From boom to bust — A balance sheet of Pakistan’s growth patterns over three decades
In December 1991, the then finance minister Sartaj Aziz delivered a keynote address on Pakistan’s economy at the Lahore University of Management Sciences (Lums) at a conference that convened some of the country’s brightest minds to assess the country’s economic landscape.
The proceedings of the conference were meticulously edited and published in a book by Professor Anjum Nasim. The late Sartaj sahab’s words are worth reflecting on, and a comparison of the data from his era and ours is illuminating. A few excerpts, with slight edits for readability, will be of interest to readers about the current state of our economy.
The aim? To craft a balanced narrative — one that doesn’t shy away from acknowledging both triumphs and tribulations.
How we grew
Sartaj sahab began his speech systematically. “We need to begin with an overview of the last 30 years of development history in Pakistan and try to make a balance sheet of both positive and negative factors,” he urged. The speech to come would be a clarion call to action, providing a panoramic view of history in order to build a roadmap for prosperity.
“We have many positive features,” he began, “the most important being a sustained growth of almost six per cent (over the previous 30 years)”. This was an entirely different Pakistan from ours, brimming with promise and dynamism, and growing faster than our neighbours.
Across the border, India lagged behind, inching along at just above 4pc. The tables seemed firmly set, destinies apparent.
But fast forward 30 years, and the landscape has shifted drastically. The trajectories of these two nations underwent a dramatic reversal, in an eerily precise way. India, once the tortoise in the race, has surged ahead with newfound vigour, consistently clocking in growth rates of around 6pc. Pakistan, on the other hand, finds itself at a crossroads, grappling with a more subdued 4pc growth rate.
This can be illustrated by comparing the two countries’ data in two halves: in the 30 years leading up to 1991, and the three decades since.
Inflation (mostly) under control
“There has been relative price stability in the country. Of the last 30 years, there have only been seven years when inflation went to double digits,” Sartaj sahab noted at the conference.
He painted a compelling picture — one that revealed a tale of contrasts and fluctuations. Barring the 1973-4 Oil Crisis, Pakistan kept inflation in check, often outperforming India on the price stability front. In fact, inflation remained below that in India two thirds of the time across those three decades.
Again, this picture is nearly exactly the reverse over the last three decades, with our inflation being lower than India’s only a third of the time. Perhaps more worryingly, Pakistan saw three major price shocks (in 2008, 2018 and 2022) that are better explained by our policies than exogenous circumstances.
The dawn of industrialisation
Sartaj sahab continued with optimism: “The industry’s share of the GDP has expanded significantly, rising from 10pc to 26pc. Specifically, large-scale manufacturing (LSM) has surged to nearly 13pc of the GDP (gross domestic product).”
The sector has since fallen back to about 20pc and LSM to under 10pc.
“The increase in exports is also quite encouraging. Two-thirds of our exports are manufactures, although simple manufactures. However, there is a notable structural shift, albeit focused and heavily reliant on cotton.”
Sartaj sahab was correct in being bullish on exports. Pakistan was exporting twice as much as India or Bangladesh, relative to the size of the economy. We were, however, standing at the summit and about to go through a generation of reversal, with our exports nearly halving in share, while our neighbours were gearing up for an unprecedented surge, more than doubling their own export capacities.
As we think about what ails Pakistan’s economy today, it is worth asking: what went wrong in those pivotal decades?
In his prescience, Sartaj sahab was already worrying about emerging vulnerabilities: “This performance, however, is marked by several negative factors, as there are serious weaknesses and imbalances in the system.”
Failure to save
“First, the rate of investments and saving is very low in Pakistan”.
Sartaj sahab’ was already worried, but things were about to get worse.
A comparison with India and Bangladesh illustrates this story of an early 1990s inflection best. Consider the data he would have been looking at, at the top, versus what has happened since, at the bottom. In a meaningful way, we are no longer in this peer group.
Sartaj sahab also had the foresight to warn about our savings rate at a time when all seemed well in terms of our growth.
“For Pakistan, to manage a sustained growth rate of about 6pc with only 18pc investment, is quite heroic. The secret lies in the agriculture and water sectors where pay-off of our investment has been very high, but this cannot be repeated. These easy opportunities of low ICOR (Incremental Capital Output Ratio or the impact of savings on a country’s income) … would not be available anymore. Investment has to be stepped up and … it will require a very substantial increase in domestic (taxation and) savings,” he said.
Nations thrive on investments, yet Pakistan found itself trailing behind its counterparts in this crucial aspect of securing its future prosperity. For too long, it relied on the crutch of infrastructure funded through the Indus Water Treaty and reaped the rewards of the Green Revolution, masking its underlying deficiencies. Sartaj sahab saw through this veneer of success, recognising that without addressing our abysmal savings rate, our growth would inevitably slow down.
As it turned out, this is precisely what unfolded.
In fact, the picture gets clearer — and a lot worse — when we add more comparator countries. Across Asia, the trajectory of economic reinvestment over the past five decades paints a clear picture: China emerges as the frontrunner, Pakistan languishes at the bottom, and the rest fall somewhere in between.
Pakistan’s poor performance on savings is one of the clearest markers of a long-standing crisis: we have underinvested in our future for nearly two generations now. Despite its critical significance, this issue continues to be grossly overlooked in policy discussions to this day.
A mostly closed economy
Reflecting on the seismic shifts that marked the end of the Cold War and the subsequent transformations in Eastern Europe, Sartaj sahab said: “In a world of increasingly rapid changes in technology, business organisations, and economic conditions, the premium is on openness. We should be open not just to trade but also to ideas, to foreign investment, and to business methods.”
These words echo a similar sentiment expressed by former Indian Prime Minister Narasimha Rao earlier in the year. During a pivotal moment of historic economic reforms, Rao articulated his vision for a self-reliant nation: “Self-reliance means the ability to pay for our imports through our exports. My motto is trade, not aid. Aid is a crutch. Trade builds pride… After changing the value of the rupee, we undertook a major overhaul of the trade policy. Our message was simple — you cannot import if you do not export.”
However, unlike our neighbour, we have deviated from this path of openness in the past decade. Instead, we’ve witnessed a troubling trend of increasing non-tariff barriers to trade, driven by powerful business lobbies and politically connected entities.
Spending beyond means
“Another serious issue is the fiscal deficit. The fiscal situation has created numerous short-term problems because, over the past few years, this growing fiscal deficit has been financed through large-scale external and domestic borrowing. This gives us a key element of the strategy for the future.”
In essence, Sartaj sahab was advocating for a crucial shift: tax more, spend less. These words echoed through countless publications, reports, and strategy papers in Pakistan in the years to come, yielding disappointingly little impact.
Growing malaise in state-owned enterprises
He is worth quoting at length on SOEs:
“I am not implying that public sector enterprises are inherently inferior, but there are political prerequisites for their success: a strong ideological framework; a well-trained and disciplined party cadres, which can create a great deal of non-material motivation. If you do not have these prerequisites, you get stuck with bureaucratic socialism, as we were, and then you get the worst of both worlds.”
“The first problem in most of the public sector industries is overstaffing. Every political government is under pressure to provide jobs…”
“The second problem arises from the relative reluctance or hesitance of the bureaucratic managers to take risks. If they have a job for two or three years, why should they take the risk and make investment in new technologies or in expansion plans unless they are asked to do so by their superiors?”
“And what is much worse, the price policies of most public sector units tend to be influenced by political considerations. As a result, they do not allow the market forces to operate as the public does not take a rise in prices well.”
“The result of the policies are chronic losses in most public sector enterprises. Having invested Rs40 to Rs50 billion in all these units, we should have got a return of at least 10pc a year. Instead, the net impact of all the public sector units has been a net loss of Rs4b to Rs5b every year. And these are only the apparent balance sheet losses and do not include all the loans that were written off or remain on the books as bad loans. Which budget can absorb losses of that magnitude year after year?”
Once again, a problem that was well understood 30 years ago has only been allowed to worsen — the yearly burden of loss-making SOEs now comprises approximately one-fifth of our budget deficit.
Unsustainable domestic debt
He then narrated how domestic borrowing rapidly multiplied in size throughout the 80s, growing to more than 25 times the size it had earlier been.
“[…] the annual borrowing … is just enough to finance the debt servicing. If you borrow at 15pc … the debt servicing doubles in less than five years. Now we are borrowing only to service the domestic debt that we have so far contracted.”
“The total tax and non-tax revenues was Rs150b (last year). Approximately, Rs80b is spent on debt-servicing, Rs70b on defence, and nothing is left for other expenditures. Our entire federal government is financed by borrowing, and our entire development is financed by borrowings. This is the fiscal bind that we face.”
We can only dream of governments with the minimum prudence to heed this advice. In the past decade alone, Pakistan’s debt has risen by more than 40pc, and the gap between taxation and government expenditures has widened.
Missing investments
“Because fiscal resources were scarce, we did not … (make investments) in education and health.
“This is one of the tragedies of Pakistan, that while in economic terms, after achieving 6pc growth rate for 30 years we are about to graduate to middle-income status — in terms of social progress, we are bracketed with the lowest of low-income countries.
“If we had invested more money in education and population planning in the 1970s, when our population growth rate was 2.2pc as in India, today our literacy rate would be (nearly double what it was).
“Thus the fiscal imbalance is not just a fiscal imbalance in a narrow sense, it has created a major imbalance in the development strategy as a whole, because of our inability to balance the social and economic sectors.”
On multiple education attainment measures, Pakistan in 2024 lags behind what other countries in South Asia achieved 20, and even 30 years ago.
Liberalising firms, taxes, and tariffs
“Privatisation involves two processes: one is to sell off those public sector enterprises which we cannot manage very well, and simultaneously open those sectors of the economy to the private sector which are reserved for the public sector at the moment.”
“It will take time to move to a more automatic and capacity taxation system because of the vested interests involved.”
“Why should anybody invest in export industries with (an overvalued) exchange rate?”
Sartaj sahab recognised that the process of tariff reforms, while necessary, is not without its complexities and repercussions. The dismantling of high tariff walls poses a significant challenge to industries that have long thrived under protectionist measures. Hence, a cautious approach is warranted, although with a commitment to gradual reduction over the span of two to three years.
His proposed strategy involves a dual approach: easing tariffs on machinery and capital goods to spur productivity and innovation, while simultaneously lowering maximum tariff rates on consumer imports, with exceptions like automobiles, to a more reasonable 50pc threshold. This balanced approach seeks to foster competitiveness while safeguarding strategic sectors.
In simpler words, his message can be broken down into three core ideas — the first being that a cheap dollar hurts exports and encourages industrialists to move away from export sectors and towards becoming low value-add assemblers who are not viable without high duties.
Second, he says we are constrained in the short term in moving away from tariffs because of our overreliance on tariffs and export duties to raise government revenue. This is the same plea taken every year by our economic managers. The fact that we have not managed to fix this crucial issue in three decades is inexcusable.
Lastly, he defends the protection of certain industries, such as car assembly. The fact that, 30 years later, car (and other durable goods) assembly remains dependent on high tariff walls tells you that this stance was a singular misjudgment in his otherwise insightful speech.
The road ahead
“Now if you look at this balance sheet of our achievements and weaknesses, the strategy for financing our economic and social goals for the next decade flows very logically from this analysis. You can only conclude that without a drastic structural change which reduces the role of the government, you cannot solve any problem. In the past 20 years, governments have been concentrating on issues which are not its concern and neglecting areas like education and health,” Sartaj sahab concluded.
He could have been writing in 2024.
Over 30 years ago, Sartaj sahab had identified the trade and fiscal deficits, inefficient SOEs, low savings rates, and low investments in human capital as some critical economic problems Pakistan faced in 1991. These remain our most pressing issues today. If we are to finally tackle these problems effectively, it is worth assessing the attention being paid to each one, and asking why our history is littered with unheeded policy prescriptions like Sartaj sahab’s.
Header image created with AI