficit widened again to 8.7 per cent and 7.5 per cent in FY91 and FY92, respectively,” noted the World Bank in 1993.
Defence, debt servicing and subsidies formed the largest chunk of government expenditures then as well as now, standing at about 45 per cent of GDP in FY 1992, which was 47 per cent at the start of the adjustment programme in 1988.
All of this was complemented by changes taking place in credit policy, privatisation, liberalisation of the exchange rate and the opening up of foreign currency deposits (FCDs).
A comprehensive move away from a state-centric growth and development strategy was under way in these years, and the political background against which these economic developments unfolded provided the most important context.
By most accounts, this early reform effort was reasonably successful, except for the fiscal deficit, the growth of which was controlled for two years followed by blowouts in 1991 and 1992. The reserves situation failed to improve, staying around three weeks of merchandise import cover throughout the reform period except for 1992.
So a question suggests itself. Despite some effort, probably the most strenuous Pakistan had made until then, to implement reforms designed to integrate the country with a globalising world, the reforms failed to bring sustainability to government finances or to the external account. Why? One easy answer would be to point to the shortcomings in the reforms, to highlight politically motivated slippages.
But the fact that the Asghar Khan case has brought to light offers another explanation. Even as Pakistan’s civilian authorities worked mightily to bring about changes necessary for the economy to participate in a globalising world, shadowy powers worked hard to execute policies that isolated Pakistan more and more.
This tension, between the work of the civilian authorities that sought openness and engagement with the outside world, and the military authorities wanting to project power in the region at the cost of international goodwill, must be properly explored. The same time period when the first large-scale reform programme was implemented, also saw the country come under sanctions, become a platform for militancy, and come to the brink of a near full-scale war with India in 1990.
Nawaz Sharif himself said later that Aslam Beg and Asad Durrani talked to him about exporting heroin as a way to pay for the covert actions they wanted to carry out, now that foreign money was no longer available to pay for their dirty deeds, showing the insanity of the enterprise these people were prepared to undertake to pursue their ambitions.
This history needs to be told. The subversion of democracy by those named in the Supreme Court judgment is a historic crime. But the subversion of the economy, which paid the cost through isolation at a time when it desperately needed openness to adapt to a changing world, is the untold subtext in this story. This is a cost that we will be bearing for many more generations to come.
The writer is a Karachi-based journalist covering business and economic policy.