Thursday, September 22, 2022
India’s economy has outpaced Pakistan’s handily since Partition in 1947 – politics explains why
India and Pakistan inherited the same economic legacy of underinvestment and neglect from Britain when they became independent states following the Partition on Aug. 15, 1947. Their colonial economies were among the poorest in the world.
For both nations, independence almost immediately led to strong growth and fueled significant gains in education, health care and other areas of development. But it was Pakistan that saw faster growth rates during the first four decades or so, while India lagged behind.
Something began to change around the 1990s as their roles reversed and India vaulted ahead of Pakistan, eventually becoming the world’s third-biggest economy by purchasing power and the “I” in BRICS – an acronym referring to a bloc of five key emerging market countries.
What accounts for India’s growth spurt?
As a scholar of international political economy, I believe India’s stronger embrace of democracy – at the same time that Pakistan experienced frequent military dictatorships and changes in government – has a lot to do with it.
A colonial inheritance
From 1857 to 1947, Britain ruled directly over most of the territory that became the independent states of India and Pakistan.
Economic growth under British rule was minimal, averaging just 0.9% a year from 1900 to 1947. This happened largely because the colonial Indian economy was mostly agricultural, and yet the British made little investment in improving farm productivity.
Additionally, Great Britain made limited investments in the well-being of the people of India, notably by underfunding their education and health care. As a result, colonial India had one of the lowest literacy rates in the world at about 17%, and life expectancy was in the mid-30s. Britain’s neglect of the plight of Indians is perhaps best illustrated by the 1943 famine in Bengal in eastern India, in which over 1.5 million people died as result of policy failure.
Post-independence growth, led by Pakistan
Britain decided to give up its “jewel in the crown” and partition the region into Hindu-dominated India and Muslim Pakistan after facing mounting pressure from the local population and a growing nationalist movement.
This led to one of the largest forced migrations of the 20th century: Nearly 9 million Hindus and Sikhs moved into India and about 5 million Muslims to a geographically separated East and West Pakistan over the next two decades. An estimated 1 million people died amid mass violence.
Economic growth, however, took off, with both new countries growing at 3% to 4% in the first decade or so of independence as the respective governments invested more into their economies. But soon, differences emerged.
While both economies were largely state controlled, India’s government curtailed exports and adopted a protectionist trading policy in the 1960s that limited growth.
Pakistan, on the other hand, benefited from significant trade from its East Pakistan region. The newly created Pakistan was geographically separated by India – on one side of it was West and the other side East Pakistan. Each was carved out by the British due to its Muslim majority. Pakistan lost its growth engine in 1971, when East Pakistan became Bangladesh following a war of independence.
Pakistan also received billions of dollars in military aid from the U.S. Fellow oil-rich Muslim countries in the Middle East have also given aid to Pakistan. As a result, Pakistan’s growth accelerated to about 6% a year from 1961 to 1980, compared with 4% for India.
India vaults ahead
The growth script flipped in the 1990s, with India growing at a 6% rate over the next 30 years, outpacing Pakistan’s 4%.
What explains the role reversal? Economics and politics both played a part.
Pakistan has long relied on external sources of funding more than India has, receiving $73 billion in foreign aid from 1960 to 2002. And even today, it frequently relies on institutions such as the International Monetary Fund for crisis lending and on foreign governments like China for aid and infrastructure development.
The aid has allowed Pakistan to postpone much-needed but painful reforms, such as expanding the tax base and addressing energy and infrastructure problems, while the loans have saddled the country with a large debt. Such reforms, in my view, would have put Pakistan on a more sustainable growth path and encouraged more foreign investment.
While India also got a fair amount of support from international aid groups and a few countries such as the U.S. earlier in its existence, it never depended upon it – and has relied less on it in recent decades. In addition, in 1991, India liberalized trade, lowered tariffs, made it easier for domestic companies to operate and grow, and opened the door to more foreign investment.
These reforms paid off: By integrating India’s economy to the rest of the world, the reforms created market opportunities for Indian companies, made them more competitive, and that, in turn, led to higher growth rates for the overall economy.
Another way to measure the different paths is in gross domestic product per person. In 1990, India and Pakistan had almost identical per-capita GDPs, a little under $370 per person. But by 2021, India’s had surged to $2,277, about 50% higher than Pakistan’s.
The reasons for their different choices have a lot to do with politics.
Pakistan has suffered from near-constant political instability. From 1988 to 1998 alone, it had seven different governments as it alternated between civilian and military governments following coups. This discouraged foreign investment and made it much harder to make reforms and follow through on them. Through all these changes, Pakistan’s military spending as a share of its GDP remained higher than India’s during the entire post-independence period.
India, on the other hand, has managed to maintain a steady democracy. Though it’s far from perfect, it has kept leaders more accountable to the people and led to more inclusive growth and less reliance on foreign institutions or governments. In one decade alone, India lifted over 270 million people out of poverty.
At a time when democracy is under threat in so many parts of the world, this history, in my view, reminds us of the value of democratic institutions.
https://theconversation.com/indias-economy-has-outpaced-pakistans-handily-since-partition-in-1947-politics-explains-why-187053
How floods in Pakistan compound people's economic woes
Pakistan has witnessed catastrophic flooding over the past few weeks that affected over 33 million people — some 15% of the nation's population — and submerged a third of the country.
The natural disaster has killed over 1,500 people and caused damage worth billions of dollars, compounding the woes of an economy already beset by a raft of problems, ranging from a heavy debt burden and ballooning current account deficit to a tumbling currency and skyrocketing inflation, particularly food prices.
The rains have damaged vast swathes of rich agricultural land and crops.
Parts of Pakistan were cut off from the rest of the country as flooding rendered roads and bridges inaccessible — crucially, this included areas in the nation's southern breadbasket.
Finance Minister Miftah Ismail said at the end of August that the price of onions, a common ingredient in Pakistani meals, had increased by more than fivefold.
The price of tomatoes — another essential ingredient in Pakistani cuisine — also soared following the destruction of most of the crop, official statistics show.
Khaqan Najeeb, a former adviser to the Finance Ministry, said crops like cotton, rice and tomatoes have been seriously damaged.
The damage to the agriculture sector is likely to widen Pakistan's trade deficit from the current 2.4% of GDP to more than 3.5%, as the country is forced to import more foodstuffs and other goods from abroad, he pointed out.
Rising costs and low growth
Pakistan will import more tomatoes, rice, wheat, cotton and other food items, said Qaiser Imam Shaikh, a leading businessman in the country. And rising freight costs mean that the prices of these items will continue to surge, making life very difficult for poor and middle-class Pakistanis, he told DW, adding that imported items cannot be sold at discounted rates, "So, of course, there will be more inflation in coming days because of the destruction of agriculture."
Shahida Wizarat, a Karachi-based economist, said that Pakistan finds itself in a tough spot.
"If we do not import industrial raw materials, then manufacturing would be hit and if we do, the import bill will rise exponentially. We are in a very difficult economic situation," she stressed.
The expert called on advanced Western economies to waive off Pakistan's debts and help, "After all, it is their obsession with growth that has destroyed the environment, punishing countries like Pakistan, which contributes very little to carbon emissions."
In June, the Pakistani government set a 5% growth target for this year, while the International Monetary Fund forecast that the economy would expand by 3.5%. But after the disastrous floods, many expect zero growth this year.
"Given the current economic and financial hardships, the zero percent growth prospect is not unrealistic," a renowned economist, who asked not to be named, told DW.
Finance Minister Ismail, however, told DW that the growth will be "around 2%."
"We forecast growth of 5% and expect growth of 2% now, hence a loss of 3%. But this is our model. The IMF predicted growth of 3.5% but hasn't shown yet, to the best of my knowledge, what the reduction will be. It is wrong to use our reduction number in the IMF model. We still think growth will be around 2%," he said.
Help only with strings attached
Pakistan's foreign exchange reserves currently stand at about $8.6 billion, only enough for about a month of imports. The year-end target was to increase the buffer by up to 2.2 months.
The country was able to bring an International Monetary Fund (IMF) program back on track after months of delay, thanks to tough policy decisions.
Salman Shah, a former finance minister, said Pakistan will likely have to increase its borrowing in the coming months to service its foreign debts and finance essential imports.
The South Asian nation needs a total of $33.5 billion in the year through June 2023, Bloomberg reported in July. Its next big payment — $1 billion in international bonds — is due in December.
Shah said funds from bodies like the IMF to service the debt will come with strings attached, such as conditions to increase electricity prices, impose additional taxes or cut fuel subsidies.
Vow to take 'prudent decisions'
Despite the challenging financial circumstances, Finance Minister Ismail said Pakistan will "absolutely not" default on debt obligations.
"The path to stability was narrow, given the challenging environment, and it has become narrower still," he told Reuters on Sunday, adding: "But if we continue to take prudent decisions — and we will — then we're not going to default. Absolutely not."
He acknowledged that global markets were "jittery" about Pakistan, given the economy's massive losses after the floods, but noted that external financing sources were secured, including over $4 billion from the Asian Development Bank, Asian Infrastructure Investment Bank and World Bank.
"Yes, our credit default risk has gone up, our bond prices have fallen. But ... I think within 15 to 20 days, the market will normalize, and I think will understand that Pakistan is committed to being prudent."
The Interview: Bilawal Bhutto Zardari: 'The scale of climate catastrophe in Pakistan is truly apocalyptic'
By:Marc Perelman
https://www.france24.com/en/tv-shows/the-interview/20220921-bilawal-bhutto-zardari-the-scale-of-climate-catastrophe-in-pakistan-is-truly-apocalyptic?ref=tw