By Muhammad Obaid Ahmed
- Decoding Economic policy: Neoliberalism in Pakistan
- Pakistan faces a myriad of economic challenges including high unemployment, widespread poverty, stagnant growth, and monetary instability.
- Historically, the country has relied on governmental intervention for industrial and agricultural development, but shifts towards neoliberal policies, including privatization and liberalization, have had mixed results.
- The nation’s heavy reliance on oil imports, coupled with its inability to control trade dynamics, exacerbates its economic challenges, requiring strategic solutions such as diversifying energy sources and managing imports more effectively.
Pakistan finds itself grappling with a myriad of economic hurdles, ranging from soaring unemployment rates and widespread poverty to stagnating growth and monetary instabilities. In order to fully comprehend the complexities of these challenges, a holistic examination of Pakistan’s overarching policy framework becomes imperative.
Post-World War II, newly independent nations embraced the developmental Keynesian model to propel industrialization and achieve economic growth, diverging from the colonial development trajectory. The phenomenon of colonial developmental path is meticulously quantified by scholars such as Irfan Habib and Utsa Patnaik. During the colonial period, a substantial portion of India’s surplus resources flowed to Europe, fueling the economic advancement of European nations. This drain of resources from colonized regions to colonial powers significantly hampered the economic development prospects of the colonies themselves.
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The developmentist models in the Third World encompassed diverse approaches, including the Nehruvian model, Ayubian model, South Korean model, and Brazilian model, each characterized by distinct strategies and policies. However, a common thread running through all these models was the substantial role played by the government in fostering industrialization and overall national development.
The Keynesian developmentalist model witnessed a decline during the tumultuous period spanning the 1970s to the 1980s. In the First World, this era was marked by the ascendancy of the New Right, epitomized by the political leadership of Reagan and Thatcher, alongside the economic doctrines championed by Milton Friedman. The OPEC crises of 1973 and 1978 exerted significant pressure on global economic dynamics, further contributing to the erosion of the Keynesian consensus. Similarly, in the Third World, the onset of the Mexican debt crisis in 1978, which escalated into a full-blown catastrophe by 1982, dealt a severe blow to the Keynesian developmentalist paradigm.
Throughout its history, Pakistan has consistently responded to the dynamic shifts within the global economy, aligning itself with international changes on the economic front. In the annals of Pakistan’s economic evolution, the early strides in industrial and agricultural development were predominantly propelled by governmental intervention rather than adherence to the principles of a free-market economy.
Neoliberalism in pakistan and the trajectory of industrial development predominantly relied on government support facilitated through institutions like the Pakistan Industrial Credit and Investment Corporation (PICIC) and the Pakistan Industrial Development Corporation (PIDC). Likewise, the Green Revolution, a pivotal agricultural transformation that significantly augmented crop yields, was primarily spearheaded by government initiatives.
Following Ayub Khan’s tenure, the government under Zulfikar Ali Bhutto embraced a policy of nationalization, which is widely attributed as the primary catalyst for the economic downturn in Pakistan. The subsequent era of General Zia-ul-Haq is often depicted as a reversal of Bhutto’s policies; however, there was no significant denationalization during Zia’s regime.
It was during the tenure of Prime Minister Nawaz Sharif that a substantial privatization drive was initiated, spurred by structural shifts occurring globally. These changes in the global economy necessitated a reassessment of Pakistan’s economic strategies. Here, we delve into the transformative forces shaping the global economic landscape during that period.
As the first world underwent a reversal of the Keynesian economic model, a parallel trend emerged in the third world where debt became a tool to dismantle the developmentalist approach. Pakistan, too, found itself amidst this economic transformation and signed a loan agreement with the IMF. A pivotal condition of this agreement was adherence to a new policy package, stemming from the Washington Consensus ideology. This package, commonly known as a structural adjustment program, revolves around three core principles: liberalization, privatization, and deregulation.
In Pakistan, a vivid illustration of liberalization is evident through the dramatic reduction in average tariffs. During General Zia-ul-Haq’s regime, tariffs stood at a staggering 46 percent, whereas in contemporary times, they have dwindled to single figures. Meanwhile, the privatization saga in Russia, famously termed “shock therapy,” serves as a compelling example of privatization on a grand scale.
Spearheaded by figures like Joseph Stiglitz, a notable economist, the privatization drive aimed to swiftly transfer state-owned enterprises into private hands. However, the fallout from this endeavor proved to be disastrous, leading Stiglitz to become a vocal critic of neoliberalism due to its adverse effects. Furthermore, the aftermath of deregulation paved the way for the emergence of new forms of financial capital, notably derivatives and other complex assets. This proliferation ultimately contributed to the financial crises of 2008.
The persistent challenge facing many third-world nations, including Pakistan, lies in their high budget deficits largely attributed to substantial military expenditures. Historically, these deficits have been offset by aid from the United States, particularly during the war on terror. However, with the conclusion of this conflict, the U.S. has shifted its strategic priorities, leading to a cessation of aid to Pakistan.
Despite this shift, Pakistan’s spending habits have remained unchanged, resulting in a continued reliance on external sources to finance its deficits, consequently leading to a burgeoning trade deficit. An alarming trend is observable in Pakistan’s trade deficit. Since 2003, this deficit has exhibited a troubling trajectory, steadily deteriorating over the years.
This imbalance in the balance of payments compels Pakistan to seek assistance from the International Monetary Fund (IMF). However, IMF loans come with stringent conditions, including limited control over imports and the imposition of high taxes to address budget shortfalls. These taxes predominantly take the form of indirect levies, often targeting necessities, thereby exacerbating the short-term challenge of soaring annual inflation rates, reaching as high as 24.8 percent in recent years. The IMF’s policy package has led to negative growth in real terms over the past year, plunging Pakistan into a state of stagflation.
In Pakistan’s political and economic spheres, the prevailing discourse revolves around enhancing the implementation of the existing policy package, rather than advocating for a fundamental shift in the policy framework. Contrary to popular belief among some economists, the notion that continuous policy changes exacerbate Pakistan’s economic woes is misguided. Instead, the current challenges facing the nation are indicative of the inherent flaws within the neoliberal paradigm.
Neoliberalism in pakistan. An intriguing paradox within the new free market system manifests in the form of sovereign guarantees extended by the government to capitalists. A prime illustration of this phenomenon is evident in the privatization of the power sector. Privatization policy of power sector has resulted in a substantial burden on the government, with outstanding debts exceeding 2 trillion rupees owed to Independent Power Producers (IPPs) in the form of capacity payments.
When dissecting the reasons behind the failure of IMF policies in Pakistan, a glaring culprit emerges: the privatization of the power sector. While numerous countries have entered into agreements with the IMF for short-term stabilization programs, Pakistan’s endeavors have faltered, prompting a critical inquiry into the root causes of this divergence.
As previously discussed, Pakistan’s inability to control its trade dynamics exacerbates the challenge. Typically, in classical economic theory, trade imbalances are rectified through currency devaluation, as cheaper goods spur demand for exports, thereby restoring equilibrium. However, this theory falters within Pakistan’s context due to the inelastic demand for fossil fuels, which constitute a significant portion of its imports. Consequently, as Pakistan grapples with a trade deficit, the appreciation of the dollar amplifies the cost of importing oil and gas, thus inflating the cost of production for exporters.
Despite currency devaluation, Pakistani goods struggle to compete in the global market. Indeed, the ramifications of currency devaluation extend beyond fossil fuels to encompass a myriad of inputs utilized by exporters in the production process. As per the State Bank’s assessment, the import intensity of Pakistan’s exports stands at a substantial 40 percent.
This statistic underscores the profound impact of currency devaluation on the cost of production, as a weaker currency translates into elevated costs for imported inputs. Consequently, exporters face formidable challenges as their production expenses soar, further compounding Pakistan’s struggle to maintain competitiveness in the global marketplace, highlighting the nuanced complexities that defy classical economic principles.
To address its current predicament, Pakistan must mitigate its heavy reliance on oil imports. One viable solution lies in the Iran-Pakistan and TAPI gas pipeline projects, which offer promising alternatives to traditional fossil fuels. Additionally, Pakistan ought to curtail luxury imports, a move crucial for conserving foreign exchange reserves.
While Pakistan’s WTO membership limits its ability to impose tariffs or quotas on imports, the nation can leverage mechanisms such as letters of credit to manage its trade dynamics. In this vein, Pakistan should enact a comprehensive ban on luxury imports, redirecting resources towards goods with positive externalities. Moreover, partial letters of credit can be allocated to imports with close substitutes, aligning with the country’s trade deficit realities and fostering a more balanced import portfolio.
In conclusion, revisiting our earlier discourse reveals a stark reality: while many third-world nations, including Pakistan, have achieved political independence from colonial powers, they continue to grapple with economic colonization by imperial forces. This historical struggle underscores the urgent imperative of reclaiming economic sovereignty. Pakistan’s quest for self-determination extends beyond political autonomy to encompass economic empowerment, highlighting the ongoing battle to chart a course free from external constraints and dependencies. As the nation navigates its economic challenges, the pursuit of genuine economic sovereignty remains a paramount objective, symbolizing the enduring struggle for liberation in the contemporary world order.
