This may be a good time to take stock of the economy’s recent performance. When on October 12, 2007, General Pervez Musharraf completed the eighth year of being in total power, the military had governed the country for a total of 32 years.

During this time the economy grew at an average rate of 6.3 per cent a year. For the remaining 28 years, the economy’s performance was less impressive, the GDP increased at the annual rate of 4.7 per cent.

Does this mean that the military is a better manager of the economy? This question does not have an easy answer but it can begin to be addressed by looking closely at the performance of the economy under General Musharraf.

This article is an attempt to take a look at how the economy was governed in 1999-2007 period. The conclusion that I will reach after asking a number of questions and then providing brief answers to a few of them is that while the economy performed well under the general, it was not due to any deep structural change brought about by the regime in power. Luck and a change in the external environment were important determinants of growth.

What are the important questions we need to raise at this time as we begin to assess the performance of the economy under the military? I will begin with six of them. Are the people better off after eight years of military rule compared to their situation when the military returned to power?

Has the economy, as a result of the policies adopted during this eight year period, now proceeding on a trajectory of reasonably high level of growth on which it can remain, no matter what happens to the flow of foreign assistance?

What kind of structural changes have been introduced and will these strengthen the economy over the long run? Is Pakistan now in a position to take advantage of the enormous change that is occurring in the global economy?

Was the decision making in place during the Musharraf period such that it could factor in the wishes and aspirations of the population at large? Have the governments at the sub-national level been given the autonomy to operate without too much interference from the central authority?

Full answer to these questions will need a much longer article than possible for the pages of a newspaper. That said, my main purpose today is to provide a quick overview of the performance of the economy over the last eight years and then address the issue of its vulnerability to possible changes in the perception of the world to the evolving situation in Pakistan.

I will begin with a simple accounting of the performance of the economy in terms of the growth in GDP and income per capita of the population. These are shown in the table placed below. The table shows three things. One, the economy took time to pick up under General Musharraf. It was only after three years that it began to expand and income per capita started to increase. The economy was deliberately kept in check by the decision to follow the IMF’s model of stabilisation.

Nonetheless, in the eight year period since the latest take over by the military, the size of the economy increased by almost 50 per cent and that of income per head of the population by nearly 25 per cent.

Two, once the economy shrugged off the constraints placed on it, it went on to a higher trajectory of growth on which it has remained for the last five years.

Three, over the entire period, GDP per capita has increased at nearly twice the rate of growth of population. This should have had a profound impact on the incidence of poverty. But that did not happen.

There is a reason why the poor did not benefit as much from the pick up in the rate of the economy during the period of Pervez Musharraf. This was due to the fact that growth came from the sectors which did not provide much employment to lower income groups. Much of the increase in GDP came from the sectors which returned high rewards to the investors but in which the share of wages was relatively low. Real estate development was one of the important sectors of the economy as was the modern service sector. Neither, at least in the context of Pakistan, generated employment and income for the poorer segments of the population.

The government maintains that public policy has put the economy on a trajectory of growth that would produce seven to eight per cent increase in GDP over the next several years. That claim is hard to endorse since the economy remains sensitive to the quantum of external flows. As was the case in the past, the economy would suffer a serious set back if the flow of resources from abroad is reduced significantly. The only difference between the present situation and the past is that a sudden cut off in aid will not hurt the economy as much as it did in the ‘nineties. Then, the sanctions imposed on the country following its decision to test nuclear weapons resulted in a severe economic set back. Now, if aid were to suddenly stop, Pakistan could continue with economic expansion provided capital continues to flow in from the large and rich Pakistani diasporas in three continents and provided also the Middle Eastern investors retain their interest in the country.

One of the positive features of the way the Musharraf government managed the economy is to have made it attractive for some foreign investors. But Pakistan has not become an important destination for investors as India has over the last decade. India offers the promise of political stability, a legal system that can protect investors, a highly trained workforce, and a fairly large rate of domestic savings. It also has a large domestic market which is of interest to foreign companies.

Pakistan, on the other hand, is seen as a country which has high levels of illiteracy, in which political instability continues to threaten the pursuit of economic policies that would be sustained over a reasonably long time, and in which the rise of Islamic extremism threatens economic and social modernisation. If foreign investors have been attracted to the country it is only those who either are tapping the large market for some basic goods of consumption and for some basic services. When the government claims that it has made possible large foreign direct investment into the country, it does not mention that FDI has come in the form of purchase of domestic cigarette manufacturing by America’s Altria group, or by an expansion in the presence of such food and beverage companies as Pepsi Cola and MacDonald. There has also been significant investment in mobile telephony by operators from the Middle East and China.

But investment in consumer product and domestic services cannot be the basis of long-term sustainable growth.

The vulnerability of the economy to external flows is revealed by the data on investments and the sources for financing it. During the Musharraf period, the rate of investment has increased by a third, from 17.2 per cent of GDP in 2001-02 to 23.0 per cent in 2006-07. However domestic savings have declined from 17.8 to 16.1 per cent of GDP in the same period. This means that the economy is even more dependent on foreign flows than was the case in the 1990s. This dependence may not mean that the continuing political support of western governments and development institutions such as the World Bank is absolutely critical for economic progress. But there is now reliance on other sources of external finance. In other words, some changes in the structure of the economy notwithstanding, the claim of Islamabad that the economy is now moving on a sustainable course and that it will not derailed by political storms is hard to accept. The economy remains vulnerable to external shocks but of a different kind.