Zulfiqar Ali Bhutto 1971-1977

Luck and Bhutto

GDP grew by close to 5 percent in 1970s

The economic loss of East Pakistan was strongly felt- West Pakistan exported 50 percent of its good to the eastern wing and acquired a large amount of foreign exchange from its raw material exports.

1973 International Increase in Oil prices

1973 saw a serious worldwide recession affecting Pakistans exports.

Recurrent domestic cotton crop failures and floods in 1973, 1974 (along with pest attacks) and 1976, affected Pakistans main exports.

Bhuttos government also laid the foundations for future growth and development from which his successor benefitted

Background

Pakistan lost its east wing which became Bangladesh

It greatly effected the economy because East Pakistan was main producer of Jute and other food crops to be exported

Bhutto became the first democratically elected Leader in west, which was the separated Pakistan

He introduced Nationalization to the country

Nationalization

Definition:

Nationalization is a process of taking a private industry or private assets into public ownership by a national government or state.

Bhuttos Manifesto:

The means of production that generates industrial advance or on which depends other industries must not be allowed to be vested in private hands

All enterprise that includes infrastructure of national economy must be in public ownership

The institution dealing with exchange like Banking and Insurance must be nationalized.

First Phase

The first phase took place in the large manufacturing sector in the capital and intermediary goods market.

31 key industrial units were taken over under the nationalization but it was alleged that nationalization was selective

Units included from fertilizers, chemical, Steel, cement, automobiles and so forth

Second Phase

In the 2nd phase, he declared the nationalization of 13 Banks, over a dozen Insurance companies, 2 petroleum and 10 shipping companies

They said that the wealth of the nation must be used for the benefit of the nation and cannot be allowed to concentrated in bank of the few individuals

Third Phase

The third phase of Nationalization was 2000 cotton ginning, rice husking and vegetable oil producing units

It eliminated the role of middlemen and it was rumored the producer and consumers are at the mercy of these units

Producers were deprived of due share and consumers were getting poor quality products at higher prices

Outcome

Bhuttos economic policy led to deindustrialization and it created pro-government lobby of landlords who were benefited from so-called land reforms

Private sector investment was wiped out and remained only 15% of what was in 1969

Nationalized industries were mostly inefficient and employed only 4% of large scale industrial employment

The complete control of decision making was passed onto the hands of chairman and top functionaries of political parties

Promises were broken

GDP fell to just 1.2% in 1972

Tax Policy

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

The essential inelasticity of tax system remained intact with its heavy dependence on indirect taxes and certain duties rather than direct taxes

In 1975/76, there was 40% increase in indirect taxes over preceding year

Profits of nationalized enterprises fell off rather quickly as inefficiencies crept in and growth slowed down

Collection from income and corporate tax during the 70s did not exceed 1% of GDP

There was only a marginal improvement in total federal and provincial tax revenues from 10.6% of GDP in 1972 to 11.9% in 1976

Fiscal Policy Increase in government expenditure on defence and administration

Defence Expenditure was 6.7% of GDP (1974-75) vs. 2.7% (1965)

Additional burden of Public sector losses

Ability to finance deficit from tax revenue constrained

Growing budget deficit is controlled by reducing subsidies on consumption goods and increasing indirect taxation

However, not much success attained and Deficit financing led towards increased bank borrowing. Budget Deficit as a % of GDP

1950s 2-3%

1960s 4-5%

1972-77 8%

Budget Deficit

During the Bhutto Era, budget deficit averaged over 8% of GDP compared with 2% to 3% in 50s & 4% to 5% in 60s.

Government began to borrow on large scale for current expenditures

Trade Policy

Devaluation of Pakistani Rupee by 133%

Export bonus voucher scheme ended

Exports in 1972 increased by 153% and manufactured exports were grew by 19%

Export refinance scheme was started by State Bank in 1973 and its lending rate was lower than the nominal banking rate

Import of luxury items banned

After 2 years of impressive growth, the last three years of Bhutto saw a reverse trend

Trade Deficit

0

5000

10000

15000

20000

25000

1971 1972 1973 1974 1975 1976 1977

Exports

Imports

Monetary Policy

The average annual monetary growth rate 1972-77 was 18.8% (with the lowest of 7.8% in 1975)

The State Bank raised the bank rates gradually from 5% to 10% during 1972 to 1977, also the interest on bank advances and bank deposits were adjusted upward

High monetary expansion was due to high borrowings and financing of the governments deficit transaction

Consumer price index shot up to a 18% thus sending the dream manifesto of basic necessities for all, down the drain.

The international uncontrollable factor responsible was the prices of petroleum and other imports

Rupee was devalued and the exchange rate went from Rs. 4.76 to a dollar to Rs. 11 per US $

Domestic factors Non domestic factors

Monetary Policy

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

1971 1972 1973 1974 1975 1976 1977

Money Supply

GDP Growth

Growth in producing Goods

Government of Pakistan, Pakistan Economic Survey, 1995-96, Islamabad 1996

Inflation Pressure

High Inflation experience during Bhuttos regime

Imported inflation

The international Oil prices hike in 1973-74 and prices of fertilizers also increased

Import cost of petroleum has increased by 300%

Domestic economic policies

There was an increase in currency circulation (deficit financing) during 72-76

Inflation rose by 20% to the previous growth

Reduction of consumer good and doubling of prices

Subsidies

To Combat on Inflation, large subsidies were given on: Wheat

Efforts were made to keep wheat prices relatively low and procurement price was increased from Rs. 0.5 in 1969 to Rs. 1 in 1975 which was 100% increase

Fertilizers Large direct subsidies on fertilizers and pesticides were

given for plant protection Energy

Oil import bill was rising up although Gas prices were maintained at low level to encourage use of an indigenous resource. But incentives for increased production were not attractive and there was great dependence on imported energy.

Industrial Sector

Private sector confidence was totally eroded

Public sector investment jumped from 5% to 75% in Bhutto era

Public sector investment was concentrated in projects which had no immediate pay off

Areas such as automobiles, cements and oil refining were profitable while others incurred losses

Inefficiency of Nationalized units

Overstaffing, no accountability and corruption

Government was to appoint their own directors and there was no parliamentary committee set up for scrutiny

Social Services - Education

New education policy was introduced

Free and universal education up to class 8

Technical education for all

An educational program for women in rural areas

This was the only sector which was thriving in the era with improvements

Immediate focus was the nationalization of private educational institutions and take over has effected the quality of education adversely.

Total govt. expenditure on education increased from 0.8 million in 1972 to 2.8 million 1976

Female education on primary level did relatively well.

Bhuttos Era

1960s 1970s

GDP 6.77 4.6

Manufacturing 9.93 5.5

Agriculture 5.8 2.1

Service Sector 6.74 6.30

Commodity-

Producing Sector

6.83 3.88

Industry (Large scale) 13.4 3.8

End of Bhuttos era

Elections were held on March 7, 1977.

The Pakistan Peoples Party won those elections, but was accused bytheir opponents, Pakistan National Alliance, of rigging the elections. OnMarch 14, 1977.

The Alliance started a series of nationwide protests. Talks between theAlliance and Bhutto government were held in June 1977 and anagreement was reached, but it could not be implemented.

Fresh elections were announced for October 15, 1977.

But on July 5, 1977, the Chief of Army Staff, General Muhammad Zia-ul-Haq, imposed Martial Law and the elections were postponed.