Course: Economic Development of Pakistan-II (4660) Semester: Autumn, 2021
Q.1 Discuss problems of balance of payments being faced by Pakistan. Suggest some remedial measures to cope with these problems.
Pakistan faces the chronic problem of a poorly regulated financial system that facilitates tax evasion and helps launder money out of Pakistan. This lack of financial supervision by the government creates the twin problem of fiscal and current account deficits that are directly responsible for the balance of payment crisis.
The balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world. These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services.
The balance of payments consists of two components: the current account and the capital account. The current account reflects a country’s net income, while the capital account reflects the net change in ownership of national assets.
Until the early 19th century, international trade was heavily regulated and accounted for a relatively small portion compared with national output. In the Middle Ages, European trade was typically regulated at municipal level in the interests of security for local industry and for established merchants. (Annual fairs would sometimes allow exceptions to the standard regulations.
Beginning in the 16th century, mercantilism became the dominant economic theory influencing European rulers. Local trade regulations were replaced by national rules aiming to harness the countries’ economic output. Measures to promote a trade surplus (such as tariffs) were generally favored.
The prevailing orthodoxy of the mercantilist age was the (now discredited) notion that the accumulation of foreign exchange or, at that time, precious metals, made countries wealthier, and so countries favored exporting their own goods to run balance of payments surpluses. This viewpoint prevails in the England’s Treasure by Foreign Trade (1664) by Thomas Mun.
Economic growth remained at low levels in the mercantilist era; average global per capita income is not considered to have significantly risen in the whole 800 years leading up to 1820, and is estimated to have increased on average by less than 0.1% per year between 1700 and 1820. With very low levels of financial integration between nations and with international trade generally making up a low proportion of individual nations’ GDP, BOP crises were very rare.[
1820–1914: Classical economics
The mercantilist dogma was attacked first by David Hume, then Adam Smith and David Ricardo.
In the essays Of Money and Of the Balance of Trade, Hume argued that the accumulation of precious metals would create monetary inflation without any real effect on interest rates. It is the foundation of what is known in modern economic studies as the quantity theory of money, the neutrality of money and the consideration of interest rates not as a monetary phenomenon, but a real one. Adam Smith built on this foundation. He accused mercantilists of being anti-free trade and confusing money with wealth.
David Ricardo based his arguments on Say’s Law, developing the theory of comparative advantage, which remains the dominant theory of growth and trade in modern economics.
After victory in the Napoleonic wars Great Britain began promoting free trade, unilaterally reducing its trade tariffs. Hoarding of gold was no longer encouraged, and in fact Britain exported more capital as a percentage of its national income than any other creditor nation has since. Great Britain’s capital exports further helped to correct global imbalances as they tended to be counter cyclical, rising when Britain’s economy went into recession, thus compensating other states for income lost from export of goods.
According to historian Carroll Quigley, Great Britain could afford to act benevolently in the 19th century due to the advantages of her geographical location, its naval power and economic ascendancy as the first nation to enjoy an industrial revolution. However, some, like Otto von Bismarck, viewed Great Britain’s promotion of free trade as a way to maintain its dominant position. A view advanced by economists such as Barry Eichengreen is that the first age of Globalization began with the laying of transatlantic telegraph cables in the 1860s, which facilitated a rapid increase in the already growing trade between Britain and America.
Though Current Account controls were still widely used (in fact all industrial nations apart from Great Britain and the Netherlands actually increased their tariffs and quotas in the decades leading up to 1914, though this was motivated more by a desire to protect “infant industries” than to encourage a trade surplus), capital controls were largely absent, and people were generally free to cross international borders without requiring passports.
A gold standard enjoyed wide international participation especially from 1870, further contributing to close economic integration between nations. The period saw substantial global growth, in particular for the volume of international trade which grew tenfold between 1820 and 1870 and then by about 4% annually from 1870 to 1914. BoP crises began to occur, though less frequently than was to be the case for the remainder of the 20th century. From 1880 to 1914, there were approximately 8 BoP crises and 8 twin crises – a twin crisis being a BoP crisis that coincides with a banking crisis.
Q.2 regarding foreign sector planning, should we emphasis more on export growth strategy or import substitution strategy? Elaborate your answer.
Term foreign sector Definition: The basic macroeconomic sector that includes everyone and everything outside the political boundaries of the domestic economy. This includes households, businesses, and governments in other countries. This is one of four macroeconomic sectors. The other three are household sector, business sector, and government sector. In terms of the circular flow model of the economy, the foreign sector is responsible for net export expenditures on gross domestic product.
The import substitution strategy calls for rapidly increasing industrialization by mimicking the already industrialized nations. The intent is to reduce the dependence of the developing country on imports of consumer and capital goods from the industrialized countries by manufacturing these goods at home.
Import substitution industrialization (ISI) is a trade and economic policy that advocates replacing foreign imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. The term primarily refers to 20th-century development economics policies, but it has been advocated since the 18th century by economists such as Friedrich List and Alexander Hamilton.
ISI policies have been enacted by developing countries with the intention of producing development and self-sufficiency by the creation of an internal market. The state leads economic development by nationalization, subsidization of manufacturing, increased taxation, and highly-protectionist trade policies. In the context of Latin American development, the term “Latin American structuralism” refers to the era of import substitution industrialization in many Latin American countries from the 1950s to the 1980s. The theories behind Latin American structuralism and ISI were organized in the works of economists such as RaúlPrebisch, Hans Singer, and Celso Furtado, and gained prominence with the creation of the United Nations Economic Commission for Latin America and the Caribbean (UNECLAC or CEPAL). They were influenced by a wide range of Keynesian, communitarian, and socialist economic thought, as well as dependency theory.
By the mid-1960s, many of the economists who had previously advocated for ISI in developing countries grew disenchanted with the policy and its outcomes. Many of the countries that adopted ISI policies in the post-WWII years had abandoned ISI by the late 1980s, reducing government intervention in the economy and becoming active participants in the World Trade Organization. Four East Asian economies (Hong Kong, Singapore, South Korea and Taiwan) have been characterized as rare successful examples of ISI policies, although scholars have characterized the approach of these countries as government intervention to facilitate “export-oriented industrialization.”
ISI policies generally had distributional consequences, as the incomes of export-oriented sectors (such as agriculture) declined while the incomes of import-competing sectors (such as manufacturing) increased. Governments that adopted ISI policies ran persistent budget deficits as state-owned enterprises never become profitable. They also ran current accounts deficits, as the manufactured goods produced by ISI countries were not competitive in international markets, and as the agricultural sector (the sector which was competitive in international markets) was weakened; as a result, ISI countries ended up importing more. ISI policies were also plagued by rent-seeking.
Q.3 Discuss the importance if foreign remittances made by Pakistan working in the Middle East in 1970-90 on Pakistan’s economy.
Remittances by Overseas Pakistanis, through normal banking channels, are a vital source of balance of payments support for the country. Funds channeled through Hundi or other means bypass legal conduits and deprive the country of much needed support.
South Asia is the source of cheap labour in the world because of growing population many developed countries focus these countries in south Asia to overcome labour shortage as well as hiring skilled labour to work in their countries. So developing Economies of Asia specially India, Bangladesh and Pakistan also supports this labour exports to empower youth and stabilize economic situation through higher remittances.
These Remittances save the economy from different financial shocks and in natural hazards as Remittances tend to grow when domestic country’s economy suffers from bad situation this increase in remittance depends on intentions of remitter and his self-interest. Migrants send remittance to domestic country for consumption purpose to support their families in bad time while on other hand these remittances shows negative trend if migrants want to use these for investment purposes.
Workers remittances grows rapidly in South Asia in the last decade from 18 billion in 1980 to almost 328 billion in 2008 shows almost 18 fold increase in inward flows of remittances, Specifically Pakistan remittances depicts increasing trend and increased from 136 million US$ in Fiscal year 1973 to 13186 US$ in fiscal year 2012 shows 5% share in GDP significantly grows rapidly after 2001 when Pakistan becomes ally of USA in war on terror after that foreign direct investment and favourable and consistent economic policies results in increasing rapid growth of remittances inflows.
Different factors determines the inflows of remittance which includes Micro Factors(Demographic and Social factors) and Macro Economic factors such as number of workers, black market Premium,inflation,host country income,GDP of host and domestic country etc.
Micro-Economic Factors of Remittances (Social and Demographic Determinants)
Years since worker migration
Household income level of migrant
Ratio of females in the host country
Employment status of other members of family
Professional level of migrant in the host country
Matrimonial status of migrant
Above factors determine inflows of remittances other Altruistic factor is also important because mainly remitter self-interest determines the flow of remittance mostly money is sent for supporting family. This altruistic behaviour is more prevalent when crisis situation happens in the domestic country because an immigrant wants to help their family to survive in crisis.
Macro-Economic Determinants of Remittances:
Mostly literature on remittances focus on social and demographic factors but this focus is shifting towards exploring macro-economic factors as well for building consensus on different determinants of foreign remittances. Different factors shows consistent and significant results in literature as number of workers, wage rates and income levels but most macro-economic factors still depicts contrasting views as domestic country income,inflation,exchange rate premium, Interest rate differential,GDP of domestic and host country and most importantly Black market premium etc. Below we will explain further these determinants and model;
GRO=Growth of Domestic and host countries in measured by GDP
WKR=Number of workers
WGR=Wage rates for workers earning in host country
INF=Inflation in domestic country
BMP=Black Market Premium
YHOST=Per Capita income of host countries
PRK=Political Risks in domestic country
IRD=Interest Rate Differential
MGOVDMY=Military Govt Dummy
Explanation of Variables and Hypothesized Relationship:
Growth: This variable represents economic activity of domestic and host country measured by gross domestic product. Countries with higher GDP accelerate the flow of remittances both inward and outward. The contrasting views regarding relationship of GDP and Remittances shown in the literature. Relationship depends on motives of remitter that either he is sending money for consumption purpose or for investment purpose. Literature shows Positive relationship among GDP and Remittances if the person sending money for consumption purpose while negatively related when sending of money for investment purpose.
Number of Workers: This represents the number of Workers in the host country and earning money from occupation. More number of workers sends more money to domestic country and this significant positive relationship is also confirmed by literature on remittances.
Wage Rates: Wage rate is the remuneration paid to worker in the host country. This is represented by Per Capita income and shows positive relationship with remittances means more earnings leads to more remittances.
Exchange Rates: It is the rate against which on currency is converted to another higher the exchange rate of one currency decrease the value of other currency. Literature on exchange rate shows divergent results in literature it may affect economic growth positively or negatively depends on circumstances. If Exchange rate is higher for host country than flow of remittances is increased towards domestic country but vice versa is true in case of investment purpose because investors will lose money in long term.
Inflation: It is the rate on which prices of goods and services are rising and purchasing power of persons falling. Different studies depicts different results on inflation and Remittances relationship as this depends on the altruistic behaviour of remitter if he send money for investment purpose than it is negatively related and on other hand if he do so for supporting his family in consumption than remittances are positively related to inflation.
Black Market Premium: It is the exchange rate of currency that differs from official exchange rate. It is used when official exchange rate bears less relationship with actual value of currency. This is prohibited by law in most of countries and absence of this exchange rate overvalues the currency this is positively related with remittances.
Income of Host countries: This represents per capita income of income of host countries. Literature shows this is positively related with the remittances flow because of higher income of immigrants they save more and send more money to domestic country.
Political Risks: Political risk is uncertainty of domestic countries this poses serious threat to remittances.in unfavourable situation immigrants hesitate to sending remittances to domestic country because of uncertainty of policies and lack of trust on ruling govt.So Political risks is negatively related with remittances more political risks leads to lower remittances.
Q.4 What role does export of manpower from Pakistan to other countries play as fr as the economy of Pakistan is concerned? Should it be a regular feature of our manpower planning? Elucidate.
The economy of Pakistan is the 26th largest in terms of purchasing power parity (PPP), and 46th largest in terms of nominal gross domestic product. Pakistan has a population of over 220 million people (the world’s 5th-largest), giving it a GDP per capita(nominal) of $1,543 which ranks 181st, and giving it a GDP per capita(PPP) of $5,964 which ranks 174th in the world.
Pakistan is a developing country, with a semi-industrial economy. Primary export commodities include textiles, leather goods, sports goods, chemicals and carpets/rugs.
The growth poles of Pakistan’s economy are situated along the Indus River; the diversified economies of Karachi and major urban centers in the Punjab, coexisting with lesser developed areas in other parts of the country. The economy has suffered in the past from internal political disputes, a fast-growing population, and mixed levels of foreign investment. Foreign exchange reserves are bolstered by steady worker remittances, but a growing current account deficit – driven by a widening trade gap as import growth outstrips export expansion – could draw down reserves and dampen GDP growth in the medium term. Pakistan is currently undergoing a process of economic liberalization, including privatization of all government corporations, aimed to attract foreign investment and decrease budget deficits.
As of May 2021, the Pakistani government has predicted that future growth rates will be 5%, one of the highest in South Asia. According to the World Bank, poverty in Pakistan fell from 64.3% in 2002 to 2.3% in 2018. The country’s improving macroeconomic position has led the Moody’s Investors Service to upgrade Pakistan’s debt outlook to “stable”.
In 2017, Pakistan’s GDP in terms of purchasing power parity crossed $1 trillion. By May 2019, the Pakistani rupee had undergone a year-on-year depreciation of 30% vis-a-vis the US dollar. In 2020, CPEC Phase 2 has been started, with new billion dollar agreements.
Pakistan has bilateral and multilateral trade agreements with many nations and international organizations. It is a member of the World Trade Organization, part of the South Asian Free Trade Area agreement and the China–Pakistan Free Trade Agreement. Fluctuating world demand for its exports, domestic political uncertainty, and the impact of occasional droughts on its agricultural production have all contributed to variability in Pakistan’s trade deficit. The trade deficit for the fiscal year 2013/14 is $7.743 billion, exports are $10.367 billion in July–November 2013 and imports are $18.110 billion.
Pakistan’s exports continue to be dominated by manpower export in the subcontinent, cotton textiles and apparel. Imports include petroleum and petroleum products, chemicals, fertilizer, capital goods, industrial raw materials, and consumer products.
On 12 December 2013, the European Union granted GSP Plus status to Pakistan until 2017, which enabled it to export 20% of its good with 0 tariff and 70 percent at preferential rates to the EU market. This status was given after the European Parliament passed the resolution by 406-186 votes.
Pakistan’s exports for the year 2015-2016 stood at US$21 Billion and imports were at US$44.76 billion for the same period.
Pakistan’s exports increased more than 100% from $7.5 billion in 1999 to stand at $18 billion in the financial year 2007–2008.
Pakistan exports rice, kinnows, mangoes, furniture, cotton fiber, cement, tiles, marble, textiles, clothing, leather goods, veterinary surgical supplies, sports goods (renowned for footballs/soccer balls), cutlery, surgical instruments, electrical appliances, software, carpets, rugs, ice cream, livestock meat, chicken, powdered milk, wheat, seafood (especially shrimp/prawns), vegetables, processed food items, Pakistani-assembled Suzukis (to Afghanistan and other countries), defense equipment (submarines, tanks, radars), salt, onyx, engineering goods, and many other items. Pakistan produces and exports cements to Asia and the Middle East. In August 2007, Pakistan started exporting cement to India to fill in the shortage there caused by the building boom. Russia is a growing market for Pakistani exporters. In 2009/2010 the export target of Pakistan was US$20 billion. As of April 2015, Pakistan’s exports stand at US$29 billion.
Q.5 What are different types of forigin aid and what role do they play n development?
foreign aid, the international transfer of capital, goods, or services from a country or international organization for the benefit of the recipient country or its population. Aid can be economic, military, or emergency humanitarian (e.g., aid given following natural disasters).
Foreign aid can involve a transfer of financial resources or commodities (e.g., food or military equipment) or technical advice and training. The resources can take the form of grants or concessional credits (e.g., export credits). The most common type of foreign aid is official development assistance (ODA), which is assistance given to promote development and to combat poverty. The primary source of ODA—which for some countries represents only a small portion of their assistance—is bilateral grants from one country to another, though some of the aid is in the form of loans, and sometimes the aid is channeled through international organizations and nongovernmental organizations (NGOs). For example, the International Monetary Fund (IMF), the World Bank, and the United Nations Children’s Fund (UNICEF) have provided significant amounts of aid to countries and to NGOs involved in assistance activities.
Countries often provide foreign aid to enhance their own security. Thus, economic assistance may be used to prevent friendly governments from falling under the influence of unfriendly ones or as payment for the right to establish or use military bases on foreign soil. Foreign aid also may be used to achieve a country’s diplomatic goals, enabling it to gain diplomatic recognition, to garner support for its positions in international organizations, or to increase its diplomats’ access to foreign officials. Other purposes of foreign aid include promoting a country’s exports (e.g., through programs that require the recipient country to use the aid to purchase the donor country’s agricultural products or manufactured goods) and spreading its language, culture, or religion. Countries also provide aid to relieve suffering caused by natural or man-made disasters such as famine, disease, and war, to promote economic development, to help establish or strengthen political institutions, and to address a variety of transnational problems including disease, terrorism and other crimes, and destruction of the environment. Because most foreign aid programs are designed to serve several of these purposes simultaneously, it is difficult to identify any one of them as most important.
The acquired immune deficiency syndrome (AIDS) was first formally recognized in patients in the USA in 1981. Subsequent characterization of the principal causative agent, human immunodeficiency virus type 1 (HIV-1), revealed that it was a retrovirus. As strains of HIV-1 were sampled from around the world, it became apparent that they exhibit extremely high genetic heterogeneity and that analysis of the evolution of this diversity can reveal insights into the prehistory of the virus (Sharp et al. 2001). HIV-1 strains can be divided into three distinct groups, which have very different prevalences. Groups N and O are rare, and largely restricted to Cameroon and surrounding countries. The vast majority (perhaps 98%) of HIV infections worldwide are caused by HIV-1 group M. Even within group M, there is very high diversity and the epicentre of that diversity is in Africa and in particular Kinshasa in the Democratic Republic of Congo (Vidal et al. 2000). While HIV-1 has an extremely fast rate of evolution, the virus must have circulated within human populations for many years before it was first recognized for this extent of diversity to have accumulated. Using molecular clocks, the common ancestor of HIV-1 group M strains has been dated to around the 1920s (Korber et al. 2000; Worobey et al. 2008). Partial characterization (Zhu et al. 1998; Worobey et al. 2008) of two viruses from samples initially obtained around 1960 in Kinshasa (then called Leopoldville) has shown that HIV-1 group M had already diversified substantially by that time, corroborating this time scale, and pointing to the location of the early diversification of these viruses (Sharp & Hahn 2008).
At the time when HIV-1 was first described, the closest known relative was visna, a virus from sheep that is the prototypic member of the genus Lentivirus. Additional lentiviruses were soon found in other primates, and a second virus (HIV-2) was found infecting humans. The viruses from non-human primates were termed simian immunodeficiency viruses (SIVs). Among the first species to be found to be naturally infected were African green monkeys (Chlorocebus species), where the prevalence of infection is high (greater than 50% of adults) and natural infections appear to be non-pathogenic. The number of different SIVs identified has increased steadily over the past 20 years. Currently, around 40 different primate species have been found to harbour SIVs, though information regarding prevalence and pathogenicity is lacking for most. So far, SIVs have only been found naturally infecting primates in sub-Saharan Africa, though the extent to which Asian or new world primates have been surveyed is unclear. Where multiple strains of SIVs have been characterized from a single species, they generally form a monophyletic clade, indicating that the great majority of transmissions are intraspecific. The primate viruses as a whole, including HIV-1 and HIV-2, form a distinct clade within the lentiviruses, indicating that humans acquired their infections from other primates (Bailes et al. 2002). Phylogenetic analyses of these primate lentiviruses have provided remarkably detailed insights into the evolutionary origins of the human viruses.
2. THE ORIGINS OF HIV-1 AND HIV-2
The origin of HIV-2 was resolved first. HIV-2 was first found, and is still most common, among individuals from west Africa. In 1989, a closely related SIV was found in a monkey, the sooty mangabey (Cercocebusatys), whose natural range is in west Africa (Hirsch et al. 1989). Other examples of this virus, termed SIVsmm, were soon found in other captive sooty mangabeys, and then in individuals from the wild (Chen et al. 1996; Santiago et al. 2005). Closely related viruses found in captive macaques cause severe AIDS-like illness (Letvin et al. 1985), but SIV has not been found in wild macaques (which are Asian primates), and SIVsmm seems to be non-pathogenic in its natural host (Santiago et al. 2005; Keele et al. 2009). It soon became apparent that SIVsmm had been inadvertently transmitted to various macaque species in captivity (reviewed in Apetrei et al. 2005). In phylogenetic analyses, HIV-2 strains can be divided into various groups, which are interspersed among the SIVsmm lineages (Gao et al. 1992, 1994). These observations led to a rapid acceptance that sooty mangabeys were the source of HIV-2, and the interspersion of HIV-2 strains among the SIVsmm lineages implied that there had been multiple mangabey-to-human cross-species jumps (Hahn et al. 2000). Only two of these transmission events, leading to groups A and B, have given rise to viruses that have spread widely in the human population; six other lineages are each known only from viruses found in single individuals (Damond et al. 2004).
A virus closely related to HIV-1 was also first reported in 1989; this virus, SIVcpz, was found in two captive chimpanzees (Pan troglodytes) in Gabon (Peeters et al. 1989; Huet et al. 1990). However, for many years, chimpanzees were not accepted as the source of HIV-1 because it remained unclear whether wild chimpanzees are naturally infected with this virus. Over the next 10 years, many (probably more than a thousand) other chimpanzees were tested but only a single further example of SIVcpz was found, in a chimpanzee illegally imported to Belgium from Kinshasa (Peeters et al. 1992). Furthermore, this third example of SIVcpz was more divergent from the previous examples than might be expected for two viruses from a single host species (VandenHaesevelde et al. 1996). Thus, it appeared that SIV was extremely rare in chimpanzees, and it seemed possible that both chimpanzees and humans had been infected from some other source(s), presumably some monkey species in central Africa.
In 1999, we found a fourth example of SIV from a chimpanzee. This ape was wild-caught and imported to the USA, but records of its geographical origin were not available. Chimpanzees have traditionally been divided into several subspecies (Groves 2001). Analyses of mitochondrial DNA (mtDNA) indicate four subspecies: western (Pan troglodytesverus), Nigerian (Pan t. ellioti), central (P. t. troglodytes) and eastern (Pan t. schweinfurthii) chimpanzees (Gagneux et al. 1999), which have non-overlapping ranges across western and central Africa (figure 1). (Note that P. t. ellioti was formerly termed P. t. vellerosus; Oates et al. 2009.) From mtDNA sequence analyses, we found that the two chimpanzees from Gabon were (as expected) P. t. troglodytes, as was the ape from the USA, while the other individual belonged to P. t. schweinfurthii (Gao et al. 1999). In contrast, it seemed likely that the vast majority of chimpanzees that had tested negative for SIVs were P. t. verus; this was subsequently confirmed (Prince et al. 2002; Switzer et al. 2005). Thus, the apparent scarcity of SIVs in chimpanzees could be explained by an absence of infection in the one subspecies that had been subject to the most testing. Indeed, two additional examples of SIVcpz from P. t. troglodytes were soon reported (Corbet et al. 2000).