Early Problems of Pakistan and Their Impact on Pakistan Economy

Early Problems of Pakistan and Their Impact on Pakistan Economy

On independence, Pakistan was without any infrastructure to set up a new state. It had neither of the two capital cities, Calcutta or New Delhi, developed by the British in India. It established its capital at Karachi, which had become a provincial capital only ten years previously. It has no office buildings, furniture or stationary whereby the administrative machinery for the seat of a government could be setup. People sat under trees, bringing furniture from where they resided, and government started functioning. Even Lord Mountbatten, then the governor general of India, described Karachi as as a “tent” compared to the splendor of New Delhi.

    

 Apart from the practical difficulty of setting up government machinery, there was the political difficulty that the provincial government of Sindh represented the separation of Karachi from the province. The Sindh Muslim league began to function as an opposition party. The cash strapped government of Pakistan promised financial compensation, but the provincial did not consider the amount adequate.

Riots and refugees

The partition of India was accompanied by widespread riots throughout the subcontinent. Since the boundary awards had been delayed, riots were most rampant in the Punjab. The riots were started by Sikhs and Rashtriyaswan Sevak Sangh (RSS), the militant Hindu organization, and were followed by a Muslim reprisal which was also swift and brutal. There was widespread murder, rape and arson on both sides. Partition has resulted in the largest human migration in recorded history. According to Pakistani estimates, approximately, 6500000 Muslim reached Pakistan from India; 5200000 came from the east Punjab, including the princely states where was severe. 500,000 lost their lives or were abducted. From Pakistan there was an exodus of about 5,500,000 Hindus and Sikhs. According to Richard Symonds, writing, writing in 1950, the population of Pakistan increased by about 100,000 people.

In the face of unspeakable atrocities, writers from all the three communities, Hindu, Muslims and Sikhs, led by Krishan Chandar, Sa’adat Hasan Manto and Rajinder Singh Bedi rose to the occasion and most impartially showed that the riots were crimes not against bullets, but these writers provided the bridge to mental reconciliation and normalcy. At first, numbers proved deceptive. Inevitably as news of atrocities spread in Karachi, there was rioting against the Hindus. On 9 January 1948, the Quaid-i-Azam warned the Muslim refugees ‘not to abuse hospitality that was been extended to them.

Division of Assets

Field Marshal Sir Claude Auchinlech, the British commander-in-chief of India has taken the position that regardless of the partition of India, the Armed forces should not be divided. However, when a political decision to divide the Armed Forces was taken, he testified that the Indian Government wanted to prevent the establishment of Pakistan. He did not admit that had delayed the decision of physically dividing the military assets before partition.

As far as financial assets were concerned, India was prepared to pay only 5 % of the total capital on the condition that Pakistan accept the liability of 20%of dept. in November 1947, H.M. Patel, Financial secretary of India, the Ch. Muhammad Ali, Secretary General, Government of Pakistan agreed that the disputed portion of Pakistan’s share of the cash balances in the sterling would be 17.5 %. In term of cash, it worked out to Rs 750 million. But even this agreed amount was not transferred to Pakistan. Nehru report to Liaqat Ali Khan that India could not release the money because Pakistan planned to used it against India in the ongoing Kashmir war. When Junagadh, with a Muslim ruler and Hindu majority, had acceded to Pakistan, India had forcibly occupied it, saying that Janagadh’s accession to Pakistan was against the principle of the religious divide. India had occupied Kashmir, which had a Hindu ruler and a Muslim majority, against the principle it had recently expounded. Nehru’s linking the division of assets with the Kashmir war was a false argument that deprived India of its moral ground. Gandhi started a fast undo death, forcing the government of India to transfer Pakistan’s share. Lord Mountbatten and Nehru had sidelined Gandhi therefore they resented his intervention but were forced to pay an instaltment of Pakistan’s share of assets to induce Gandhi to break his fast. Gandhi was assassinated on 30 January 1948 by an RSS member, Nathuram Godse, Gandhi had rendered ineffective the Cabinet Mission Plan but had now paid with his life for helping Pakistan. The payment of this installment did not end Pakistan’s crises. The Nizam of Hyderabad sent a cheque for a large amount, but since it was based on Indian securities, Nehru did not allow it to be encashed. At this, Sir Adamjee Haji Dawood Arranged for a loan on his Guarantee from Mohammad Ali Habib, the founder of Habib Bank, thereby preventing the financial collapse of Pakistan

THE KASHMIR WAR

           

Nehru had made a public reversal of the principle of Partition by occupying first Junagadh and then Kashmir. This diplomatic gamble could have only been taken on the expectation that Pakistan would not survive the blow. Pakistan had been denied its share of military and financial assets. Then reorganization of the Pakistan Army was still underway then the Kashmir War was thrust on it. Within Kashmir, the state forces had started a massacare of Muslim in Poonch. These Muslims had relatives in the tribal areas of Pakistan who invaded Kashmir hoping to rescue their relatives. The Pakistan Army did not have the resources to halt their advance. They were unable to control the tribals even when they looted Muslim property in Rawalpindi. Secondly, had  Pakistan taken action against the tribesmen, it would have popularized the demand for Pakhtunistan—an independent Pathan state, a demand supported by the Congress leaders.

The Government of India made the plea that it entered Kashmir because the Maharaja had signed an Instrument of Accession to India. The Instrument of Accession has never surfaced and Alastair Lamb has proved that it was never signed. Nehru promised the people of Kashmir and the whole world that the fate of Kashmir would not be decided by the accession, but by a free and impartial plebiscite of the people of Jammu and Kashmir.⁴ India has since reneged on this promise and this is one of two issues which still beset Pakistan-India relations.

THE INDUS WATER DISPUTE

The Indus Waters dispute, like the Kashmir war, had its origin in the Radcliffe Awards. Just as the award of Gurdaspur to India was responsible for giving India access to Kashmir, the award of Ferozpur and Zira to India resulted in the Canal Waters dispute. All three were Muslim majority districts, and were given to India for a purpose.

The British had developed the upper Indus basin as an integrated unit having a vast irrigation network. The Radcliffe Award gave India the Ferozpur Headworks that controlled the Sutlej River as well as the Madopur Headworks controlling the River Ravi. An Arbitral Tribunal was set up under Sir Patrick Spens, which recommended that the flow of water to Pakistan should not be stopped. Immediately after the Tribunal was wound up in April 1948, the Indian Government actually cut off the flow of water to Pakistan. Since this was in breach of international law which holds that an upper riparian country cannot interfere with the existing irrigation of the lower riparian country, the supply was partially restored. This long standing dispute was apparently resolved in 1960 when Nehru came to Karachi to sign an agreement with President Ayub and Eugene Black, Vice-President of the World Bank. India is continuing with its Baglihar project despite Pakistan's protests and this threatens to upset the Indus Basin Treaty of 1960.

Recently the World Bank has been asked to arbitrate between India and Pakistan and has prepared a report which awaits consideration.

THE JINNAH ERA

One of the greatest setbacks to Pakistan in its early days was the death of the Quaid-i-Azam, barely thirteen months after Independence. The presence of the Quaid-i-Azam as Governor General had been vital to the survival of Pakistan. Lord Mountbatten had publicly admitted that had he become the common Governor General of India and Pakistan, Partition would have been temporary. In this design, he had the support of his Prime Minister, Clement Atlee who while speaking on the Independence Bill, had expressed his hope that Pakistan would not last. It was to prevent this outcome that the All-India Muslim League nominated M.A. Jinnah to be the first Governor General of Pakistan.

In these peculiar circumstances, the Independence Act was amended to make the Governor General and not the Prime Minister the chief executive of Pakistan. From 30 December 1947 all vital policy decisions would be taken by the Governor General in cabinet. M.A. Jinnah also became the chief executive of the Balochistan province. There had been no political reforms in Balochistan up until Independence, i.e there was no Governor, no Assembly.

M.A. Jinnah envisaged Pakistan as a modern state, not as a theocracy. He chastised Muslim migrants from India on 9 January 1948 for the anti-Hindu riots in Karachi.' His 11 August 1947 speech giving equal rights to minorities was the result of years of deliberation. On 5 November 1941 he told H.V. Hodson that minorities would be represented in the cabinet. His only reservation then had been that the Hindus being a minority 'could not dictate policy'.

In the domain of foreign policy he held out friendship to all upholding the Charter of the United Nations. He believed in leaning towards the West without going out of the way to annoy the USSR. He noted later that the USSR was the only country not to congratulate Pakistan on its creation. He undertook a personal initiative with regard to Afghanistan, the only country to oppose Pakistan's membership of the UN. On 3 December 1947, the Afghan Ambassador presented his credentials to the Governor General of Pakistan as the result of negotiations conducted by the special representative, Nawab Saeedullah Khan. Jinnah also strongly supported the Palestinian cause and upheld the independence of Indonesia.

In terms of internal politics, although the Congress ministry in NWFP had lost its representative status in the Referendum, the Governor General let Dr Khan Sahib head the provincial administration. However, when Dr Khan Sahib refused to salute the Pakistani Flag and persisted in his refusal, the Governor General was obliged to dismiss his ministry on 22 August 1947.

The Quaid-i-Azam was able to visit East Bengal only once as Governor General. In his speech at Curzon Hall, Dhaka, he reiterated the decision of the AIML Delhi Legislators Convention in March 1946, that Urdu would be the official language of Pakistan. In his speech on 20 March 1948 at Dhaka, on 12 April 1948 at Peshawar, and on 15 June 1948 at Quetta, he warned the people against provincialism.

He advocated Islamic socialism and Islamic social justice, although Pakistan had to depend on its few plutocrats for its solvency. Jinnah prescribed industrialisation as the key to development. On 1 April 1948, he hailed the issuance of Pakistan's own currency as an assertion of Pakistan's economic viability and independence. On 1 July 1948, while inaugurating the State Bank he called upon it to undertake research to make banking compatible with Islamic principles. He told the youth to choose a career in commerce over one in the civil or government service.

At the Chittagong meeting on 25 March 1948, he told gazetted officers that the country would no longer be ruled by the bureaucracy and that they should have nothing to do with party politics. Addressing the military staff college at Quetta on 14 June 1948, he reminded the military of the oath which they were required to take, the text of which he read out.

By 12 April 1948, the Quaid-i-Azam's illness had overtaken him. In June he had to reside at Quetta and Ziarat in Balochistan. He was brought to Karachi without protocol on 11 September 1948. His ambulance broke down, and though his physicians said that the Quaid-i-Azam had not suffered due to the breakdown, he died the same evening.

The death of the Quaid-i-Azam created a sense of uncertainty. Sensing this, India attacked Hyderabad the next day. By all standards, the achievement of Pakistan was momentous. Jinnah had rarely displayed emotion, but his followers shed uninhibited tears, feeling the weight of history while carrying his coffin. In Stanley Wolpert's famous words:

Few individuals significantly alter the course of history. Fewer still modify the map of the world. Hardly anyone can be credited with creating a nation-state. Mohammad Ali Jinnah did all three.

THE LIAQUAT ERA 1948-1951

Liaquat Ali Khan (1895-1951), the Prime Minister of Pakistan, had been Honorary Secretary of the AIML and leader of its bloc in the Interim Government. Due to his role in the Pakistan Movement, he had the magnetism to pull the country out of its despondency over the Quaid-i­Azam's death and the consequent Indian attack on Hyderabad, Deccan. The challenges of nation building were still immense, and Liaquat Ali Khan was able to meet only some of them. As far as framing of the constitution was concerned, Liaquat Ali Khan presented the Objectives Resolution on 12 March 1949. This is a valuable document that has been retained in all subsequent constitutions. The Interim Report of 28 September 1950 proved so unpopular that it had to be withdrawn in November. In the Interim Report, the Prime Minister had recommended the concentration of power in the future president. Other major impediments such as differences over the constitutional role of Islam and the quantum of East Bengal's representation were not removed.

Liaquat Ali Khan's policy of giving precedence to the Muslim League over parliament, increased the tension between the centre and provinces and resulted in the formation of twenty-one opposition parties. Since one party was given overwhelming importance, opposition elements began forming new parties. Liaquat Ali Khan was popular with the masses but the political forces were aligned against him. The Quaid-i-Azam himself complained of rising provincialism and Yusuf Haroon, as Sindh Chief Minister, also warned against this trend. Liaquat dismissed both the Punjab Governor, Sir Francis Mudie and the Punjab Assembly, and the situation did not improve till the end of 1950 when the Muslim League won the elections to the NWFP and West Punjab. This success did not extend to East Bengal because of their outstanding demand to declare Bengali one of the national languages of Pakistan.

The constitution and the Kashmir problem remained unresolved, but Liaquat Ali Khan obtained favourable resolutions on 13 August 1948 and 25 July 1951 from the UN, calling for an impartial plebiscite. Till today these resolutions are the bedrock of Pakistan's stand on Kashmir.

Liaquat Ali Khan made rapid strides towards industrialisation. He formed two Pakistan Industrial Development Corporations, one for large and one for small-scale industries. He did not wait for private entrepreneurs, but kept provision for their partnership. Pakistan was the largest jute producer in the world, but at the time of Independence it had no jute mill. It had a large cotton crop but only fourteen cotton mills. Liaquat's boldest decision was his refusal to devalue the rupee following the British and then Indian devaluation on 15 September 1949. India refused to buy jute and other commodities at the new rate. Liaquat was demonstrating Pakistan's financial viability with a vengeance. This caused the greatest stress to the jute growers of East Bengal. Liaquat travelled to Dhaka to assure them that if the Indians did not buy jute at the new rate, the Government of Pakistan would buy the entire crop. Since Liaquat Ali Khan was a man of unassailable character, the peasants relied on him and refused to sell at the old price.

Liaqaut Ali Khan accelerated Bengali recruitment in both the armed and civil services. The government gained financial respite because of the Korean War which gave a boost to Pakistani exports. This may have been a modest and ephemeral respite for Pakistan’s economy but it was a much needed one. Similarly Liaquat’s efforts to achieve economic independence may have taken gone into building a centre.

Liaqaut Ali Khan constructed the 107 miles long BRB canal on the Punjab border and in July 1951, he de-escalated tension by a show of strength. He negotiated the Liaquat-Nehru Pact giving progress when, in Rawalpindi on 16 October 1951, he was assassinated. His last words were: “May God protect Pakistan.”

ECONOMIC DEVELOPMENT

The first objection to be made to the creation of Pakistan was that the state would not be economically viable, that is, it would not have the finances to survive. After Pakistan was created, the Government of India refused to give its share of financial assets. The excuse that Nehru gave for this was that since there was a war over Kashmir, by handing over the financial resources India would be helping Pakistan to defeat it. Mahatma Gandhi however saw the injustice of this. He went on hunger strike against the Government of India, so that it was forced to hand over 17.5 per cent of Pakistan's share. Gandhi was killed by a member of an extremist political group in India, one of the reasons for whose anger with Gandhi was the fact that he had helped Pakistan.

Yet, despite the amount that was received, which was just one installment of the amount due, Pakistan was seriously short of finances. As has been mentioned before, the ^*Nizam of Hyderabad sent a cheque fora large sum of money, but Nehru did not allow it to be encashed. Pakistan overcame this financial crisis, the worst in its history, with the help of its businessmen.

Pakistan's economy was indeed very weak at the time. It was too dependent on agriculture, which contributed 60 per cent of its income. The savings rate was as low as 5 per cent of the Gross Domestic Product (GDP), which is very low. GDP means the total value of the goods and services produced by the country in one year. To take an example, suppose a country produces 100 tons of bananas which sell for Rs 50,000 a ton, the income from the domestic product, bananas, is Rs 50 million in a year. The country also offers tourism, which fetches Rs 20 million a year. Tourism is a service and like bananas it is also a 'product' since it is marketed by the people of the country. The GDP of this country is then, Rs 70 million.

The financial system was very basic and at Independence, Pakistan had no central bank. A central bank is required to control a country's money supply, which helps in determining the buying power of money. A Central Bank fixes monetary policy which includes the rate of interest. `his helps people in calculating the risks and gains of their ventures. A central bank is also -squired to regulate other, mostly private banks. A central bank is subject to political control. Therefore, under these hostile circumstances it was even more necessary for Pakistan to set up :s own central bank which could issue its own currency notes if its economic independence was -a be upheld. This was the reason why the Quaid-i-Azam, despite his severe illness, travelled from Ziarat to Karachi to open the State Bank of Pakistan on 1 July 1948.

In the agriculture sector, the land tenure system and the low level of agricultural technology ere responsible for low productivity. The only redeeming feature was that Pakistan had inherited .)art of a well-developed irrigation system. Industries were inadequate, rather informal, and at :hat time could not be optimally utilised because of riots and mass-migration. There was a small nucleus of industrial units around Lahore; diesel engines were being manufactured, electric fans ,were produced and the machine tool factories had actually started exports in 1942. The Darra Khel arms factory, although efficient, was considered to be outside the formal sector of the economy. The witholding of military assets by India had raised disappointment to a level that even these available resources were not visible, even during the Kashmir war.

Pakistan survived, as Richard Symonds has observed, because the harvest in 1947 was good, and there were sufficient peasants to harvest it. The two initial years involved the management of the economy on a daily basis and there was no real development except for the establishment of the State Bank during the Quaid-i-Azam lifetime.

In those early years, industrialization was seen as the only road to progress, therefore Liaquat Ali Khan set up two corporations in the public sector, one for heavy and one for light industries. Under these corporations the government would provide financing to an extent not forthcoming from the private sector. As a priority it planned to set up three jute mills in East Bengal. This need can be understood when we recall that it had a large crop of jute fibre but no mill at all to process it. There were a few cotton mills in the western wing, but hardly in proportion to the size of the cotton crop in Sindh and Punjab.

However, once the economy stabilized there was progress. All governments gave priority to development. GNP increased on an average by 5 per cent a year. Undeniably there have been setbacks, there have been lapses, but Pakistan survived not only the partition of the Punjab in 1947 but also the loss of East Pakistan in 1971.

ECONOMIC HISTORY

The economic history of Pakistan can generally be divided into five phases:

1. The initial era of crisis management: this corresponds to the first democratic era of 1947 to 1958.
2. The era of determined planning: this characterizes the Ayub era.
3. The re-orientation of growth strategy: This covers the first PPP regime 1971-1977.
4. distancing the economy from state capitalism: the Zia era reaction to Bhutto's policy, and finally
5. Attempting structural reforms; the current phase.

The establishment of the State Bank of Pakistan in 1948 proved to be the first symbol of Pakistan's economic independence and in the following year Pakistan asserted itself by refusing to fall in line with Britain and India when they devalued their currencies by 37 per cent This was not rancour on the part of Pakistan as imagined. Devaluation, a political decision to decrease the value of one's currency in relation to other currencies, may have enhanced exports but would also have increased the domestic price of imported goods on which Pakistan relied much more than India did. In retaliation, instead of paying higher prices to Pakistan for the same goods, India suspended all trade links. Among those who exported raw material to India, the most important were the jute growers of East Bengal. If India did not buy jute, they would have no other means of subsistence. Liaquat Ali Khan approached the jute growers and undertook to buy the whole crop to prevent it from being sold at devalued rates.

As an indication of how Pakistan weathered the crisis, the per capita income increased by 1.4 per cent. Per capita income means the income of a country divided by the number of its inhabitants. Agriculture increased by 2.6 per cent and the manufacturing sector by as much as 23.5 per cent. External factors were responsible for constricting Pakistan's economy, but the Korean War (1950-53) proved to be a factor highly conducive to growth. The Korean War created a demand for raw materials at enhanced rates. Pakistan's decision not to devalue in 1949 paid off since it was able to sell at a higher exchange rate. It was also able to sell to different countries, which meant, in other words, diversifying the market.

Along with the Korean War boom, planning was needed to deal with the recession that would follow, when the war ended and the demand ceased. Pakistan had two choices. The first involved devaluation coupled with the rationing of imports. Rationing meant fixing the amount of a particular item that could be imported. The second was to re-impose trade and foreign exchange controls. The Government of Pakistan exercised the second option, with the expectation that the manufacture of goods that were previously imported, would grow. The government imposed tariffs, a tax on imports and exports, which meant that consumer goods would become more costly. Since rising costs could reduce profits it was thought that investing in such industries that produced goods already in demand, would increase.

The Government decided to make the process of imports a category of reward for the companies which had imported during the crisis period. In other words, to those firms who placed reliance on the government and had imported goods when the prospects were not bright, the Government issued licences to import. Ultimately this step led to a sale of licences. Uneven management skills or confidence in firms induced them to sell their licences to other parties who were more confident of making a larger profit on those licences. This system had the effect of engendering rent seeking, a practice which became entrenched and still persists. Rent seeking means that instead of trying to improve the quality of the goods and services they provide, businessmen approach the government to enact legislation to make their businesses more profitable.

When countries set priorities it means that some sectors of the economy perform better than others. But those segments of the economy which were earlier neglected, also need to be developed. If a country has the resources, it can allow all segments of the economy to develop together, but when the resources are limited, some segments are neglected. Thus initially, while industry progressed, agriculture lagged behind. It was also felt, at that time, that investment in education and social development had been too low, and this neglect would have an impact on other sectors of the economy. For example, if there were not enough educated people who could perform their functions in a commercial firm, or if health-care facilities were not provided, it would reduce the commitment and efficiency of the workforce.

One reason for the concentration on industry was that western countries had been extremely reluctant to sell Pakistan components for those industries which already existed in India. In their scheme of business, western countries wanted Pakistan's industry to be subordinate to Indian industry. In practical terms it meant that Pakistan must depend on Indian industries to purchase its raw material at prices of their choice. Pakistan needed to avoid this. In these circumstances, only some East European countries, strapped for hard cash, were ready to sell industrial units or components to Pakistan. Since 'these countries were also Soviet satellites, political exigencies prevented this market from expanding.

The decision to promote import substation industrialization was based on the premise that the terms of trade would, in the long run, prove unattractive to producers of primary commodities, and also on the premise that the capitalist sector had a greater propensity to save. It was hoped that the aggregate savings ratio could be enhanced by incentives for capital formation.

This brings us to planning, which is covered separately in the next chapter, but here we need to outline the initial efforts and the delay in beginning to plan. The Pakistan Planning Board was set up in 1951, but did not prove to be very active. Before 1955, no serious planning was undertaken. Even when the first Five Year Plan (1955-1960) was made, the objectives were too ambitious, therefore only a modicum of them could be achieved. The Plan had sought to reduce regional disparities, increase both agricultural and industrial production, to increase exports, and to increase the rate of savings.

Naturally not all of these objectives could be achieved, at least, not at a uniform rate. Nevertheless the exercise in planning was essential since it was long overdue. The exercise had begun a full eight years after the creation of Pakistan. This exercise accelerated the process of consolidation and experimentation. The plan did provide incentive, to industry, but not to agriculture or education. This was not surprising as agriculture had been allocated only 11 per cent of the total investment. This stagnation of agriculture naturally constrained other sectors of the economy.

Reference

1. Allen Cambell-Johnson, Mission and Mountbatten, London, Robert Hale, 1972, p. 87.
2. Richard Symonds, The making of Pakistan, Islamabad, NBF, 1976, p.87.
3. S. Akbar Zaidi, Issues in Pakistan’s Economy, Karachi, Oxford University Press, 2005, p.131.

Early Problems of Pakistan And Their Impact On Pakistan Economy Subject: Pakistan Studies Submitted to: Madam Asma Submitted by: Hafiz S. M. Ammar Roll No. :32 DVM 6TH Semester                                                                     FACULTY OF VETERINARY SCIENCES BAHUDDIN ZAKARIYA UNIVERSITY MULTAN