Determinants of Political Governance and Investment Trends in Pakistan

By

Athar Iqbal

021-10-13795

A thesis Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy(PhD) to Dean (Business Administration Department) at the Iqra University, main campus, Karachi

Karachi, Pakistan July , 2015

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CERTIFICATE

It is certified that a PhD dissertation titled as “Determinants of Political Governance and Investment Trends in Pakistan” has been completed by Mr. Athar Iqbal, bearing a Registration No. 021-10-13795. It is being approved for the final submission.

Supervisor,

Dr. Muhammad Ayub Khan Meher

Date:

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Dedication

This dissertation is dedicated to my mother Mehrunnisa. Thanks for always being there for me, for her kindness, affection, thoughtfulness, devotion, and for her continuous encouragement. My mother has always encouraged me, even when I was in school. Her support, encouragement and interest in studies always gave strength to me to do something more in studies. She always took interest in the improvement of my reading and writing and forgave my mistakes when she realized that I am taking interest in studies. Her support, encouragement, determination and constant love have sustained me throughout my life.

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Acknowledgements

All praises and veneration are attributed to Almighty Allah, the Compassionate and Merciful, who conferred upon me the wisdom, knowledge and ability to accomplish this thesis.

It is my pleasure to express my profound gratitude to Dr. Muhammad Ayub Khan

Mehar, Professor, Iqra University for his valuable guidance and encouragement as a research supervisor in completion of this dissertation. I am really thankful for his attention to details and for his demand for excellence. Without his wisdom, foresight, intellectual competence, regular feedback and guidance, this research work would not have been possible. He guided me from initial thinking process to the final completion of the dissertation. He showed immense patience during detailed work of checking the chapters and making corrections.

I am also indebted to all my teachers Professor Dr. UAG Issani, Mr. Ghulam

Abbas for their valuable guidance. I am also thankful to Dr. Akif Hassan who as vice president of Iqra University and registrar always trusted me, Dr. Zaira Wahab as head of M. Phil, PhD program for her valuable suggestions on various aspects of the dissertation. Special thanks to Dr. Javed Hussain, Dean, department of management science and associate dean Dr. Azam.

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I am most grateful to my colleagues, Dr. Irfan Hameed, Mr. Ghulam Abbas, Mr.

Rujaib Naseem, Mr. M. Irfan Khan, Mr. Abdul Raheem, Mr. Shahzad Shamshad,

Ms. Maria Kassim, Ms. Zahra, for their time, encouragement, and expertise throughout this study.

In addition, my wife Sadaf and my kids Sharjeel Athar, and Wajiha Rubab should also be appreciated as they patiently allowed me to spend time on this research work. My brother Akbar Nawaz Shad in his usual rigorous analytical frame of mind provided extremely useful and insightful comments on the earlier drafts and final proof reading of the entire document.

I am also indebted to the department of ORIC and its head Mr. M. Imtiaz Subhani who helped me in the preparation of the document.

I wish to express my deep sense of gratitude to Dr. Najeeb Ahamd Malik and Mr.

Aseem Rizvi for their encouragement to complete this dissertation. Special thanks to Mr. Yasir Ali Somro for his willing help and encouragement during the entire process over the years.

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Abstract

It is a generalized perception that democratic system leads to good governance, economic welfare and development. Surprisingly, the history of Pakistan shows a negative association between the democratic regime and economic development and governance. Non democratic regimes (Military rules) in Pakistan have been showing significant improvement in economic and business indicators and better governance as compare to the democratic governments. Such evidences have created a gap and contradiction between the political theories and ground realities. This study fills the gap by pointing out the frictions in transformation of the political governance into business and economic indicators.

Studying the political economy of Pakistan is an interesting pursuit. Most problems emanate not due to lack of resources, but more because of mismanagement and rent seeking activities of various groups engaged in the governance of Pakistan.

Various indicators to measure the governance and competitiveness have been referred and their associations with the business competitiveness and economic performance have been shown. Creation of feudalism in South Asia and its continuity in Pakistan; feudal influence in the political governance; Economic and political governance and its nexus with the feudalism; its impact on fiscal policy including patterns of taxes, development financing and provision of subsidies; leading to debt burden and weakening the corporate sector; Nexus of family business ownership, income inequality and wealth concentration. Impact on monetary system in terms of accelerated rate of banking defaults, subsidized investment packages, exemptions, subsidized interest rate, higher banking spread and liquidity crisis.

The study explores the nexus of feudal lords, political parties, economic policies formulating institutions and big industrialists and players of financial markets determine the overall governance of the economy in Pakistan.

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Investment in terms of FDI, portfolio investment to GDP ratio and other indicators have always been discussed broadly to describe the performance of political regimes in Pakistan. What is the relation between the trends of investment and political governance? How political changes can affect the trends of investment in the country? This study unleashes the determinants of political governance and their relation with the investment patterns. The main emphasize of this study is to find the root causes of business un-competitiveness and weakening the corporate economy, financial markets and business sector in Pakistan. Today’s patterns of political and economic governance in Pakistan are deeply rooted in the political history of South Asia.

The World Bank, Economic Freedom Network, Fraser Institute and World Economic Forum have been defining and measuring the governance indicators. These indicators have been used in this study with describing their limitations and academic implications. It is generalized agreement in the economic literature that political governance play a vital role in economic development and prosperity.

It was observed in Pakistan that feudal lords have higher accumulation of wealth without economic contribution. Furthermore the higher return on their wealth does not reflect the increasing return to scale or managerial efficiencies; it was derived by deducing the economic logic and justifications that the use of political power plays a significant role in the earning of extraordinary and abnormal returns on wealth. Consequently, the wealth accumulation rate becomes much higher as compare to the normal ways of business. The unusual concentration of wealth and the income inequalities are the natural consequences of this mechanism.

The prioritization of government spending, budget allocations, collection of revenue, financing the deficit, monetary and fiscal policies, and facilitation of business sector depend on the overall economic political governance of the country.

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Political governance uses the discretionary powers in those economic decisions which can affect the patterns of investment and businesses. Allocation of special permits and licenses for certain businesses, subsidized lending from the banks and financial institutions, allocation of funds for local development, prioritization of infrastructure development projects, and exemptions from taxes are the common tools of economic policies by political governance.

The failure of governance in Pakistan are reflected in the energy crisis, low and stagnant tax to GDP ratio, high debt burden, high incidence of tax evasion, regressive tax system, high losses of public sector enterprises, burden of subsidies, high corruption and misappropriation in development funds, and human inefficiencies in public sector enterprises.

This research recommends the consistent economic policies without political influence by ruling parties, equity and egalitarianism in taxation policy, autonomy of central bank with independent monetary policy, freedom of commercial banks from political influence, minimum sized and lean government.

This thesis examined the impact of feudalism on wealth concentration as well as on governance of a country, business competitiveness and success of a country.

Bad governance has deep impacts on economy of Pakistan. Excessive debt, high fiscal deficit, high inflation, low tax to GDP ratio, high trade deficit, lack of adequate capital formation and severe energy crisis are some of the economic challenges faces by Pakistan from decades. Economic policies are in the hands of feudal lords due to their majority in national assemblies. Their economic policy decisions are not in the favor of Pakistan as many economic indicators are negative or showing poor performance. Deteriorated foreign exchange reserve due to high debt payment, growth of imports, stagnant exports, declining foreign inflows, poor privatization proceeds, inability of government to obtain international debt and declining grant assistance are the main reasons behind this declining trend. Cheaper external financing which was available in Pakistan earlier is no longer available now and its flow is declining. Non-bank borrowing also declined. Now government is mainly dependent on domestic banking system from where

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covering its deficit at higher cost as well as crowding out the private sector. Pakistan cannot sustain it. There is consensus that increase in budget deficit reduces growth and if country faces higher budget deficit which exceeds to certain level then it is difficult for country to sustain. Pakistan present and overall weak governance in every walk of life which is indicated by all international governance measurement indicators developed by World Bank, Fraser Institute, World Economic Forum, Fragile State Index Ranking, United Nations Human Development, Transparency International etc. We found significant negative relation between governance indicators and wealth inequality, income inequality, business competitiveness and success of a state.

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Abbreviations and Symbols

United Nations Development Program (UNDP)

Indian National Congress (INC)

All India Muslim League (AIML)

National Reconciliation Ordinance (NRO)

Public Accounts Committee (PAC)

State Bank of Pakistan(SBP)

United Nations Development Progarm (UNDP)

Asian Development Bank (ADB)

Organization for Economic Cooperation and Development (OECD)

Worldwide Governance Indicators (WGI)

Country Policy and Institutional Assessment (CPIA)

Universal Declaration of Human Rights (UDHR)

Transparency International(TI)

Human Development Index (HDI)

World Business Environment Survey ( WBES)

Business Environmental and Enterprise Performance Survey (BEEPS)

Corruption Perception Index (CPI)

Pakistan Integrated Household Survey (PIHS)

Household Income and Expenditure Survey ( HIES)

Khyber Pakhtunkhwa ( KP)

International Country Risk Guide ICRG

United Nation (UN)

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International Comparison Program (ICP)

Human Development Index (HDI)

Inequality adjusted Human Development Index ( IHDI )

Human Poverty Index (HPI)

Poverty of Opportunity Index (POPI)

Human Governance Index (HGI)

Statutory Regulatory Order (SRO)

State Owned Enterprises (SOE)

International Monetary Fund (IMF)

Pakistan People’s Party (PPP)

Non Government Organization (NGO)

Agha Khan Rural Support Programme (AKRSP)

Pakistan Integrated Household Survey (PIHS)

Pakistan social and Living Standard Measurement Survey (PSLSM)

The Institute for Management Development, Lausanne (IMD)

The World Economic Forum (WEF)

Gallup International on behalf of Transparency International (TI/GI

Freedom House, Nations in Transit (FH)

Political and Economic Risk Consultancy, Hong Kong (PERC)

World Bank’s World Business Environment Survey (WBES)

The Economist Intelligence Unit (EIU)

PricewaterhouseCoopers (PwC)

State Capacity Survey by Columbia University (CU)

Pakistan Industrial Development Corporation (PIDC)

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Water and Power Development Authority (WAPDA)

Karachih Electric Supply Corporation ( KESC)

Trading Corporation of Pakistan ( TCP)

Pakistan Agricultural Storage and Services Corporation (PASSCO)

Public Sector Enterprises (PSE)

Development Financial Institutions (DFI) nationalized commercial bank (NCB)

Muslim Commercial Bank (MCB)

Allied Bank of Pakistan(ABP)

Human Rights Commission of Pakistan (HRCP)

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Table of Contents

S.NO DESCRIPTION PAGE NO.

Certificate…………………………………………………….. ii Dedication……………………………………………………… iii Acknowledgement…………………………………………….. iv Abstract……………………………………………………….. xi Abbreviations and Symbols…………………………………… x Table of Contents…………………………………………….. xiii List of Tables…………………………………………………. xviii List of Figures………………………………………………… xxii

1. Chapter 1: Introduction………………………………...... 1

1.1 Overview……..……………………………………………… 1 1.2 Identification of Problem…………………………………….. 2 1.3 Background……………………………………………………. 3 1.4 Creation of Pakistan………………………………………. 5 1.5 Justification of the Study…………………………………... 7 1.6 Outline of Study………………………………………………… 9 Chapter 2: Economic and Political Governance: Theoretical and Empirical Advancement……………………………… 10

2.1 Feudalism ………………………………………………… 10 2.2 Feudalism around the world………………………………. 15 2.2.1 Feudalism in South Asia………………………………. 15 2.2.2 Feudalism in Arab World……………………………… 33 2.2.3 Russia……………………………………………….. 34 2.2.4 Nigeria……………………………………………….. 36

2 2.3 What does Governance Means? ...... 37 2.4 Views on Governance……………………………………… 38 2.4.1 The World Bank…………………………………… 38 2.4.2 United Nations Development Programme………….. 38 2.4.3 Organization for Economic Cooperation and 38 Development………………………………………….. 38 2.4.4 Commission on Global Governance ………………… 39 2.4.5 Other Definitions………………………………… 39 2.5 Governance Clusters……………………………………… 41 2.5.1 Voice and Accountability………………………….. 42 2.5.2 Political Instability and Violence…………………… 43 2.5.3 Government Effectiveness …………………………. 43 xiii

2.5.4 Regulatory Burden………………………………… 45 2.5.5 Rule of Law……………………………………… 45 2.5.6 Graft……………………………………………… 46 2.6 Advantages of Governance Indicators………..………… 47

2.7 Economic and Political Governance: Empirical Evidence…. 49 2.7.1 Corruption and Development…………………… 50 2.7.2 Impact of Fiscal Policy on Economic and Political Governance………………………………………….. 56 2.7.3 Income Inequality and Economic Governance……. 58 2.7.4 Wealth Inequality and Economic Governance……. 66

Chapter 3: Economic and Political Governance in South Asia…… 71

3.1 Measuring and Implications of Good Economic and Political Governance……………………………………………….. 77 3.1.1 Good Economic Governance………………………. 81 3.1.1.1 Privatization and Economic Governance…….. 85 3.1.2 Good Political Governance…………………………. 87 3.1.3 Good Civic Governance…………………………… 90

3.2 Economic and Political Governance in Pakistan……… 91 3.3 Political Governance in Pakistan…………………………. 91 3.3.1 Corruption in Pakistan………………………….…. 98 3.4 Economic Governance in Pakistan………………………. 100 3.4.1 Economy of Pakistan………………………………… 101 3.4.2 Fiscal Policy in Pakistan………………………………. 111 3 3.4.3 Subsidies in Pakistan…………………………………. 113 3.4.4 Economic Management of Public Sector Enterprises……………………………………………. 114 3.4.5 Balance of Payment……………………………….. …. 115 3.4.6 Debt Burden on Pakistan’s Economy…………….. …. 116 3.5 Structure of Financial Market and Corporate Sector in Pakistan………………………………………………….. 116 3.5.1 Equities Market in Pakistan………………………….. 120 3.6 Family Business Groups…………………………………. 121 3.6.1 Family Business Groups Around The World………….. 121 3.6.2 Family Business Groups in Pakistan…………………. 126 3.6.3 Breaking of Monopoly of Family Business Houses Concentration by Nationalization……………………. 132 3.7 Agricultural Taxation in Pakistan…………………………. 133 3.8 Bonded Labour in Pakistan………………………………. 135 3.9 Patwari (Clerk) System in Pakistani Rural Areas……….. 137 3.10 Landowner’s Power in Pakistani Politics……………… 138

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3.11 Efforts of Elimination of Feudalism from Pakistan……… 140 3.11.1 Land Reform in Pakistan…………………………. 141 3.11.2 Failure of Land Reform policy in Pakistan……… 143 3.12 Bureaucracy and Governance……………………… 146 3.13 Bureaucracy in Pakistan……………………………… 156 3.13.1 Criticism on Bureaucracy in Pakistan………… 161 3.13.2 Administrative Reform of Bureaucracy………. 163 3.14 Role of Army in Pakistan’s Economic and Political Governance……………………………………………… 163

Chapter 4: Deriving The Corollary……………………………. 171

4.1 Family Business Houses and Pakistan’s Economic Environment……………………………………… 171 4 4.2 Feudal concentration of wealth in Pakistan……….. 175 4.3 Income Inequality in Pakistan……………………… 176 4.4 Proposition………………………………………….. 181 Proposition 1 ………………………………………… 183 Corollary 1…………………………………………… 184

Chapter 5: Political Governance in Pakistan…….…………….. 186 5.1 Pakistan First Political Phase (1947-1958)…………… 187 5.2 Pakistan Second Political Phase (1958-1971)………… 191 5.3Pakistan Third Political Phase (1971 -1977)…………. 194 5.4 Pakistan Fourth Political Phase (1977-1988)…………. 196 5 5.5 Pakistan Fifth Political Phase-Democratic Transition (1988-1999)………………………………………….. 197 5.6 Pakistan Sixth Political Phase (1999-2008)………….. 201 5.7 Pakistan Seventh Political Phase (2008 onward)…….. 202 5.8 Feudal Influence in The Political Governance of Pakistan 204 Proposition 2 …………………………………………. 210 Corollary 2…………………………………………….. 213

Chapter 6: Impact of Bad Political Governance on Pakistan’s Economic Governance……………………………….. 215

6.1 Corruption in Pakistan………………………………… 215 6.2 National Reconciliation Ordinance (NRO)……………. 219 6.3 Corruption and Shadow Economy in Pakistan…………. 220 6.4 Bank loan defaulters in Pakistan………………………. 221 6.5 Development Work in Constituencies………………. 226 6.6 Overstaffing in State Owned Enterprises… 227 6.7 Political Appointments in State Owned Enterprises and

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Bureaucracies………………… 228 6.8 Grants and Subsidies for Political Benefits… 229 6.9 SRO Culture in Pakistan……………………… 231 6.10 Cartel in Pakistan…………………………… 232 6 6.11 Foreign Direct Investment………………… 233 6.12 Macroeconomic Instability…………………… 235 6.13 Liquidity Problems……………………………… 236 6.14 Current Account Deficit………………………. 242 6.15 Fiscal Deficit in Pakistan………………………… 244

6.16 Energy Crisis in Pakistan……………………………… 251 6.16.1 Lack of Vision in Energy Management………. 253 6.16.2 Issues of Good Governance in Energy Sector….. 260 6.17 Capital Market of Pakistan………………………….. 260 6.18 International Governance Indicators and Pakistan’s Ranking……………………………………………… 267 6.18.1 Worldwide Governance Indicators………… 268 6.18.2 World Freedom Report ……………………… 270 6.18.3 United Nations Human Development Index…. 272 6.18.4 Human Governance Index of Pakistan……… 274

7 Chapter 7: Root Causes of Incompetitiveness of Pakistan……. 278

7.1 Global Competitiveness Ranking of Pakistan………. 278 7.1.1 1St Pillar-Institutions……………… 287 7.1.2 2nd Pillar-Infrastructure…… 288 7.1.3 3rd Pillar-Macroeconomic Environment… 288 7.1.4 4th Pillar-Health and Primary Education… 288 7.4.5 5th Pillar-Higher Education and Training…… 288 7.1.6 6th Pillar-Good Market Efficiency…… 289 7.1.7 7th Pillar-Labour Market Efficiency……… 289 7.1.8 8th Pillar-Financial Market Development…… 290 7.1.8 9th Pillar-Technological Readiness……… 290 7.1.10 10th Pillar-Market Size……………… 290 7.1.11 11th Pillar-Business Sophistication……… 290 7.1.12 12th Pillar-Innovation…………………….. 291 Proposition 3 ………………………………… 292 Corollary 3…………………………………… 293

8. Chapter 8: Success of a Country and governance Issue… 294 Proposition 4………………………………………… 297 Corollary 4…………………………………………. 298 Corollary 5………………………………………… 298 Corollary 6…………………………………… 298

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Governance Model……………………………………………….. 299

9. Chapter 9: Empirical Results…………………………………….. 301

10. Chapter 10: Conclusion and Recommendations………………… 318 11. Chapter 11: Reference ………………………………………… 330 Appendices: 352 Appendix A……………………………………………… 352 Appendix B……………………………………………… 366 Appendix C……………………………………………… 376

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LIST OF TABLES

S Table TABLE Page Number No No. 1 2.1 Estimated Global Gini Indices 1820-2002 68 2 4.1 Family Business Houses in 1970 172 3 4.2 Concentration of Family Business Houses 1959-1970 173 4 4.3 Concentration of Assets in Pakistani Companies-1970 174 5 Pakistan Income Inequality based on Consumption 4.4 178 Expenditure 6 4.5 Consumption Inequality Gini Coefficient in Pakistan 179 7 Gini Coefficient of Income Inequality in Pakistan 1992- 4.6 179 2006 8 4.7 Income Inequality of Pakistan by World Bank 180 9 Time Line of Pakistan Political History With Major 5.1 186 Changes 10 Feudal Families in National and Provincial Assemblies of 5.2 205 Pakistan 11 5.3 Sufi Family Name in Pakistani Politics 209

12 5.4 Social Class Background of National Assembly Members 210 13 5.5 Feudal Influence in Pakistani Cabinet 212 14 6.1 Pakistan Shadow Economy % of GDP 220 15 Direct investment in Pakistan 2007-2012 6.2 233

16 6.3 Real GDP of Pakistan (1951- 2010) 235 17 6.4 a Total Debt of Pakistan (a) (1971-1991) 238 18 6.4 b Total Debt of Pakistan (b) (1992-2010) 238 19 6.5 Domestic Debt of Pakistan (1960-2010) 239 20 6.6 Defense Saving Certificate(DSC) Rates 241 21 6.7 Current Account Deficit of Pakistan (1949-2010) 242 22 6.8 Fiscal Deficit of Pakistan(1979-2010) 245 23 6.9 Tax Revenue Collection (% of GDP) 247 24 6.10 Credit to Private Sector in Pakistan (% of GDP) 248 25 Profile of Karachi Stock Exchange from 2001-2013 6.11 261

26 Listed Companies of KSE(1992 to 2000) 6.12 261

27 Delisted Companies of Textile Sector in Pakistan(1991- 6.13 2013) 263

28 Textile Sector Dividend Payment Behavior 6.14 264

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29 50 Random Companies of Karachi Stock Exchange: 6.15 264 Ownership Concentration 30 6.16 Pattern of Shareholdings in Pakistan 265 31 6.17 Worldwide Governance Indicators of Pakistan 269 32 World Economic Freedom Ranking 2010 (South Asian 6.18 271 Countries) 33 Pakistan Ranking in Five Components of World Economic 6.19 271 Freedom Report Ranking 34 United Nations Human Development Index Ranking (South 6.20 273 Asian Countries) 35 Human Development Index Score of South Asian Countries 6.21 274 and Sub-Saharan Countries 36 6.22 Human Governance Index Ranking of South Asian Countries 275 37 Human Governance Index Score (Comparison of South 6.23 276 Asian Countries) 38 Comparison of Pakistan and Bangladesh Governance 6.24 Performance 277

39 Pakistan Ranking in The Global Competitiveness Report 7.1 279

40 Global Competitiveness Report Components: Pakistan 7.2 281 ranking 41 7.3 Most Problematic Factors for Doing Business in Pakistan 281 42 Global Competitiveness Ranking of Pakistan: Component 7.4 Wise(2008 to 2012-13) 286

43 8.1 Pakistan Failed State Index Ranking 294 44 Pakistan Failed State Index Ranking(Twelve Key Points 8.2 296 Position 2005-2013) 45 Countries Surrounding Pakistan in Failed State Index 8.3 296 Ranking-2013 46 Correlation between Income Inequality and Governance 9.1 302 Indicators 47 Regression Result of Income Inequality and Governance 9.2 303 Indictors 48 Correlation between Governance Indicators and TI 9.3 Corruption Perception Index 305

49 Correlation between Governance Indicators and World 9.4 306 Freedom Report Ranking 50 Correlation between Wealth Inequality and Income 9.5 Inequality 308

51 Correlation between Income Inequality and Governance 9.6 310 Indicators xix

51 Regression Result of Income Inequality and Governance 9.7 312 Indictors 52 Correlation between Governance Indicators and Global 9.8 314 Competitiveness Ranking 53 Regression Result of Business Competitiveness and 9.9 315 Governance Indicators 54 Correlation between Governance Indicators and Failed State 9.10 Ranking 316

55 Regression Result of Success of Country and Governance 9.11 316 Indicators

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LIST OF FIGURES

S Figure Figure Page Number No No. 1 4.1 Gini Index of Income Inequality of Pakistan 180 2 5.1 Feudal Influence in Parliament 211 3 Feudal Influences in Pakistani Cabinet 5.2 213

4 6.1 Shadow Economy of Pakistan 221 5 6.2 Direct Investments in Pakistan 234 6 6.3 Real GDP from 1951 to 2010 236 7 Total Debt of Pakistan (1971-2012) 6.4 239

8 Domestic Debt of Pakistan 6.5 240

9 6.6 DSC Rates 241 10 Current Account Deficit of Pakistan (1949-2010) 6.7 244

11 6.8 Fiscal Deficit of Pakistan 246 12 6.9 Listed Companies of Karachi Stock Exchange (1993-2012) 262 13 7.1 Global Competitiveness Ranking 280 14 8.1 Pakistan Failed State Index Ranking (2005-2013) 295 15 GOVERNANCE MODEL 8.2 299

16 9.1 Relation between Income Inequality and Wealth Inequality 307

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Chapter 1: Introduction

1.1 Overview

Pakistan’s financial sectors always remain in the grip of various governance issues like as expressed by Papanek (1967) in the sixties that major part of industrial and financial sector is owned by few business families. Later it was supported by popular ( Haq,1976) 22 families’ statement which highlighted the issue that Pakistan’s industrial and financial sector is under the control of few families. These families were engaged in rent seeking activities and citizens were not getting benefits of investment and growth of economy. This issue was further explored by

Rashid (1974) who took data in the seventies and highlighted the fact that family business groups have major stake in Pakistani capital market and also discussed formation of these groups.

Rehman (2006) observed that similar trend is continuing in Pakistani market without any change after decades even when in early 70’s Zulfiqar Ali Bhutto government nationalized many industries on large scale and various family business groups suffered a lot.

It is general practice in Pakistan’s stock market that local investors, provided they have sufficient fund to invest, prefer to manage firm as a director rather than act as an ordinary shareholder and give this assignment to only qualified people with relevant experience. So, they try to form company irrespective of whether they can properly manage it or not. Take example of textile sector. Out of total Pakistani registered public limited companies, there are more than 175 companies registered in textile sector in 2013 but none of them belong to any multi-national company. Their average size is very low as compared to companies listed in other developing and developed stock market. Half of the companies do not participate actively in trading of stock market. Volumes of investment in many companies are very low in Pakistani stock market. Most of these companies do not pay dividend while they have adequate earning. Further they are not xxii

paying tax to government which they can pay from their earning. They are keeping profit as retained earnings and taking maximum benefits in terms of salaries, perks and other allowances as highlighted by (Jensen & Meckling, 1976) in their agency theory. Corporate ownership is highly concentrated and majority of companies are owned by certain family business groups which have strong hold on companies management (Javaid & Iqbal 2008). The family members of these groups hold majority shares in these companies. Majority of directors elected in listed companies are usually part of the same family business houses. In many companies at least five or six directors belong to the promoter. The managing director does not appoint people on key positions of the firm on the basis of merit and competitiveness but rather appoints directors belonging to family or close relatives on the important positions of management. These executive obtained maximum benefit in the form of compensation and allowances and they also control company through which they also receive various other benefits. There is a long list of benefits that they can obtain, take for example they receive accommodation with all facilities, education's expenditure of their children, reimbursement of personal expenditures for family medical services, utility bills, elite clubs' membership fee and traveling allowances etc. They can use their influence in recruitment of the lower management, and suggest suppliers from whom company should buy various supplies, and they have to take social status in the society as a corporate director. In short they do all such things to get control and to get power, which can be profitably employed to make further economic gains for themselves and their families.

1.2 Identification of Problem

It is a generalized perception that democratic system leads to good governance, economic welfare and development. Surprisingly, the history of Pakistan shows a negative association between the democratic regime and economic development and governance. Non democratic xxiii

regimes (Military rules) in Pakistan have been showing significant improvement in economic and business indicators and better governance as compare to the democratic governments. Such evidences have created a gap and contradiction between the political theories and ground realities. This study fills the gap by pointing out the frictions in transformation of the political governance into business and economic indicators.

Pakistan’s performance in sixty five years after independence is not very disappointing.

Pakistan’s poverty ratio has declined and economy shifted to more diversified production structure from agrarian economy. Integration with the world economy has been fairly good, and liberalization and deregulation of the economy have begun to take root. But potential for growth and development is far more than what realized by Pakistan (Hussain,1999). Human development indicators computed by United Nations Development Program (UNDP) of Pakistan is far behind other countries of Asia and rest of the world. Overall literacy rates, life expectancy, infant mortality are much below than neighboring countries as well as from those countries who are around same per capita income level (Human Development in South Asia, 2012; UNDP,

2013). Fiscal and monetary policies have been lax, and the gains achieved by establishing sound institutions in the earlier years are being gradually eroded. The physical infrastructure has not kept pace with the speed and level of economic activity. Technological and scientific progress has been limited despite possession of nuclear technology (Hussain,1999).

1.3 Background

To trace the origin of concentration of wealth in Pakistan we will have to look back into the history of land management in the Indo Pak subcontinent. During Mughal era, land was given to the members of the ruling family or people who supported the rulers as rewards who

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were supposed to manage the estate, to collect taxes, to maintain law and order and to provide necessary man and material at the time of war. This system worked well for the ruler as he had to deal only with the few nobles who in turn were responsible for their estates (Ramusack,

2003; Ernst & Pati,2007; Naseemullah & Staniland, 2013; Banerjee & Lyer, 2005).

Most of these nobles were Muslims as Hindus concentrated on small time trade (Banya) and

Muslim rulers preferred their Muslim brothers. This later on had serious implications in determining class orientation of Indian National Congress and All India Muslim League.

But the tenure of the estate depended on the whim of the king. He may cancel it any time and at the death of the landlord the estate reverted back to the king who may allot it to any one whom he wishes. This had serious implications for land development as the feudal lords had no permanent title to the land, consequently had no incentive to develop it (Ernst & Pati, 2007).

When East India Company arrived in the subcontinent, they maintained the same feudal system for their benefit (Banerjee & Lyer, 2005; Saxena, 1952). Although they developed army, police and bureaucracy for war, law and order maintenance and tax collection but their police and bureaucracy relied heavily on local feudal lords in performance of their duties (Ernst & Pati,

2007).

When industrialization started during British era, most of the industrialists were from same

Hindu banya class who were encouraged by the British as they had more experience of trade and industry and banking. Most of the industrialists, traders and bankers in the pre partition India were from Hindu community and Muslims lagged far behind. As we have earlier discussed,

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Muslims tended to be part of landed elite as they were favored by Muslim kings and their role in trade and industry were minimal.

During British period, political parties on the modern lines were established for the first time in the subcontinent. Indian National Congress (INC) was established in 1885 which represented

Hindu middle class. Muslims remained away from INC because of fear of Hindu majority and in

1906 formed their own All India Muslim League (AIML). Most of the leaders of AIML were from same old landed elite (Gazdar, 2009; Jalal, 1994). This contrast AIML from INC. While

INC was from day one a party of the masses, the AIML was party of the feudal lords. INC in the meanwhile developed land reform program but AIML never paid attention to the same.

There is another aspect of the INC and AIML difference. AIML had concentrated in the Muslim minority provinces and Bengal (these were the two areas where AIML performed better in 1936 elections) (Schwurtzherg, 1980; Jalal,1994). So in the areas now forming state of Pakistan AIML had little mass appeal and after passing of Lahore Resolution in 1940, AIML leadership had to rely heavily on local landlords to perform better in elections held in 1946 (Jalal,1994). In order to get support of the feudal class, AIML did not try developing any land reform program.

1.4 Creation of Pakistan

The partition (1947) was a time of great upheaval and a time of opportunity too as society was ready for any change. We believe this was the ideal time for conducting extensive land reform but as Muslim League lacked true people’s leadership, they failed to take advantage of this opportunity. While, on the other hand, Indian National Congress took the opportunity and conducted land reforms on large scale basis.

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In Ayub era, a half hearted attempt of land reforms was made but it failed to make any significant impact as it lacked political will. Ayub era was also a time of rapid industrialization but here too issue of concentration of wealth was not addressed as either same old feudal lord were allowed to establish industries or few old families forming part of small community of

Muslim traders and industrialists were given licenses and bank loans resulting in the development of phenomena of 22 families.

After the fall of East Pakistan (1971) and formation of Bangladesh, Zulfiqar Ali Bhutto came to power in the country. He had broad public support and had a defined economic agenda. Bhutto and his economic advisers were under the influence of Socialism and wanted to make Pakistan an ideal socialist state but that did not happen. As land reforms conducted by Bhutto were as ineffective as land reforms conducted by Ayub.

Reasons of failure of land reforms conducted by Ayub and Bhutto are the same as the feudal in

Pakistan also form the backbone of political class (Human Development in South Asia,1999;

Hussain, 1999; Shafqat,1998) and no ruler howsoever strong can dare to challenge them.

Therefore we observe that after Bhutto no ruler has even tried to conduct any land reforms however superficial in the last 35 years (Tahir, 2002).

One area in which Bhutto did make significant inroads was nationalization of industries. Bhutto nationalized almost all the significant industries and managed to break the hold of 22 families to a large extent (Amjad,1976). But as Trotsky said in Socialism means of production may belong to state but the state belong to bureaucracy. In Pakistan too, industries changed hands from 22 families to one large owner known as bureaucracy and as with the rest of the world, bureaucracy didn’t manage the industries well. With the start of privatization process in the West and fall of

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communism in the East, privatization was also carried out in Pakistan. But no attention was given to avoid concentration of wealth and few selected business houses were allowed to own majority of privatized units. As a result today we may not have 22 families but we do have 44

(Rehman, 2006).

1.5 Justification of the Study

Pakistan economy is facing various problems. These problems are of multiple natures. Some of the issues are given below which may help to understand its dynamics.

 The News (2012) reported that Pakistan as per Global Competitiveness Report 2012-

2013 has been ranked among the bottom 20 out of 144 economies around the world.

 World Bank’s doing business report kept Pakistan at 128th position out of 189 countries

and considered it a tough place to do business.

 According to Failed State Index (renamed Fragile States Index) ranking, Pakistan stands

at number 13. Pakistan falls under the ‘high alert’ category.

 Pakistan ranked 74 out of the 82 countries as per The Economist Intelligence Unit (EIU)

released the business environment ranking for 2014.

 As per survey of Transparency International 2012, Pakistan ranked at 139 on the scale of

1-175.

 As per Economic Freedom Report rating, Pakistan stands at 111 out of 144 countries

ranked.

 According to HDI ranking by UNDP in year 2012, Pakistan ranked at 146 out of 187

countries. Pakistan falls under the ‘low human development’ group.

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 KOF Index of Globalization which measures economic, social and political dimensions

of globalization ranked Pakistan at 108 out of 166 countries in 2012.

 Mongabay.com in its country report stated that Pakistan economy is facing high budget

deficit which has adverse impact on balance of payment, exchange rate, inflation, capital

formation and financial stability (http://www.mongabay.com/).

 The Express Tribune (2012) reported that Pakistan is facing liquidity problem as return

on bonds rises due to continuous borrowing from government side.

 The Economist (2012) reported that Pakistan may face financial crisis due to ever

increasing current account deficit and mounting public debt

(http://www.economist.com/news/21566503-pakistan).

 The Economist (2012) showed Pakistan position in terms of debt interest payment which

remained 5 to 6 percentage of GDP and current account deficit was always negative from

2004 to 2013. (http://www.economist.com/news/21566503-pakistan).

 The Express Tribune (2013) reported that large fiscal deficit of Pakistan economy poses a

serious threat to macroeconomic stability.

 Pakistan Defence (2009) reported that as per National Reconciliation Ordinance (NRO)

list, bureaucrats get more benefits than politicians. (http://defence.pk/threads/nro-

beneficiaries-list-issued.39637/).

 The Express Tribune (2010) reported that Public Accounts Committee (PAC) has list of

450 members of the bureaucrats who have obtained personal gain through plot allotment

policy promoted by successive prime ministers.

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 Pakistan is facing lack of political stability as from October 1999 till 2008 nine different

government i.e. four interim appointed, four elected and one following the military coup

of October 1999 ruled Pakistan.

 Husain (2005) observed that international financial community has doubt on Pakistan’s

credibility due to failure to implement agreements.

 Local investors’ confidence has been shaken by government when government decided to

freeze foreign currency accounts.

 Foreign investors were unhappy when criminal action was started against Hubco and all

power purchase agreements were re-opened (Ali & Beg, 2007).

 The Nation (2012) reported based on Governor of State Bank of Pakistan(SBP) Shahid

Kardar that agriculture sector of Pakistan receives substantial amount of subsidies while

due to political pressure agriculture sector is not paying taxes. On the other hand

Pakistan tax to GDP ratio is amongst lowest in the world. Investment in Pakistan’s

various sectors dropped to 11 percent of GDP, which is lowest in Pakistan’s history. In

Pakistan there are 34000 registered commercial electricity users who are engaged in

various business activities but out of them only 4000 file tax returns.

 Dawn (2013) reported on the basis of report released on Pakistan by World Bank that

Pakistan economy is trapped in low growth equilibrium, its growth is lower than other

South Asian countries. Reports says that reason is macroeconomic instability, unfriendly

business environment, low investment, saving and low productivity.

1.6 Outline of Study

This thesis is organized as follows:

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Chapter 1 gives brief overview about the study. In chapter 2,3 literature have been reviewed

which provides theoretical advancement and empirical evidences. Chapter 4,5,6,7 and 8

developed various propositions and corollaries. Chapter 9 provides empirical results and

chapter 10 provides conclusion and suggestions of the study.

Chapter 2: Economic and Political Governance: Theoretical and Empirical Advancement

2.1 Feudalism

The term feudal or feudalism is taken from Frankish word fehu-od. Its meaning was cattle which later on were taken in the sense of wealth or remuneration of services. Later on a Frankish word fief developed which means that a landed property given to someone who in return rendered services to a landlord. In Latin the word fief is taken as feodum (feudum) (Pintescu, 2005).

Tonomura (1999) referred Francois Louis Ganshof who defined feudalism in 1964 as “ a body of institutions creating and regulating the obligations of obedience and services ( mainly military service) on the part of free man (the vassal) towards another free man (the lord), and the obligations of protection and maintenance on the part of the lord with regards to his vassal. The obligation of maintenance had usually been as one of its effects, the grant by the lord to his vassal of a unit of property known as a fief”

Brown and Brown (1973) in his famous book ‘Origins of English Feudalism’ argued that feudalism may be regarded as a type of society and has many characteristics of which four are fundamental or essential; one is the knight, second vassalic commendation, the fief and the castle.

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Bloch (1961) in his famous book ‘feudal society’ defined feudalism, “ A subject peasantry, widespread use of the service tenement (i.e. the fief) instead of a salary, supremacy of a class of specialized warriors, ties of obedience and protection which bind man to man and, within the warrior class, assume the distinctive form called vassalage, fragmentation of authority leading inevitably to disorder, and , in the midst of all this, the survival of other forms of association, family and state, such then, seem to be the fundamental features of European feudalism.

Bloch (1961) related social development to politics and showed from the study of feudalism that organized feudalism was associated with the emergence of a new military aristocracy. Feudalism was inimical to kinship and hereditary personal status. It was the work of the fittest who had survived and indeed exploited the chaotic conditions and opportunities of the ninth, tenth and eleventh centuries.

Feudalism was a vague political system where lords owned large part of land. Lord belonged to monarch. Major parts of land were owned by the Church. King had divided land in various estates called fiefs (land grants), that fief was given to lesser lords who were called vassals.

These vassals pledged their loyalty and military support to their lords in return of fiefs. Peasants who lived on the estate were serfs. These serfs were bound to the land. These serfs serve to the lord in return , protected them. These serfs were loyal to the lord.

Pintescu (2005) argued that many scholars linked feudal age as unique age and related it to the

Western part of Europe only. Pintescu (2005) referred Joseph Calmtte who thinks that feudal word consists of Christian Occident of Europe, area conquered by crusaders like Syria, the Latin

Empire of Constantinople, Greece. Ganshof considers that feudal society existed in Germany.

France, England, Italy and Spain were founded by crusaders. Bloch (1961) gives his view about

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feudal society which, according to his opinion, existed in Western Europe and in some part of

Central Europe. On the other hand Claude Cahen observed that feudal characteristics existed in the Muslim, Byzantine and Slavic societies. Pintescu (2005) observed that feudal institutions also existed in East of Europe but were somehow imperfect.

Feudalism is a kind of hierarchy of power where land and natural resources are main form of wealth which provides the base of all political, economic and social structure of the society.

European feudalism was developed after the fall of long centralized Roman Empire. Feudalism emerged in some parts of Europe when central government broke down. In this situation various public functions and privileges were taken over by individuals. Various areas shifted to small local units. Feudalism, specifically, had relationship between lord (patron) and vassal(client).

Under feudalism, there was a relationship developed among various landlords or landowners. In this system powerful landlord provided protection and economic support to small landowners and in return received tax revenue and military services. Generally the vassal(client) was indentified in society as knight. As it is discussed earlier that people and land were main ingredients of feudal system, in that system fief was granted to vassal. That vassal became landlord of the given fief. Now that land was organized by landlord with the help of labor, serfs and other people who had limited rights and resources. Under this feudalism, the peasant family emerged as the main unit of production.

North, Wallis and Weingast (2009) observed that military service and land tenure became closely linked, forming the origins of the feudal system. It was observed that invasion of England by

William in 1066 developed an unusual political situation in Europe. To protect political entity

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and population, William and his associates developed feudal political system in which major military and political figures held land granted directly by the king and in return provided knight services and homage to the king.

Tonomura (1999) after observing definitions of various many authors suggested five factors which are important in feudalism: first is grand system of state government, second is dispersion of public powers as a whole among provincial lords, third is a system of classes and ranks, fourth is personal relationship between a lord and lastly his vassals as well as grants of estates.

Tonomura (1999) observed that feudal societies had some common features like absolute authority of royalty in spite of the decline of its political power, growth of cities and commerce, rise of lower classes, increase of intelligence and germination of industrial capitalism. These features were present in feudal part of Europe, Japan and China. Tonomura (1999) divided study of feudalism into two separate part, one from historical point of view and another from economic point of view.

Bagchi (2000) discussed that in the Eastern and Central Europe revolutions of 1848 abolished feudal tenures and formally in Hungary, Russia and Rumania abolished feudal tenure in 1860s.

Feudalism was ended in Germany after abortive revolution of 1848.

Itandala (1986) broadly divided feudalism concept in terms of non-Marxist and Marxist. He further divided non Marxist into two categories: one non-Marxist who considered feudalism as a group of political and legal institutions which manage the association between lords and vassals in medieval Western Europe. This system was decentralized and had specific set of property rights as also discussed by Van der Ploeg (2011).

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The second non-Marxist who interpreted feudalism in much broader form than the first one.

They considered it as a form of social, political and economic organization which existed in medieval Western Europe. In East Africa various countries emerged between 15th and 19th centuries like Busoga, Buganda, Nkore, Rwanda, Bunyoro, Brundi and Buha which had feudal association.

North (2006) observed that in Europe feudalism ended after almost one thousand years of collapse of Roman Empire in fifth century A.D. During this period centre of economic activity had mainly remained with the manor and sometime in towns. Manorial organization was structured on division of land in three forms: one lord’s demesne, second holding of peasant and third by commons. Most of the peasants were restricted to work for the landlord as serfs. They were under the jurisdiction of lord. They could get justice from the lord’s court and their movement was restricted. It was generally observed that traditional manorial organization did not encourage economic growth.

Sharma (2006) in his pioneering book ‘Indian Feudalism’ discussed pre-capitalist India and argued that political economy of India was not very different from pre-modern Western Europe.

Sharma discussed that during Gupta and post Gupta time i.e. third to sixth century, when land was granted to religious and secular donees and used as an administrative apparatus, not only revenue facility was handed over but control over the inhabitants of these gifted land also given to the beneficiaries. These beneficiaries had coercive and administrative power and dealt with the inhabitants independent from kingdom. These grant of land created an intermediary with political and economic power.

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Ramusack (2003) in his book ‘ The Indian princes and their states’ observed with reference to the book ‘Our Indian Protectorate’ published in 1893 by Tupper who believed that relationship between British Raj and the states were of feudal nature. It is also observed that growth in this region hindered due to the higher percentage of revenue received by the jagirdars in a state, less development work had been done in that area. In this regard Hurd even observed that jagirdars took revenue from the states treasury for their personal purpose. In Bihar, Orissa and Bengal landlord existed before the arrival of British. Princely states had been characterized by two principal categories, one was landlord which may be king of the state and another one was peasants.

2.2 Feudalism around the World

There is no doubt that feudalism existed in various parts of the world including European,

African and Asian countries in the past. Feudalism was mainly related to land and with the passage of time got abolished from many parts of the world. Nonetheless in present century, feudalism still exists in different regions as well as in various countries. Here we discuss it in detail.

2.2.1 Feudalism in South Asia

Feudalism is a term used by scholars, politicians and planners as traditional lord-tenant relations

(Herring, 1980). Feudal lords have power and dominant role in society through the possession of land and real estate. Feudalism is a major source of influence and power in many countries in which Muslim countries like Brunei Darussalam, Libya, Pakistan, Nigeria, UAE, Tunisia, Saudi

Arabia and Ukraine, Kirgizstan, Turkmenistan, Belorussia as well as Western shore of Africa

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are included. In the nineteenth century, Marx suggested that if rural area is not capitalist then it must be feudal (Herring, 1980). Feudalism was the power of the ruling class and this feudal system has an element of coercion, they had control on land and are in a position to exploit the peasants. Land is not considered as labor and it is not available in commodity form and claims on land property are contingent and not absolute (Herring,1980).

Human Development in South Asia (1999); Marco (2009) observed that Pakistani politics is managed and concentrated in the hands of landlords who exert power through land control and biradri system, these feudal elites are key component of patron client nature of politics.

Croissant (2004),Dalrymple (2007, September 1); Anwar (2013, May 19) and Kugelman (2013,

January 3) observed that Pakistan is under the heavy influence of feudal lords. To understand feudalism in Pakistani context, we give some background here.

In Mughal Empire ( 1526-1707) the emperor was the owner of whole land and assigned revenue collection duties to various officials (Niaz, 2006).

Gazdar (2009) observed that these Jagirs were superior claims on land and on these lands, landowners did not pay revenue to state and that practice was followed before colonial rule.

British also continued similar practice and further awarded Jagirs to their supporters and loyalists to strengthen themselves.

All economic resources owned by feudalists have been received by their ancestors by serving as agent of rulers. It was a grant of land to army officers, land lords and states that were authorized to collect revenue, safeguard the interest of rulers, maintain law and order in their area. They also provided army personnel when state needed. This practice was followed in Mughal era and then

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in colonial states too ( Niaz, 2006; Naseemullah & Staniland, 2013; Banerjee & Lyer, 2005).

This land did not belong to these feudal lords (jagirdars) but with the passage of time it had been considered as their property with no record in public documents.

Saxena (1952) observed that when British settled in India on permanent basis, they developed various rules and regulations to administer the land. The Jagir system, as existed in Mughal period, was not modified by Britishers but somehow strengthened when British Raj made various political settlements with these Jagir holders and princes. Under British Raj these Jagir holders and princes were independent in their own states. Saxena (1952) described Jagirdari system characteristics in which property rights and Chiefs rights are two distinct rights that existed, property rights were described with the support of Hindu law of inheritance while Chiefs rights were not divisible and its succession was only possible through family customs and traditions .

Secondly Jagir could not be transferred to someone else, third where natural heir was not available, adoption is possible and fourth those who were working on land had no rights of property.

Iyer (2010) observed that British colonial system was based on the princely states and feudal lords in Indian sub continent. Indian subcontinent was governed by British Empire for almost

200 years in which Pakistan, India, Burma and Bangladesh were included. British India meant where Her majesty’s ruled through Governor General of India and rest was considered as princely states by the British government. Iyer (2010) showed that around 680 native states were recognized by the Foreign Office in 1910. Princely states consist of 23 percent of total British

India population excluding Bruma and Sind and it constituted around 45 percent of the total area of British India. Some of these princely states were very large like Hydrabad and some were very

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small and consisted of few villages. On the other hand these princely states had different legal autonomy from very large legal and controlling power and only some were allowed to deal with petty civil cases. These states had their own revenue collection system as well as administrative and justice system.

These princely states and lords were the political agents and chief collectors of the central government. Similar kind of functions was performed by mansabdari system in Mughal era for the collection of land revenue by Emperor Akbar. After the fall of Mughal era these officials became powerful landlords in their own local areas. Feudalism is rooted in the tribal tradition and history of the areas which now form part of Pakistan like Sindh and Punjab. In the nineteenth century British government allotted land and gave judicial and administrative powers to Muslim landlords to gain their support for the administration of the territory.

When British took control of Indian sub-continent, there was no clear way to collect land revenue which formed a substantial part of government revenue ( Naseemullah & Staniland,

2013). The British established three different systems to collect land revenue and taxes, first was cultivator based system( raiyatwari), second was landlord based system ( zamindari ) and third was village based system ( mahalwari).

In landlord areas, property rights of land were given to landlord who had responsibility to collect revenue from cultivators and British government had no direct link with cultivators. Madhya

Pradesh, Orissa, Bihar, Bengal, Tamil Nadu and Andhra Pradesh were regions where landlord system prevailed. Niaz (2006) discussed that Lord Cornwallis (1785–1793) given proprietary rights in land to the landlords in exchange of fixed amount.

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On the other hand, raiyatwari system (individual cultivator) was adopted in some parts of

Bombay Presidency, Assam and Madras where, with the help of detailed survey, land property rights were established and land revenue was collected from individual cultivator. Village based

( mahalwari ) system was introduced in Punjab and North West Provinces where village was jointly owned by people living there and they were responsible to collect and pay land revenue tax to government. This system in some areas had close association with landlord system where one person or family was given responsibility to collect land revenue and in other places larger bodies were responsible (Banerjee & Lyer, 2005).

Banerjee and Lyer (2005) observed that in landlord areas wealth inequality was on higher side as compared to non landlord areas because landlord were in a position to extract as much rent from tenants as they liked and they could put pressure on cultivators because of their control of administrative and judical power. In British colonial era as discussed earlier, land revenue collection was divided in three parts, at various places landlord were committed to pay fixed amount irrespective of what they collected from cultivators. British government could not raise it due to political power of those landlord, so British governemnt took more interest in those areas where non landlord system was working to collect land revenue, because they could get more rents from those areas. It was due to this reason, British government invested more funds in non landlord areas in railways, irrigation, school, health and other infrastructure including all canal system.

Banerjee and Lyer (2005) divided the areas into two categories, one where landlord based revenue system was followed i.e. landlords were responsible for revenue collection and the other, where cultivator based system was followed i.e. where the ruler collected the revenue directly

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from the cultivator. In the first mentioned system there was greater land inequality and overall administration and development was poor since most of the benefits of the good crop were seized by the land lord for himself and little benefit was transferred to the farmer.

The landlord class was created and supported by the British to support their rule in the Indian subcontinent (Niaz, 2006) and later they became supporter for the creation of Pakistan (Rashid,

1978). In Pakistan feudalism is termed as Jagirdari (Herring, 1980). The first five year plan described landlordism as a historical accident in which most landlords acquired their land by

British rulers for supporting them (Herring, 1980; Rashid, 1978). Lancaster (2003, April 8) observed that in Sind and other parts of Pakistan, feudal system established when British colonial officials delegated administrative and judicial powers to prominent Muslim Landlords. Wendt and Barnett (1993) observed that in case of decolonization, regime had given power to local elites who had been created by colonial masters for their benefits (Niaz, 2006; Rashid,1978).

Socially, feudalism has meant in Pakistan the presence of tyrannical and oppressive landlords.

Abusive conditions in the social relations of production are conducive to neither economic efficiency nor political stability (Herring,1980). The feudal orientation of Pakistan’s political elites (Human Development in South Asia,1999; Marco,2009) which are reportedly dominated by around three hundred influential families obstructed the process of national economic modernization, social transformation and the creation of a just and egalitarian order in Pakistan (

Khan, 2002). These landlords played an important role in the politics of Pakistan from its independence till today (Haqqani, 2006; Keefer, Narayan, & Vishwanath, 2003; Croissant,

2004). All major political parties are full of feudal lords like PPP and PML-N and new emerging party Pakistan Tehrik-e-Insaf (PTI) is also not behind in the race.

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These feudal lords cannot allow abolishment of feudalism. They hold the significant majority of both houses of parliament and all four provincial assemblies from independence till today

(Haqqani, 2006; Ismail, Rizvi, & Mahmood, 2000; Keefer, Narayan, & Vishwanath, 2003).Their voters are their own people because these are peasants who serve their landlords. Coercion is common in local politics, feudal lords have their own trusted people everywhere to check who is voting against them on Election Day and those who go against them face its consequences in the form of false cases, unfair prices at mills held by feudal lords etc. (Baker & Bhutto, 2008,

February 13). These landlords after reaching provincial and national assemblies are least interested in the formulation of foreign policy, economic and education policy and various other governance issues that Pakistan faces. Members of parliament do not focus on macro-economic policies (Pasha, 2000). They are only interested in those economic policies which are going in their benefits like loan at reduced rate from commercial banks, exemption from taxes, allocation of funds for their constituencies is their main concern and burden on public organization by forcefully appointing their people who will in turn give favorable support to these landlords in future . All revenue earned by these landlords in the form of crops, farm houses, live stocks, fruits, fishing and dairy farming are exempted from taxes. They have strong control over judiciary, civil services, and law enforcement agencies and never encourage tax on wealth and agriculture income. They obtain loan from banks at reduced rate at the name of rural economy and then with the help of political influence, compel banks to write it off. Whenever prices of agriculture product increases or government spend on rural area infrastructure development, benefit goes to these landlords who in return, do not pay any tax to the government. These feudal lords generally do not keep permanent place in any political party and shift their loyalties whenever they needed, this indicates that they do not have any concern with party manifesto and

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ideology. Since their family vote bank is with them so they can easily move with more popular party whose chances are more to win the election in national and provincial assembly.

Nobody in Pakistan is in favor of feudal lords but unable to eliminate them from society because of their strong influence at every policy making platform in Pakistan. In this way feudal lords are protecting themselves, their wealth and leading to inequality and underdevelopment in Pakistan.

Feudal lords create hurdles in economic growth and prosperity by shutting the door of competition in their land due to extreme uneven distribution of resources. They exercise traditional power to control peasants working in their land. Lack of education, women empowerment, and lack of industrial development are common problems in feudal land. Even in some areas of Pakistan basic human needs are not available for people living in tribal land

(Haqqani, 2006). Haqqani (2006) observed that these feudal lords are not interested in the improvement of their area in terms of education and infrastructure, with the fear that people of their area will get progress and then they will not respect and obey landlords. The Guardian (15

February 2008) reported that these landlords have control on vote bank and they use it for their advantage and cast these vote to that party who provides them subsidized irrigation water , fertilizer, roads (for their own village) and various other personal benefits.

Pasha (2000) observed that most of the subsidies benefit given by the government goes to landlords in the form of income tax liability, subsidies on inputs of irrigation, agriculture credit, electricity for tube wells and tractors at reduced interest rate etc. Total subsidies expenditure to the government is around Rs. 40 billion. These subsidies increases profitability of landlords but its benefits goes in their pocket rather than to poor cultivators. They also get water for irrigation with the help of government officials more than what they should get as per rules, this activity

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develop shortages of water supply to poor farmers who do not have money to pay to corrupt officials nor have influence on bureaucratic setup.

Haqqani (2006) argued that in order to understand feudalism in Pakistan, one needs to understand the circumstances into which Pakistan came into being. The persistence of feudal culture throughout country from independence till today (Time World, Feb 13,2008) and similar group of people in provincial and national assembly exert their influence (Pakistan State Times,

13th Aug, 2013) in all decision making process is a root cause of bad political governance.

Dalrymple ( 2007, September 1) argued that Pakistani democracy is a form of feudalism and highlighted this issue through top most political party in Pakistan i.e. Pakistan People’s Party

(PPP), where Bhutto’s feudal friends and relatives were nominated for various provincial and national assembly seats and these landlords knew that their peasants, villagers vote for them.

Real democracy has never thrived in Pakistan, in part because landowning remains the principal social base from which politicians emerge.

Keefer, Narayan, and Vishwanath (2003) observed that Pakistani politics is heavily influenced by feudal landlords who with the help of rural voters have strong position both in national and provincial assemblies. Whatever policy decisions they take, rent seeking activities is obvious and through their influence they target government spending in those areas where they and their associates have benefits rather than for public goods. When these politicians do some development work in their area, objective is not to provide support to local people but through it they create jobs for their supporters and relatives as well as contracts are also be given to associated people who use defected and cheap material for construction to get unreasonable profit. Through each and every activity it is clear that these politicians are following patronage

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model consistently. To understand land concentration and landlord influence in rural setting

Keefer, Narayan, and Vishwanath (2003) used various variable in regression and found that before election politicians are familiar that they need to provide goods and services to their voters but not quality or improvement in existing facilities and concentration of landholdings influence on voting pattern of villagers.

Budhani and Gazdar (2011) observed that in Sindh, eastern Baluchistan and in Southern Punjab landlords have large holdings of land and dominate rural economy and society. Small farmers are under their influence and these small farmers can have claim on land ownership provided they abide by their influential tribal leaders, even in Katcho (river side areas where property rights are not properly defined by government) area, these landlords protect criminals who are absconders from law to maintain control of the area and use these criminals to put pressure on small farmers to use them for their own benefits. Poor people living and cultivating in Katcho areas have some institutional problem too, their land is not under any survey record of Pakistan, hence do not have proper property claims, mostly because these land inundated by flood water gives benefit to influential landlords who exert their control in these areas. The security of their so called houses, other capital goods depends on political protection from powerful landlords. Budhani and

Gazdar (2011) found a clear distinction between people who are living on the land of big landlords and working there and those who are living in villages officially recognized. Those who are living on landlords land and are not allowed making proper house for their living, for example in eastern Baluchistan and upper Sindh are in worst situation. In some cases families who have taken money from Jagirdar for domestic purposes or for cultivation and now they are unable to pay it, Jagirdar put pressure on them to come and work for Jagirdar on his land in settlement of their debt. xlv

Busch and Muthoo (2003) presented a very interesting case with reference to India that land is concentrated in the hands of few landlords who provide employment to village people as well as provide them finance when they need, in this case these landlords have enormous bargaining power over villagers and hence these landlords discourage any positive change in the status quo.

Similar situation is present in every village in Pakistan where landless labor is totally dependent on landlords (feudal lords) who have sufficient resources to manipulate any arrangement and reform. These landlords have political and administrative influence as government officials are under their dominance and these landlords use them to put undue influence on landless labor.

These feudal lords had their own writ in their land rather than state and had absolute power

(Herring, 1980). Lancaster (2003, April 8); Kristof (2009, August 1) also observed that landlords in their vast estates in Pakistan maintain their own writ, keep their enemies in their private prison. On the other hand (Dalrymple, 2007, December 3) observed that same landlords shifted to politics and became member of provincial and national assembly with the support of the people working and living in their land and under sever influence of these landlords. Now being a political leader these landlords gained more power and authority, they took its advantage and involved in rent seeking activities. Landlords accept the writ of state but this writ in real sense do not apply on the people living in their land, people living in their land are only accountable to landlord. In simple words state within state exist (Herring, 1980). Even in some feudal land, powerful landlords give guarantee of right of ownership of land provided owner supports him and gives bribes to land administrator, on the other hand landlord threat the owner of land who in some cases may withdraw from the right of land ownership (Budhani & Gazdar,

2011).

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State tries to penetrate in this society to transform it. In some areas state involves in the local affairs but this does not happen in Baluchistan, Swat, Dir and part of Khyber Pakhtun Khwa (

KPK ) old NWFP (Herring, 1980). The western and northern tribal areas are feudal society and government writ does not exist (Herring, 1980). Although the number of landlords are smaller in

Peshawar and Mardan than in remaining districts (Beringer, 1962). Beringer (1962) reached to this conclusion that big landlords are concentrated in those districts where land values and productivity are highest and small and medium size landlords exist in the less prosperous areas.

By using the vote bank of the people in their lands, they control over the national politics.

These landlords also established strong contacts with military hierarchy. At the time of independence the Indian National Congress announced that all jagirdarees, princely states and landlords (so called Nawab) will be abolished but Pakistan couldn’t do it. The Guardian Friday

(15 February 2008), Gazdar (2009) argued that All India Muslim League was led by feudal lords and had no plan to address issue of landless and small peasants to overcome their economic problems.

These feudal lords participated in politics with the support of wealth, influence on public in their constituencies and reached to highest level but their tendencies did not change. Pakistan has laws which only remains in the law books and in library and do not influence on feudal system.

Feudal system has firm hold on the society. Feudal lords have strong background, since the decline of Mughal Empire and gradual takeover by British, various areas were under the control of small zamindars/jagirdars and commanders of troops who defended empire had been given full control of the area by giving them this land as prize.

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Haines (2011) referred (Wealth Karachi, 13 August 1950) that government did nothing to remove landlord holdings in Sind while these jagir holders pay nothing to government in terms of revenue. In other areas which may not be classified as Jagirs, the landlord use labor force at extremely cheap or free of cost (beggar) for unlimited time period as landlord wished. Political authority is controlled by landlord and it is decentralized and each feudal land has its own traditions and laws. Loyalty of the people living in feudal land belonged to landlords who have control on means of production (Herring, 1980).

Kristof (2009, August 1) observed that feudal structure of society is major obstruction in education system in Pakistan, landlords have best English medium school for their kids and second and third class schools for rest of the public and even they discourage overall education in their own estates. Gazdar (1999) observed that in Pakistan collapse of school system is mainly due to the act of powerful landlords, tribal chiefs and local patrons. Gazdar (1999) observed that feudal lords don’t like education in their area because of this fear that these people will not obey and respect them, people will demand their rights and undermine the status and positions of landlords. Gazdar (1999) specifically checked in their survey of particular areas where feudal lords are heavily dominated and found another interesting issue that these landlords take resources from government and encourage building and other infrastructure development in their area for local people, then use it for their personal purpose rather than for public use. The contractors are their relatives who get these profitable contracts from various government departments and make very good profit by providing low quality of material. Misappropriation and miss-allocation in fund is common with primary objective to get benefit from political position for them rather than for general public service. These influential landlords also preferred

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to do all work in their own constituencies, specially selected areas from where they expect future political benefits.

As discussed earlier that these landlords are also substantial part of provincial and national assembly, where (Human Development in South Asia, 2012) argued that parliamentarians put less attention to budgeting process and in the approval of the annual budget. They have responsibility to critically analyze the budget but they are least bothered with it. In Pakistan generally budget process is the responsibility of bureaucracy and hence they will accountable in case of any mismanagement rather than politicians. Human Development in South Asia (2012) observed that Pakistan National Assembly take on average twelve days to discuss budget process while India takes seventy five days and USA and Canada take eight to four months.

Kaufmann and Kraay (2002) argued that when most of the profits earn by economy goes to certain elite class of society because of its influence and misgovernance, then growth in per capita income is not reflected in governance. These elites form oligarchs in economy. They have taken example of robber barons in the USA at the end of 19th century, crony capitalism in the

Philippines under Marcos, Mexico during PRI era, former Soviet Union. Kaufmann and Kraay

(2002) referred to survey of Business Environment and Enterprise performance Survey (BEEPS) carried out in 1999 in 24 post socialist economies and found high prevalence of state capture in the transition economies. Azerbaijan, Ukraine, Moldova and in Russia more than 30 percent firms reported significant presence of state capture. Similar type of state capture is also present in Latin America like Colombia, Peru and Honduras which are captured by influential elites and posing major governance issue. Through these observations they reached to this conclusion that higher income may be appropriated by elite who further erode overall governance and specially

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corruption and property rights. Similar situation is present in Pakistan where elite capture the benefit of growth (Marco,2009). Kaufmann and Kraay (2002) presented in politics where they are setting policies for their own benefits, they themselves or their friends or family members have presence in business houses, landlords and in army where they get benefits of these relationship, make policies, laws for their advantage.

Gazdar (2007) took Dir area to show how feudal system working in that locality till 1970s when government decided to take this part of feudal land in government administrative system. The feudal lords have full political control of the locality. All farmers, other people living there and land users must pay various taxes to him. The whole governance of the area was controlled by feudal lords (called Nawab) including judicial duties and revenue collection. Gazdar (2007) explored Sanghar village where six schools are working, one for girls and other five for boys, only two functional and rest are not using for teaching purpose, in one school teacher himself is landlord of the area and no one can complain against his performance. Similar situation is observed in Muzaffargarh villages and Thatta, Mardan and Upper Dir.

Junejo (2011, May 23) argued that every year hundreds of people are killed in rural areas either in tribal fights or feudal conflict. Rulers take advantage of conflict between various tribes and turn the situation in their favor. Conflicts and killings created insecurity in the areas which are directly affecting political, social and economic life of these people. These conflicts in various tribes discourage people to participate in democratic process and they cannot cast vote independently. Feudal lords keep these people engaged in tribal conflicts so that they can strengthen themselves and no one comes forward to replace his position at local level which ultimately help them to get provincial and national assembly seat. Jamil Junejo highlighted

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various causes of this situation like low literacy rate and his view is also supported by (Hiro,

2008), lack of rule of law in feudal land, non existence of civil society, inefficient management, lack of vision of political parties and lack of proper policing of areas. Even in some areas, some of the voters cannot cast their vote on the Election Day due to insecurity and threat.

Verkaaik (2001) worked on perception of people about feudalism living in Pakistan, first observed that concentration in the form of feudal state is against the Islamic ideology of musawat

(equality). Public, whether appearing in media or in general discussion do not have good impression and experience with the term feudal, they use many other terms like Wadera,

Jagirdar, Landlord and Zamindar but one very important thing attached with all these terms, not in a single meaning or concept it is taken in positive sense. In television dramas and movies landlord is presented as very illiterate, ill mannered and cruel person who owns vast lands as jagir and plenty of bonded laborers whom he use for farming, domestic purpose and keep them under his influence for various purposes.

In Punjab where canal colonies exist, this type of feudalism does not exist but economic, social and political relations between landlords and peasantry have often been of feudal type. Loyalty, respect, rules all are expected from subordinate as they are living in feudal land. The state law is quite secondary. These areas have local police, courts and revenue officers (Herring,1980).Tribe is a social division that is affiliated to each other based on common ancestors. They consider themselves different from others based on ancestor’s concept. Generally tribes are considered as political unit. Generally government rules and regulations do not apply on Pashtun tribes in its true sense. These tribes follow tribal rules and regulations and instructions and order passed by

Jirgas, Sardars and Nawabs from time to time.

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All villages and its surrounding areas have a chief who is called zamindar (chief). Zamindars are protected by landlords (feudal lords) and have greater control on the land output and social activities of the area. Before the independence of Pakistan landlord realized that time has come to get benefit from Pakistan independence movement and they were showing active participation in political movement.

Following are the landlords who joined Muslim League before the election of 1946.

 Major Mubarak Ali Shah

 Family of Syeda Abida Hussain

 Firoz Khan Nooon

 Mian Iftikharudin

 Mumtaz Tiwana

 Nawab Muzaffar Khan

 Syed Amjad Ali

Some joined after election

 Kahn Bahadur Faiz Mohammad

 Major Ashiq Hussain Qureshi

 Sardar Jamal Kahn Laghari

 Moulana Daud Ghaznavi

The feudal system had power and wealth, power in the sense that zamindar and peasants were under its control and landlords can exploit them which are evident from bonded labor in rural areas as discussed above. Feudal system was already working before partition and they continue their old system with the support of bureaucrats after independence of Pakistan. Bureaucrats are

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part of feudal and deliberately placed at various governments administrative positions to protect the interest of landlords. Biradri system played integral part in the governance system of

Pakistan.

Most of the land was used for agriculture purpose, forestry and mining but later landlords realized benefits of participation in industrial sector and they diversified themselves to agro based industries. Now the feudal system has entered in urban areas real estate and other business as well.

Marco (2009) argued that economic and political system of Pakistan has historically been dominated by selected group of people who belonged to big land owning families. Political parties in Pakistan are dominated by big personalities and their families and these families ensure that there is little internal democracy in the party and party leadership is not elected by one man one vote rather the leadership is transferred from father to son or daughter or from brother to brother.

Dawn (2013) newspaper conducted a workshop on ‘ Status of land reform in Pakistan’. This workshop was organized by the Society for Conservation and Protection of Environment

(SCOPE) with the support of Sindh High Court Bar Association and the National Peasants

Coalition of Pakistan. It was highlighted in the workshop that five percent people hold 64 percent of Pakistan’s farmland, on the other hand 50.8 percent of rural households are without any possession of land. It is observed in workshop that agriculture is the backbone of Pakistan’s economy as 25 percent of gross domestic product comes from agriculture side, 60 percent of export earning is from agriculture area and around 48 percent of employment contributed by this sector. Nevertheless feudal system develops highly unequal land distribution in Pakistan.

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Khandker (1973) work on inequality and wealth distribution related to Pakistan in 1960 supported the view that land distribution is much skewed in Pakistani rural areas.

2.2.2 Feudalism in Arab World

Arab feudalism raised on the ruins of the Roman slave system. European feudalism was backward, primitive and poor while Arab feudalism was developed and progressive. This is the reason that democracy easily entered in European countries rather than in Arab countries. The

Arab feudal lords were responsible to collect, rent and taxes. Sultan gave these lords rights which in Syria and Palestine changed from year to year while in Egypt remained fixed and heirs also received preferential rights.

Rothstein and Broms (2011) observed that collapse of Ottoman Empire helped new elites to emerge in all newly born Arab states. Although they abolished old style of government which was covered under caliphate but now a new authoritarianism emerged in the form of modern style. In most Arab countries elites have control of natural sources as well as state bureaucracies.

Chaney, Akerlof and Blaydes (2012) observed that political power and control is concentrated around religious leaders and military.

Lutsky (1969) in his article explored the Arab world after 1840. When Egyptians had withdrawn

Arabian Peninsula, the country got divided into various small regions. This division was not in the form of city state but rather feudal formation emerged in Hejaz, Yemen, Wahhabi Nejd,

Kasim and Shammar in Inner Arabia and Oman. These regions except Oman were under Turkish control.

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Khan (1972) argued that most of the Arab countries have monarchical system of government which is deeply influenced by primitive sheikhdoms as well as at some places existed with highly organized bureaucratic monarchies. The national policies of many of these monarchies are directly or indirectly connected with the preservation of feudal institutions. Farjānī (2002) reported about Arab countries that these countries have freedom deficit and presented various examples for it.

These Arab countries have natural resources which helped them to accumulate wealth and they used these natural resources wealth to maintain their supremacy. These authoritarian regimes gives many benefits to their people which keep people satisfy. Nevertheless these easily available facilities create lack of competitiveness in the overall society as compared to other societies where natural resources are not abundant and people work hard to gain similar benefits.

2.2.3 Russia

Blum (1951) supported the view that feudalism existed in Russia. He argued that feudalism whether Russian or Western was a system of economic relationship. This system is based on agricultural production where landlord was in a position to exploit the peasant by using his power on the peasant. This system developed in Kievan period and continued till nineteenth century.

Rosefielde (2005) worked on Russia and observed that the land, capital stock and other resources are mostly in the hands of state. In Russia, oligarchs control the judiciary and use it to suppress competitors. Oligarchs monopolistic control hold Russian market and have strong relation in government agencies. Oligarchs have much influence on society as they have power of wealth

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which they use for economic and political purpose. They use this fund to bribe officials and use in official election campaign.

Blank (2008) observed that Russia under Putin regime is similar to old feudal system Putin viewed state as it is considered by Tsarist prerecession his property which he can given to any of his official. Robinson (2003) observed that Russia has skewed distribution of economic wealth.

This may be termed as oligarchic system, which is also termed by some researchers as ‘ new- feudal traits’. Researchers termed it in this way because small elite obtained rent from mineral wealth of Russia.

Government programs are selected by Putin and his close associates rather than any democratic process for decision. There is no major political opposition to Putin’s government and there is no rotation of power at central level. Leading Russian politicians do not have courage to speak against Putin publicly. Media is also in Putin’s control and cannot give news against him.

Distribution of wealth is much skewed. Economy declines but billionaires increased which is clear indication that oligarchs took advantage of their monopolistic position and control.

Shlapentokh (2003) argued that the new Russian society has both liberal and feudal elements.

As in other countries of the world when central government will be weak and cannot enforce its power then feudal type society developed. Central government is not strong even in Putin’s regime. Its budget is not strong enough to satisfy the basic needs of society. In this situation

Moscow decided to shift many responsibilities to state governors who took advantage of this situation and become unrestrained rulers in their state. Weakness of central government and the support of Putin’s to its close associates further strengthen the corrupt officials of law enforcement agencies. Oligarchs were also taken advantage of this situation. Hence researcher

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argue that situation is similar to feudal era as laws issued by the central government are mostly ignored by the local governors and even by common Russian people. Law is not obeyed by people and administrators and law enforcement agencies are corrupt so overall situation is similar to Middle Ages.

Shlapentokh (2003) discussed that feudal civil society emerged in Russia in the form of local barons, oligarchs and bureaucratic class who enjoyed freedom and influence on society. It is argued that in post- Soviet Russia, the central administration was weak even under Putin rule, hence power shifted to local governors who became strong and rendered services to those who could afford them. The local rulers have high degree of autonomy and central government looked unsuccessful in front of local barons. Shlapentokh (2003) further referred feudalism in the national republics.

2.2.4 Nigeria

Ugbomeh and Atubi (2010) argued with the reference of Okowa that Nigerian state in present day is feudal one. The state is dominated by feudal oligarchy. During British period some democratic process was introduced in Nigerian society but basic system is still feudal mindset.

Social system in society is also under feudal influence.

Ugbomeh and Atubi (2010) observed that Nigeria is still under developed country together with inequality, unjustification and violence. Oil did not bring any prosperity in the society. In

Nigeria poor governance, injustice in resource control, centralization of power and poor management in economic and political opportunities are widespread due to kind of leadership exist there. Political system is also impregnated with feudal orientation. Political elites are only

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interested in divide and rule rather than integration of society. Feudal government in the form of

Fulani Empire existed in the Southern part of Nigeria before the arrival of British. Feudal lords owned everything including oil wealth. North of Nigeria and South of Nigeria are two uneven developed provinces in which North is feudal influenced and South is capitalist looking.

Van der Ploeg (2011) observed that oil revenue per capita in Nigeria increased from $33 in 1965 to $325 in 2000, but on the other hand per capita, income has not shown similar growth and it is stood around $100 in PPP terms since its independence in 1960 and keeps Nigeria in worst fifteen poorest countries in the world. In 1970 the top two percent had same share of income as the bottom 17 percent but when we compare position in 2000, it shifted to 55 percent rather than

17 percent.

2.3 What Does Governance Mean?

The word governance is not new, as Human Development in South Asia (1999) observed that much has been discussed and written about governance, and specifically about good governance by academics and international policy makers. World Bank researcher Kaufmann and Kraay

(2008) observed that discussion on governance and its related issues go back to 400 BCE when

Kautilya, then chief minister to the king of India gave administrative advice on important governance pillars like ethics, justice and anti autocratic tendencies. Kautilya argument put emphasis on the duty of the king to safeguard wealth of the country and its people and maintain, enhance and protect this wealth.

Human Development in South Asia (1999) argued that governance took its importance after collapse of communism when transitional economies found it difficult to cope up with the

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emerging market economy. Transitional economies faceed lack of proper institutions, unfulfilled contracts, poor protection of rights, poor insurance mechanism and poor civil society. The objective of governance in any society should be social development as well as economic growth and prosperity.

2.4 Views on Governance

There are various ways in which governance has been defined, presented and promoted by various international institutions like World Bank, United Nations Development Progarm

(UNDP), Asian Development Bank (ADB), African Development Bank, Inter-American Bank and many others. Some of these definitions of governance are presented here.

2.4.1 The World Bank Governance is studied and advised by the World Bank as the way in which power is applied in the administration of a country economic and social resources. The World Bank pointed out three specific areas of governance, first is structure of political government, second how authority is applied to manage country’s resources for social and economic development and third is, government capacity to design, formulate, and implement policies and discharge functions (World Bank,1994).

2.4.2 United Nations Development Programme

United Nations Development Programme (UNDP) views governance as the performance of economic, political, and administrative authority to supervise and manage a country’s business at all levels. It consists of mechanisms, processes, and institutions with the help of which public lix

and various groups express and understand their interests, legal rights are exercised by public, fulfill their responsibilities, and settle their disagreements (UNDP,1995).

2.4.3 Organization for Economic Cooperation and Development (OECD) According to Organization for Economic Cooperation and Development (OECD), the governance is viewed as use of political authority and exercise of control in a country for the management of its resources which are required for the social and economic progress of a country (OECD,1995).

When we look at this comprehensive definition, it covers the role and responsibilities of government in organizing the atmosphere in which business persons and investors can function smoothly and government will also determine the division of benefits as well as also looks after the nature of the relationship between the ruler and the ruled.

2.4.4 Commission on Global Governance

Commission of Global Governance viewed governance as the sum of the many ways individuals and institutions, public and private, manage their common affairs. This is not a one time process but rather a continuing process with the help of which various groups and individual settle their diverse interests and issues and reach to cooperative actions. In this process all official institutions and government are allowed to execute compliance, on the other hand people and institutions develop informal arrangements which are suited for their common interest

(Commission on Global Governance,1995).

2.4.5 Other Definitions

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The American Heritage Dictionary defines governance as “the act, process or power of governing government”.

The Oxford Dictionary defines it as “the act or manner of governing, exercising control or authority over the actions of subjects, a system of regulations”.

The Asian Development Bank (ADB) considered four necessary components of governance including (i) Accountability (ii) Transparency, (iii) Predictability, and (iv) Participation. ADB considered accountability a necessary part where public officials will be responsible for task assigned to them and actions taken by them. Transparency calls for access to relevant information at low cost and that also make sure the real actions taken by government.

Predictability means, rules and regulations as well as laws should be clear to people; known in advance, and uniformly and effectively enforced. Participation means democratic participation in the decision-making processes that have collective repercussions.

The African Development Bank has introduced the notion of macro-, meso-, and micro- governance. Governance is divided into three components, one is macro that is related to politics, second is meso which is related to project and third one is micro which shows planning, suggesting that authoritarian regimes committed to development might exhibit good governance at middle and lower levels.

The Inter-American Development Bank placed special emphasis on the modernization of the public sector and the participation of civil society in public issues.

Institute of Governance, Ottawa stated that governance comprises the institutions, processes and conventions in a society which determine how power is exercised, how important decisions are

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made and how various interests are accorded a place in such decisions. On types of power, it lists

(a) state power; (b) political power; (c) money power (TNC, MFI, local business); (d) criminal power (mafias, narcotics, terrorists); (e) family power; and (f) male power.

The journal “Economics of Governance” viewed governance as synonymous with governing, and encourages submissions that deal with all manners of problems that emerge in the way groups of individuals govern themselves in the public or private sectors. Its statement of aims and objectives, however, evades the tricky issue of how to define governance.

The Ford Foundation viewed governance as the extent to which government institutions are

“transparent, accountable, responsible and guided by the rule of law and dedicated to reducing inequality.”

2.5 Governance Clusters

Kaufmann, Kraay, and Zoido-Lobatón (1999) developed six governance indicators called

Worldwide Governance Indicators (WGI) with the help of hundreds of indicators taken from 31 organizations, survey of firms and individuals, responses from citizens, experts and enterprise managers covering 200 countries.

Here we give a brief explanation of these six basic governance indicators concept. Kaufmann,

Kraay,and Mastruzzi (2006) also took support from political and business risk rating agencies, international organizations, non-governmental organizations, think tanks etc. Kaufmann et al.

(2006) pointed out that sources of data consists of survey of individuals who have first-hand knowledge of governance in specific countries.

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The Worldwide Governance Indicators (WGI) is among the most widely used cross-country governance indicators. They devised systematic measures of governance and taken 194 measures that used in various places to measure governance from 17 sources and divide them into six broad categories. These are somehow reasonable breakdown which brings things together.

Following are the six governance indicators.

1. Voice and Accountability

2. Political Instability and Violence

3. Government Effectiveness

4. Regulatory Burden

5. Rule of Law

6. Graft

2.5.1 Voice and Accountability

This indicator measures political, civil and human rights and related issues. This governance indicator covers the process through which citizen’s of a country can select and remove those people who are in authority, means managing the affairs of a country. This is called “Voice and

Accountability”. Voice and Accountability covers a number of indicators like political rights, civil liberties and political process, citizen’s participation in the selection of government, freedom of expression and independence of media.

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World Bank(1992) observed that when officials or bureaucrats have delegated power and assigned task to perform, government spent resources to perform task, so these government officials and bureaucrats should also be accountable for their decisions and actions. There is no doubt that in real sense, ultimate responsibility lies on political leaders. This accountability mechanism varies from country to country due to variations in political, cultural characteristics and administrative capacities. Accountability is required to gain economic objectives by government. This is only possible when actual implementation of various policies and rules reflect government seriousness, willingness and capacity to monitor their economic performance.

The government also provides mechanism through competitive policies, securities, rules and regulations and regulatory bodies to make private sector accountable too. World Bank (1992) focused on accountability and highlighted its significance for overall economic performance and financial accountability in any country. Financial accountability is very important for proper resource utilization and to monitor corruption in various government departments. On the other hand economic performance accountability is possible through monitoring public sector investment, control on unnecessary employment in public sector, allocations of resources to basic health and education sector.

2.5.2 Political Instability and Violence

This indicator covers perceptions of the chances that the present regime will be overthrown by violent means or by any other unconstitutional manner and terrorism. If government is changing without completing its tenure by other means, it will not be good from country governance point of view because continuation of polices will be difficult to force. On the other hand it would be difficult for people to perform their duty of selecting government peacefully.

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2.5.3 Government Efffectiveness

Sound policies and their implementation in short and long term is vital for smooth functioning of any country from economic and social point of view. In this variable Kaufmann, Kraay, and

Zoido-Lobatón (1999) covered quality of bureaucracy, performance and competence of civil bureaucracy, public service quality, political pressure on bureaucracy and its impact on civil servant and government commitment to its policies and decisions. The core area of this indicator is to understand that how government is good in the implementation of its policies.

World Bank (1992) referred McLean (1987) that government plays an important role in any economy specially because government provides facilities to public in the form of rules that help to establish market and for its smooth functioning and where required corrective measures and actions taken by government when market failure is imminent.

World Bank (1992) observed that in an economy government is also responsible to provide various goods and services to public like education, health facilities, infrastructure and various other basic facilities when private sector is reluctant to participate. To achieve the above objectives government need finance and bureaucrats who will help the government to collect revenue in the form of taxes and enable the government to provide goods and services to public as policies set by government. All of these works are not possible without proper accountability measures and smooth flow of information regarding rules and regulations from top to bottom.

World Bank (1992) observed that poor governance can be recognized provided following symptoms exist there :

 Public resources are used for private benefits.

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 Rules, laws are used in unpredictable manner and in arbitrary fashion.

 Market smooth functioning blocked by excessive rules, licensing and unnecessary

regulations which encourage rent seeking activities.

 Misallocation of resources.

 Decision making is not directed towards achieving development goals.

World Bank (1992) argued that these problems exist in any country due to poor capacity to implement and its severity vary from country to country.

2.5.4 Regulatory Burden

There are various policies which are important for proper and smooth functioning of the market like appropriate bank supervision, price controls, less burden of regulations in business development and foreign trade. This indicator helps to asses regulatory burden on business in any economy.

2.5.5 Rule of Law

Success of any country depends on developing an environment in which state, institutions, citizens and other agents interact with each other, so contract enforcement, courts and police are important for smooth functioning of a society. Rule of law covers various indicators which measure predictability and effectiveness of judiciary, incidence of crimes and contracts implementation. World Bank (1992) referred Eggertson (1990) that institutions are necessary with strong base to make and implement rules, to protect property rights and to enforce law and

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order and all of the above required in any economy for its smooth functioning, development and growth.

World Bank (1992) observed that various people participate as economic actors like business man, workers and farmers. These people work, invest on the basis of various opportunities available in an economy. They also need safety and protection from any arbitrary interferences and expropriation. Here rules and laws prevent these people from any mishappening and it is important for economic development. Rule of law has two main areas, one is related to legal format components which are necessary for system of law to exist and second is related to content of law which includes justice, fairness and liberty. Rules should not only available but their implementation and amendment is also very significant for economic development. It is not important that rules framed and published in books but rather should be enforced when required.

Appropriate judicial bodies and institutions required to enforce laws, contracts, rules and regulation and their lacking or poor performance will not give meaningful outcome. Judiciary provide strong shield against executive arbitrary exercise of power.

2.5.6 Graft

Corruption is very difficult to measure because it is the power exercised by public servant for personal gain. Corruption levels vary from country to country and measured by different senses.

Existence of corruption in any organization means failure of governance.

World Bank (1992) observed that risk and uncertainty are always present in market but reliable and timely information in market reduces it and improves competitiveness. Government provides different kinds of information to market players like macroeconomic indicators, government

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policies etc. which is beneficiary for economic activities as well as to reduce corruption. When different government policies, budget are available, economic efficiency may improve.

Transparency in government policy making also plays significant role in the development of economic efficiency. Government decisions should be transparent which reduce corruption and increase proper utilization of public resources. When government takes various decisions without consulting the private sector in a closed environment, chances of error increases and government ultimately faces public unfavorable reaction to these decision. Transparent decisions may help the government to overcome this situation.

Relevant and reliable information plays a very important role in capital market as well as strengthen the trust and confidence of investor. Proper disclosures help banks and investors to participate in capital market. Lack of transparency may discourage investors to participate in market, hence reduce investment and growth. Nonperforming loans is one of the example that shows lack of transparent market participation and are very damaging for banking system.

Kaufmann and Kraay (2008) measured governance with a range of -2.5 to 2.5 and higher positive value indicate better governance outcome.

2.6 Advantages of Governance Indicators

Kaufmann and Kraay (2008) argued that ambiguity exist in these indicators but these are somehow useful. These indicators covering a larger set of countries by summarizing, organizing and combining information from different sources than other individual indicator. Each indicator covers broad relevant area. Application of formal statistical test is possible to compare various countries differences in governance. Since information is gathered from various sources

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so this aggregation helps to reduce measurement error in any single indicator. These variables may be used in regression analysis as independent variable.

Kaufmann and Kraay (2008) gave the example of Country Policy and Institutional Assessment

(CPIA) aggregate rating which covers 16 components and Global Integrity indicators has six indicators which gather information from 200 separate indictors but are scored by the same respondent which develops biasness. It can not be compared with aggregate indicators like

WGI(World Governance Indicators) which is based on various sources.

Some researchers did not use WGI but rather use other variables like (Rajkumar & Swaroop,

2008) who used quality of bureaucracy and level of corruption as governance indicators and found relationship between good governance indicators and primary education improvement.

Huther and Shah (2005) used citizen voice and exit, social development, government orientation and economic management. Huther and Shah (2005) used four composite indices to provide an indication of government ability to make sure political transparency, effective and efficient public services, health and well-being of citizens and favourable economic climate and for this purpose (Huther & Shah 2005) used World Bank (1992) booklet, Governance and

Development. Holmberg, Rothstein, and Nasiritousi (2009) observed that World Bank and

United Nations always put emphasis on importance of good governance and relate it with development outcome. Holmberg et al. (2009) worked on three measures of Quality of

Government namely Government Effective Index, Corruption Perception Index and Rule of Law

Index and twenty two social outcomes broadly related to five areas i.e. economy, health, social policy, environmental sustainability and life satisfaction.

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Holmberg et al. (2009) observed that no doubt that Quality of Government, and economic and social development are related to each other but its significant to explore whether good governance is as important as highlighted by various international policy community. Holmberg

(2009) further observed that different empirical studies regarding good governance showed different results due to the broad concept of good governance as it has been defined by different researchers in different sense (Hyden & Court (2002).

2.7 Economic and Political Governance: Empirical Evidence

Governance is popular, both at theoretical level where lot of researchers worked on it, as well as practical level, where economies apply various procedures to develop themselves economically and socially. Governance from this point of view is divided into two parts; one related to governance in terms of practice and other in terms of content. The first one may be described as rules of dealing and managing public affairs and another is controlling and monitoring public matters. Human element is present in governance because their intention and action is also reflected in governance intervention. Governance may also be viewed as ongoing process through which various objectives have to achieve. These views are taken by various practitioner and academicians as per their need and requirement.

Kaufmann, Kraay, and Zoido-Lobatón (1999) presented examples of Ukraine and Russia where because of weak governance, in terms of lack of property rights, and ineffective rule of law, living standards are at decline. Kaufmann et al. (1999), Rajkumar and Swaroop (2008) pointed

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out that good governance has positive impact on growth and development while weak governance slows economic growth and development.

According to Goran Hyden (2002), during 1990s world development agencies recognized that developemnt is not only confined to programs and projects but it is also related to politics.

Political developemnt is a prerequisite for growth and development of any society. The rules developed by government and policies framed, nevertheless it is important for development, how political process is designed in a particular state, and how economy and society support and interact with each other.

Hyden and Court (2002) argued that governance has many functional dimensions that develop and shape rules by various instituions. First is civil society which deals with pulic issues and develop rules where public participate in their intrest and give their input to make rules. Second is political society which deals with how intrests and ideas are gathered into policy development.

This is important because in any society various groups lie and it is not necessary that they all agree on one policy at a time, but to develop consensus, political process is necessary. Different societies opt for different methods of electoral system to develop political stability, like presidential system or parliamentary one. Government whatever form select, the objective should be to build, and strengthen relations between society and state. Beureaucracy, protection of property rights, capital and trade practices are the areas where government rules and regulations and their implementations required.

2.7.1 Corruption and development

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Corruption is always with us in one form or the other, it’s a part of human society (Aidt 2003).

There is growing literature on corruption and governance in which Transparency International,

World Bank, UNDP are more popular.

Shleifer and Vishny (1993) took corruption as sale of government property by government officials for private gains and benefits. For example bribes for licenses and permits, barriers for competitors, safe passage in custom. Since government officials have control and can exercise power to decided over the provision of permits, licenses, visas and passports, they demand and received bribes from individuals. Shleifer and Vishny (1993) discussed three cases, in the first case, Russia, African countries and India are involved in monopoly corruption scheme, where government agents act in various capacities and get bribes from individuals to maximize their revenue. In another case new government officials and various organizations create new laws, rules and regulations and demand bribes from individuals to give permit and licenses. The third case where several complementary goods are provided by at least two government officials in different locations and in this case because of competition and lack of connection between officials bribes level will go down, if one will demand bribe, the individual can get government goods from another agent. Shleifer and Vishny (1993) pointed out that in the third case bribe will be lowest, in the second case highest and in the first case at intermediate level.

Mauro (1995) selected 70 countries data including Pakistan and investigated the relationship between corruption and investment and found negative association between corruption and investment as well as growth. Result showed that one standard deviation improvement in the corruption index will increase investment rate by 2.9% of GDP. Brunetti and Weder (1998),

Shen and Williamson (2005) further confirmed Mauro (1995) findings.

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Kaufmann, Hellman, Jones, and Schankerman (2000) observed that corruption is basically a governance problem. Poor governance and corruption are correlated with Human Development

Index (HDI) measured by United Nations and per capita income. It is concluded that rich countries have less corruption and better public governance. From the economic point of view corruption is not only transfer of money from one pocket to another, it is distortion induced by these transfers. Its impact on economy is more that the volume of money transferring hand. On the other hand (Rose-Ackerman, 2004) argued that to improve governance countries should tailored policies which off course will be discouraged by elites who have influence and political power and prone to status quo.

Treisman (2000) used Transparency International (TI) annual indexes for 1996 to 1998 to understand causes of corruption. He supported findings of La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1999) that countries with more developed economies and Protestant traditions have higher quality government and low corruption. Higher corruption leads to slower development and economic development to lower corruption. British colonies have lower corruption because of common law legal system but he relates it with legal culture and administration of law enforcement in specific countries. Nevertheless (Javid & Iqbal, 2010) observed that Pakistan also falls under common law countries and has developed laws in books but due to poor implementation, the overall corporate governance is very poor.

Mo (2001) reached the same conclusion by calculating the impact of corruption on growth and finds that 1% increase in corruption reduces the growth by 0.72%. Political instability is the main channel through which corruption affects economic growth. The other significant channels are

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share of private investment and level of human capital. Where institutional inefficiency exists like weak legislative and judicial system, red tape, corruption spreads.

Fisman and Gatti (2002) worked empirically on decentralization and corruption by taking cross country data. They supported the view that greater decentralization in fiscal expenditure reduces corruption across countries. Countries where government expenditures are more decentralized, have better ranking in terms of corruption.

Aidt (2003) gave two examples of corruption to highlight the fact that corruption exists in every society in every part of history, like in England, incidence of sale of parliamentary seat before the Reform Act of 1832 and machine politics in USA in immigrants cities at the turn of 19th century. Aidt (2003) referred to Jain definition of corruption and reaches this conclusion that there are three conditions necessary for corruption to develop and grow. The first is discretionary power of public officials, who can design and manage regulations and policies, the second this discretionary power help public officials to extract economic rents and third, existence of weak political, legal and administrative institutions that support public officials to extract rents through their discretionary power. These officials may also develop systems to create rents. Aidt

(2003) surveyed, categorize and analyzed corruption in four different point of view, like Alam

(1989) and Rose Ackerman (1999) with further considerations of the benefits obtained by public officials in designing institutions and implementing policies.

Lambsdorff (2003) showed that corruption negatively impacts on capital accumulation and discourages both capital inflows and foreign direct investment by taking 54 countries in which

Pakistan is also included. Similar findings were reported by Blonigen (2005) who argued that corruption increases cost of doing business which reduce FDI in economy. Commander,

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Davoodi, and Lee (1997) also argued that private investment in any economy reduces due to corruption which has negative impact on growth as well as return to private sector reduces due to implicit tax in the form of corruption.Batra, Kaufmann, and Stone (2003) found financing difficulties, taxes, corruption has negative effect on firms’ sales growth.

Researchers are generally agree and substantial literature is avaialble that demonstrate that ineqaulaity has negative impact on growth (Alesina &Rodrik, 1994 ; Ali, 2008). Hellman and

Kaufmann (2003) observed that elite sector of the economy control and keep under influence legal, political and regulatory insitutions through their resources and take advantge of this position.These elites use these institutions for inefficient redistribution, for anti-competitive measures and to make policies in their favor and protect their propety rights irrespective of what would be its consequences on other people.

Many researchers like Mauro (1995 and 1997); Knack and Keefer (1995); Edgardo, Lien, and

Pradhan (1999); Brunetti, Kisunko and Weder (1997) ; and Brunetti and Weder (1998) found that corruption reduces ratio of investment to GDP in cross section of countries. Rogoff, Wei, and Kose (2003) also supported this view. Rogoff et al. (2003) discussed corruption when discussing foreign direct investment flow in developing countries. They emphasized that though institutional quality is important, low level of corruption and high degree of transparency and good governance attract foreign direct investment. Corruption which has negative impact on foreign direct investment in any economy. Méon and Sekkat (2005) assessed the relationship between the impact of corruption on investment and growth and the quality of governance in a sample of 63 to 71 countries between 1970 and 1998 and found a negative effect of corruption on both investment and growth. Inefficient government and political violence and weak rule of

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law aggravate negative effect of corruption on investment and slows growth. Corruption impacts growth when investors do not accumulate capital. Countries where governance is already poor, these countries will be in better position by reducing corruption.

Méndez and Sepúlveda (2006) supported the claim that political regime is an important determinant of the relation between economic growth and corruption. For free countries they found non linear relationship between income growth and corruption. Corruption is not an independent factor, it is part of other institutional and political elements and depending on other government policies as well as socio-political circumstances.

Schneider (2007) observed that corruption and shadow economies exist in our societies, in some countries less and in some other countries more. The shadow economy covers all goods and services which are legal and have market demand but concealed intentionally from authorities to avoid payment of income or other taxes, avoid social sector contribution, avoid to pay labor charges as per standard set by authorities and to avoid legal documentations and formalities etc.

Dreher and Schneider (2010) further worked on the relationship between shadow economy and corruption by taking 98 countries data including high and low income countries. They found that in low income countries corruption increases with a larger shadow economy.

Aidt, Dutta, and Sena (2008) explored that corruption, quality of political institutions and growth have close link. Aidt et al. (2008) used example of two society, one where institutions are weak and leaders get maximum rent from economy shows low growth, on the other hand another society where institutions allow people to replace leaders if they are too corrupt have better growth. Aidt et al. (2008) result showed that corruption has impact on growth but depends on regime, if quality of institutions are high corruption reduces growth both in short run and long

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run while if quality of institutions are low corruption has no impact on growth in short or long run. By using corruption perception index they presents that in case of good quality political institutions a one point reduction corruption increases growth in the short run by 0.5 to 0.6% while 0.37 to 0.39 in long run. Dixit (2009) argued that extortion by the agents of the government through various means is similar to a tax, and deters economic activity just as a tax does.

Van der Ploeg (2011) observed that in many countries like Nigeria, Angola, Sudan, Liberia and

Congo as well as Columbia and Afghanistan weak institutions may be the reason of poor performance of these countries.

Mathur and Singh (2013) explored impact of level of democracy and corruption perception on foreign direct investment in developing economies. Mathur and Singh (2013) observed that investor always check before investing in any economy the level of corruption and those countries where corruption level is high, foreign direct investment is low. Mathur and Singh

(2013) found that less corrupt countries and less democratic countries receive more foreign direct investment. Economic freedom and perception of corruption are highly correlated.

2.7.2 Impact of Fiscal Policy on Economic and Political Governance

Giavazzi and Pagano (1990) argued with the help of empirical finding that reduction in deficits can increase investment and private consumption with the help of wealth effect. Fiscal contraction can stabilize an inflationary economy as well as increase investment and private consumption that also gives expansion to output. When government reduces deficits, they need fewer amounts to pay for debt servicing, reduce future taxes which increase profit and wealth,

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hence increases investment and growth. When wage increases and taxes are so structured that finally give higher wages to labor causes lower profits and hence lower investment.

Alesina, Ardagna, Perotti, and Schiantarelli (1999) presented working on supply side link between investment and fiscal policy taking investment to present and expected future profits on eighteen OECD countries over the period 1960–1996 that labor costs increases when public spending increases, hence reduce profit which finally reduce investment. Alesina et al. (1999) showed that one percent spending to GDP decrease investment as share of GDP of 0.15 percent.

When spending in terms of government wage bill increases then effect is more strong and investment to GDP ratio declines by 0.48. On the other hand taxes reduce investment and profits while labor taxes have the largest negative impact on investment and profits. Spending cut in government wages and transfer can increase growth. Abed and Gupta (2002) gave similar views in studies compiled.

Baldacci, Hillman, and Kojo (2004) observed that as in high income countries, in low income countries, investment has its impact on fiscal policy and growth. But in low income countries there is another channel called factor productivity that impact on fiscal policy and growth.

Factor productivity is main channel linking fiscal policy to growth not investment because of poor governance characteristics of public sector institutions and administration. In low income countries corruption causes low private investment.

Adam and Bevan (2005) argued that government expenditure may be divided into two broad categories i.e. productive which helps the government to increase growth and un productive which do not increase growth. As spending divided into two parts, in similar fashion financing is divided into five parts including taxes, domestic debt, external debt, and grants or printing

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money by government. Adam and Bevan (2005) worked on 45 non OECD countries from 1970 to 1999 and found negative correlation between fiscal deficit and growth rate. High debt has adverse effects on fiscal deficit as well as higher level of interest bearing domestic debt is associated with lower future growth.

2.7.3 Income Inequality and Economic Governance

Generally researchers take advantage of the distribution of income as starting point to learn the distribution and accumulation of wealth. It is generally believed that higher income households are generally better positioned to set more aside, because it is generally believed that spending does not increase as income increases and thus accumulate greater wealth, than those at the lower end of the income distribution because they have to meet their basic necessities and after that low income group will think to save. Despite income and wealth increasing in same direction, wealth is more concentrated than income.

Kuznets (1955) discussed in his paper the causes of long term changes in personal distribution of income and its relationship with the growth of an economy. Kuznets (1955) observed that inequality rises during the early stage of development, lessen at growing stage and conclusively declines at maturity. At initial stage of economic development, financial market is not very strong, as economy grows, financial market get its strength, saving increases but only concentrates on rich class and in this situation income disparity between rich and poor expand.

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Situation does not remain same, as economy reaches to maturity, financial market developed, saving rate falls and disparity between rich and poor reduces.

De Kruijk, Van Leeuwen, and Kemal (1985) examined inequality and poverty in Pakistan during 1970s as well as decomposed inequality into various components. They found that poverty decreases by 50 percent and income inequality rises in same period. Another work in similar area by (De Kruijk & Kemal,1987) observed that in Pakistan with the information available it is clear that poverty declines while inequality rises. A household earn income from various sources like property income, wages, and remittances. When inequality increases, it means some or one of the sources causing this inequality. Their findings showed that more than

80 percent income comes from wages which is generally assumed to remain unchanged in rural areas, so in rural areas wages is not main reason of income inequality, property income in the form of land could be taken as source of income inequality and foreign remittances while in urban setting occupational income may be the main reason of income inequality.

Greenwood and Jovanovic (1989) developed single model linking between distribution of income and economic growth, and relationship between economic development and financial structure and showed that growth contributes resources for the development of financial structure and improvement in financial structure accelerate growth.

Murphy, Shleifer, and Vishny (1989) argued that increase in export or improvement in agricultural productivity increases income and thus demand for domestic manufactures increases. Extreme concentration of wealth will produce demand for handmade and luxurious goods but will not develop demand for local manufactures even if export income or agriculture income grows in economy, so middle class is necessary for local goods because they have the

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buying power and create demand for local goods. Industrialization face problems in case of oligarchical income distribution because only few people demand goods which is not necessarily to be produced in economy, it may be imported, so local industry will either suffer or will be unable to develop, consequently overall ecnomy faces lower growth.

Adams and Alderman (1992) explored sources of income inequality in rural Pakistan taking survey of 734 households during 1987 to 1989 in three provinces covering Punjab, Baluchistan and KP( old NWFP). They covered five main sources of rural income including agriculture income, rental income, livestock, transfer income and non farm income. Gini coefficient of income inequality increases during the survey period from 0.384 to 0.417. Interesting result obtained when household falling under lowest income group received more than 40 percent of their income from non farm activities. Adams and Alderman (1992) further decomposed income and found that agricultural and rental income are increasing inequality as observed by them that land is unevenly distributed in rural areas, on the other hand non farm income reducing inequality.

According to Alesina and Rodrik (1994) political struggle is somehow related to get economic resources in control which helps in income and wealth distribution. Alesina and Rodrik (1994) have taken land ownership as measure of wealth distribution. Alesina and Rodrik (1994) observed that in any country when distribution of resources are more unequal, economic growth and prosperity of that country will be lower than the society where distribution of resources are not much unequal. To understand this phenomena. They worked on land distribution of 54 countries inlcuding Pakistan and computed land distribution Gini coefficient of these countries, though argued that land is imperfect proxy but observed that inequality in land distribution is

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highly associated with inequality in the distribution of assets. Alesina and Rodrik (1994) found correlation between income Gini and land 0.35, hence reached to this conclusion that income inequality is negatively associated with growth and wealth Gini.

Political instability, social unrest affects growth. Political instability may be taken in the form of executive violence. Various researchers worked theoretically and empirically on this hypothesis linking other factors like income inequality on political instability and effect of political instability on investment and growth. Generally it is argued that income inequality is harmful for growth as well as political instability is also negatively associated with growth and investment

(Barro, 1991; Alesina, Özler, Roubini, & Swagel, 1996; Venieris & Gupta, 1986; Mauro, 1995;

Alesina & Perotti, 1996; Ortiz & Cummins 2011).

Benabou (1996) presented a very interesting study where Benabou (1996) compared

Philipines and South Korea during past thirty years. In 60’s both countries were very similar in terms of various macroeconomic indicators. Benabou (1996) found that ratio of the income share of top 20 percent in Philippines to the lower 40 percent of the people was on average twice as large as in South Korea. After a period of twenty five years, Korea grew by 6 percent and left

Philippines far behind because this 6 percent growth increased output level in South Korea by five times, while that of the Philippines grew only by 2 percent, due to this slow growth country output level only reached to double GDP. Hence Benabou (1996) argued that the more unequal country in terms of wealth and income grew more slowly.

Gradstein, Milanović, and Ying (2001) argued that it is generally perceived that those countries where democracy exist should have low level of income inequality than those countries where rich oligarchy prevail but Gradstein et al. (2001) also pointed out that it also depends on society

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value of equity, if society gives value to equity then rich oligarchy may have low inequality as compared to economy where people don’t value equity while living under democracy.

Parliamentary system of democracy and presidential system of democracy have its impact on equality, in parliamentary system redistribution may be better as compared to presidential system due to coalition or greater role of political parties. In presidential system Gradstein et al. (2001) have given two examples, one Salinas in Mexico where inequality increases and second Chavez in Venezuela where inequality decreases depending on presidential own policy and decision.

Gradstein et al. (2001) concluded that democracy has negative but weak impact on inequality as well as parliamentary system reduces inequality when compared with presidential system.Milanovic (2002) observed that some researchers argue that inequality does not matter, provided poverty is low. On the other hand there is general consensus that inequality is important because it may slow growth and leads to instability and develop social problem.

Bourguignon and Morrisson (2002) began their work from 1820 and taken into account impact of Industrial Revolution, income distribution among individuals and changes in life expectancy due to changes in world inequality. Bourguignon and Morrisson (2002) found that world income inequality deteriorated during the past two centuries. Theil index increased by 60 percent and Gini coefficient increased by 30 percent during the period of 1820 and 1992 because of increase of disparity across regions of the world which is clear from Theil index shifted from

0.06 in 1820 to 0.5 in 1992. Asian region showed relatively slow economic growth in 19th century and first half of 20th century while this region is also heavily populated. From 1820 to

1950 income per capita in this region increases by 0.2 percent which is 4.5 times slower than the

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world average and 6 times slower than Western European regions. Bourguignon and Morrisson

(2002) reached to this conclusion that Asia performance was worst during this period.

Glaeser, Scheinkman, and Shleifer (2003) observed and presented model that inequality is bad for growth but only in those countries where rule of law is poor consequently political institutions are weak and institutional breakdown is common. For the countries where rule of law is good, inequality has no effect on economic growth. Glaeser et al. (2003) reached to this conclusion that growth will depend on performance of rule of law which identify misallocation of investment and find causes of lower growth. Rigobon and Rodrik (2005) reached to same conclusion.

Rao (2003) worked on World Development Report 1999. Rao (2003) observed that South Asian economies data are very limited and only Ginis coefficient is unable to provide true inequality, so with the help of poverty level which is quite high, inequality may be observed. Despite giving subsidies in India and in other South Asian countries, overall impact on income inequality is negligible. Rao (2003) is not hopeful that growing inequality will reduce with economic growth, in support Rao (2003) argued that land reform and government funded public and social services are not encouraging and limited flow of manpower, free global trade and investment are main obstructions.

Gradstein and Milanovic (2004) mainly reviewed and prepare survey based on inequality related to within nation and not between nation, Gradstein and Milanovic (2004) reviewed article of democracy where democratic process is taken as free and fair election, freedom of speech and construction of political parties. Gradstein and Milanovic (2004) were mainly concerned with

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unidirectional approach where causality checked from democracy to inequality not other way around as well as distribution of economic resources and distribution of political power.

Kemal (2006) discussed that objective of economic growth and development is to change the living standard of people living in society, only growth is not enough, equitable distribution is also required. Kemal (2006) worked on Pakistan and suggested how inequality may reduce or if can not reduce, to what extent it may be stopped to increase. Kemal (2006) used Pakistan

Integrated Household Survey (PIHS) and Household Income and Expenditure Survey ( HIES) to estimate inequality. Kemal (2006) observed that though data is small and sampling error exists specifically income received by higher income group is underestimated but it may help to understand trend. Four main factors that are responsible for personal income distribution. First distribution of assets in society, received by inheritance, saving accumulation and investment return, second functional income received by employees, third foreign remittances and internal country transfer, for example many people are working in Lahore with family living in remote village or town, fourth taxes and public expenditure which directly affects on public income.

Ali (2008) observed that Asia’s economies are growing with modest rate but inequalities is widening generally. Study of inequality is vital because it provides significant information about different members and how they are engaged in the development and growth process of any economy. Average income does not give clear picture as highlighted by the fact that increasing

Gini coefficient portrays growth process where income/expenditure of top twenty percent of the distribution have risen more faster than bottom twenty percent. High inequality in any economy shows that poorer are getting fewer benefits from growth than the rich. Ali (2008) further argued

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that because of inequality, quality of institutions suffers and may lead to a deterioration in social cohesion which affects economic growth.

Akhtar (2008); Khandker (1973) showed serious doubt on various reports and data presented in

Pakistan about regional inequality. Akhtar (2008) worked on regional inequality in various provinces in Pakistan. Akhtar (2008) took data from 1998-99 to 2004-05 and found that poor percentage in Pakistan reduced from 31.1% in 1998-99 to 23.9% in 2004-05. Similar trend of decline reported in urban and rural headcount. On the other hand 2005-06 data showed that urban- rural gap is widening at country level. Based on consumption Gini, inequality in consumption are less than disparities based on income. Punjab and Sind consumption inequality is on higher side than the country level, on the other hand consumption inequality in Khyber

Pakhtunkhwa ( KP- old N.W.F.P) and Baluchistan is more equal than country level. Non consumption disparities is also checked with 5 non Millennium Development Goals ( MGD) and

7 MGD indicators, out of twelve, seven indicators showed reduction in inequalities.

Idrees and Ahmad (2010) with the help of Household Integrated Economic Survey(HIES) from

1990-91 to 2004-5 found inequality in Pakistan rural and urban areas based on consumption.

Asad and Ahmad (2011) showed upward trend from 1990 to 1997 in inequality. A different view presented by (Idrees & Ahmad, 2010). Idrees and Ahmad (2010) empirically tested by taking data of household income including individual income from occupations, income received from remittances, rent received and profit earned as well as host of other items found that inequality declined during the period of 1998-99 to 2001-02. Idrees and Ahmad (2010) suggested that due to middle class in rural and urban areas has strengthened which is the main

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cause of inequality declined during this period. However income inequality for the year 2004-

05 increased in Pakistan (Idrees & Ahmad, 2010).

Akram, Wajid, Mahmood, and Sarwar (2011) argued that there is a relationship among bad governance, income inequality and poverty level and to check it empirically selected head count ratio, International Country Risk Guide (ICRG) indicator of quality of governance and Gini coefficient to measure income inequality. Results show that there exists a relationship among these variables, income disparity has positive impact on bad governance and poverty as well.

Akram et al. (2011) observed that poverty increasing in Pakistan. On October 2006 nearly one quarter of Pakistani population falls under poor category and 17.2% of population lives below the poverty line, on the other hand 33.4 percent people lives under the human poverty index line in 2009. Akram et al. (2011) observed that earlier poverty trend was declining in 70s and 80s but due to poor policies, corruption, poor governance it reversed in 90s.

Cheema (2012) selected eight household income and expenditure surveys of Pakistan covering

1992-93 to 2007-08 which includes both urban and rural bread up. Cheema (2012) found relationship between income inequality, poverty and growth. Cheema (2012) argued that growth of economy helps to enhance income of population but not necessary to reduce poverty, it may increase inequality and further aggravates the situation, poor become more poorer and rich become more rich. Cheema (2012) found that growth has negative relation with poverty while inequality is fixed, on the other hand inequality has positive relation with poverty when growth is constant. Cheema (2012) analysis of urban and rural areas showed that in rural areas growth elasticity of poverty is higher than urban areas.

2.7.4 Wealth Inequality and Economic Governance

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Various researchers argued that investment in physical and human capital is effected by wealth inequality and finally affect growth in long run. Persson and Tabellini (1991); Perotti (1996) concluded by using large cross section of countries that more equal societies shows higher rates of growth as compared to more unequal societies. On the other hand investment and growth is lower in those countries which are socially and politically unstable. Perotti (1996); Easterly and

Rebelo (1993) worked on marginal and average tax rate for redistribution and found significant positive impact of redistribution on economic growth. Jäntti and Sierminska (2007) observed that wealth plays crucial role in the understanding of economic welfare and differences arising because of wealth inequality.

Milanovic (2002, 2009) ; Bourguignon and Morrison (2002) found a very high inequality in living standard in the world’s citizens, but Milanovic (2002, 2009) ; Bourguignon and Morrison

(2002) viewed that this rising inequality within many countries in recent decades has not given a clear cut upward trend in global income inequality. Milanovic (2002, 2009) ; Bourguignon and

Morrison (2002) viewed that this lack of trend is may be due to the sudden increase of income in many developing countries, of which China is an important one.

Davies, Shorrocks, Sandstrom, and Wolff (2007) observed that economic inequality usually covered with the support of consumption or income and their findings give very high disparity of living standard among the world’s citizens but did not give upward trend to global inequality.

Davies et al. (2007) focused on household wealth which provide long term consumption through return on investment and dissaving. Davies et al. (2007) further argued that private wealth is more important in those countries which do not have adequate pension scheme, source of

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business finance and appropriate social safety nets. Davies et al. reported based on Gini coefficient, wealth distribution is more unequal than income for all countries where sufficient data is available.

Milanovic (2009) worked on data that was collected under international comparison program which is joint effort of World Bank, OECD and UN. This program covered almost the entire world taking price comparison of 1000 goods and services. This is largest program in the history of International Comparison Program (ICP). Data consist of 146 countries including China which is included first time in ICP based on 2005 estimates of purchasing power parity exchange rate. Milanovic (2009) found all global and international inequality on higher side on the basis of 2005 PPP in which India and China also included. Population weighted inequality decline because of India and China who are growing at a higher rate than rest of the world.

Inequality among individual shifted from 65 Gini to 70 Gini point which is significant upward revision based on 2005 PPP.Milanovic (2009) found Gini indices from 1820 to 2002 which is steadily increasing over time as given below in Table 2.1.

Table No. 2.1: Estimated Global Gini Indices, 1820-2002

Year Gini Coefficient 1820 43 1850 53.2 1870 56 1913 61 1929 61.6 1950 64 1960 63.5 1980 65.7 2002 70.7 Source: Milanovic (2009)

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Ortiz and Cummins (2011) found evidence that those developing countries where inequality is on higher side tend to grow more slowly. Inequality is not beneficial for economy because spending is concentrated in the top income group which makes their market smaller. Taking data of inequality and economic growth for 131 countries they showed that those countries whose inequality rises between 1990 to 2008 showed slower growth in terms of annual per capita GDP.

On the other hand strong negative correlation exists between high inequality and high growth for developing countries. They further found with the help of Kaufmann World Wide Governance

Indicators that inequality is strongly associated with political instability.

Davies, Sandström, Shorrocks, and Wolff (2009) reported first estimate of distribution of household wealth around the world on the basis of net worth. They presented data of 20 countries where concentration is clear at top 1 percent which consists of on average 22.3 percent and for USA it reaches to 32.7 while for Switzerland 34.8. Davies et al. assumed that income inequality is highly correlated with wealth inequality and on this basis used income distribution data of World Income Inequality Database (UN- WIDER WIID) for 144 countries where direct wealth distribution data is lacking. Davies et al. compared income share of 20 reference countries with wealth share and found stable relation between these two.

Davies and Shorrocks (2005) worked on wealth inequality of 11 nations and found that Sweden was at the lowest inequality in 1980s and USA was at the top. Kessler and Wolff (1991),

Klevmarken, Lupton, and Stafford (2003) and Faiella and Neri (2004) also worked on micro data but their studies are based on bilateral comparison while The Luxembourg Wealth Study (LWS) database allowed Davies and Shorrocks (2005) to work on wealth concentration among various

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countries to find international differences. Germany and Canada comes in inequality after USA.

United Kingdom, Finland and Italy showed more equal distribution in terms of net worth.

Developing and transition countries required more accumulation of wealth as compared to other developed countries, observed by Davies and Shorrocks (2005) because households in these countries face greater uncertainties.

Davies et al. (2011) worked on OECD countries and observe that household wealth vary within a country and across the countries. Davies et al. (2011) worked on both inequalities i.e. between country and within the country. Between country wealth inequality shows Gini coefficient

0.533 per adult while within country wealth inequality per adult reaches to 0.802, this within country inequality is quite high, which helped to suggest that within country wealth inequality is more than between country inequality. Similar result was found by Milanovic (2005). Cagetti and De Nardi (2008) worked on OECD countries and found that USA has highly concentrated and unequal distribution of wealth where richest 1 percent possess one third of the total wealth and richest 5 percent hold around half of total wealth.

United Nation Development Program (UNDP, 1995) argued that there is close link between economic growth and human development and proportionate distribution of income and assets is prerequisite for it. (UNDP, 1995) highlighted that in countries where income and assets distribution is very disproportionate like Nigeria, Pakistan and Brazil, even though countries have high GNP, growth rates couldn’t show improvement in human lives. Some countries show very admirable progress in human development without superior growth or income distribution with the help of well planned social expenditure by their government like Jamaica, Sri Lanka,

Cuba and Zimbabwe. United Nation Development Program (UNDP, 2013) observed that equality in any economy impacts on human development specifically in income, health and xci

education. Fiscal policies particularly taxation system may be the main reason of income inequality in some countries.

Chapter 3 Economic and Political Governance in South Asia

Human Development in South Asia (1999) observed that South Asia is a region which is divided among rich and very poor as richest one-fifth population earn approximately 40 percent of the income and poorest one-fifth earn less than 10 percent of the income, so there is a wide gap between rich and poor in South Asia. Rich and poor are divided apart; on the other hand some of this region emerged as most poorly governed regions in the world. A region where 515 million people are struggling for their survival and future of 395 million illiterate adults are at stake.

These illiterate people have no source of regular earning and no training to get jobs.

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With the help of economic data of South Asia it can be said that by only growth of GDP of any country, all economic and social problems will not be solved. In South Asia we have problems of governance and this crisis of governance in South Asia can halt economic and social progress of this region. South Asia has extreme income inequality where richest 10 percent is six times richer than the poorest 10 percent, this shows lack of governance in economic system where equitable distribution is almost impossible (Human Development in South Asia,1999).

Human Development in South Asia (1999) observed that South Asia has many governance issues like in this region income tax is only paid by one percent of the population and share of direct taxes is only 29 percent of the total revenue generated by taxes. Defence expenditure is on very higher side as compared to spending by government on social sector. Advances given by public sector banks to various sectors show one fifth non recoverable and shadow economy is around 35 percent of GDP. In Pakistan and Bangladesh half of the time government is in direct control of the army which shows political mismanagement. Landlords are in majority in assemblies. Media is somehow in the control of government. NGOs exist in large number but they don’t have access to large poor people across the region. There are plenty of challenges in terms of economic, political and social faced by this region due to colonial and feudal history.

Lack of sufficient nutrition, water, education, and housing is common phenomena in South Asia.

More than half of the population is illiterate; one out of five children under the age of five is undernourished. Human Development in South Asia (1999) presented and compared two indexes, Human Poverty Index (HPI) which is prepared by UNDP, Poverty of Opportunity

Index(POPI) which is prepared by Dr. Mahbub ul Haq with $1 a day as defined by World Bank for poverty incidence and showed that other than India all other countries in South Asia is more poor when analyzed on the basis of HPI and POPI. Pakistan’s HPI and POPI is four times higher xciii

than income poverty as defined by World Bank which is clear indication of poor governance in

Pakistan where whatever income generated by country couldn’t be transferred to people on equitable basis.

Human Development in South Asia (1999) calculated Human Governance Index (HGI) for 58 countries including industrial and developing countries in which Pakistan, Bangladesh, India and

Sri Lanka were also included. Out of 58 countries, Pakistan ranked 52, India 42, Sri Lanka 53 and Bangladesh 54. Unstable political regimes and poor economic management is a common phenomena in South Asia. Weak political governments in Sri Lanka and India, nuclear tests in

India and Pakistan, political demonstrations in Bangladesh are few examples which are highlighting the issue of governance in this region.

Khan (2006) observed widespread corruption in South Asia is a clear indication of poor governance and this poor governance is responsible for weak economic performance. Poor governance not only affected economic performance but increased poverty and reduced foreign investment in this region. No doubt those NGOs, citizens group and World Bank played a significant role in the issue but Khan (2006) observed that after all these efforts corruption still persists in South Asian countries. Many prime ministers and presidents in Pakistan, Bangladesh and India have been convicted or put on trial due to corruption cases. Media and political rivals always criticized in Sri Lank and in Nepal to the prime ministers on the issue of corruption.

Corruption persists in South Asia irrespective of whether authoritarian or democratic regime prevails. Khan (2006) divided corruption in four types in South Asia and observed that worst kind of corruption exists in many areas where social order and government writ has been

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completely broken down. Various groups take political and economic benefits with or without the support of corrupt officials.

In chapter 12 ( Citizen Report Cards ) of Sampford, Shacklock, and Connors, Fredrik Galtung

(2006) in the collection of articles on measuring corruption Gopakumar , Thampi and Sita,

Sekhar observed corruption in South Asia and argued that corruption in most of the developing countries is effecting life of the people on daily basis and its main area is public service.

Transparency International conducted a survey in South Asian countries including India,

Bangladesh, Pakistan, Nepal and Sri Lanka during 2001-2002 covering education, healthcare, land administration, power, police, judiciary and taxation. They found that top three corruption prone sectors as per user feedback are as follows:

Pakistan – Police (1) Land Administration (1) Tax (3)

India – Police (1) Judiciary (1) Land Administration (3)

Nepal – Police (1) Judiciary (2) Education (3) and Tax (3)

Bangladesh – Police (1) Judiciary (2) Land Administration (3)

Sri Lanka – Police (1), Judiciary (1) Land Administration (3)

Human Development in South Asia (2012) observed that corruption of all sorts like fraud, bribery, misuse of public funds, government contract kickbacks, tax evasion are widespread at all levels of administrative and political role in South Asia.

Human Development in South Asia (2012) observed that more than one third of South Asian population ( nearly 200 million people) lives on less than $1.25 a day. Income inequality, regional disparity, multi religious, multi-racial are main issue of the region. HDI of this region is still behind many other regions of the world, just above Sub-Saharan Africa. Report presented

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Human Governance Index(HGI) for 51 low and medium human development countries as categorized by the UNDP in which South Asian countries are also included. Pakistan ranked 46 out of 51 countries, all other countries of South Asia including India, Sri Lanka and Bangladesh are better ranked than Pakistan.

(UNDP, 2013) reported recent data on Human Development Index (HDI) in which South Asian countries ranked at very low compared to other Asian countries. Pakistan is ranked 146,

Bangladesh 146, India 136, Bhutan 140, Nepal 157 and Sri Lanka 92. Other than Sri Lanka all other countries of South Asia ranked above hundred. Income inequality in Pakistan has increased during 2000-2010 from 0.27 to 0.29. Expenditure on social sector by Pakistan is much lower than other South Asian countries like Pakistan spends 0.8 percent of GDP on health while India spends 1.2 percent and Bangladesh spends 2.2 percent. When (UNDP, 2013) report compared these expenditure with African country like Congo, they spend 1.2 percent on health, much higher than Pakistan. An alternative to income based poverty estimates developed by UNDP called Multidimensional Poverty Index that shows people living in poverty is quite high in South

Asia, for example Pakistan 49 percent, India 54 percent, Bangladesh 58 percent and Nepal 44 percent.

Human Development in South Asia (1999) observed that in South Asia democracy is improving but there is much distance between common people and political leaders. Report observed that

Pakistan is a country where majority government acts weaken other institutions. Tax burden in

Pakistan on poor people has increased by more than 10 percent, on the other hand tax burden on rich has declined by more than 4 percent. Tax on agriculture is either not applied and if applied, it is heavily under taxed. In Punjab last year tax on agriculture sector collected only one billion

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rupees rather than target of two billion which is very low as compared to potential of Punjab agricultural activities.

Croissant (2004) worked on Asian countries democracy and observed that in South Asia,

Pakistan has no democracy at all. After 1980 military governed the country and this practice was continue in 90s. No doubt that Pakistan has multi party system but this system does not have loyal opposition. Croissant (2004) observed that though Pakistan has official name of Islamic

Republic but the country is still undecided whether follow secular law or Sharia laws. Due to this reason both systems are working in Pakistan side by side in different regions of the country.

Merkel (2004) discussed third wave of democratization in world. Modern democracies have complex institutional structure. These democracies face internal and external complexities and develop rules to perform various functions. Merkel (2004) observed that liberal democracy have five partial regimes i.e. a democratic electoral regime, civil rights, political rights of participation, horizontal accountability as well as power to govern lies in the hands of democratically elected representatives. Democratic elections in any society do not necessarily means a liberal democracy. It is possible that on the name of democracy they have authoritarian rules provided society is missing rights of freedom, rights of participation, checks on power and effective power to govern. If any of the five components of embedded democracy is missing then it can be taken as defective democracy. Pakistan falls in the category of defective democracy.

Merkel (2004) classified defective democracy as exclusive democracy, domain democracy, illiberal democracy and delegative democracy. Defective democracies dominate in three transitional regions and three countries fall into autocracy including Pakistan, Peru and Belarus.

There are various causes of defective democracy. Defective democracy rises due to acute

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imbalance of power and elite class regarded democracy as obstacle for their objectives. Defective democracy emerged in a society when it has more unequal distribution of resources and lower level of socio economic development, when country has authoritarian inheritance like clientalism, corruption and patrimonialism.

Human Development in South Asia (2012) observed that South Asia has poor implementation of rule of law. Judiciary plays a very important role in the implementation of rule of law in any country is independent. Judiciary is under influence of politicians that creates hindrance in its performance ( Marco, 2009). Large part of population do not have access to courts and those who get access, long delays from 5 years to 20 years is common in Pakistan and Bangladesh.

High number of ill trained judges, high corruption, and politicization of judicial system are core issues.

3.1 Measuring and Implications of Good Economic and Political Governance

Topic of governance was first comprehensively covered by World Bank 1992 report which pointed out that good governance is represented by anticipated, open, and liberal policymaking, a bureaucracy competent with a professional attitude; should be accountable for its actions, and a strong civil society participating in public interest; and all carry out their task as per the rule of law. The president of World Bank Lewis T. Preston in his forward note of World Bank report of

1992 “ Governance and Development” supported the view that good governance is compulsory xcviii

element for stable economic policies. Efficient bureaucracy with accountability and clear polices are significant for performance of markets and government which off course leads to economic development.

Commander, Davoodi, and Lee (1997) observed that literature support that growth of any economy is positively affected by stable macroeconomic policies, education attainment, trade openness and development of financial market and negatively affected by political instability, budget deficits, population growth and policy distortions. Thus, fiscal policy could influence the long run equilibrium growth path with the help of productivity of government spending.

Husain and Kennedy (1999), Rajkumar and Swaroop (2008) observed that good governance required for effective allocation of resources, to bring comparative advantage, to increase productivity, to make market more competitive and most importantly to distribute the resources equitably in any society. Husain and Kennedy (1999) pointed out that governance is how power exercised by the government in the management of an economy while good governance provide rules and regulations, check and balances to discourage rent seeking activities by politicians and bureaucrats and support strong institutional infrastructure. Check and balances are also required to control arbitrary actions, decisions and corruptions by bureaucrats and politicians. This is possible when different mechanisms work in institutions which discourage corruption and lead good governance.

Hyden and Court (2002) took the view that if governance follow basic principles, then we can say that it constitutes good governance. These basic principles are participation and involvement by various stakeholders, decency and fairness in society, accountability, transparency and

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efficiency. If these basic principles exist and followed by any regime then good governance exists in that society.

Governance and its relevant topics have gained attention all across the world and become a key component of policies for economic growth and prosperity. It is observed that high and sustained economic growth is possible through good governance because good governance provides better environment for saving and investment. It provides incentives to producers, develop better environment in market, help to increase size of the market by removing international trade barriers (Grindle,2004). Huther and Shah (2005) found positive correlation between governance quality and ten year economic growth.

Kaufmann, Kraay, and Zoido-Lobatón (2000); Kaufmann and Kraay (2002);Kaufmann, Kraay, and Mastruzzi (2006) found a large causal effect of good governance on strong institutions, growth and development. Many reformers in various government, people of civil society and aid donors highlighted significance of good governance for development. If country improves one standard deviation in corruption or the rule of law, it can increase two and fourfold increase in per capita income. Kaufmann et al. (2006) documented relationship between income and governance in the Latin America with the help of newly updated worldwide governance indicators for the period 2000-01 covering 175 countries.

Kaufmann et al. (2006) speculated that poor governance has negative effect on per capita income. Elites capture state and make policies for their benefits as presented evidence from Latin

American countries. It is suggested that actions should be taken to improve governance particularly when such malicious elites influences on public policies. Haq, Zia, and Arif (2006)

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worked in their paper on financial aid effectiveness and argued that effectiveness of financial aid in any country depends on its good policy environment

Pasha (2000) concentrated on the concept of good economic governance and proposed that there are nine elements related to good economic governance. Pasha (2000) pointed out that government can improve economy through better policy and management and presented his argument with the support of nine elements of economic governance. Pasha (2000) observed in

Pakistan that in 90s Nawaz Sharif regime adopted policies which were short run and couldn’t give long run benefit to Pakistan economy like micro credit schemes for self-employment, large- scale subsidized, urban transport and housing. No doubt that these short term policies raised employment and income in short run but because of fragile financial sector and political patronage damaged economy in long run. In 90s growth rate of Pakistan fallen from 6.1 of 80s to

4.6 percent and poverty shifted from 17 percent to 34 percent. Good fiscal policy is necessary for quality of economic management where government settled its obligations through its own resources rather than borrowing consistently. Pakistan debt servicing rising, in 80s it was 40.4 percent which shifted to 63.2 percent in 90s. Large number of institutions is involved in policy making but most of the groups and committees deal with micro issues related to various projects rather than concentrate on major policy issues. Government under pressure of various influential groups changes its policy from time to time. Another issue observed by Pasha (2000) is Statutory

Regulatory Order (SRO) culture and mini budget.

Haq, Zia, and Arif (2006) worked based on Kaufman governance indicators. Haq et al. (2006) selected Pakistan economy from 1996 to 2005 and showed that voice and accountability and political stability ranked in lower percentile and portray a dismal picture. Poor political

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governance is very clear from the fact that Pakistan has lowest tax to GDP ratio. Haq et al.

(2006) showed that economic governance is better as compared to political governance. Rule of law and control of corruption gained low score and lowest percentile in the world. Haq et al.

(2006) reached to this conclusion that from governance point of view Pakistan is facing unfavorable situation which needs to improve. Pasha (2000); Haq et al. (2006); Grindle (2004) observed that good economic policy is essential for the growth in Pakistan.

Osborne (2003) observed that government policies have impact on growth and bad policies negatively affect economy. Osborne (2003) work is based on Barro (1991, 1996) approach of neoclassical growth model. Osborne (2003) dependent variable is GDP growth over five year interval and political instability, democracy, human capital, premium, inflation, openness and per capital GDP as independent variables and found that policy impacts on growth and in this respect worst performing countries are mostly African. Pakistan was ranked 41 out of 58 countries indicating bad governance impact.

Grindle (2004) argued that low growth, inequality, poorly provided services, lack of economic protection, lack of social services, poor legal protection and wasted resources are the outcome of government poor performance. Good governance needs improvement in all departments and institutions which are engaged in political and economic interaction. Grindle (2004) argued that good governance is not a single task, it raises many questions and government should decide what plans they should make, when these plans will start and how these plans will be implemented.

Husain and Kennedy (1999) pointed out that not only good governance but effectively functioning institutions are also required. Good governance keeps check and balances in

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country’s institutions capacity and functioning. Husain and Kennedy (1999) discussed

Kaufmann, Kraay, and Zoido-Lobatón (1999) aggregated governance indicators and showed governance score with the help of various international agencies for Pakistan. With the help of governance score and Human Development Report on South Asia published in 1999 they reached to this conclusion that indicators score make it clear that governance position and institutional development in Pakistan is pathetic.

Human Development in South Asia (2012) argued that South Asia showed good economic growth of average 8.2 percent during 2003 to 2008, highest as compared to other countries of

Asia, but this growth is unevenly distributed and due to poor governance and lack of social sector reform, its benefits are not reaching to poor segment of the societies.

3.1.1 Good economic governance

Human Development in South Asia (1999) observed that state role is important to develop relation with market. After Second World War, state role became more important and government expenditure increased as a proportion of GDP. Nevertheless after collapse of

Russian federations, East European shift and fiscal crisis in different parts of the world including developed and developing countries, again raised the issue of good economic governance and reached to this conclusion that state activities should match with its capability. State should concentrate on development of environment which is suitable for the growth of civil society and for the expansion of market activities effectively and efficiently.

Human Development in South Asia (1999); Hussain (1999) observed that in South Asia government concentrate more on unproductive areas and pay less attention on important areas

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which can improve the overall governance environment in the country. Government is more engaged in production and distribution of goods and services rather than facilitating private sector and improving environment for sound economic activities. Because of this reason corruption, and unnecessary expenditure increases which slows down economic activities and growth. Due to large economic control, a benefit of growth goes to few elites (Marco, 2009;

Hussain, 1999). Government expenditure in South Asia was $25 per capita in 1975 which reached to $56 in 1995, in 1960s around 270 million people were in poverty which reached to

515 million in 1995. Illiterate adults have increased from 280 million to 395 million during twenty five years duration.

Human Development in South Asia (1999); Hussain (1999) reached to this conclusion that good economic governance should provide unbiased outcome of economic activities to all people living in a society with this care that poorest should also be beneficial. Subsidies and taxes in economy should be progressive.

Rajan and Zingales (2003) argued that in any country there are some indicators that shows whether financial system is developed or underdeveloped including property rights, accounting and disclosure system, legal system of enforcement, regulatory infrastructure and observed that private arrangement is possible to achieve all this but suggested that government can coordinate and enforce above arrangements to improve market condition and confidence of investors. Rajan and Zingales (2003) argued that developed financial system is not required by a group who can use their own earning for investment rather acquiring fund from capital market, on the other hand if they do not have sufficient cash in hand, they can borrow, based on their reputation in market, so in this case they do not need developed capital market and use their reputation to finance the

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projects. New entrepreneurs will make joint venture with these groups and in some cases, sell their business to these groups or get them in business but Rajan and Zingales (2003) argued that in the case of developed financial market, these rent positioning activities will be reduced and new comers will enter into market and get profit. Disclosures also help the financier to get information and monitor fund provided by them, while in the absence of proper disclosure and enforcement , financier use their personal connection and relationship to monitor loans and recovery of fund. Through financial development in country, these old ways will diminish and new risk management and project evaluation technique will take its place.

Dixit (2009) emphasized on economic governance as important element in any economy. It is observed that country cannot function properly in its absence. It is taken in terms of structure and functioning of the legal and social institutions that help in economic activities by protecting property rights, provide organizational and physical infrastructure and enforcing contracts.

Property rights are important because in its absence people will be reluctant to save and invest, hence capital market will not function properly. Enforcement of contract gives benefit to all parties involved. In case of any fear of lack of enforcement will prevent people to enter into contracts. Institutional and organizational structure is important for private economic activities which facilitate in the provision of public goods.

Croissant (2004) argued that Pakistan in terms of democracy is a failed estate; consequently slow development and growth exist while corruption is widespread. Human Development in South

Asia (2012) argued that despite high growth in South Asia during last decade, governments are unable to manage themselves effectively and efficiently. Rather than spending on necessary

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areas like social reform, governments are spending on unnecessary areas like military expenditure. On the other hand governments are unable to implement their policies effectively.

Fagerberg, Srholec, and Knell (2007) observed that some countries show better and faster trade performance than others and showed interest in the understanding of factors behind this performance. Countries vary in their performance and various factors work behind their performance. Fagerberg et al. (2007) work is based on Schumpeterian logic which focuses on

GDP and trade performance for competitiveness of countries. Fagerberg et al. (2007) took four factors including capacity competitiveness, technology competitiveness, price competitiveness and demand competitiveness to understand significant factors responsible for performance. First technological competitiveness highlights the ability of a country to compete in market with new innovations in goods and services. Second capacity competitiveness is taken in the sense which strengthens technological opportunities like quality of financial institutions, level of education and efficiency of governance. Third price competitiveness is taken with the concept of impact of wage increment on economy as generally assumed both have negative relation. The last one is demand competitiveness which focuses on how and what type of products’ growth gives country’s production demand in world economy. Fagerberg et al. (2007) found that all variables are significantly related to economic growth.

3.1.1.1 Privatization and Economic Governance

Shirley and Walsh (2001); Shleifer (1998) observed that public sector enterprises gained popularity after Second world war with a view that it protects from market failures, unnecessary

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monopoly and help in planned development. Later on in late 1960s researchers argue that public sector enterprises are not efficient. On the other hand, government in various countries also realized the inefficiency of public sector enterprises. Megginson and Netter (2001) observed that key government role is to provide efficiency. In the case of some market failure, state ownership or control enter in economy and on the other side when state ownership fails, privatization comes to take its place.

Objective of privatization everywhere in the world is to generate revenue for the government, to reduce fiscal deficit pressure, to get rid of inefficient public sector enterprises (López-de-

Silanes,1997). Good Price is the main objective of any privatization of State Owned Enterprises

(SOE). López-de-Silanes (1997) analyzed all privatized Mexico state owned enterprises. Net price of privatized units were affected by active union activities, on the other hand operating and financial performance of state owned enterprises deteriorated as process reaches to its conclusion and reduces net price of privatization company. When more companies participated in auction process, price increases and negatively affected as number of requirement of privatization process increases.

Megginson and Netter (2001) conducted a survey on privatization which was introduced by

Thatcher’s government in United Kingdom in the early 1980s and then it was accepted as a tool to use market resources and used by various governments in more than 100 countries. Shirley and Walsh (2001) reviewed detailed literature on SOE and privatization merits, demerits and objectives along with empirical work on privatization process explored by various researchers.

Megginson and Netter (2001) referred Price Waterhouse (1989) to describe the objectives of privatization which is generally accepted by not only by UK government but other government

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too as follows: one objective is to raise revenue for the government, second it helps to promote economic efficiency, thirdly reduce government interference in the economy, fourth more dispersed ownership, fifth level playing field available for entrepreneurs and lastly develop market discipline.

Sheshinski and López-Calva (2003) argue that sole objective of privatization should not be to generate revenue for the government, it must have broader view like higher productive efficiency, increasing role of private sector in country, improvement and stability in public sector financial health and concentration of government towards social policy issues. British privatization success attracted other countries like France, Germany, Italy and Spain and they started privatization process during 1990s. Japan and later on various Asian countries took this opportunity of privatization and sold many large companies when market was performing good or when government needs to fill gap in budget deficit. Later on Latin America and African countries participated in privatization process and in the last Soviet-bloc countries in Eastern and Central Europe came forward with lot of challenges. State ownership continue to decline not only in developed countries but in low income countries too where earlier it was 16 percent of

GDP which dropped to around 7 percent in 1995 and further declined to near 5 percent.

Theorem of welfare economics supported privatization where in competitive market government role has lessened and chances of market failure are remote. Sheshinski and López-

Calva (2003) looked at the privatization from various theoretical points of view. From microeconomic point of view various evidence supports privatization, improves efficiency and profitability as well as capital investment increases in economy. From agency point of view, check and balance in public sector enterprises are poor and political interference discourages

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objective function of managers to maximize wealth and reduce efficiency, over employment and empire buildings are common issues. When government faces large fiscal deficit, they accelerate the process of privatization which provides funds to government in short term and remove the need of subsidies to public sector enterprises. Even in some cases government may be able to collect taxes, provided firms show profit after privatization. When government uses proceeds of privatization to reduce public debt, it reduces its interest payment, lower future debt which may reduce future debt servicing rate, reduce inflation, and hence increase investment and growth.

3.1.2 Good political governance

Human Development in South Asia (1999) viewed that an ideal nation or society must have strong constitution. Sometimes state is governed by politicians who are involved in rent seeking activities, make policies that favor them and their associates, in this situation various groups in society emerge that surrounded the legislatures for personal gains and promise to support rulers in re-election process, on the other hand general voter is also interested to maximize his own benefits, avoid to pay taxes and takes advantage of any situation which can provide him personal gain. In these situation bureaucrats only increase their capacity to spend so that they can manipulate budgeted amount for their own benefits. It is necessary that under good political governance free and fair elections on regular basis should be held and democracy should be on multi party basis. Strong judiciary and constitution is also necessary for good political governance.

Human Development in South Asia (1999) specifically discussed South Asia and argued that weak institutions and strong political people strengthen misadministration in South Asia. Over centralization of power, few privileged classes in society, corruptions, lack of transparency and

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very poor accountability of bureaucrats and politicians are key problem areas. Political system in

South Asia consists of monarchy, democracy and authoritarianism. Whatever system of governance exist in different countries of South Asia, one thing is common that general people are not part of decision making process even where so called democratic system exist. Decision making is under the control of few elites (Marco,2009).

Money politics, electoral fraud, corruption charges on politicians are common in South Asian political stage. Mahatma Gandhi, Liaquat Ali Khan, Indira Gandhi, Bandaranaike, Mujib ur

Rehman, Rajiv Gandhi, Zia ur Rahman and Premadasa are few examples of prominent leaders who belong to India, Pakistan and Bangladesh and Sri Lanka who were assassinated in political violence. Even in Pakistan every elected government has been removed on corruption charges.

Human Development in South Asia (1999) observed that in South Asia other than good political governance, good public service, stable law and order situation and inexpensive and prompt justice is also required. Human Development in South Asia (1999) measured political governance by using various indicators like quality of bureaucracy, corruption, law and order, accountability and ethnic tension.

Uncertainty and instability in politics as well as elections outcomes in any economy has short and long term impact on investment, income distribution and prosperity in a country. Politics in any country has influence on decisions of investment by companies. Every government whatever policies and priorities they have, try to pursue policies that maximize their chances of winning elections again. Companies’ decisions to invest or hold are directly related to policies of elected government. If government policies are in their favor, companies decide to invest immediately or

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hold it till policies are in their favor. Policy uncertainty damages economic outcomes (Julio &

Yook, 2012; Baker ,Bloom, & Davis, 2013; Białkowski, Gottschalk, & Wisniewski 2008).

Political government changes generally bring some policy changes but the uncertainty in policy changes delay investment until the uncertainty is resolved. In real world scenario political leaders have fixed term in office and they are replaced with another leader who may have different policy preferences. Companies carefully observe these changes in leadership which bring changes in regulations, trade policy, taxation and monetary policy (Baker, Bloom, & Davis

2013).

Julio and Yook (2012) examined the impact of political uncertainty on firm’s investment behavior. Political influence on corporate investment is studied with the support of election year in 48 countries from 1980 to 2005. Julio and Yook (2012) investigated changes in corporate investment in election year and non election year and showed evidence that during election, due to political uncertainty investment reduces as compared to non election years. Julio and Yook

(2012) also found that those countries where government is less stable and government spending to GDP ratio is on higher side show large changes in temporary investment decline than other countries. Baker, Bloom, and Davis (2013) found that as policy uncertainty rises, real industrial production falls as well as employment. Baker et al. (2013) observed much larger decline in private investment.

Government owned banks are under the control of politicians. Dinç (2005) argued that politicians use these banks lending activities for their own benefits especially during the election year when politicians have to provide many favorable things to their supporters. Dinç (2005) explored how government owned banks behave during election year as compared to privately

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owned bank in emerging market during the period of 1994 to 2000. Dinç (2005) found that government owned banks increase politically motivated lending in election years as compared to private banks. Dinç (2005) further argued that fund provided by IMF to various countries for economic and financial stability where IMF put various fiscal and monetary restrictions on government not to use these funds for political purpose but Dinç (2005) pointed out that these restrictions are not sufficient to restrain politicians from their misuse of funds.

3.1.3 Good Civic Governance

The third part of governance highlighted by Human Development in South Asia (1999) is civic governance. People in any society interact with each other in informal small groups like in market, family gathering, neighborhood, town etc. Civic governance covers all private and voluntary services available in society in the form of NGOs, company and welfare societies, associations and community centers, trade unions, religious groups and business associations.

These civil societies protect citizens and help them to attain their rights, freedom through supporting them at all levels. Good civic governance is not a task which will only be fulfilled by civil society alone, for it, good citizen, good employer and good social sense of people living in society is also required. Human Development in South Asia (1999) measured civic governance by freedom of expression, nondiscrimination, political participation and rule of law.

3.2 Economic and Political Governance in Pakistan

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Economic and political governance are closely associated. Here we discuss literature and empirical work related to Pakistan’s political and economic governance, its background and main features.

3.3 Political Governance in Pakistan

Pakistan is a country that has been ruled by few elitist groups and most of these elites are feudal lords (Marco, 2009). On the other hand, dynastic politics is also a common feature in Pakistani politics. This is ironic that in last fifty years of independence several elections have been held but faces and groups are almost the same. Since same people with similar background are repeatedly appearing in political front so there is no change in political governance of country

(Human Development in South Asia,1999; Shafqat,1998).

These elite not only control administration of the country but they also have strong control on economy through their holdings in various businesses, because of this reason they discourage any policy which is against their accumulation of wealth and interest Marco, M. (2009). This is obvious from 60’s policies when Pakistan had handsome growth on industrial sector, which was possible through accumulation of capital, as argued by Rodrik (1997) that capital accumulation is the important source of growth but in case of Pakistan it was distributed disproportionately by keeping wages fixed at lower side.

Human Development in South Asia (1999) observed that in Pakistan, whoever came to power, his political statement is to provide good governance but his sole objective is to get power, power with money, not only for himself but for the whole groups of relatives and friends surrounding him. State resources were used up to maximum extent for personal benefits. Many

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examples are available though these elites do not accept it. These state resources are used through various means like giving plot to bureaucrats, employment in government offices to political supporters, unnecessary expenditure in own constituencies, benefits by tax exemption to particular industry and lavish foreign trips etc.

Ismail, Rizvi, and Mahmood (2000); Marco (2009) observed that Pakistan faces issues in governance specifically due to strong link among various elites who have to become more powerful and get advantage up to maximum extent. Ismail et al. (2000) pointed out that result of their link is clear from subversion of law, weak institutions and lack of accountability in

Pakistan. Policy setting and decision making is influenced and controlled by elites for their own advantage (Marco, 2009). Inefficient deployment of resources and rising debt burden is further aggravating the situation. Institutions are weak because of influence of specific personalities who use resources for their benefits. The elites are mostly landlords who have disproportionate share in Provincial and National Assemblies, hence discourage any sort of reform in society

(Human Development in South Asia, 1999; Marco, 2009). On the other hand few industrialists have huge resources and through their association with bureaucrats dominate the federal budget.

Nasr (1992) observed that in Pakistan, people perceive that after long coup when democracy comes back, democracy will solve their economic, political and social issues and they will be in comfort as compared to when they were living under authoritarian rule but democracy soon removes this concept from their mind. Economic stagnation, weak political institutions and plenty of social conflict reappear with the advent of democracy in Pakistan. Ethnic violence, poor policies and implementation, poor economic growth, poor public health and education

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reform and many more make it clear that Pakistan under the phase of, as Nasr (1992) suggested in governance crisis.

Benazir Bhutto’s government distributed political and civil jobs to their supporters and to those from whom they want to get some benefits. These people assigned various jobs in government public sector organizations where they were not fit as per their capability. Economic reform in the form of privatization was worst with widespread corruption which further damages the democratic process and aggravated the crises of governability. Many Pakistan People’s Party

(PPP) leaders were involved in corruption charges and there was general perception that bribes are part and parcel to move government machinery. All privatization progress, other government contracts were suspected due to corruption and mishandling. Financial offers from one party to another party members in National and Provincial Assembly was common phenomena with the objective of weaken another political party. Because of this reason political parties do not keep an eye or check and balance on the activities of their own members. The trade of parliamentary representative which is called horseracing become a growth industry and reached to its climax in the COP’s drive to unseat the government through vote of no confidence in 1989.

The government had thus become a hostage of elected representatives, money becomes the only measure of political loyalty and they have no concern with the problem facing the country in terms of economic and social point of view.

Husain and Kennedy (1999) took all indicators developed by Kaufmann and discussed with the reference of Pakistan one by one. Husain and Kennedy (1999) by observing Pakistan’s governance score suggested that there is somehow improvement in voice and accountability indicator in Pakistan during the last decade. Social media emerged in Pakistan which highlight

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and debate on various economic and social issues. Non Government Organizations (NGOs) are seriously working in different areas like human rights, environmental protection and women labor rights, though their access to needy person is still limited but progress is going on. For example Agha Khan Rural Support Programme (AKRSP) and Orangi Project are very popular.

Accountability Ordinance enacted in 1999 by interim government with the objective to setup process to hold accountable to office holders for their activities. Husain and Kennedy (1999) had serious doubt on the neutrality of accountability process in Pakistan.

Husain and Kennedy (1999) further observed that Pakistan never faces political stability because none of the government from independence in 1947 till 2008 completed its tenure and Pakistan faces long military intervention from time to time. On the other hand rumors and speculation about government change occur time to time whenever civilian government rule in Pakistan, seriously deteriorate business confidence and slowed down investment in new projects which reduces growth and put long term negative impact on Pakistan’s economy. This political instability led to macroeconomic instability. To deal with macroeconomic issues Pakistan seek support from international financial institutions but due to populist policies it becomes difficult for Pakistan to meet the conditions put forward by international financial institutions and develop a confusing situation.

Government effectiveness is always remained a major problem for Pakistan. On the other hand when political leaders try to correct its deficiency, Husain and Kennedy (1999) argued that it becomes more ineffective. Political leaders appoint their own people at every senior position of government departments and state enterprises to get political benefits and neglect merits, competence and expertise. When people at senior position are appointed on political grounds,

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naturally they lack effective decision, increases corruption and do not follow accountability process. In Pakistan it is generally observed that no action has been taken against a person for acts of omission but many people sacked from the position who took initiative in larger interest of public.

According to Husain and Kennedy (1999), lower judiciary in Pakistan has close similarity with bureaucracy in Pakistan in terms of corruption and mismanagement and there is a battle between higher judiciary and executive to define their boundaries and roles according to constitution.

Lower judiciary play their role to fix judges to delay cases and develop mistrust among people on judicial system. Due to tampering in property rights by judicial functionaries at tehsil

(district) and municipal level, property rights are not protected in Pakistan. Corruption in

Pakistan is widespread and it is so extreme that four elected prime ministers dismissed from their offices on corruption charges. On the other hand there are plenty of cases in court against various high ranking officials and opposition leader specifically related to corruption. Husain and

Kennedy (1999) decomposed corruption in Pakistan as bribery and extortions, fraud and embezzlement, tax evasion, rents in preferential credit, industrial sanctions and licensing etc.

Gilley (2006) explored the determinants of legitimacy in 72 countries and collected 34 potential causal variables covering political, economic and social areas of state legitimacy. Gilley (2006) took finally nine variables covering governance, welfare and rights. On the other hand Gilley

(2006) presented various paired comparisons of States in which Gilley (2006) compared

Pakistan with Bangladesh. In this comparison Pakistan has better income level than Bangladesh but in all variables Bangladesh showed better position as compared to Pakistan.

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Democracy remains on and off in Pakistan since independence in 1947. Pakistan witnessed weak political party system and prolonged military rule. Military rule also developed political parties to strengthen themselves which further weaken political party system in Pakistan. Before 1970

Pakistan political parties and leaders were under the influence of bureaucratic elites who directly or indirectly were governing the country. Zulfiqar Ali Bhutto joined Ayub Khan’s military regime and remained with him during 1958 to 1966. Later on Bhutto separated himself from

Ayub Khan’s regime and established a political party called Pakistan People’s Party (PPP) and through his socialist ideologies soon developed a national party. Bhutto himself never encouraged election in inner party circle and appointed different persons at various political positions as per his own plan. Other political parties presented similar attitude and there was no coordination among various political parties. Political parties’ hostilities and differences encouraged the military to intervene and took control of the government (Shafqat, 1998; Shah,

2002; Hussain,1999; Jaffrelot,2004).

Zulfiqar Ali Bhutto brought the 1973 administrative reforms with the objective to strengthen civilian supremacy on bureaucracy. Zulfiqar Ali Bhutto objective was to strengthen political leadership on bureaucracy to strengthen political institutions. This reforms gives some strength to political parties but Zia ul Haque (1977-1988) regime worked against it and rather than strengthening policital parties, Zia ul Haque encouraged local bodies system. Local bodies elections were conducted in 1979, 1983 and 1987. These local bodies members were given fund to improve utilities, health and education in their areas. This local bodies system brought new political leaders at national level. In 1985 non party based government of Mohammad Khan

Junejo granted Rs. 50 lakh to members of assemblies as development grant for their constituencies. In this activity Public Works Department (PWD), local government and cxviii

administration were involved and caused rent seeking activities with the mutual consensus of local elites and administration. Funds were used for personal enrichment rather than for the development of local areas.

General Zia’s rule (1977–1988) weakened the political party system and encouraged non party system to strengthen his own rule but could not suppress political parties entirely. During army rule tension between prodemocracy and anti-democracy forces persisted. Mohammed Khan

Junejo, who was handpicked by Zia-ul-Haq as prime minister (1985–1988) through non party based election system, demonstrated democratic dispensation, and allowed the return of Benazir

Bhutto ( daughter of Zulfiqar Ali Bhutto) to Pakistan. He also promoted an environment in which opposition political parties could function. Simultaneously, Mohammed Khan Junejo revealed a strong propensity to establish the dominance of Muslim League. Muhammad Khan Junejo considered as good politician who had respect for oppositions leaders, follow rule of law but he was removed before he could stabilize democratic process in Pakistan.

Benazir Bhutto and Nawaz Sharif ruled in Pakistan during 1988 to 1998 as a democratic leader.

There was general perception in Pakistan that these new generation leaders will uphold rule of law and will work in Pakistan to strengthen democracy and democratic institutions but their autocratic tendencies removed this perception. They did not follow rule of law, couldn’t develop good relation with opposition parties and both leaders were surrounded by rent seekers. Rather than working on to develop a good democratic political environment in Pakistan, both tried to develop one dominant party system which further aggravated governance crisis in Pakistan.

Democratic elections provide equal opportunity to all groups to participate but in Pakistan generally tribal leaders, landlords, feudal lords, retired bureaucrats, business tycoons and

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religious leaders are main contestants. Feudal behavior is common in parliament (Human

Development in South Asia, 1999) . Most of the parliamentarians do not have proper school education and majority of them are not able to understand English. From 1985 to 1998 democratic rule prevailed in Pakistan but during this time National Assembly held very few sessions. During Benazir Bhutto’s first government, only 11 sessions were held which rose to 31 in second term. Nawaz Sharif first government held only 17 sessions and in second term it rose to 20 without any significant legislative work. There is no important legislation work done by parliament but it rather relied on Ordinance passed by President from time to time and of course, on this Ordinance, no debate is held in parliament or consensus build up. National Assembly couldn’t develop a platform where various political and economic issues raised, debated and then with consensus reached to a conclusion.

3.3.1 Corruption in Pakistan

Human Development in South Asia (1999) argued that corruption is one of the most evident impacts of poor governance . It slows down saving, investment, and growth in society. It has power to disturb all political, economic and social institutional activities from very low level to the highest. Corruption may be in politics, bureaucracy, private or public sector, local and international level. Corruption includes bribery, fraud, nepotism, extortion, undue influence and embezzlement. In South Asia Human Development in South Asia (1999) divides corruption in three main types including grand corruption, petty corruption and middling corruption.

Human Development in South Asia (1999) observed that South Asian corruption cannot be compared with other developed and economically rich countries. Human Development in South

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Asia (1999) highlighted the fact that in South Asia corruptions starts from top and then come to bottom which creates hurdles in policies, development priorities, decision making process, public sector goods and services. On the other hand the money received in the form of bribery are not invested back in economy, it is shifted from here to other countries to keep it safe (Pasha,2000).

Another problem highlighted by Human Development in South Asia (1999) is that corruption exist in society, pointed out by politician and media but no prominent personality caught and punished.

Transparency International (TI) provides information about level of corruption in a country. It is an international organization that publishes data on corruption since 1995. They collect data with the support of business and experts assessment about corruption in any country with the help of surveys. Transparency International annual indices consist of three years average data.

As per Corruption Perception Index ranking released by Transparency International in 2011,

Pakistan stood at 134 ranks out of 183 countries and in 2012 Pakistan stood at 139 out of 174 countries.

Pasha (2000) observed that corruption in Pakistan is at every level of government department and is one of the reasons of lack of development policies and priorities. Corruption money shifted from Pakistan to other countries hence does not create any multiplier effect in informal economy at local level. Pasha (2000) divided corruption at three level namely petty corruption at low level of employees of various department, middle level to handle licenses, quotas etc. and grand corruption in which highest level of people involve. Price control, government subsidies, trade restrictions are common and popular sources of corruption in Pakistan.

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Human Development in South Asia (1999)reported tax evasion, illicit trade across borders, theft and under-payment of public utility, commission in engineering contracts, granting bank loans and police and judicial corruption are common in Pakistan.

Associated Press of Pakistan (APP, 2013) reported that Prime Minister Muhammad Nawaz

Sharif criticized inefficiency, corruption and wastage of people money in Nandipur Power project and Neelam Jehlum power project. These projects may start on time but delayed which not only cost more to government but also delayed electricity generation capacity for couple of years. According to expert estimate there is huge loss in energy sector due to pilferage amounting to Rs.150 billion to Rs. 250 billion annually.

Corruption situation has become so prominent in Pakistan that Tran (2013, February 1) reported that UK Department for International Development (DfID) planned to confront the endemic corruption in 29 countries including Pakistan, Nepal and Somalia. Pakistan will receive 971 million UK pound between 2012-15 to support public accounts committee to tackle corruption.

They give example of Punjab where to curb worst situation of corruption, every citizen who have any work in tax, provincial local government, health, police or education will receive free calls or message to report any corruption incident.

3.4 Economic Governance in Pakistan

Economic governance in Pakistan has many ups and downs which are directly and indirectly affected by bad political governance. Here we give literature review which mostly covers various aspects of economic governance in Pakistan.

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3.4.1 Economy of Pakistan

After independence in 1947, Pakistan’s economic development has been undertaken through a series of Five Years Plans which passed through various forms of government. Formerly East

Pakistan( now Bangladesh) had jute growing areas without any processing facilities. On the other hand no organized industry was available in West Pakistan (now Pakistan), only cotton produced in this area (Abbasi, 1994). Industry contribution in national income was minimal,

West Pakistan(now Pakistan) had only three textile mills, some minor industries related to sporting goods, food products, surgical instruments and cement production (Ali & Malik 2009).

Consumer and manufactured goods were imported from India and most of the trade and commerce of this region was in the hand of people who migrated to India after independence. In these circumstances Pakistan started its economic development with the help of First Five Year

Plan (Abbasi, 1994).

According to Human Development in South Asia (2012) ; Hussain (1999), Pakistan economic growth is not consistent. It can be divided in five main intervals when economy made major shitfs starting from 1947 to 1958 which is initial phase after independence.

Pakistan faced economic ramifications due to unstable political environment in the country during first ten years after creation. The First Five Year Plan formally announced in 1957 while it was approved in 1955, though economic plan announced but lacked administrative discipline and implementation (Abbasi, 1994).

1950’s is Pakistan early period after independence when GDP was mainly linked to agricultural output which is almost 50 percent, industrial output is 8 percent and service sector consist of 39

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percent ( Hussain,1999). Government encourage private sector but industrial growth was slow, businessmen were more interested in trading activities, on the other hand Korean war helped a lot to Pakistani exports, mainly raw cotton and jute and Pakistani entrepreneur earned huge profit during this period (Ali & Malik 2009). On the political side, 1950s is characterised by unstable governments which remained in power for short time and were unable to effectively implement any economic policy. This situation remained till country faced first martial law in 1958

(Abbasi,1994).

Pakistan economic growth in 1960’s was 6.8%, looks very good from 60’s point of view, agriculture growth rate is 4.1 percent, manufacturing 9.1 percent and trade grew by 7.3 percent but Hussain (1999) argued that Pakistan didn’t utilize its full potential of growth and development. Investment and business decision were mainly influenced and controlled by government bureaucracy like import licences, foreign exchange control. Government decided to establish Pakistan Industrial Development Corporation (PIDC) to build and strengthen industrial sector and boost private sector investment (Ali & Malik, 2009).

This era was mixed with achievements and disappointments, despite high growth, inequaity within the population rises, constant wages, emergence of elite classes, bureaucratic dominance were major issues (Hussain, 1999). Business families who had good contacts in government departments took benefit in this era and earned huge profit. These families had contorl on industrial sector as well as on financial and insurance sector Ali and Malik (2009).

Abbasi (1994) argued that the second five year plan 1960-1965 brought a change in economic policies. Government encouraged private sector which was considered to be engine of economic development and growth. The plan was based on the assumption that groups with high marginal

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saving rates would have the first claim on resources. Private sector investment during this period accounted for over 40% of the total investment undertaken by the private sector. The economic performance during the second five year plan was impressive and the private sector responded beyond expectations. However Abbasi (1994) argued that the government was not favorably inclined to any significant institutional changes. An overvalued exchange rate worked against agriculture, while industry was compensated through various incentives.

The third five year plan coincided with the Green Revolution in Pakistan. The main factors responsible for a sharp increase in agricultural output were the irrigation and power projects coming on stream Mangla, high yielding varieties. It gave major boost to the economy and enhanced GDP growth. However the balance of payment position remained weak due to reduced inflow of foreign capital together with stagnant saving and reduced investment levels (Abbasi,

1994).

Various policy measures were taken in 1960s, one of them was Export Bonus Scheme which was introduced in 1959. It enabled the government to discriminate between sectors via multiple exchange rates, while allowing a limited free market for imports. Exporters of certain items received permits equivalent to 10 to 40% of the value of exported goods. As these were negotiable vouchers, holders could command premium of upto 150%. The official exchange rate continued to be applied to major exports on the assumptions that demand for these products was price inelastic. By the mid 1960s, these effective exchange rates ranged from Rs.4 to Rs.20 per

US dollar, the later rate being applied to industrial exports, which were the chief beneficiaries of the scheme (Abbasi, 1994; Din, Ghani & Siddique,2003; Khandker,1973).

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(World Bank, 2006) report observed that from long term perspective Pakistan’s annual real GDP rate of 60’s was not disappointing. Growth rate was better than many countries of East Asia but other countries achieved more growth and economic development than Pakistan later on, it clearly indicates that Pakistan couldn’t perform upto its potential.

In 1970’s Pakistan gradually spoiled its growth due to political crisis, separation of East

Pakistan, nationalization of major industries, severe oil price shock, GDP declined to 4.8%. On the other hand Hussain (1999) observed that in Pakistan we can not totally rely on government statistical data because of presence of large shadow economy running parallel to official economy, as IMF estimated that in Pakistan shadow economy consist of 30 percent of official economy. From 1971 to 1977 is a duration in Pakistan when socialist oriented nationalization policy and economic reform entered in Pakistan. Economic performance during this era is very poor in many respects, manufacturing sector growth is 2.3 percent and agriculture sector growth remains on average around 3.2 percent. This is the era which showed higher income inequality in

Pakistan. During this era, Zulfiqar Ali Bhutto regime decided to devalue Pakistani currency to attract export and it helped Pakistan to increase its export. To discourage concentration of wealth and monopoly of few business families, all major industrial units, private banks and insurance companies nationalized, which was major blow on investment in Pakistan from private sector.

The outcome of nationalization was not in favour of Pakistan’s economy. Nationalized units performance was very poor, private sector investment declined, capital outflow from Pakistan and bureaucracy inefficiency caused huge losses in nationalized units.

To discourage income inequality in Pakistan, land reform was proposed by government, but it failed as it had failed earlier in late 1950’s due to poor policy implementation, low number of

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beneficiary and majority of big landlords transferred land to their non existent relatives. There was no positive economic feature in this tenure except foreign remittances from Pakistani workers helped a lot to manage balance of payment position of Pakistan.

Rashid (1978) discussed that new civilian government in December 1971 took control of the financial institutions, industries and non missionary educational institutions. No parliamentary committee was established to scrutinize the investment expenditure and revenues of taken over units. The partial nationalization with the promise of fair compensation is a big contradiction in a country like Pakistan. These taken over industries control was given to chairman and functionaries of political party who were big landlords and upcoming business men cum industrialists.

From 1977 to 1988 is a period of military dictatorship which decided to denationalize all nationalized units, liberalized economy and developed policies to attract private investment back in Pakistan. Rebates, tax holidays and various other steps taken by governmnet to improve private sector investment. The gap between balance of payment and fiscal account was one of the main problem duirng this period. Despite the heavy inflow of foreign workers remittances, fiscal deficit remained around 4 to 5 percent of GDP. In the second half of this regime, fiscal deficit further increased and reached to 8 percent. To arrange financing for fiscal deficit, Pakistan rely on non banking borrowing but at a higher rate which slowed down investment. Zia regime decided to bring Pakistani currency on the managed float system. During Zia regime Russian invasion in Afghanistan open foreign aid, war related assistance that helped a lot to solve

Pakistan economic crisis.In 1980’s GDP again increases to 6.5% due to international aid flows, foreign remittances, privatization and liberalization of economy (Hussain,1999).

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From 1988 onward is a democratic period in Pakistan but during this period Pakistan couldn’t maintain its economic growth and in 1990’s it declined to 3.42% (Human Development in South

Asia, 2012). During this period agriculture growth rate was 3.3 percent and manufacturing at a growth rate of 5.9 percent. Fiscal deficit and current account gap had increased with significant increase in debt servicing cost.

Economy liberalized and government encouraged foreign exchange inflow by opening foreign currency account but it couldn’t encourage national saving and investment (Hussain,1999). Debt burden further rose as government was unable to increase its reveue sources . Government paid high debt servicing cost which increased fiscal deficit and further aggravated macroeconomic position of Pakistan. Currency further devalued without improvement in export and current account remained negative.

According to Husain and Kennedy (1999) study conducted on Pakistan during 1980s showed that a medium size company in Pakistan faces more than sixty government departments and agencies in the course of doing business. This whole process starts from obtaining a piece of land for starting a business to sell product in local and international market.

Various meausres had been taken by government to improve trade sector. Cancellation of industrial licence requirement, tax holidays, reduction of tariffs on capital goods and various incentives offered to exporters. This was the tenure when government took privatization seriously and gives very clear objective to reduce fiscal deficit and improve efficiency of industrial sector, though privatization process was slow than planned but anyhow government

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sold 90 units to private sector by the end of 1995. However private sectore was not satisfied with the government plan and transparency in privatization process. Private sector had fear of any reversal of policies to nationalization. During 1990s Pakistan attracted foreign direct investment and significant increase in FDI reported during this period. Since fiscal deficit has become a growing problem for Pakistan economy, to control it Prime Minister Moen Qureshi applied income tax on agriculture which was discouraged by landlords and government couldn’t get any success from this tax application. Energy policy reform during this period encouraged private sector and first Independent Power Project HUBCO was built near Karachi.

During this economic period , industrial sector had excess capacity other than textile sector which shows expansion by balancing, modernizing and replacement of available capacity.

According to Hussain (1999), Pakistan economy made huge structural change in the components of GDP. In last fifty years agriculture which was fifty percent of GDP now only twenty five percent of GDP and export of agricultural primary product decline from eighty percent to almost ten percent. Share of agriculture sector decline and manufacturing goods and services sector sharply rises, particularly service sector which is now fifty percent of GDP.

According to Ahmed and Qayyum (2007), Pakistan GDP growth rate remained on average around 5 percent. Nevertheless when we compare it with investment to GDP, progress is not satisfactory and investment remain 17 to 18 percent of GDP which is low as compared to other

South Asian countries.

In early 1950s investment was 4.1 percent of GDP, but as economy progressed and entrepreneurs accumulate fund through Korean war, investment had risen to 10 percent of GDP.

This progress in investment continues in the next decade due to import substitution policy,

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foreign aid, growth had reached to 22.3 percent of GDP in 1964-65. After 1965 war, investment declined and reached to 15.6 percent of GDP in 1969-70. Decline in capital inflow may be one of the major reason due to political disturbance in country and finally Pakistan divided in two parts. In 1970s, nationalization further upset the investment environment but government took various steps and investment rises to 12 to 20 percent of GDP in this duration. In 1980s government changed its plan and encouraged privatization but investment remained low.

Investment started to increase after 1987-88 and reached to 20.6 percent of GDP in 1992-93.

Pakistan couldn’t sustain this investment environment and due to miss planning by government investment to GDP ratio reduced to 13.9% in 2001-02. Ahmed and Qayyum (2007) found that in Pakistan, private sector were not attracted to invest due to poor and unstable macroeconomic management and policy issues. Unless these issues were resolved, it was difficult to get strong investment response.

There were significant improvement in trade openness and reduction in government burden during 2005 which helped Pakistan to reach very close to top 25 percent of developing countries but Pakistan was facing problem in financial stability, public infrastructure, health and education.

World Bank (2006) argued that to reach to top 25 percent developing countries in these areas,

Pakistan needed 100 percent improvement in financial stability, 375 percent development in country’s infrastructure and will need 228 percent progress in education. On the other hand only

12 percent improvement was required in trade openness.

Pakistan economy faced many challenges in 2000 especially as the international oil prices increased. In addition to this, global economic recession, natural calamities in the form of earthquake, and floods caused heavy damage to Pakistan. Because of above stated reasons

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Pakistan economic growth has slowed down since 2006-07. It again recovered during 2010 and

2011 but at slow rate. World Bank (2006) observed that Pakistan during last couple of years showed progress towards macroeconomic stability but country needs to do more to check and reduce fiscal deficits and ever rising debt burden which may cause macroeconomic instability.

Malik and Ahmed (2010) found by applying Taylor rule in Pakistan from 1991 to 2006 that monetary policy by State Bank of Pakistan generally set through discretionary measures rather than implementing a rule. Reason may be given that SBP did not consider inflation and output stabilization rather policy concentration. It is argued with the help of stochastic simulation and historical study that macroeconomic performance may be better if Taylor rule applied.

Cohen (2011) explored that from its peak in 2005 till 2007, economic indicators of Pakistan deteriorated. GDP in 2005 reached at 7.7 percent which came down to 1.6 percent in 2008 recession and in 2011 it was only 2.6 percent. Economy is unable to cope with demographic growth and GDP per head is around $2400 level which Pakistan had in 2007. Inflation crossed

20 percent in 2008 and now it is around 10 percent. Unemployment reached twenty years record of 14 percent. Labor productivity is stagnated since 2006. Foreign direct investment peaked in

2007 at $6 billion, and it is estimated to remain at $2 billion for coming years. This is general practice in Pakistan to import more than what it exports.

Kemal (2007) observed that Pakistan export increased from $8 billion to $18 billion dollar but this export level is low as compared to other South Asian countries. It is more alarming that other countries of South Asia had low export than Pakistan a few decades back. Kemal (2007) pointed out that low level of technological product, few competitiveness areas of export are main reasons for low export. Kemal (2007) argued that only by providing subsidies and devaluation of

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currency, it would be difficult for Pakistan to increase export. Pakistan needs to improve its total factor productivity.

Pakistan economic Survey (2013) stated that Pakistan’s economy faces many challenges in which electricity shortage is one of the key problem area that held investment and growth in

Pakistan at low rate. GDP rate in the last five years has an average of 2.9 percent which is below the potential of Pakistan’s economy. Agriculture sector holds 21.4 percent of GDP. Agriculture sector’s performance remains poor due to adverse weather conditions. Industrial sector consists of 20.9 percent of GDP. Service sector consists of 57.7 percent of GDP. Investment slowed down during 2012-13 as compared to 2011-12, last year its percentage was 18.79 of GDP that dropped to 14.22 percent in the current year. Fiscal deficit is still a big challenge for Pakistan argued by Pakistan Economic Survey.

Dilawar (2012, February 1) reported that IMF observed that Pakistan has various external economic pressures and couldn’t achieve its economic targets. Balance of payment is under pressure and government needs to take various steps for macroeconomic stability. IMF showed their reservations and suggested to mobilize revenue targets , broaden tax base, public sector restructuring, removing unnecessary subsidies to strengthen economy. IMF also strongly observed that investment environment in Pakistan is not supportive and government needs to take steps to improve it.

Bhutta (2013, June 12) reported that energy crisis is not going to end in few months or years because annual demand is increasing by 5 to 6 percent while with poor current production, crisis of circular debt, poor financial health of energy companies, declining gas output, underutilization of coal, hydel resources, it seems difficult that country can meet its energy

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requirements, consequently this situation will have a very bad affect on economic growth and prosperity of the country.

Kashif (2012, October 30) reported that high inflation, low economic growth and high food inflation make urban life more painful as well and Pakistan clearly missed its Millennium

Development Goals (MDG) targets. Lower growth in terms of GDP is pushing people below the poverty line. Kashif (2012, October 30) referred to Sartaj Aziz, a former finance minister who observed that high food inflation, slow industrial production and rising cost of doing business, security concerns are main issues faced by Pakistan. Poverty level which declined to 28 percent in 2005-06 from 34.4 percent in 2001 has again reached to 33 percent.

Pakistan Economic Survey (2013) observed in their report that Pakistan’s economy is still facing lower growth and weak macro economic fundementals, high balance of payment shocks, misgovernance, energy shortage and policy issues. These are the key issues faced by the economy of Pakistan, though report observed that there is some improvement in inflation and fiscal deficit. On the other hand election year is near and government is adopting populist measures that could further aggravate macro economic management.

3.4.2 Fiscal Policy in Pakistan

Pasha (2000) observed that in Pakistan, generally government follows expansionary fiscal policy to achieve its growth target. Sometime fiscal policy is so manipulated that main objective is to povide benefits to their favored groups like landlords and businesses groups. There are various reasons as explored by Haq (2003) of fiscal difficulties 1990s including high government

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spending, inherited legacy of financial repression and unsuccessful revenue generation which resulted in large public debt, consequently high debt servicing cost.

Haq (2003) observed that when government faces fiscal deficit, the problem is how it could be financed, if through money creation then inflation will increase, other two options are domestic loan or external sources, both gives rise to the overall debt level and further increase debt servicing requirement in future.

Haq (2003) discussed that as per IMF understanding the budget deficit should be around 4 percent of GDP. Haq (2003) further argued that slowdown in economic growth during 90s when

GDP growth rates are around 3 to 4 percent which is below the average of 1980s of 6 percent and unemployment reaches to double of 1980s due to unsustainable macroeconomic imbalances and excessive borrowing of 1980s. Pakistan government took various steps but all reform efforts failed and couldn’t improve investor confidence and private investment remained at 9 to 10 percent of GDP.

Haq (2003) examined relationship between fiscal deficit and private investment, fiscal deficit in

Haq (2003) result is not statistically significant may be due to small sample size of 22 years. On the other hand fiscal deficit showed positive relation with private investment which helped him to conclude that higher fiscal deficits would be associated with Keynesian crowding-in rather than a ‘neoclassical’ crowding-out of private investment. Further Haq (2003) worked on the relationship of fiscal deficit and GDP and concluded based on positive correlation that growth will be suffered whenever public investment will be used to meet fiscal deficit target.

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Human Development in South Asia (2012) argued that there are two sides of fiscal policy, one is revenue generation and second is expenditure side, tax revenue should be a major part of revenue generation but in Pakistan taxes are only 10 percent of the GDP. In Pakistan very few people pay taxes and according to their estimate, out of 180 million population only 1.5 million are in tax net. Similar observation was reported by (Haque, Husain, & Montiel, 1994) almost twenty years back about Pakistan’s fiscal deficit that Pakistan economy faces fiscal deficit issue because of the political and administrative inability of the government. Government is unable to broaden its resources as well as unable to control expenditure side. Inelastic tax base, high defense expenditure, debt servicing cost, administrative expense are some of the issues aggravating the fiscal side of the economy.

With some more reservations, (Pakistan Economic Survey, 2013) observed that Pakistan is facing severe macroeconomic imbalance due to poor tax collection with narrow base, heavy losses of state owned enterprises, low savings and poor position in export market. Pakistan

Economic Survey (2013) observed that if Pakistan couldn’t effectively addressed these macroeconomic issues, Pakistan would face severe macroecomic stability issue. When we compare Pakistan Economic Survey observation in 2013 and (Haque, Husain, and Montiel’s

,1994) argument, both are showing similar pattern, it means after twenty years, there is no improvement in Pakistan’s macroeconomic management.

3.4.3 Subsidies in Pakistan

Pasha (2000) argued that impact of economic governance can be checked whether its benefits are directed towards elites of society who will be protected through various means in which subsidies and tax exemptions are more popular in Pakistan. Tax expenditure of 1998-99 was

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estimated in excess of Rs.100 billion which is equivalent to one third of actual tax revenue collected. This benefit goes to income from foreign currency accounts, income on capital gains, profit from IPPs, tax holidays for certain businesses and industries, exemption from taxes to elite clubs and chamber of commerce etc. Pasha (2000) argued that most of these benefits go to elites.

Special concession is a common practice of government in textile sector because of strong lobby of APTMA. Over- employment is a common practice in all state enterprises which not only put burden on fiscal policy but develop inefficiency and mismanagement. Political patronage is a main cause of this over-employment. Public utility subsidy is provided to various consumers, agriculture, public sector and other designated areas cost around Rs. 30 billion as compared to the actual revenue of Rs. 130 billion (Pasha, 2000).

Planning commission of Pakistan observed that the reason of fiscal deficit is not poverty reduction related program but due to unreasonable subsidies to various public sector enterprises like Water and Power Development Authority (WAPDA), Karachih Electric Supply Corporation

( KESC), Trading Corporation of Pakistan ( TCP), Utility Stores, Pakistan Agricultural Storage and Services Corporation (PASSCO). The Nation (2012) refered to Governor SBP Shahid

Kardar that agriculture sector receives substantial amount of subsides despite the fact that due to political pressure this sector is not paying tax as it should pay. Hamayun (2013, June 17) observed that Pakistan needs to manage its subsidies, subsidies that are only given for cheap political publicity and to get political support like Sasti Roti in Punjab. Utility Stores from where any one, no matter how rich he is can buy subsidized food items like oil, sugar and flour.

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Subsidies given to fuel sector is a huge burden on Pakistan’s budget and this subsidy is again enjoyed by very rich to poor.

3.4.4 Economic Management of Public Sector Enterprises in Pakistan

According to (Human Development in South Asia,2012), Pakistan has many public sector enterprises (PSE) which are causing very significant economic loss to the country. Human

Development in South Asia (2012) observed that poor management, corruption, political interference, political appointments, poor administration of pricing system are some of the reasons due to which public sector enterprieses are facing losses. Another reason (Human

Development in South Asia,2012) observed is most of the public sector enterprises are run by people who are appointed on political grounds, they are not professionally qualified to run huge organization, nor technically qualified, have no proper training and are not aware of the recent developments in their areas. Most of them are retired bureaucrats, retired army officers, relatives of influential political leaders and those who have some connections with political leadership.

Planning commission of Pakistan observed that PSE is distorting Pakistan’s economy because of their inefficiency. Government is spending money on PSE, giving loans and providing subsidies but is unable to run them profitably. It is not clear why government has their presence in agricultural market and distribution system which is only crowded out private sector from this market. Planning commission argued that some of the PSEs are suffering loss and it is difficult for a government to privatize these units but there is no alternative except transparent privatization.

3.4.5 Balance of Payment

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Pasha (2000) argued that Pakistan is facing continuous problem in balance of payment and due to poor management of balance of payment, since 1988 Pakistan is taking support of IMF program. IMF put certain conditions of reforms that needs to be implemented by government.

Generally IMF plan imposed and enhanced interest rates, utility tariffs and tax rates, currency depreciation. Even though IMF plan was to restore macro-economic stability but Pakistan did not achieve desired objectives. Pakistan never implemented IMF plan with ownership, defective implementation, delayed and partial implementation are common issues. Pasha (2000) observed that Pakistan takes various actions and show active concern when there is a time to get IMF tranches and later on becomes inactive.

3.4.6 Debt Burden on Pakistan Economy

Public debt was very high in 1990’s and reached to 91.7 percent of GDP but positive growth during 2000-07 reduced this burden and it declined to 55.4 percent of GDP. However after this modest recovery it couldn’t be sustained at this level and it again increased to 60.9 percent of

GDP in 2011. Human Development in South Asia (2012) argued that reason of huge public debt does not mean that government is spending on productive side like health, education, training but debt is increasing mainly due to spending on flood management, security, subsidies and huge oil import bills etc. Human Development in South Asia (2012) further argued that debt can help to develop economy but not in the case of Pakistan where real growth in debt is higher than real growth in revenue.

3.5 Structure of Financial Market and Corporate Sector in Pakistan

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Levine (1997) observed that financial development of any economy is directly associated with its economic growth. Financial development includes stock market development. Stock market development enhance liquidity, turnover, market capitalization and informational efficiency.

Levine and Zervos (1998) studied the empirical relationship between stock market development, banking sector development, economic growth and productivity. Levine and Zervos (1998) found that there is strong positive association with stock market liquidity, banking sector development, economic growth and productivity. Similar results were found by ( Gertler &

Rogoff, 1990; De Gregorio & Guidotti, 1995; Arestis, Demetriades & Luintel, 2001; Wurgler,

2000). Bekaert, Harvey and Lundblad (2005) also found that financial liberalization of stock market enhance growth. Those economies that have developed financial markets can boost investment in growing industries and reduce their investment in declining industry, hence financial market enhance economy (Wurgler, 2000).

Haque (1997) observed that Pakistan did not have a well established financial market at the time of independence in 1947. Pakistan’s main source of revenue was agricultural activities. For faster economic growth and development, industrial growth was necessary and for industrial growth and development, financial market development was a prerequisite. Pakistan’s financial institutions are mainly divided into two categories, banking companies and non banking financial institutions and both are controlled and monitored by State Bank of Pakistan(SBP).

Financial sector of Pakistan was directly managed and supervised by government of Pakistan

(Haque, 1997; Khan, Qayyum, Sheikh & Siddique, 2005; Bonaccorsi & Hardy,2005). Since government had its own objectives to achieve, lack of efficiency, poor growth and losses were borne by financial sector. Pakistan faced severe macroeconomic problems in 70s and 80s due to inefficiency of the financial system (Khan, Qayyum, Sheikh & Siddique, 2005). Bonaccorsi and cxxxix

Hardy (2005) observed that banks were given detailed instructions to provide credit to specific sectors and also provide finance to government of Pakistan. On the other hand government set various interest rates for different purposes. Banking fee for various services were also set in detail by the government. Provisioning and capital requirement were weak. In this situation banks were unable to attract new savings as well as unable to reduce operating cost.

Haque and Kardar (1995) referred by Haque (1997) that Pakistani financial sector was unable to perform many important functions. For example due to lack of financial market instruments, hedging, risk sharing arrangements are difficult to manage as well as capital mobilization is difficult, hence its difficult for investors to exit from market other than if investor has holdings in banks. Pakistan has no derivative market, consequently diversification of risk facility is limited.

Lack of contract enforcement, weakness in rules and regulations and their implementations and inadequate supervision of financial institutions developed asymmetric information in financial market. Government intervention as regulator, owner of financial institutions as well as owner of various financial product couldn’t develop market efficiency. Large non performing loans and bad debts in banks also put nationalized banks in trouble.

Haque (1997); Bonaccorsi and Hardy (2005) observed that government has control on all commercial banks as well as Development Financial Institutions(DFI) in Pakistan. These banks and DFI are providing more than 60 percent of all loans to government and private sector.

Government is in practice to issue bonds to meet their financing needs, consequently more than

40 percent of financial wealth consists of these bonds.

Commercial banks were nationalized by PPP government in 1974 with the objective of directing bank credit to specific sectors and later under liberalization plan, privatization process started in

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1992 .After 1992 domestic private banks were allowed in financial market but major financial wealth of the economy were in the hands of nationalized commercial banks (NCBs). In the second half of 1980, six national banks controlled by the government of Pakistan were holding more than 90 percent of banking assets (Bonaccorsi & Hardy,2005; Haque,1997).

Foreign banks were still working but with limited number of branches and have smaller deposits as compared to NCBs but due to better management polices and low political influence were able to earn profit. NCBs were inefficient, showed poor management skill, heavy influenced by political decisions, negative real rate of interest paid to depositors ( Haque, 1997).

Reform in Pakistani banking sector started in the late 1980s. Administration of interest rate got relaxed and streamlined in 1989-90. In 1989 authorities reduced credit to specific sectors and bank to bank credit ceilings also eliminated in 1992. In 1989 new prudential regulations were introduced to strengthen banking sector. In 1991 a system of auctioning government securities was initiated and auctions of short term and long term bonds started. Government of Pakistan started to liberalize foreign exchange control by allowing foreign currency accounts for residents and non-residents (Di Patti & Hardy, 2003).

Government issued licenses to private domestic banks in 1991and ten new Pakistani private banks entered in financial sector. Government decided to privatize two nationalized banks i.e.

Muslim Commercial Bank (MCB) and Allied Bank of Pakistan(ABP) in stages. At first stage

MCB’s 26 percent shares were given to private sector and later in 1993, 49 percent shares of

MCB were given to private investors. The control of ABP were given to Employee Management

Group and sold to them 26 percent shares and later on 25 percent shares of ABP sold to private investors in 1993 ( Bonaccorsi & Hardy, 2005).

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In 1997 privatized banks and state owned banks assets share has reduced to 70 percent and at this time remaining nationalized banks held 50 percent of banking assets. New private banks that emerged during liberalization process has increased market share to 10 percent of loans by 1997

(Mian, 2006).

Government of Pakistan took many steps to improve banking sector and set guidelines to recover bad and doubtful loans, establishment of banking courts and closure of unprofitable branches but these structural reforms interrupted by macroeconomic problems were faced by Pakistan during

1998-99. Pakistan faced balance of payment issue, consequently currency depreciation was faced by economy. The conversion of foreign currency accounts was suspended which put foreign banks in trouble who had large sum of deposits in foreign currency (Bonaccorsi & Hardy, 2005).

DFI were developed to provide long term debt facility to various economic sectors of Pakistan.

Their main source of funding were either from government or multi-lateral agencies ( Haque,

1997).Leasing companies, modarabas, Islamic mutual fund and investment banks emerged in

Pakistan’s financial sector during 1990 in the phase of financial liberalization process ( Haque,

1997).

3.5.1 Equities Market in Pakistan

Haque (1997) observed that Pakistani stock market can not be assumed as efficient and fair.

Insider trading is a common feature without any adequate control. Regulatory authority is not fulfilling its responsibility, hence supervision of companies is weak and small investor suffers.

Price of stock not presenting the fair value of company and unfair jumps in stock prices are common. Poorly supervised and illiquid stock market do not attract many investors which kept diversification of ownership limited. No takeover threat available in stock market to discipline

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various players. Since market discipline does not exist, agency problem prevails in stock market.In 1990-91, in largest 20 domestic firms, only 8 percent of their shares were in the hands of small shareholders, 33 percent was in the hands of institutional investors and 54 percent was held by large shareholders.

Daouk, Lee, and Ng (2006) empirically worked on capital market governance by taking 32 countries stock market data including Pakistan. Twenty two countries are developed and ten from emerging market. Daouk et al.( 2006) with the help of capital market governance explored country’s regulatory environment from 1969 to 1998. Daouk et al.( 2006) in capital market governance measured composite earning capacity, insider trading laws and relaxation for short selling restrictions. Daouk et al.( 2006) found that improved CMG increases pricing efficiency, increase market liquidity. The bottom three countries in ranking of CMG are Pakistan, India and

Greece and Pakistan scored 1.13 out of 10.

3.6 Family Business Groups

Family business groups have very singnificant impact on economic mangement and business structure around the world in various countries. Here we present various studies which worked on these groups.

3.6.1 Family Business Groups Around World

Leff (1978); Leibenstein (1968) argued that entrepreneurship and industrial organization are related to each other. Leff (1978) analyzed both and its effects on functioning of economies. In many economies privately held industrial enterprises mostly functions in groups. These groups have various names in Asia, Africa and Latin America. Most of the groups consists of various

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companies under common family or groups entrepreneurial control. Groups get capital and top level of managers from one family and these wealthy families became a single economic unit.

Sometimes one family controls the whole group’s top management while sometimes number of families join themselves to make such group to strengthen their power and position in market of developing countries. For example Keiretsu in Japan, Chaebols in South Korea etc. Pakistan,

India, Brazil, Nicaragua are countries where various groups have a strong control on economy.

Porta, Lopez‐De‐Silanes, and Shleifer (1999) showed in their first study that many wealthy families generally use control pyramids where a family firm controls another firm and that firm controls many more firms and in this way this chain system continues which gives a family more control on companies rather than cash flow investment by this family. Key management are kept by family members, closed friends and relatives in each firm to keep strong control. In this way few families control greater part of economy. Porta et al. (1999) worked on ownership structure of companies of 27 countries. Porta et al. (1999) showed that controlling shareholders have more control rights than cash flow rights and these firms are not run by professional managers but by family members. Porta et al. (1999) observed that ownership concentration is due to poor legal protection. Porta et al. (1999) also argued that it is not necessary that controlling shareholders must possess more than fifty percent shares because many small shareholders do not participate in annual meeting. Morck, Wolfenzon, and Yeung (2004) argued that family concentrated control creates lots of problem in economy because major part of economy has been given to few elites and these elites can create biasness in capital allocation, slows down growth of capital market and overall growth of economy. Javid and Iqbal (2010) found negative relation between rule of law and ownership concentration in Pakistan because

Pakistan also faced weak legal protection for investors. cxliv

Claessens, Djankov, and Lang (2000) continued Porta, Lopez‐De‐Silanes, and Shleifer (1999) work and with some improvement and modification in methodology they applied on East Asia and investigate controlling ownership in 2980 companies of East Asian countries including

Japan, Indonesia, Hong Kong, South Korea, Singapore, Philippine, Malaysia, Thailand and

Taiwan. It is generally observed that in all East Asian countries control of firms is managed and enhanced through pyramids structure with the help of multiple voting shares as well as crossholdings.

Morck, Wolfenzon, and Yeung (2004) presented a simplified picture to show pyramid structure.

A family firm hold fifty percent and one share in first tier of firms and then these first tier firms hold fifty percent and one share in second tier firm and then this second tier firms hold fifty percent and one share in third tier firm and so on. In this way family firm successfully controls more than eight billion dollar firm with investment of only one billion dollars.

Berglöf and Perotti (1994) discussed in their paper about Japanese Keirtsu. Firms in Japan have closed links with each other through Financial Keirtsu. In Japanese economy these groups have very influential position. These groups have debt and equity in each other’s companies and hence present a complex trade and capital structure. This cross holding and complex capital structure, where firms have debt and equity in different group companies help these groups to strengthen themselves and improve coordination and support on long term basis. Different companies in group have small percentage of total company equity but oveall they have sufficient number of shares to control the group. Bank as a central point provide support to member companies internally. These group companies provide trade credit to other members and they have substantial number of transactions within group members.

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Dyck and Zingales (2004) observed that private benefits can be obtained by controlling shareholders from the firm run by them. Dyck and Zingales (2004) argued that to determine private benefits and to measure it is difficult because it is not easy to verify it, on the other hand if it will be easy to detect then minority shareholders can take steps to discourage this misappropriation. Dyck and Zingales (2004) took 39 countries and 393 transactions between

1990 to 2000. When they quantified private benefits in different countries, they found that magnitude of private benefits varied in countries. Dyck and Zingales (2004) found that in countries where private benefits of controls are on larger side, businessmen will be more reluctant to offer their companies stock in public.

Khanna and Palepu (2005) explored concentration of ownership in India and found that India is not different from other countries like Canada, Germany or France. Indian corporate sector has dominant family business groups. Around 1,113 companies associated with various business groups were registered in Indian’s stock exchange in 1993 and almost 1,539 non group companies were listed due to government restriction on existing companies capacity. Group companies have more domestic and foreign institutional ownership than non group companies and found insider ownership on higher side in business groups. Khanna and Palepu (2005) observed that concentration in capital market exists because of lack of intermediaries in capital market or institutional deficiency but Khanna and Palepu (2005) are not against concentration of ownership provided these ownership are not engaged in rent seeking activities. Groups mainly perform in those market where intermediary institutions are not mature to cater the need of the financial market like venture capital which is available in most part of developed world but not available in underdeveloped market to some extent. These groups identify investment

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opportunities in market and took risk of capital and used in house human resources to turn these opportunities into success.

Khanna and Palepu (2005) observed that software industry took advantage of concentrated ownership in India and got easy access to capital and talent in internal market. No doubt that license system in India creates obstacles but these business groups in software industry done well. Khanna and Palepu (2005) observe that there is not a single group or groups that are continuously dominating concentrated ownership in India, no doubt that Tata group remained the largest group in Indian market, other groups changed their prominence in market time to time, for example Martin Burn, Inchcape and Andrew Yule belonged to pre-independence era, during

1950s and 1960s Thapar group, during 70s and 80s Ambani group and during 80s and 90s

Munjal groups. Khanna and Palepu (2005) also observed that political connections also help to rise and fall of various business groups except Tata which faced all political favoritism and opposition but remained at top, hence must have some features which kept this group at top.

Birla group helped in independence movement financially and was appreciated by politicians and in return reached to the top second business group in 70s, criticized later for manipulating licensing system later by the government of Indira Gandhi and later this group shifted its some part of business outside India and proved that its success was not only due to political support but rather its entrepreneurial skills.

Aganin and Volpin (2005) found Italy is one of the country that has dominant business pyramidal groups. Aganin and Volpin (2005) worked on the Italy’s financial development and concentration of ownership in twentieth century. Aganin and Volpin (2005) found that family owned business groups were more dominant and powerful in the middle of the century than at

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the end or beginning. The reason of this tendency may be explained due to impact of laws and political activities in the country. Aganin and Volpin (2005) relate this tendency with the concept of investor protection but due to U shape of financial variables, government intervention in the stock market is the main cause. Due to excess intervention by government in business and economic management of the country, government debt burden increased and to mange it, government presented privatization plan during 1990s. In 1928 there were three major family owned companies that existed in Italy, Italcementi owned by Pesentis and was engaged in cement production, second was FIAT owned by Agnelli family and engaged in car manufacturing and third was Pirelli owned by Pirelli family and was engaged in rubber cables and tires business.

Here we discuss these influential groups relevant to Pakistan.

3.6.2 Family Business Groups in Pakistan

Due to market failure in less developed countries, these family groups emerged. So to understand causes of emergence of these groups, environment of a specific country is an important factor to understand. These groups have access to scarce resources, information and contacts which they use to receive private gains. These groups diversify themselves in local market by entering in diversified product line where due to small size of economy, new entry of manufacturing firm is not very attractive. These family groups work in backward and upward linkages which help them to discourage monopolists and oligopolistic existence in input market and output product of their companies. Leibenstein (1968) also supported this view that these groups have access to input and took advantage of imperfect market conditions of the less developed countries. Business groups successfully gain rent from output they produce.

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Political connectios is one of the main cause of emergence of groups business. These groups have access to political parties and support them in their political campaign and image building, fund them when they need and in turn these groups receive permits, licences, subsidies, exemptions from various taxes and levies, access to information and host of other benefits from various institutions of government. Papanek (1972) observed that group structure and features in developing countries is due to highly uneqaual distribution of wealth.

Ali and Malik (2009) observed that Muslims in those areas which became Pakistan were not engaged in business, commerce and trade, rather majority was engaged in agricultural activities.

Business and trade was in the hand of non Muslims who emigrated to India after independence and causes a major disturbing effect on economic development in Pakistan. In British India, banking, trade and industry was in the hands of Europeans, Parsis and Hindus. Rich Muslims were landlords, government officers and military officers. In West Pakitan (existing Pakistan) before partition nearly about 80% of industrial business were in the hands of non Muslims.

Dawoodi Bohras and Khoja Ismaillis were engaged in trade and commerce on a very limited scale in Karachi and export trade was in the hands of Europeans. After independence non

Muslims shifted from these land now called Pakistan and Muslims trading communities migrated from Gujrat( Memons)and Bombay(Bohras) and settled in Karachi( the Karachi then capital of

Pakistan after independence). These Muslims started their business in Pakistan again. Many

Chiniotis from a small town near Faislabad who were doing their business in Calcutta during

British period returned to Pakistan and they were the first who started textile industry in

Pakistan. The Korean War boom not only helped in the rise of a large group of businessmen in

Pakistan but it also helped them to accumulate large profit which helped them to shift from trade to industrial business sector. Later import substitution policy supported industrialist, since rate of cxlix

return was quiet high so in a very short span of time industrialists recover their investment and they further reinvested in different sectors. Investment and business decision was under the control of the government. With the help of control on license, permit and various other undue influential activities government was in a position to manage business families and it was under government control to decide who will be succeeded in business. This influence developed interest of businessmen to have good relations with the government people ( Ali & Malik, 2009).

Financial sector was at a very initial stage, Pakistan Industrial Development Corporation(PIDC) was established to fill this gap. It is gererally believed that PIDC supported only established business families who established good relations with bureaucrats. Major beneficiaries of PIDC plan were Adamjee, Amin, Saigol, Isphahani and Crescent business groups. The leading businesses have industrial investment as well as capital in financial sector so these houses took advantage of this monopoly and made industrial investment during this period (Ali & Malik

2009).

Rashid (1978) observed that Ayub Khan’s industrial policy helped to rise small groups of industrialists at the expense of majority of the people. Policy was based on this understanding that factory owners would save more and reinvest in businesses which would stimulates growth.

In this process landlord suffered a lot on one hand and petty bourgeoisie on the other hand through low wages etc.Cohen (2011) argued that Pakistan opted policy of concentrating economic production in 60s then spinning these off to the private sector which developed concentration of economic power in famous twenty two families and Pakistan at one stage reached at the middle incomes status. However ignored land and agriculture reform and low wages, not investment in basic education were the flaws of Pakistani strategy.

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Wealth concentration is an issue in Pakistan dated back to 60’s when a report was prepared by a Study Group set up by the Government of Pakistan in 1963 but it was never published.

Generally it is believed that Dr Mahbub ul Haq the then Chief Economist of the Planning commission inspired by this report which was completed in 1966, developed the slogan of twenty two families and highlighted the issue of concentration of wealth in industrial and financial sector (Human Development in South Asia,1999; Papanek, 1972).

Professor Lawrance White who was with USAID program in 60’s explored on the basis of

Karachi Stock Exchange listed companies that 98% of non financial companies are controlled by 43 families and cover 53 percent of total assets. As per his working Amin, Adamjee, Dawood and Saigols held and managed 20 percent of total assets.

Papanek (1972) discussed the issue of very large business industrial houses and their relationship with political elites. Papanek (1972) worked on how these big houses emerged and observed that development of Muslim industrialist and entrepreneur was a result of partition of India and

Pakistan and migration of Hindus and Muslim form various provinces which developed a vacuum in businesses, because Hindus and Sikhs had bulk of businesses and more affluent than

Muslims and their migration adversely affected industrial and financial sector in the provinces now called Pakistan (Khan,2002; Ali & Malik, 2009). In this situation government encouraged private entrepreneurs to make investment in industrial and financial sectors.

Papanek (1972) pointed out that twelve big business houses which belonged to big families has significant assets in industrial sector. These houses do not include large landowners. These families included Dawood, Habib Bank, Adamjee, Crescent, Saigol, Valika, Heysons, Bawany,

Amin Jute, Wazir Ali, Fancy and Colony. When this list expanded and included many houses

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which had business before partition and some Punjabi families then it became twenty to twenty five, some of them are presented here with their name, origin and settlement information.Ismail,

Rizvi, and Mahmood (2000) observed that few industrialists are so powerful and have huge resources in Pakistan that their resources are more than the federal budget presented by government.

Marco (2009) observed that industrialists are another elite group in Pakistan , who control industry, trade and commerce of most of the country. Similar observation made by (Javaid &

Iqbal, 2008) who conducted research on Pakistani corporate sector governance issue. Busch and

Muthoo (2003) argued that when some agents possess enormous power, they discouraged change and try to maintain status quo and took advantage of the enormous bargaining power, hence efficiency of the institutions suffer. Money in politics and then maximum benefits enjoyed by business families is one of the reason of close association between business families and political parties. Political parties received substantial funds from business houses in party funds, consequently, political parties also helped business families to develop their empire (Human

Development in South Asia, 1999).

Human Development in South Asia (1999); Papanek (1972); Rashid (1974); Rashid (1978);

Marco (2009); Cohen (2011) observed that large businesses houses is another elite group who have control on economy. Since monopoly and control on various sectors is only possible when government policies are in their favor and for this purpose they keep good relations with politicians who make policies in their favor. The net worth of first eight houses was close to above $20 million in 1968. Of course these houses had background of business and they accumulated profit during Korean war boom and reinvested in businesses. These business houses

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are relatively small in number as compared to overall economy and its social and political implications are much stronger and long run as compared to its economic consequences.

The emergence of this new class with high concentration in industry and financial sector shows failure of government to address equitable income distribution. It seems that government was trying to accumulate the industrial concentration rather than distribute it various minor hands.

Papanek (1972) concluded that these groups played a very significant role in the development of economy as well as political relationship because they had highly concentrated economic control. They also developed strong political connections and supported new political forces so that they can strengthen themselves. They had hidden and overt participation in decision making process of government economic policies which will further support them in accumulation of wealth (Ahmad,1997).

Rashid (1974) highlighted that minority communities have played an important role in industrialization process in Pakistan and observed that at initial stage of industrialization feudal class had complete absence except one group i.e. Hoti from Charsaddah.

In 1970, when Bangladesh was a part of Pakistan and called East Pakistan, 41 industrial houses controlled almost 80 percent of assets of manufacturing companies quoted on the Karachi stock exchange. The 15 big industrial houses had assets more than Rs. 100 million which consisted of

36.4 percent of private domestic assets and over 25 percent of toal assets in the manufacturing sector. The figures showed concentration of industrial houses. On the other hand these industrial houses had 29.2 percent production of manufacturing sector. Amjad (1976) argued that only few industrial houses changed their position in 1970 when compared with 1961.

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Javaid and Iqbal (2008) observed in Pakistan family owned companies are managed by owners themselves and maintain family dominated boards. The corporate structure of Pakistan is considered as concentrated family control, cross shareholdings and interlocking directorship as well as pyramid structure is common.

3.6.3 Breaking of Monopoly of Family Business Concentration by Nationalization

Zulfiqar Ali Bhutto, chairman of Pakistan People’s Party (PPP) observed this concentration of wealth in few wealthy businesses families and realized that benefit of economic growth and industrialization is limited to few hands, consequently benefits of economic growth is not transferred to lower and middle class income group. Zulfiqar Ali Bhutto took advantage of this biasness and declared in their manifesto that all insurance companies, banks and all vital sources of production will be handed over to public sector and in this way their party will eliminate monopoly of few business houses.

Rehman (2006) observed that Zulfiqar Ali Bhutto regime after taking decision of nationalization of various industries decided to cancel managing agency system which was very popular and through which companies were able to appoint a person who had been sole responsible to purchase and distribution, a mechanism through which concentration of industries was kept in few hands. Rehman (2006) illustrated this managing agency system with an example of The

Steel Corporation of Pakistan, it was a listed company managed by Fancy group, and this company was buying its material from Pakistan Industries Limited, a wholly owned subsidiary of

Fancy group. The Steel Corporation of Pakistan sold its product and marketed by Steel Sales

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Limited, it was also a part of Fancy group. Another interesting point is that management of The

Steel Corporation of Pakistan was in the hands of Industrial Management Limited which is also

Fancy group company. Some prominent companies nationalized in 70s with their groups name have been given in Appendix B( Table No.B1).

3.7 Agricultural Taxation in Pakistan

World Bank (1999) observed that revenue from agriculture tax in Pakistan is very low and has no comparison with its contribution in GDP( in GDP agriculture constitute 25%). In fiscal year

1996 agricultural tax revenue was only Rs. 2 billion which is only 0.5 percent of the agricultural part of GDP. Agricultural income tax in Pakistan is quite low as compared to other countries like in Malaysia it is 2.2%, Chile 6.3% and Argentina 4.6%. On the other hand World Bank (1999) report observed that in Pakistan agriculture income tax is treated differently as compared to other sources of income, consequently there are opportunities available in law through which tax payer avoids and manipulate agriculture income tax. High illiteracy rate in rural areas, small land holdings, insufficient record of land holdings, difficulty in estimating revenue from agricultural activity, family members dominance in agricultural activity, administrative problems in collections are some of the major issues in agriculture tax revenue. World Bank (1999) further observed that one of the key problems is that federal government as per constitution cannot impose agriculture income tax, it can only be levied by provincial and local government. Rural elite presence in Pakistani politics in provincial assembly as well as in national assembly and

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their vast holdings in rural agriculture sector is one of the main problems that no serious efforts can be seen from the government to collect tax revenue.

Land revenue or land tax is the oldest system of collecting tax through land. Though various changes and amendment made in this system but from 1967 Land Revenue Act has uniform basis to collect land revenue in overall Pakistan’s four provinces. Another change in land revenue system was introduced in 1975 when up to 12.5 acres of irrigated land was exempted from collection of land revenue and higher rates were imposed on large size landholdings. In

1977 PPP federal government replaced land revenue tax by agriculture income tax which remained active for a very short time and after that agriculture income tax remained a debatable issue in revenue collection area of Pakistan. Agriculture income tax was suspended by Zia ul

Haq government and again imposed land revenue with new rates. After this various committees were formed by government to study and apply agriculture income tax and various policies formed but no major impact on tax evasion and income tax revenue was materialized. World

Bank (1999) further pointed out very interesting point in Federal Wealth Tax Act (1963), according to which agricultural land is part of wealth of a person but will only be included in wealth of a person who is paying income tax or wealth tax due to other source of income and in this way majority of rural landlords were exempted to pay wealth tax on their land, this situation remains active in law since 1994. In 1996 government introduced at provincial level

“Agricultural Income Tax Ordinance” but (World Bank, 1999) report observed that in reality whatever efforts put forward either at provincial or federal level taxes on agriculture sector is very low. Due to low and in some cases no tax on agriculture land gives opportunity to many people who have to avoid tax payment like in urban areas, many people avoid paying tax by

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declaring the income earned from agricultural activities and corrupt bureaucrats show their income earned by them through agriculture land acquired by them through illegal money.

World Bank (1999) further observed that Patwari in local setup play a very important role in land record and revenue record and collection system. Being a local official he collects information on the size of land holding. Due to landlords heavy influence and political pressure there is no doubt that patwari successfully manipulate these landholdings records in the favor of big landlords who do not have to pay any sort of tax to the government. Overall World Bank (1999) report showed very unsatisfactory performance in terms of agriculture tax system from land record system to tax collections and observed that no serious efforts from government side so far showed to improve the system. Reason is also given in report that due to political influence from landlord, it is difficult to take serious efforts to impose agriculture income tax.

3.8 Bonded Labor in Pakistan

Bonded labor is another prominent issue in Pakistani agricultural and brick-kilns region where landlords take labor work by force and either pay nothing or pay very minimal amount. These labors are either engaged at landlord agriculture land or for domestic purpose. Debt bondage is particularly very prominent in sharecroppers. Especially in lower Sind and Southern Punjab, situation is very alarming. Since no official data is available, so they rely on various proxies available to assess bonded labor status. As per their estimate based on Census of Agriculture of

1990, more than 720,000 bonded labors are working in Pakistan. Even landlords in Sind think that these bonded people are a compulsory part of their culture and society and they filed a complaint in the Sind High Court. Landlords consider themselves superior than those who are working as bonded labor in agricultural areas, at home or brick-kilns. Generally landlords do not

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agree that tenant-landlord relationship is covered by Bonded Labor Act, they assume, that this relationship is covered under Tenancy Act, hence labor is bonded to act according to the wishes of landlords when they are indebted. Ercelawn and Nauman (2001) explored the issue of bonded labor in Pakistan with the help of interviews with government and non-government organizations in Punjab and Sindh. Bonded Labor System (Abolition) Act passed by Pakistani Parliament in

1992 and Pakistan imposed complete restriction on all kind of forced labor. This restriction is only imposed in papers and government of Pakistan never showed its concern to identify the intensity and magnitude of bonded labor in Pakistan. Economic Survey of Pakistan does not show relevant information and Census of Agriculture has very little information on sharecropping settlements.

Ercelawn and Nauman (2001) interviewed with various officials who gave their view that government generally considers bonded labor issue as law and order problem rather than human rights issue. On the other hand it is also possible that government does not acknowledge it because some elites are also involved in this arrangement and have active participation in government formation. Even it is observed that Islamic leaders do not show their concern on bonded labor.

Ercelawn and Nauman (2001) shared data collected and reported by Human Rights Commission of Pakistan (HRCP). HRCP reported that they freed 1600 haris(farmers) from private jails in

1999 and around 700 laborers were released from brick-kilns. Ercelawn and Nauman (2001) observed that some Sindh districts are very popular in bonded labor issue like Sanghar,

Mirpurkhas and Umerkot. Ercelawn and Nauman (2001) observed that government only shows its concern to the number of bonded labor case reported in court or to local administration while

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the actual number is lot more than reported. Main areas of bonded labor where situation is quite alarming are Southern Punjab and lower Sindh. Especially where non-Muslims haris work or

Hindu migrated haris from Tharparkar. Ercelawn and Nauman (2001) reported that only in

Hyderabad division around 500,000 persons are in bonded sharecropper. On the other hand in

Southern Punjab like Multan and Bahawalpur division reported around 200,000 persons in bonded sharecropping. Bonded labor is also freely used in brick-kilns. HRCP reports showed that half of them are women and children. Ercelawn and Nauman (2001) interviewed with brick- kiln owners who confirmed that all workers took loan and unable to pay, so these labor work in brick-kiln to settle their loans. Bonded labor is suffering in Pakistan mainly due to poor response from government departments and cultural links among judiciary, local administrative officials and landlords. Because these bonded labor do not belong to upper class and have no cultural link with landlords and administrative people. Even in some areas of upper Sindh and Baluchistan, tribal traditions and tribal links also provide protection to landlords from excessive bondage of labor.

3.9 Patwari (Clerk) System in Pakistani Rural Areas

Patwari ( a clerk at tehsil or sub-division level) job is to maintain a record of land ownership, revenue etc. Raza, Almas, and Ahmed (2005); Kardar (2006) explored that patwari system was initially set up by British people to administer land and these patwaris were responsible to collect agricultural revenue. These patwaris were also responsible to maintain pedigree database, transfer of land or its relevant information as well as managing land records of their areas. This system is continued in Pakistan for the past two hundred years without any major modification.

Though this system is not fulfilling needs of present days but still is continued in all provinces

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of Pakistan. The main objective of this land management system was to manage land and revenue collection properly but due to manipulation by people engaged to manage this system, this system is losing its strength.

World Bank (1999) observed that patwaris are at very low scale as per government grade but very popular in rural setting due to their nature of work. Patwaris hold control on land management , and they have intimate knowledge and can easily temper records. This is the reason that patwari demands money and receives bribes to manipulate land record because he can do it very successfully . Abbasi ( 2008, July 9) observed that patwari is the most corrupt official in land management system. This word patwari in rural setting is so popular and corrupt that some politicians claim in their political campaign that they will eliminate this patwari culture. Even patwaris do not demand promotion for their work because of money they can generate from this low scale government post. Politicians, landlords have close links with patwari and keep him under their pressure because all land records are kept by patwari, so all manipulation in land record is only possible through a patwari. No doubt that record of land is maintained at three levels to avoid manipulation, like at patwar, tehsil and district level but somehow, whole record may be tempered or removed from its place intentionally.

Raza, Almas, and Ahmed (2005) observed that land record system in Pakistan is unsafe and poorly maintained. Maps are not followed properly, poor accuracy due to manual recording.

Generally use of approximation in measurement rather than modern computer mapping. Undue complexities and slow process due to manual management and widely distribution of data creates severe mismanagement in land record.

3.10 Landowner’s Power in Pakistani Elections

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Time World ( Feb. 13,2008) covered a story of Bhag Chand whose mobile and some money was taken away by robbers, he complained to police but they did not arrest the robbers due to lack of evidence. Bhag Chand went to Mumtaz Ali Bhutto, a local landlord and told him the whole story, who called the police to settle the issue. This is one very clear example of how rule of law and policing is weak and under the heavy influence of feudal landlords. The Guardian (15

February 2008) referred to Observer who reported about a village in Sind where population is only 3000 but local landlord has a very lavish life with high walled banglow, expensive cars and many more things, his opponent in politics also maintain a similar lifestyle. Chaudhry Pervez

Elahi PML-Q candidate from Punjab uses helicopter to campaign for elections in his constituency and in his village he promises to provide gas pipeline, one can imagine that his constituency does not have gas to consume on daily basis and he is travelling via helicopter, spending huge sum of money on his campaign. Bhutto family, who is controlling one of the major political parties in Pakistan owns thousands of acres of agricultural land, one can understand that why land reform is difficult to materialize. Similarly Bhutto’s cousin Mumtaz

Bhutto holds more than 15,000 acres of agricultural land and always keeps himself active in politics. PML-N has millions of assets in various industries in Pakistan and is one of the two major political parties in Pakistan.

Pakistan faced floods in 2010 when vast area of land was full of water, feudal elite saved themselves at the cost of peasant class. In Sindh Province and Southern Punjab landlord elites through their influence and power diverted flood water from their land to other areas where poor peasant class had agriculture land.

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Washington Post ( April 8,2003) by John Lancaster portrayed Ghulam Murtaza Jatoi who owns family land on both sides of Indus River. Jatoi initially received more than 120,000 acres of land from British rulers as provincial tribal rulers to collect taxes and enforce law. Later on, this holding reduced due to various land reform initiatives taken by different regimes but still owns more than 30,000 acres of land. He is 43 years old proud landlord, belongs to reputed feudal family of Sind and former provincial and national assembly legislature. Their family has strong political and social influence in their area. They settle social and criminal issues of their villagers who are working on their land from last two centuries as sharecroppers. Though Jatoi support his lifestyle and ways their people respect and take care of them but exploitation factor exists there. Landlords argue that they do a lot of things for their people like road building, education, clean water etc.

Washington Post( April 8,2003) reported another feudal family member Tashfin Baloch who studied in USA and worked for WHO, also lived in Australia, came back to Pakistan to support his family business argue that the lifestyle they follow as landlord is difficult to get at any other place of the world.

William Dalrymple (The Observer, Sunday 30 December 2007) argued that Benazir Bhutto (a prominent leader of PPP who was assassinated during election campaign) was also belonged to feudal family of Sindh. On the other hand she was also educated in Western world, so both features are reflected through her political style but somehow or the other she was typical

Pakistani political leader.

3.11 Effort of Elimination of Feudalism from Pakistan

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Pakistani politics was under full control of landlords till 1958 and whenever government changes, it is only a reshuffle of same family members and feudal lords ( Rashid,1978). During

Ayub rule bureaucracy and industrialist was on main front and landlords was on back

(Rashid,1978). In 1959 Jagirs were formally abolished and citizenship established but the relation between landlord elites and subordinate did not change. Similar characteristics of

Jagirdari period still exist in these areas.

Feudalism was seen in vast areas of Pakistan and generally considered a main obstacle in progress so Pakistan People’s Party in 1967 planned to eradicate feudalism from Pakistan. In

1970 it was PPP election manifesto that feudal estate should be removed and ceiling on agriculture land should be applied and then this land would be distributed to poor peasants on equitable basis. Herring (1980); Rashid (1978) argued that Bhutto took support of young radicals, landlords and petty bourgeoisie and formed government and in his period of autocratic rule, landlords were the main privileged group.

3.11.1 Land Reform in Pakistan

Beringer (1962) argued that the basic objective of land reform should be to break up of large landed estates to increase number of cultivators and through it, welfare and efficiency may also be achieved. Both Ayub Khan and Zulfiqar Ali Bhutto were on the same conclusion that ceiling was compulsory for the progress and improvement of the peasantry class as well as it would motivate landlords to intensify and modernize operations (Herring, 1980).

It is also observed that in an agrarian society, land means pervasive and extensive control of people. On the other hand other necessary employment opportunities like water, credit, machines

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for cultivation are also under the control of landlords, so elimination of feudalism means cultivation should have access to marketing services, working capital, machines etc. Another method that may be applied was an extremely low ceiling for example around 13 acres. In this way landlord would only control and exercise power on few peasant families (Herring, 1980).

Kristof (2009) suggested that a very strong and committed land reform is required in Pakistan to break feudal power. Associated Press of Pakistan (2013) observed that currently land reform is not priority agenda of any political party in Pakistan. Feudal landlords who have strong hold in assemblies would not allow passing any legislation which goes against their interest as well as against their relatives and associates. Zulfiqar Ali Bhutto land ceiling reform was an attack on feudalism but feudalism was a larger concept, it was a social system in these areas and difficult to delimited by only size of farm. Important feature of Bhutto’s reform seem to follow Lenin’s

Prussian model. The region, outside Sind and Punjab, the farm mechanization did not improve and remain without technological advancement (Herring,1980).

Land reform plan made by Bhutto to support his political campaign but he himself was feudal and the people in his surrounding was also belonged to landlord families (Gazdar, 2009;Hussain,

2008). The objective of reform was to restore dignity and self respect for peasant class and weaken the strength of feudal class. Bhutto did ceiling reform plan according to First five year plan and for the same reason to remove anti national parasitic feudalism from country. Massive estate of feudal would be breakup into smaller agriculture farm (Herring, 1980).

Faruqee and Carey (1996) observed that various unsuccessful land reform attempts created uncertainty in market and usually land was used by wealthy landlords to protect them from tax.

Tax exemption policy destroys the land market at all. Prices of land artificially increased and

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return from agricultural products decline as compared to land value. Small farmers did not have access to credit market so they were not financially strong enough to invest in land, machinery etc, so their holdings couldn’t grow, on the other hand influential large landlords had access to credit market who took advantage of this facility but this benefit did not pay return to small holders. Government various subsidies offered to agriculture sector also benefited to large farmers who artificially increased their profit without much effort. Subsidies, wealth tax exemption on machinery, tax exemption on agricultural land, access to water, credit market access helped these large landlords to use their influence and kept them engaged in rent seeking activities.

3.11.2 Failure of Land Reform Policy in Pakistan

Ayub Khan’s land commission set ceiling at 500-1000 acres which was a large area but defend it that it is necessary for better production and to provide various other incentives. Commission further argued that low land ceiling would discourage the modernizing agriculture (Herring,

1980). It was found by (Beringer, 1962) and (Gazdar, 2009) that number of landlords affected by this ceiling arrangement was very few, consequently small number of landless people became land owners. Gazdar (2009) observed similar view. Government taken over more than 2.5 million acres of land by keeping 500 acres ceiling limit and distributed this land to 180,000 families but this constitute only 5 percent of total cultivated area of Pakistan. 1959 land reform couldn’t develop progressive agriculturist and hence landlords remain at their same position

(Herring, 1980; Rashid,1978).

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Bhutto termed Ayub Khan’s 1959 reform a failure because its purpose was to make people fool because all facilities were given to landlord. Bhutto reduced the ceiling by about two third without any compensation to former owners. Bhutto couldn’t bring the ceiling of land around average 13 acres because of political composition (Herring, 1980). Zulfiqar Ali Bhutto was not satisfied with the outcome of 1972 land reforms, he again launched land reform campaign in

1977 but due to military coup couldn’t get success and later on as per Islamic law, land acquisition was objected in the Federal Shariat Court and upheld by the Supreme Court. After this ruling, land reform has no progress so far in Pakistan (Gazdar, 2009). The traditional tax on land revenue was uniform. Bhutto attacked on feudalism by exempting tax on all farmers who have holding less than 25 acres of irrigated land. Land revenue was to be replaced by a progressive income tax. Bhutto later claimed that agriculture income tax couldn’t apply by former regime because of strong feudal lobby (Herring, 1980).

Bhutto himself said (Herring, 1980).

“I can't nationalize the land. It's not possible. Tomorrow, if some-one wants to do it, let him try.

At the same time, I can't allow bigger estates to remain. I must cut them down so that production increases and the feudal power is eliminated. The world doesn't come to an end with one reform.

If that reform is proper and successful, on that you can build other reforms. But no one can sweep the boards clean in one go.” (Herring, 1980).

Objective of land ceiling was to control and dispersed concentration of land and hence control feudalism but in actual sense reform was a compromised because majority landlord hold more than 150 acres of land. Resistance came on land reform of 1972 from opposition political parties and also from various PPP political leaders. Land was concealed, records were altered, forgeries

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made. Many landlords did not declare their landholding, about 1200 owners had been caught for concealing land in Bhutto regime (Herring,1980).

Another problem faced by government in land reform is that the legislation allowed landlords to select the land to be retained, consequently landlord took advantage of this legal weakness and only wasteland was handed over to the government for distribution. Widespread fraud at local record level observed. Lack of proper rent control, poor monitoring system, corruption in

Revenue Department may also be blamed for lack of implementation of land reform (Herring,

1980).

PPP land reform plan was a political plan, though claimed by PPP that they eradicated feudalism from Pakistan through land reform policy. But landlord’s power didn’t allow political party to achieve their objective. On the other hand it is very clear from PPP party members in which large number of Khans and Sardars present and have larger interest and share in agriculture land and revenue (Herring, 1980). The 1972 reforms produced no better results than Ayub’s land reform of 1959. Rashid (1978) argued that rather than distribution of land through land reform, it helped to consolidate it under Bhutto regime and which developed conflicts between landlords and industrialists of urban areas. Rashid (1978) presented data (see Appendix B, Table B2)through which he made it clear that during Bhutto regime more resources were diverted towards landowning class.

When compared agricultural investment by government with industrial investment (see

Appendix B, Table B3) in non-public sector during same period, things are clear that industrial sector suffered a lot (Rashid,1978). Industrial investment declined rather than increase during same period.

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In 1977 land reform reduced ceiling to 100 acres of irrigated land and 200 acres unirrigated land.

It was a political game as it was passed from national assembly on the eve of dissolution of assemblies. Bhutto was unable to implement his second land reform (Herring, 1980). No doubt that Pakistan was in the hold of feudal landlords and these landlords for their benefits always inclined to changes. Before Pakistan’s creation they were operating their jagirs (tribal lands) and after independence they still followed the same tendency.

3.12 Bureaucracy and Governance

Mauro (1995) found evidence that investment and growth will be high if bureaucracy is more efficient and emphasized that efficiency of bureaucracy is as important as political stability. The bureaucratic efficiency and corruption are both associated with average per capita GDP growth for the period 1960 to 1985 covered by researcher. Mauro (1995) found a one standard deviation improvement in the bureaucratic efficiency index will increase investment rate by 4.75% of

GDP. Bureaucratic efficiency is also closely linked with private investment. Bureaucratic inefficiency could also lower the private marginal product of capital, thus lowering the investment rate.

Banerjee (1997) developed theoretical model to understand existence of corruption, red tape and lack of incentives and their association with bureaucracy after considering various assumptions. Banerjee (1997) showed by assuming that people have cash constraint as compared to good available, goods are also limited which are allocated by bureaucracy.

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Bureaucrats use prices and red tape to allocate resources. In the first case where government and bureaucrats both are welfare oriented, bureaucrats use price mechanism and provide goods to those who can pay and discount for those who cannot pay, these people probability to get good comes in last as government keeps some goods for them . Another case where government and bureaucrats are only interested to make money for themselves. In this case government gives free hand to bureaucrats to get maximum price for goods and then charge fee or price on bureaucrats who do not use red tape, only one price will be charged by bureaucrats from all people to give them equal chance. On the other hand a middle case also developed between above two extremes where conflict of objectives arises in the form that government wants to give good to only high type and bureaucrats make very small money in low type, in this case bureaucrats use same price and use red tape to discourage low type as long as bureaucrat can do it. Banerjee (1997) argued through his model that bureaucrats use red tape to charge high price for low type to make money.

It means a country where there is difference in what people can pay and what they are willing to pay will have more red tape. That is why red rape mostly found in the dealing of poor people.

Corruption is also on higher side where red tape is high. Banerjee (1997) further observed that lack of ability to pay in poor countries may be due to poor capital market and poor government performance. Of course there would be no red tape if people afford prices or government and bureaucrats share maximization of social welfare.

Evans and Rauch (1999), Husain and Kennedy (1999) argued that bureaucratic inefficiency impact on growth of economy. Husain and Kennedy (1999) observed that corrupt and inefficient bureaucrats always encourage lengthy and complex procedure to complete any task so that they can get opportunity to manipulate the whole procedure, for example procedure for opening a business in society. When entrepreneur faces problem in opening new business so clxix

naturally investment will reduce which has negative effect on growth. As Commander, Davoodi, and Lee (1997) argued that transactions costs rise due to bureaucratic inefficiency.

Evans and Rauch (1999) observed that public institutions play very significant role in the economic growth and transformation in any society. Evans and Rauch (1999) argued that growth depends on governance and examined the original Weber’s bureaucratic features and studied its effect on economic growth. Evans and Rauch (1999) collected data of 35 countries including semi-industrialized and poorer countries where industrial transformation is going on from all major regions of the developing world. Evans and Rauch (1999) found that

Weberianness Scale and total growth have strong and significant correlation. Evans and Rauch

(1999) took initial level of GDP per capita, investment and human capital as robust variables of growth and added Weberiannes Scale in basic equation, result improved as equation explained better growth. Evans and Rauch (1999) reached to this conclusion that state bureaucracy with proper recruitment and rewarding career are important for higher economic growth. Evans and

Rauch (1999) findings also support the causes of East Asian strong economic growth and low

African growth which are associated with bureaucracy competency.

Hyden and Court, (2002) argued that bureaucracy is significant part of overall governance mechanism in any regime which mainly cover policy implementation and organization. Policy development according to the need of society, implementation and delivery services are major functions. Bureaucracy has direct public contact and public get impression through their act how governmnet functions.

Institutions always matter for growth, prosperity and development of a country. It has become main concern of prominent agencies all over the world like World Bank, OECD, and UNDP etc.

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Institutions play vital role for social, economic and political development of country. Empirical literature document and confirm significant relationship between institutions and development

(La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1999). Every country has various institutions which are providing various forms of services to the society such as social, political and economic. Efficiency of these institutions whether in public sector or private sector, in formal form or informal form, developed by cultural norm or belief shape society behavior, promote equity and justice and reduce poverty.

North (1990) defined institutions in a very refined way that institutions set rules of the game in any society or these are limitations devised by human being to interact with each other. North

(1990) examined institutions in detail in his book. In the first section of the book, North (1990) explored the significance of institutions and its impact on economic performance, in second section explained theory of institutions and impact of behavioral change, in third section

North(1990) analyzed the distinctive achievement of different economies through time.

North(1990) gave importance to human behavior theory that shape and develop rule of game in the form of institutions. Players of the game analyze cost benefits of the choices available but this analysis depends on their subjective perceptions because they have imperfect information and consequently sometime they are unable to reach to optimal choice.

Shleifer and Vishny (1994) referred Atkinson and Stiglitz (1980) when discussing traditional view of public enterprises that it is generally viewed by economists that public enterprises are remedy of market failures. It is generally believed that government controlled enterprises will look after public interest in better way and provide social support where private enterprises are unable to do it. As per this view, public enterprises are more efficient and product prices reflect

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social cost consideration. Empirical evidence does not support it and various studies in socialist, market and mixed economy found that public enterprises are very inefficient because of political control and inappropriate political pressure.

Shleifer and Vishny (1994) studied public enterprises and private enterprises and linked it with politicians and their considerations. Shleifer and Vishny (1994) worked on relationship between politicians and enterprises managers as well as bribes and subsidies to each other. At initial stage their model consists of three players: politicians, treasury and manager. It is assumed that politicians will be in benefit by employing excess workers at higher wages and for this purpose they provide subsidies to firm so that manager hires extra employees. These employees’ wages reduce firm’s profit. Another way to get benefits from firm is to pay bribes to firm’s managers.

On the other hand when politicians have control of firms, mangers of firms provide various benefits to politicians through employment to their supporters, bribes so that politicians do not unnecessarily influence firms. Shleifer and Vishny (1994) further showed effects of subsidization and corruption on privatization and corporization of firms and reached to this conclusion that profitable firms are privatized by politicians and firms making loss continue to get subsidies from government.

Ayal and Karras (1996) empirically tested bureaucracy impact on investment and economic growth. Ayal and Karras (1996) selected twenty one OECD countries data from 1960 to 1990.

Bureaucracy inefficiency is measured with the help of government employment, government consumption and GDP. Ayal and Karras (1996) found negative relation between bureaucratic inefficiency and economic growth as well as investment. Ayal and Karras (1996) argued that reason behind this inefficiency is due to government licensing, quotas and transfer activities that

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actually divert the direction, skill and efforts of bureaucrats, hence impact on interest of entrepreneurs that reduces investment activities in any economy.

Commander, Davoodi, and Lee (1997) selected bureaucracy to evaluate quality of government because foreign investors face red tape in transactions and business engagement with other countries. Size of government was taken as government consumption relative to GDP and quality of bureaucracy shows positive and significant impact on growth. On the other hand government consumption and quality of bureaucracy shows positive coefficient. Commander et al. (1997) also found in African region and South Asia that government size has negative effect on performance of countries. Commander et al. (1997) pointed out that poor performance in African countries and in South Asia is also due to poor policy and low investment. Commander et al.

(1997) concluded that bad policies, poor bureaucracy and size of government hold down country growth. Ayal and Karras (1996) presented similar view by testing empirically. Ayal and

Karras (1996) reached to very interesting result that due to poor policies, low quality of bureaucracy, a government take 165 years to double its per capita GDP as compared to countries with low distortion and good quality of bureaucracy which takes only 23 years to double per capita GDP. Ayal and Karras (1996) found that if country size is high and bureaucracy shows low quality, this type of country take 239 years to double its per capita GDP compared to small size and good quality of bureaucracy which takes only 22 years. To explain and develop scenario

Ayal and Karras (1996) took USA and Brazil example and showed that USA took 31 years and

Brazil 57 years to double their per capita GDP.

Rauch and Evans (2000) worked on bureaucracy by taking 35 countries including Pakistan with this understanding that government performance no doubt impact on economic growth of any

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country but institutional characteristics are also important to understand similar area. Rauch and

Evans (2000) understand that bureaucratic characteristic play important role in this regard like red tape and corruption. Rauch and Evans (2000) based their finding on the view that for better and professional bureaucracy it is necessary that government follow meritocratic recruitment by competitive exams, refined procedure for appointment and removal rather than based on political appointments and influential transfers and postings.

Busch and Muthoo (2003) referred to Milgrom and Roberts (1992) who proposed four basic manners to explain institutional organization. As per Marx organization is class interest and power relationship, while Harvard Industrial Organization defines it as an attempt to negotiate prices. Williamson (2002) took organization as minimizing transactions costs and finally modern efficiency approach took organization as the conducive choice for those who can bargain effectively. Busch and Muthoo (2003) developed model based on idea presented by North

(1990) and various other researchers like Bardhan (1980); Acemoglu ( 2003); Tirole (1988) and

Milgrom and Roberts (1992) and reached to this conclusion that when there is a small inequality of bargaining powers between two players, it is helpful for efficient institutional change, but when inequality in terms of buying power is quite large enough then there are chances that inefficient organizations are presumably to continue.

Knack and Keefer (1995) explored in their paper that poor economic policy as well as low and inefficient investment in public sector generates low income for countries. On the other hand

Knack and Keefer (1995) concluded that protection of property rights by institutions is very crucial for investment as well as growth of economy. A more capable state can be a more effective state, World Development Report (WDR, 1997) argued that effectiveness and

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capability are two different thing and in case of Pakistan it is very clear, in last sixty five years, many economic indicators shows that Pakistan’s economy progressing better than other countries, growth rate and per capita income have more than twice, poverty is declining, state improving its industrial base. Pakistan has resources but there is lack of effectiveness, state is not using their capability to meet society’s demand.

WDR (1997) observed that judiciary is under political influence in many countries like Pakistan where interim appointments of judges weaken judiciary and judicial system. It is observed that in Pakistan education spending is not on equal basis as boys get more educational spending than girls, generally this ratio is on higher side in poor families who gives more prefer to boys than girls. WDR (1997) observed that Pakistan didn’t get success in direct tax reform. Government reduce tax rate with the objective to remove tax holidays but it was discouraged by powerful landlord elites of the society. Report observed that in many countries of the world political interference is major obstacle in effectiveness of state. WDR (1997) specifically discussed

Pakistan where state is under heavy influence of feudal lords and powerful business groups who took maximum monetary and non monetary advantage of their influence on government, for example no reform on agricultural tax system in last sixty five years. WDR (1997) further observed that in South Asia one of the issue faces by various countries is overregulation, this overregulation cause corruption and malpractices. Because of political pressure reform is difficult. In South Asia (WDR, 1997) showed that major problem is poor infrastructure, taxation system and corruption.

Generally it is believed that bureaucracy and politician use tax power to gain their benefits, they give incentives to those who are associated with them and impose higher tax to discourage other

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sectors, use tax department to threaten their enemies and opposition by using various means like unfair audit and compliance requirement. (WDR, 2002) gave a very understandable solution adopted by industrial and developing countries from Japan, Canada to Colombia and Mexico, these countries have given tax collection responsibility to revenue agencies with certain autonomy and keep it separate from other public sector bureaucracy. These agencies have their own budget to collect taxes which is compared with their actual collection and show their performance as well as autonomy from ministry gives strength to human capital to show their performance. However similar autonomy experience didn’t show any improvement in Mexico,

Bolivia, Venezuela and Peru

WDR (1997) observed that investment suffer when private sector feel that state is unable to enforce rule of game, investor react in different ways like they avoid investment in uncertain situation, to protect themselves and their property, hire private security agency that increases their cost of doing business, pay to various influential persons who gives them surety of protection, even in highly unreliable situation they try to shift their capital from this country and make investment elsewhere.

Human Development in South Asia (1999) argued that without strong institutions in any economy, political and econimic governance outcome will not be equitable. Human

Development in South Asia (1999) highlighted role of institutions for the development of competitive environment which is compulsory part of better production and for the growth of saving and investment in economy. To improve effficiency of the market, saving and growth of invesment requires adequate bankruptcy law, protection of wealth and property, application of rules and regulations in business environment, anti-corruption policies, sound judiciary system in

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economy. In the absence of strong institutions and rules and regulations, misgovernce increases in economy that gives strength to corruption (La Porta, Lopez-de-Silanes, Shleifer, & Vishny,

1999) , miscommittment, breach of contract, increases inequality, support accumulation of wealth, slows down grwoth and investment.

Human Development in South Asia (1999) observed that in South Asia, institutions progress is very uneven, it is general perceptions that even democracy didn’t bring significant improvement in institutional role in society and application of rules. Formal institutions are on decline, corruption, violence, street crimes, poor quality of bureaucracy are all indicators of poor performance of informal and formal institutions.

Berthelier, Desdoigts, and Ould Aoudia (2004) explored institutional mechanism and its impact on development. Berthelier et al.(2004) developed data base consist of fifty one countries including developed, in transition and developing countries with the help of questionnaire compiled in 2001 by the French Ministry of Economy. They found Pakistan, Nigeria, Thailand,

Cameroon and Indonesia in Southeast quadrant which is informal and where government is somehow inefficient and not present in economic activities, societies are generally traditional, rights of citizens are not secured.

Sapienza (2004) studied the impact of government owned bank’s lending behavior in Italy. In

Italy more than half of banks lending come from state owned banks. Sapienza (2004) result showed that those companies which can take loan from private banks also gets benefits from state owned banks and obtain loan at lower rate than private banks. Shleifer and Vishny (1994) presented similar view. Sapienza (2004) further found that large firms get loan at lower rate than smaller firms. Sapienza (2004) result showed that politically affiliated banks give loan to their

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affiliated party at lower rate. Sapienza (2004) supported the view of Shleifer and Vishny (1994) that public sector banks serve politicians. Sapienza (2004) concluded that public sector banks misallocate financial resources.

Human Development in South Asia (2012) argued that civil service develops a link between public and various department of government for services, allocation of resources and access to resources. In South Asia there is a wide gap between policies set by government to get various desired objectives and its implementations. Report also observed that civil service hiring, promotion, placement and transfer are not transparent in South Asian countries.

3.13 Bureaucracy in Pakistan

Many researchers and historians like (Human Development in South Asia, 1999) ; Khan (2002);

Tanwir and Fennell (2010) have identified British colonial system as origin of present bureaucratic structure in India as well as in Pakistan. Wendt and Barnett (1993); Tanwir and

Fennell (2010) observed that since economies and state did not have political legitimacy so bureaucratic structure was designed to uphold authority of state. The core objective of bureaucratic structure was to give security and support to foreign actors rather to support mass population.

It is observed that in British colonial system, policies were made by British masters and these were implemented by highly centralized bureaucratic structure (Wilder,2009). Tanwir and

Fennell (2010) also supported the view that some important features of public administration have been taken from Mughal administrative system

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In 1886 Imperial Civil Service later on called Indian Civil Service was established. Both British and Indian was eligible to apply for exam and were able to receive high salary (Khan, 2002).

Tanwir and Fennell (2010); Niaz (2006) argued that British administrative system was developed to suit the needs of a colonial power. Acemoglu, Johnson, and Robinson (2000) argued that colonization policies vary from one geographic location to other and observed that

European Powers established extractive states where they had no intention to settle so they did not develop comprehensive protection for private property and neither it monitored and controlled expropriation. The main objective of these extractive states was to transfer their resources for their own benefits. On the other hand where European planned to settled themselves, they established and replicate European institutions with great emphasis on protection of property rights, consequently successfully managed government and elites. It seems that bureaucratic structure they established in sub- continent was to get their own benefits.

British Empire was very confident that their civil servants are honest, trustworthy and do not misuse their power and not involved in any corrupt activities. As the newly independent state, the Pakistani government faced a different mandate that of promoting economic and social development and colonial administrative system was no longer adequate for this purpose.

Pakistan adopted the same system of administration as it was before independence and this system remain without any significant change till 1973 (Tanwir & Fennell 2010; Islam, 2004).

All Pakistan services comprised Civil Services of Pakistan, Police Service of Pakistan and

Central Superior Services. Pakistan administration services founded in 1948 and renamed in

1950 as Civil Service of Pakistan (Khan, 2002). Civil Services of Pakistan (CSP) was modeled on the basic concept of Indian Civil Serives and possessed a distinct elite status in society (Islam,

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Islam (2004) investigated that District Administration which is headed by DMG officer is third important administrative troika that runs the country. Maintaining law and order, collecting revenue, providing justice and coordination in various government departmental programs is possible through them. This is the key element of British colonial system inherited in Pakistan.

Nevertheless in Pakistan this bureaucratic system was not followed in true spirits and bureaucrats were engaged in both activities, they were making policies and also implementing it

(Human Development in South Asia, 1999; Tanwir and Fennell, 2010). Wilder (2009) argued that from 1947 to 1971, the bureaucracy played the dominant role in Pakistan’s policy setting and controlled the politician. As Khan (2002) discussed that normally secretery influenced policy making processes. Pakistani politicians have only advisory or rubber stamp function, they are unable to initiate legislation and mostly support the executive branch of government. Generally bureaucrats bypass parliament altogether through promulgating presidential ordinance in

Pakistan (Wilder, 2009). The reason behind this activity is due to inexperienced political leadership and constantly changing cabinets and minsters who din not stay in their job long enough to fully exercise their authority. Most of these politicians are belong to feudal class.

They are not properly educated, so this environment helped a lot to bureaucrats to stenghthen their position in political setup (Human Development in South Asia, 1999; Khan, 2002). On the other hand training of Civil Services Academy may be one of its reason that developed the impression of elite calss. Membership of Lahore Gymkhana would be given to new members of

Civil Services. To develop this elite class, new memebers were sent out of country for one year on degree training program. Since these members were trained with specific objectives so they are posted on higher administrative positon in federal and provincial level when they come back from training (Khan, 2002). clxxx

Human Development in South Asia (1999) identified that by 1996 ten prim ministers were dismissed by seven presidents, three of these presidents were genrals and four senior bureaucrats. This shows strength of bureaucracy which reached to top administrative position of the country. Bureaucracy is a major component of Pakistan democracy and has responsibility to act according to directives and policies provided them by ministries and they provide information and recommendation as they get from various sources and through their own working. Fragile democratic infrastructure in country gave way to feudal lords, civil and military bureaucracy and industrialist to strengthen them. The CSP’s immense influences in the ministries were reinforced by its control over district administration. They have vast influence in their district as commissioner and deputy commissioner.

The bureaucracy vital role as patron also attracted every family to have member employed in government services to solve problems faced by family and also support them to get other benefits (Wilder,2009). Bureaucrats had proper education and training which developed administrative skill in themselves. These people are very experienced and helped politicians when they need help and in this way bureaucrats made close relations with politicians and kept them under their influence.

Wilder (2009) observed that corruption, over-politicization and diminishing capacity of bureaucracy is undermining Pakistan’s social, political and economic development. Wilder

(2009) further argued that billions of aid received by Pakistan from various donor agencies but it is used by Pakistan in a very ineffective and inefficient way, Wilder (2009) suggested that by strengthening civil service through reform Pakistan can overcome this problem.

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Tanwir and Fennell (2010) examined the bureaucracy role in Pakistan and the perceptions of bureaucrats. Tanwir and Fennell (2010) observed that bureaucrats and political forces both contested in Pakistan for power and 1973 reform was against the power of bureaucrats. Tanwir and Fennell (2010) conducted interviews of bureaucrats who presented their views about politicians. One bureaucrat stated that ministers were not interested to make policies but rather keep themselves engaged in daily routine matters and threatened bureaucrats by making them officer on special duty (OSD) i.e. no work, no job and no perks. Bureaucrat during interview observed that bureaucracy should be impartial and neutral; it should not be aligned with any political party, but this situation did not happen in Pakistan. On the other hand bureaucracy should not have any political influence and independent to take decisions and his posting to any place should be on merit basis rather than on political connections. Major cause of decline of civil service system is involvement of politics in bureaucracy, lack of job security, dismissal on political ground, promotion on political influence and lack of career perspective etc.

All significant positions in various government departments like secretary of commerce, economic affairs, finance, and education are appointed based on political connection rather on merit. It is clear that when these appointments are based on political interest so these bureaucrats will not serve for the interest of people and a selected group gets its advantage. On the other hand personal benefit obtained by bureaucrats at the cost of national interest may suffer government objectives. Tanwir and Fennell (2010) further argued that bureaucrats’ priority to serve is not public interest but rather selected groups and their constituency. Tanwir and Fennell

(2010) reached to this conclusion after conducting many interviews of bureaucrats that due to mismanagement of bureaucracy and politicians, development programs become very inefficient which affected Pakistan economically and socially as well. clxxxii

Human Development in South Asia (2012) observed that despite reform, privatization of various units, government has reduced its participation in economic activities, civil bureaucracy has increased in number which is an economic burden on Pakistan government and one of the reasons of huge fiscal deficit. Most of the bureaucracy is hired on different quota and regional basis rather than on merit which is also adversely affecting efficiency of bureaucracy in

Pakistan. Ali (2011, May 23) discussed that in Pakistan civil servant and army bureaucrats consider themselves above law and assume that they are immune from any legal proceedings, in this situation governance of country face serious consequences.

3.13.1 Criticism on Bureaucracy in Pakistan

Tanwir and Fennell (2010) observed that for good governance political neutrality, accountability and transparency of bureaucracy is important. Researchers argue that Pakistani bureaucracy impeded the nation’s political development.

Bureaucracy was at its peak during Ayub Khan’s regime and they exploited the power given to them and in return they give its benefits to politicians and businessmen of the regime and supported landlords. Musarrat and Azhar (2012) argued that political control during Ayub

Khan’s regime was basically in the hands of bureaucracy. Bhutto planned reform program in

1973 which disturbed bureaucracy strength a lot but later they again receive advantage from nationalization plan of PPP. This nationalization plan gave new influence and power to bureaucrats as they were appointed in various nationalized units. In Zia period bureaucracy given much relaxation and they became partner of army to rule on Pakistan (Khan, 2002). Islam (2004) observed that CSP was not revived but the DMG (District Management Group) obtained their

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strength and elite character. Despite the creation of the Secretariat Group, DMG members have dominant position at senior level.

Corruption is an acute and pervasive problem in Pakistan’s higher bureaucracy since independence. Corruption when Hindus and Sikhs evacuees were distributed among Muslim refugees. In Ayub Khan regime when license, quota, regulations were in the hand of bureaucracy. Bhutto period during nationalization when heavy industries management has been handed over to top bureaucracy and during 1990 when economic liberlisation plan impelmented through disinvestment and privatisation and again bureaucrats involved in this process(Khan,

2002). Shafqat (1999) argueed that reform and removal by various governmnet perturb the confidence of the bureaucrts which increased corruption and exploitation of authority.

Bureaucrats came under criticism and considered as a conservative group at the helm of a corrupt malfeasant, lazy, mediocre and aloof bureaucracy (Khan, 2002). Since 1988, both PPP and

PML-N used bureaucracy to achieve their objectives and civil services have become politicised and transfer and postings were not as per merit but to gain political benefits (Wilder, 2009;

Human Development in South Asia, 2012). Whenever government shift in Pakistan whether democratic or army take over, they all make arrangements at top level and shift existing bureaucracy, so bureaucrats were compelled to seek political patronage in order to attain promitions and transfers to their desired postings, and the concept of neutral, exemplry bureaucrat has been compromised (Shafqat, 1999). This may be one of the reason of lack of professioalism and inefficiency in bureaucracy (Khan, 2002).

The civil service quoata system created more efficiency problem. In quota system candidate will be selected on provincial quota basis and care has been taken that disadvantaged and remote

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areas must have representation, in this way some candidates will be selected who otherwise are not eligible, consequently efficiency will be suffered. This plan was made during Zulfiqar Ali

Bhutto regime in 1970s to give opportunity to the people living in remote and rural areas.

Bureaucracy served the interest of feudal elite by interfering in political process and obstructed the political development in Paksitan, collaborated with military and business families and caused the concentration of economic control in a few hands (Khan, 2002).

3.13.2 Administrative Reform of Bureaucracy in Pakistan

Various measures have been taken by government for reform of bureaucracy by appointing number of commission for reform purpose but couldn’t succeed (Khan, 2002). Islam (2004) observed that from 1948 to 1973 five major reform commission formed and made various recommendations but except one, no report ever made public and system remained same for 25 years. Government at various times in the past pursued reform with the objective to clean and purify bureaucracy but their intention was to get political control on bureaucrats. President Ayub did this reform plan with Cornellius Pay Services and Reform Commission of 1962. General

Yahya removed 303 bureaucrats on the basis of Cornellius Report. Zulfikar Ali Bhutto’s compulsory retiring of 1300 bureaucrats is all part of this reform (Shafqat, 1999; Wilder, 2009).

Wilder (2009) explored that progress on civil service reform in Pakistan is very limited and in past sixty years only more than twenty studies conducted on civil service reform and concluded that ineffective political strategies are main cause of it.

3.14 Role of Army in Pakistan’s Economic and Political Governance

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Siddiqa (2007) observed that military is key player in policy making all over the world. Due to nature of their work in society, army has given special status from policy makers, but if they will remain unchecked then it is possible that army can overshadow all other stakeholders by their nature of work and power. Indonesia, Turkey and Pakistan has parent guardian military type where army after takeover take constitutional support for their regime which is off course not possible without the support of civilian partners and in this way both work together for mutual benefits. National Security Council (NSC) is a great idea behind the concept of parent guardian relationship in which army make sure their presence in overall governance of country, this idea in Pakistan was initially planned by General Muhammad Zia ul Haq during 70’s and finally established by General Pervez Musharraf in April 2004.

Haqqani (2006); Wilder (2009) argued that weak political leadership and democratic institutions which is evident in Pakistan from its independence gives opportunity to army to intervene in the matters of political governance of country. Croissant (2004) observed that political power of military in Asian countries decline except Pakistan. According to Cohen (2011) one of the most devastating developments in Pakistan over the years has been systematic destruction of the state qua state. Politicians during military rule established their alliance with army and instead of working for restoration of democracy, they get favor from army and in return support them in the management of country’s economic and political affairs. There are many leaders in Pakistan who are by product of army rule in which Zulfiqar Ali Bhutto and Nawaz Sharif are most prominent.

Wilder (2009) observed that since independence Pakistan democratic institutions remained weak than bureaucratic institutions and power remained in the hands of military and civil bureaucracy.

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Siddiqa (2007) argued that weak political system help army to intervene at all levels of political and economic system of Pakistan. In Pakistan, Turkey, Indonesia, Myanmar and Thailand, military has total control on politics and they are main players who make profit by manipulating policies in their favor as well as keep control of policy making institutions. Military in Pakistan has huge investment in business sector and the most prominent groups are Fauji Foundation and

Army Welfare Trust. They keep good relations with other elites of the society to seek benefits.

Other groups also need army support to get opportunities and they accommodate them, in this way create a patron client relationship. These elites and political forces view military as a means to extract benefits. In Pakistan when army officers retired from services, most of them join other public sector organizations at senior levels, become politicians, make their own political parties, start their own business like security agency, property consultant and provide patronage to various political parties or groups and keep strong relations with army as well.

Ali and Malik (2009) argued that in British colonial period canal irrigated system was created in

Punjab which started land buy and sale activities in which rich landlord participated and government also given land to military and civil bureaucracy. Bureaucracy had control on land management, canal water, land grant, transfer and distribution which helped them to strengthen their position after 1947 independence. Military was the major beneficiary of land grants, on the other hand land was set aside for retired military officers to give them at the time of retirement and huge land was also allocated for their routine activities. This practice was contine in Punjab after independence which helped army to strengthen their econmic position and military elites enjoyed landlord status too in various areas of Punjab.

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Siddiqa (2007) argued that Pakistan has 93 million acres of state land and more than 20 million landless peasants but rather than distributing land to them it is given to military personnel who already hold 12% land of the state. Army retired personnel not only holds land but they also receive subsidies in various form from government. Military also receive land in urban areas of cities like Karachi, Lahore, Islamabad, and Multan at subsidized rates, develop these lands with army resources and earn high profit on it. Earlier army housing scheme gives land to retire army officers who later sell it in market at high profit. Whole management of this land distribution is kept in the hands of army personnel.

The army is very powerful and strong group and institution in Pakistan. The basic objective of this institution is to protect national security, property rights and internal law and order whenever required but in real sense army is engaged in all political and economic affairs of the country.

Authoritarian regimes are mostly governed by a support of military and elites of society (Bhave

& Kingston, 2010). In Pakistani politics military role is very obvious because from independence in 1947 to 2013, three times covering seven to ten years each time, military has overthrown democratic governments, took control of country and as a result civil society and political institutions remain weak (Siddiqa, 2007).

Bhave and Kingston (2010); Khan (2012) argued that each coup was motivated by an infringement of the institutional interests of military and supported by elites whose interests had also been compromised. This cooperation of elites has been detrimental to democracy in the long run because they have conceded more and more power to the army. Military dictatorship always set policies in Pakistan that support bureaucracy, landlords and Islamic clerics and reason is very clear that when army need support from these groups, they always welcome. Bhave and

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Kingston (2010); Khan (2012) further observed that military would never chose to rule without support of other groups because army can overthrow a government, they are expert to deal in organized violence but they do not have sufficient understanding of production, so they need support of groups who help them in the management of social and economic institution. The elites have access to resources as well as wealth so they come forward and support army to takeover. Bhave and Kingston (2010); Khan (2012) observed that democratic elections threatened the benefits army and elites receiving during their authoritarian rule.

Anwar, Rafique, and Joiya (2012) observed that Pakistan is a developing country and ranked

156th in purchasing power parity (PPP), HDI ranking is also not good and ranked at 125th, in peace keeping ranking received by Pakistan is 145th while in defense spending Pakistan ranked at 35th. Pakistan spent on military around 4.5 percent of GDP from 1995 to 2009 which reflects huge burden on Pakistan economy. On the other hand it is argued by Pakistani decision makers that the reason of high defense spending is due to potential threats from inside and outside of country. Nobody can refuse that these threats do not exist. Pakistan faced four armed conflicts with India from 1947-48 Northern Kashmir issue to Kargil conflict in 1999. On the other hand

Afghan border and Tehrik-e-Taliban Pakistan (TTP) have also engaged army in Northern areas of Pakistan.

Jalal (1995) observed in her book that in 1958 army and civil bureaucracy were in doubt that how they will maintain their dominance on power in case of general election so both decided to take direct control over the state. Zia during his regime recognized and took support from another elite group available in Pakistani society so called ulema (the Muslim clergy) that

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played vital role during Zia’s regime. Leon (2009) examined the economic causes of coups and concentrated on income and army spending and found negative relation between army spending and coups. Khan (2012) observed that military becomes more powerful and independent from civil government as their economic autonomy increases. Here brief outline is given which reflect the fact that army has almost continuous presence in political setup.

1947 Formation of Pakistan

1958 Coup: Ayub Khan

1969 General Yahya Khan took charge from Ayub Khan

1971 Democratic transition: Zulfiqar Ali Bhutto

1977 Coup: General Zia ul Haq

1988 Democratic transition: Benazir Bhutto

1999 Coup: General Musharaf

2008 Democratic transition

Senior army officers have very privileged position in our society and have very high standard of living (Haq, 1999; Khan, 2012). General Musharraf regime removed army pensions from army budget in 2001, on the other hand in 2001 this pension amount was 26 million which reached to

Rs.76 billion in 2010 for three million retirees. Earlier per retiree pension was Rs. 3600 which shifted to Rs.24000 on average (Khan, 2012). It is clear from above discussion that inexperienced, segmented leadership (mostly landlords) not only encouraged bureaucrats but also supported army to takeover government. cxc

Shah (2002) observed that the basic structural fault in governance stems from the military’s consistent refusal to accept subordination to civilian authority. There is strong realization among political leaders that mistakes committed by politicians in power have contributed to this mess by encouraging the army to use undemocratic means and methods to divide the political opposition and rule with impunity. The effective civilian control on army does not exist in Pakistan

(Shah,2002). Politicians are under influence of army officers and when they face any internal conflicts they take support form army to resolve the issue, on the other hand to remove opponents from government they always welcome army to intervene.

Shah (2002) observed that in Pakistan each military intervention has created its own set of political distortions and referred to Leo Rose and D. Hugh Evans that army’s wide political influence distorts the democratic process and Musharraf’s dictatorship is no different when he constituted the National Security Council (NSC) in July 2001. Musharraf coup of October 1999 and eleven years of what most liberal intellectuals saw as democratic misrule had worsened corruption in government, undermined key state institutions, failed to ensure the rule of law, politicized he civil service, and had left the economy in shambles. Wilder (2009) explored that with the passage of time military bureaucracy through its power and influence has replaced the power and influence of civilian bureaucracy.

Marco (2009) observed ssubstantive power in Pakistan tends to lie with small elite and its military allies. These elites have used its control over social and economic resources to maintain and enhance its position of authority. Then they got power, elected and army officers have been able to use their formal positions of authority to gain their personal fortunes and those of their clients and patrons.

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Cohen (2011) argued that army in Pakistan is doing the work which should be done by civilians which is effecting on state capacity to tax, education, law and order, economic policies etc.

Cohen (2011) further argued that it is clear from low ranking of Pakistan on every international governance indicators and as well as its high ranking in Failed State Index where it slipped from

12th place in 2007 to the current Top 10.

Marco (2009) observed that military has directly or through military-dominated civilian governments, ruled Pakistan for over half of its history. To a great extent, the army comprises a

“state within a state” with increasing economic power. Even in civilian regimes, when it is generally believed that political parties are ruling Pakistan, in real sense, the military has heavily influence on foreign policy and the domestic allocation of resources. The most important power holder has undoubtedly been the security apparatus. The armed forces have historically been dominated by Punjabis, and have represented landed and industrial interests (Marco, 2009).

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Chapter 4: Deriving The Corollary

4.1 Family Business Houses and Pakistan’s Economic Environment

One of the major groups which have concentrated wealth in Pakistan is family business groups.

Families are define here as feudal families and business families. These groups are engaged in various business activities and have close ties with various political parties which help them to adjust government economic policies in their favor. Here we give some historical background of

Pakistani business families which established themselves in 60s and later on.

Family ownership can be defined as where a family or a group of family can control shares in a target company either by owing shares directly or indirectly through associated company.

Business families accumulated wealth after the Korean war boom in 1950s and later on with the help of various government policies in 1960s strengthened themselves and became key players in

Pakistan’s economy. This issue was highlighted by Dr. Mahbub ul Haq in 60s as concentration of wealth in 22 selected families.

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The major business houses in 70’s, families and their origin are given here in Table 4.1. Table

4.1 shows that three families are from Memon community, four of them are from Punjabi Shaikh and rest from various other groups. Most of the groups were either settled in Karachi or Lahore.

Table No.4.1 Family Business Houses in 1970

Industrial Houses Community Family Origin Settled Location

Adamjee Memon Kathiawar Karachi Calcutta

Dawood Memon Kathiawar Karachi Bombay

Saigol Punjabi Shaikh Chakwal Lahore Calcutta

Valika Dawood/Bohras Bombay Karachi Bombay

Colony Punjabi Shaikh Chiniot Lahore Lahore

Fancy Khoja Ismaili Kathiawar Karachi East Africa

Bawany Memon Kathiawar Karachi Rangoon

Crescent Punjabi Shaikh Chiniot Layallpur Delhi

Beco Punjabi E. Punjab Lahore Batala

Wazir Ali Syeds Lahore Lahore Lahore

Amins Punjabi Shaikh Punjab Karachi Calcutta

Nishat Chinioti Chiniot Lyallpur

Hoti Pathan Landlord Charsaddah Charsaddah Charsaddah

Fateh Marwari Gujrat Karachi

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Isphani Iranian Karachi Calcutta

Karim Bohras Bombay Karachi

Source: Papanek (1972) and Rashid (1974)

To compare concentration between 1960 and 1970 Amjad (1976) presented following information. It is evident from information below in Table 4.2 that there is no major shift in concentration of business houses during1959 to 1970.

Table No.4.2 Concentration of Family Business Houses in 1959-1970

% of Private assets % of Private Sales

1959 1970 1959 1970

Top Seven Houses 24.4 22.2 15.6 14.6

Top Sixteen Houses 38.2 33.6 25.3 22.1

Top Twenty four Houses 45.9 39.5 31.9 26.3

Top Thirty seven Houses 51.9 45.3 35.9 30.9

Source: Rashid (1974)

Similar concentration is found in banking and insurance sector. In 1970 out of 9 banks (which control almost 90 percent of total assets of all private commercial banks) 8 were under the control of big industrial houses. In insurance sector 80 percent of private domestic insurance companies were in the control of various big houses. These houses control not only on manufacturing sector but they also had very good control on financial sector which help them to

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create overall monopoly and support them when they need investment for industrial development.

Here we also present data of companies analyzed by Investment Corporation of Pakistan. In this analysis 100 companies were taken from which 9 belonging to East Pakistan(now Bangladesh), 9 companies belonging to financial sector and rest of the companies analysis presented as follows:

Table No. 4.3 Concentration of Assets in Pakistani Companies-1970

Firms No. of Companies Total Assets( in % millions)

Foreign 10 Rs.1023 15%

Public 3 1236 19%

Private 71 4330 66%

Souorce: Khandker (1973)

A list of wealthy families had been developed by Lawrence White in 70s ( see Appendix A,

Table No.1). These families are also part of famous business houses as shown in Table 4.1 above like Dawood, Saigol, Adamjee, Fancy, Colony, Bawany, Crescent, Wazir Ali, Isphani,

Nishat and Beco. Big business houses had substantial assets in listed capital market which is of

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course not showing their total wealth position because many businesses are in private sector as well as in foreign countries which couldn’t cover by this list.

Another list of wealthy families prepared by Monthly Herald in 1990s (see Appendix A, Table

No. 2 and 3) wherein some families who were doing good business in 70s were not present and some new ones were added. The basic reason of this shift is due to nationalization process of

PPP regime in early 70s when Zulfiqar Ali Bhutto nationalized major industries and therefore various business houses lost many assets, consequently lost their interest in development of business in Pakistan. Some of them even left Pakistan to establish their business out of country.

There are many families who maintained their position in top wealthy families and business houses (see Appendix A, Table No.4) in Pakistan from 70s to 90s.

Some families have strong position in various businesses and showed continue dominating business activities in Pakistan. Some families which were not in 70s list of wealthy families but late in 90s they made their position and established themselves (Rehman,2006)

The list ( see Appendix A Table No.5) has many features which need to be discussed to understand the causes of poor governance in terms of politics as well as business in Pakistan.

Most of the business tycoons have strong relations with political parties in Pakistan. They always influence on monetary and fiscal policies to bring it in their favor. The list covers their estimated wealth and business type in which they are engage, few old names are still there.

Overall Pakistan’s physical and financial resources are in the hands of few elites who one way or the other have to keep control on Pakistan’s economic resources (Marco, 2009; Hussain, 1999;

Rehman,2006). Therefore they are also involved in political governance of Pakistan either

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directly or indirectly to influence on all monetary and fiscal policies of the government. The above data helped us to understand that though Pakistan is a developing country and has very poor performance in various economic and social sectors but has very healthy list of rich landlords, business families, politicians, army and business elites.

4.2 Feudal concentration of wealth in Pakistan

Concentration of wealth is an old issue for Pakistan as highlighted by (Papanek,1967; Haq,1973;

Rashid, 1974, Human Development in South Asia,1999; Hussain, 1999). We have discussed it in detail in literature review. Wealth is mainly concentrated in Pakistan in the hands of feudal lords and business families, hence creating wealth inequality. To strengthen themselves, these feudal families entered in Pakistani politics and in this way able to influence on all economic policies of

Pakistan. Wealth inequality affects investment in and growth of a country. Feudal lords have possession of land, real estate and other natural resources in vast area of Pakistan. These feudal have also invested in industries and now have substantial share in the industrial assets of

Pakistan. In Mughal Empire and later in British colonial rule supporters and loyalist of state were awarded these jagirs so that they work as agent of the state and collect revenue. They also provide various other services for state and with the passage of time these landlords become very powerful and owner of these jagirs. There is no government record where these landlords property ownership land and other natural resources are recorded.

These landlords have strong presence in the politics of Pakistan since independence. They are the people who make policies and they are also beneficiaries. In this way, they are using all means to accumulate wealth. The best example in this regard is tax on agricultural revenue which no

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government so far in Pakistan could implement, while it is fact that Pakistan has very low tax to

GDP ratio as compared to other countries.

4.3 Income inequality in Pakistan When society has more wealth concentrated in few hands, income inequality will also be on higher side. These wealthy people are active in politics. They possess natural resources of the country and also engage in agricultural activities and have huge investment in industrial and financial sector. It is understandable that when these people have more wealth, they will have more income as well. Take for example a salaried person, as his salary increases, he pays more taxes to government, hence his income will not increase as compared to a landlord who pays no tax on his incremental income because his income is exempted from tax. In this way he will be able to accumulate more wealth with the passage of time. This accumulated wealth will further help this person to get more income, consequently resulting in more income inequality.

When government prepares economic policies, main objective should be to promote growth and prosperity in a country which in turn benefit all citizens of the country. But if inequality is increasing within the rich and poor class of society, it means economic growth’s benefits were not distributed equitably in a society. Pakistan facing both dilemmas, on the one hand Pakistan does not have sustainable economic growth on the other hand inequality within the poor and rich class is also on increasing side.

We understand that political instability, poor economic policies, corruption, rent seeking behavior of politicians at all levels are the main reasons of this inequality in society. Politicians for their own interest and profit make policies which benefit them. These people borrow loans from financial institutions and then with their influence, they successfully get these loans written

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off. They give contract of various rural and urban areas development work to those who provide them commission or share in profit, in this way they themselves or their rich friends and relatives accumulate profit, so naturally inequality gap will increase. Economic policies like yellow cab scheme, utility store concession and Benazir Income Support Program, all show that government through various schemes provide support to poor people but plenty of corruption cases are reported in newspaper and in courts against those influential people who are actually behind these schemes and benefitted from these schemes, nonetheless not a single influential person go behind the bars so far. Low agricultural output, poor infrastructure, corruption, slowdown in industrial growth, law and order situation, energy crisis are other reasons that are also increasing inequality due to negative impact on economy of Pakistan.

We take Gini coefficient of income inequality as calculated by Anwar (2009) based on consumption expenditure with the support of Pakistan Integrated Household Survey (PIHS) and

Pakistan Social and Living Standard Measurement Survey (PSLSM) during the period of 2001 and 2005. Overall income inequality is 27.52 in 2001-02 which increases to 29.76. In 2001 ratio of highest to lowest was 5.5 which increases in 2004-05 to 6.24. Rural area Gini coefficient is

23.67 in 2001-02 which increases to 25.19 in 2004-05 and urban areas Gini coefficient shifted from 32.27 to 33.88. Income inequality of Pakistan rises which supports our view and previous literature (Gradstein, 2007) that in those countries where governance is poor, income inequality is an issue.

Table No. 4.4 Pakistan Income Inequality based on Consumption Expenditure

2001-02 2004-05 Rural Urban Overall Rural Urban Overall

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Gini 23.67 32.27 27.52 25.19 33.88 29.76

5.6 2.3 4.4 5.5 2 4.1 7.2 3 5.7 7.2 2.8 5.4 8.1 3.7 6.5 8.2 3.3 6.2 8.8 4.4 7.2 8.8 4.3 7 9.3 4.6 8 9.3 5.4 7.8 10.1 6.5 8.8 10.3 6.2 8.6 10.5 8.9 9.9 11.3 7.6 9.8 11.9 10.5 11.4 11.8 10.8 11.4 13.3 4.6 13.8 13.4 15.3 14.2 15.1 40.4 24.2 14.2 42.4 25.6 Ratio of highest to lowest 2.7 17.57 5.5 2.58 21.2 6.24

Source: Anwar (2009) Another work on consumption inequality covered by Asad and Ahmad (2011) shows that there is overall rising trend in consumption inequality as given in Table 4.5 below. Urban area consumption inequality rises from 0.302 to 0.320, nonetheless rural areas does not show any major change and remain at 0.252 levels in 2004-05 as compared to 0.254 in 1990-91. Asad and

Ahmad (2011) argued that income inequality in rural areas not shifted due to foreign remittances from labor class.

Table No. 4.5 Consumption Inequality Gini Coefficient in Pakistan

Year Overall Urban Areas Rural Areas

1990-91 0.282 0.302 0.254

1992-93 0.266 0.304 0.225

1993-94 0.265 0.272 0.232

1996-97 0.259 0.264 0.233

1998-99 0.27 0.260 0.227

2001-02 0.278 0.308 0.238

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2004-05 0.299 0.320 0.252

Source: Asad and Ahmad (2011) Cheema and Sial (2010) computed Gini coefficient of income inequality in Pakistan from 1992-

93 to 2005-06 which shows that overall income inequality rises in Pakistan. In 1992-93 inequality is 0.2685 which rises to 0.30 in 2005-06. Rural inequality is 0.2388 in 1992-93 which shifted to 0.2438 in 2005-06 and in urban areas increases from 0.3170 to 0.3473.

Table No. 4.6 Gini Coefficient of Income Inequality in Pakistan 1992-2006

Year Rural Urban Pakistan

1992-93 0.2388 0.3170 0.2685

1993-94 0.2344 0.3071 0.2709

1996-97 0.2265 0.2877 0.2585

1998-99 0.2521 0.3583 0.3012

2001-02 0.2366 0.3217 0.2749

2004-05 0.2518 0.3381 0.2969

2005-06 0.2438 0.3473 0.30

Source: Cheema and Sial (2010) When we look at the gini coefficient of income inequality of Pakistan collected from World

Bank, it shows that inequality declines in 2008 compared to 1987, but there is no significant change in income inequality in Pakistan.

Table No. 4.7 Income Inequality of Pakistan by World Bank

1987 33.35

1991 33.23

1997 28.65

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1999 33.02

2002 30.39

2005 31.18

2006 32.74

2008 30.02

Source: World Bank Reports Figure No. 4.1 Gini Index of Income Inequality of Pakistan

Source: Prepared by author Ortiz and Cummins (2011) worked with the help of WDI (2011), quintile information extracted from UNU-WIDER(2008) and European Commission (2011) and Gini Index used prepared by

Solt(2009) and observed that in Pakistan overall average income inequality decreases from 32.6 to 30.8 during the period of 1990 to 2005. On the other hand, it showed that poorest 20 percent(Q1) of population’s inequality rose from 8.1 to 9.1 while richest 20 percent (Q5) decreases from 41.7 to 40.5.

The reader should keep in mind the problem faced by researcher in Pakistan where availability of data is a major issue. Most of the information in terms of data is not available at ground level, not even in government and ministry record. On the other hand, data which is available does not

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reflect true picture of the situation. Data is manipulated by various vested groups for their own benefits, reasons may be to hide information from tax authorities, part of shadow economy which they do not want to bring in main stream etc. So in case of Pakistan it is possible that income inequality does not show true picture as income is hidden by higher income groups to avoid various taxes and lower income group does not understand its significance and could not reveal true income due to lack of education.

Proposition

As it has been discussed in the literature that holding of land and mineral resources by some groups of individuals, who hold it by use of power and without paying the fair cost of these assets will be considered as ‘Feudalism’.

The control of these assets is originated in the name of regime change, during the transformation of a society i.e. capitalism to communism or communism to capitalism or democracy to military government or one kingdom to another kingdom or democracy to kingdom etc. During this transformation the groups of individuals control and hold land and mineral resources and then these controls are shifted from generation to generation. There is no economic or financial transaction occurring for the change of ownership of such assets. Such groups of individuals are formed sometimes in the name of economic justice or ethnicism or sectarianism. Political and religious thoughts may lead to formation of such groups of individuals.

Many examples are available in economic and political history of the world. Feudalism in

Europe in 16th and 17th century, India (including the area in Pakistan) in 17th, 18th and 19th century or the oil producing Arab countries in 19th century are the examples of the formation of

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feudal states. This practice can be observed in post-Soviet regime in Russia and Central Asian

Republics.

The holding of large agricultural assets and land resources provides the source of social and political powers to the feudal lords to hold political power in their region. Local feudal lords join the club of feudal lords in the national politics and the political institutions protect the feudal interests. In protecting the feudal interest they may sacrifice the national economic interest and the burden of economic policies is shifted towards the urban middle classes and business community. This phenomena is too common all over the world and there is no exception from this mechanism in Pakistan, where feudal dominated parliaments protects the interests of feudal lords by exempting tax on agricultural sources, the share of the parliament member in the development budget, initiate new development projects in their area etc. The influence of feudal lords in the appointment and selection of civil servants, public owned business enterprises and employment in local administration and civic services are too common. All these steps change the pattern of political governance.

On the bases of above discussion about Pakistan governance issues and concentration of wealth we have established the following proposition:

Proposition 1

“Feudalism leads to the wealth accumulation higher than the fair change in wealth”.

The more stock of wealth in the previous periods leads to more addition in wealth, while “i ” is the price of wealth and Δ wealth is the value of wealth earned during the year.

W = Wt-1 + ΔW ccv

ΔW = i1Wt-1------if Wt-1<ѿ------(4.1)

ΔW = i2 Wt-1 ------if Wt-1>ѿ------(4.2)

therefore i1

It is obvious that more stock of wealth will help the wealth accumulator to enhance its wealth by increasing return to scale because banking and financial system allow higher average return on higher wealth. So addition in wealth of the richest will be as follows.

ΔW1 = (i2-i1) Wt-1------(4.3)

ΔW1 is the further return to the wealth accumulator. Furthermore, if feudal lords get benefits through its political control and power. The additional benefits may be in the form of tax exemptions on agricultural activities, advantages of political influence being a member of parliament, borrowings from banks at subsidized rates, writes off loans through political pressure, obtain favorable license/permits to run business, government contracts for himself and for his family and associates, transfer and postings of his close associates in various government institutions, funds for developing projects, unpaid services from public sector organizations, value of bribery and nepotism etc. appeared to increase his personal wealth.

Let these benefits to the sum = B i

In this case the addition in wealth will be

B i + ΔW1 = Q ------(4.4)

Hence

Corollary 1

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“ Wealth concentration leads to more income inequality in society”

As we discussed in Proposition one that feudal lords are able to accumulate more wealth than other people in society and economic system further support them to accumulate more because they are able to take more return on their wealth together with other benefits that they obtained through rent seeking activities. Since similar people also governed Pakistan through their influence, they participate in all policies developed by government. Hence these people are also responsible for poor governance in country.

On the basis of above argument, we developed equation (4.5) below that feudalism leads to wealth concentration and equation (4.6) that feudalism affects negatively on governance of the country.

WCNC   1Feud ------(4.5)

WCNC  Feud  1

Where

WCNC = wealth concentration

Feud = Feudalism

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Gov    1Feud ------(4.6)

We put equation (4.5) in equation (4.6)

 (WCNC) Gov    1 1

    WCNC  1 1 1 1      1 1  1 WCNC 1 1

Gov  K0  K1WCNC ------(4.7)

Where Gov = Governance

1 1 1 Ko  and K1  1 1

Equation (4.7) supports our earlier understanding that wealth concentration by feudal lords leads to poor governance in country.

Chapter 5 Political Governance in Pakistan

Political governance is poor in Pakistan is demonstrated through Kaufmann, Kraay and

Mastruzzi (2010) governance indicators where Pakistan’s six governance indicators are all in negative and specifically political stability magnitude is higher than other governance indicators.

When we look at the Pakistan’s political governance, we observe that Pakistan is not a stable country in terms of politics. We define political stability when country successfully transfers power from one regime to another regime democratically and after completion of its tenure in office. A brief political history from independence is presented here:

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Here first we present time line of Pakistan political history in Table 5.1 and then we discuss major events one by one.

Table 5.1 TIME LINE OF PAKISTAN POLITICAL HISTORY WITH MAJOR CHANGES

Time Line Prime Ministers Governor Generals & President

1947 to 1958 Seven Prime Ministers held the Four Governor Generals and Presidents Formation of Pakistan position during this period: held the position during this period:

- Liaquat Ali Khan - Quaid-e-Azam Muhammad Ali - Khawja Nazimuddin Jinnah - Mohammad Ali Bogra - Khawja Nazimuddin - Chaudhry Mohammad Ali - Malik Ghulam Mohammad - Hussain Shaheed Suharwardy - Iskander Mirza - I. I. Chundrigar - Feroz Khan Noon 1958 to 1969 Ayub Khan

1969 to 1971 Yahya Khan

1971 to 1977 Zulfiqar Ali Bhutto

1977 to 1988 Zia ul Haq

1988 to 1999 Nine Prime Ministers held the Five Presidents held the position Democratic position during this period: during this period: Transition - Benazir Bhutto - Ghulam Ishaq Khan - Ghulam Mustafa Jatoi - Wasim Sajjad - Nawaz Sharif - Farooq Laghari - Balakh Sher Mazari - Wasim Sajjad - Nawaz Sharif (Transition) - Rafiq Tarar - Moeen Qureshi - Benazir Bhutto - Malik Meraj Khalid - Nawaz Sharif

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1999 to 2008 Four Prime Ministers held the Pervaiz Mushrraf position during this period:

- Zafar Ullah Khan Jamali - Chaudhry Shujat Hussain - Shaukat Aziz - Mohammad Mian Soomro

2008 to present Four Prime Ministers held the Three Presidents held the position Democratic position during this period: during this period: Transition - Yousuf Raza Gilani - Mohammad Mian Soomro - Raja Pervaiz Ashraf - Asif Ali Zardari - Mir Hazar Khan Khoso - Mamnoon Hussain - Nawaz Sharif

5.1 Pakistan First Phase-1947 to 1958

During the first phase of Pakistan seven Prime Ministers and four Governor Generals ruled within ten years of time that gave an average of less than two years for one Prime Minister. This average clearly suggests that Pakistan never had a stable government in its first decade

(Kamran,2009). What were the reasons for that? The reasons for that lie in the geography and ethnic composition of the country. The country consisted of two halves where one half is thousands of miles away from the other and separated by thousands mile of enemy territory. East and West wings of Pakistan were different in all respects. Language, Religious Practices, Land holding, Crops, Occupations, Overall economy and the most important of all the demography where numerical majority belongs to Bengalis but all institution of power belongs to West

Pakistanis. This made the establishment of democratic norms in the country impossible.

Numerically superior Bengalis wanted one person one vote while in the West Pakistan, no one wanted to give them power. Pakistan lost first twenty four years in this struggle.

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Pakistan took nine years to promulgate its first constitution; the most important reason for delay in constitution making was the question on distribution of power between the two wings. Even the constitution of 1956 was made possible only after smaller provinces in West Pakistan agreed for One Unit and East Pakistan agreed for parity (Kamran, 2009).

Within thirteen months of establishment of the country Jinnah died of natural causes and in his place a politician from East Pakistan-Khawaja Nazimuddin- was appointed as Governor General.

But now all powers belonged to Prime Minister Liaqat Ali Khan and Nazimuddin was just a figurehead Governor General. In 1949 Objective Resolution was passed and path to constitution making was cleared but it also opened an avenue for the religious extremism and strengthened the hands of religious lobby. After the death of Jinnah, Liaqat Ali Khan also assumed the presidency of Pakistan Muslim League. His example was also followed by provincial Chief

Ministers and they took over the charge of their respective provincial branches of Pakistan

Muslim League.

In October 1951 Liaqat Ali Khan was killed by an assassin while he was addressing a public rally in Rawalpindi. The causes of his murder were never investigated properly nor were his real assassins apprehended. His murder was a ground breaking event in the early history of Pakistan from which the country never really recovered. Political conspiracies after the death of Liaqat

Ali Khan caused much harm to the democratic setup of the country and strange decisions were taken by the people in the helm.

First of all Khawaja Nazimuddin, who was Governor General of the country at the time of the death of Liaqat Ali Khan, left his post and assumed the charge of Prime Ministership, perhaps he believed that just as Liaqat Ali Khan used to exercise all the powers of the executive by being

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head of the government so he would be able to do the same. But he never realized that in a country like Pakistan where democratic norms are not well established, the real power belongs to the personality and not with the legal powers attached to a particular designation. Since he was a weak personality so as we shall see later in history he was never able to do justice to his position.

In place of Khawaja Nazimuddin, Malik Ghulam Muhammad assumed the charge of Governor

General. Basically he belonged to the bureaucracy and his appointment to this post was not a good omen for the country. From now on the civilian and military bureaucracy showed greater sign of involvement in politics of the country. In 1953 riots broke out against the Ahmadi community in the city of Lahore. Islamic parties were demanding that Ahmadies should be declared non Muslim. In order to control law and order the Nazimuddin government resorted to declaring martial law in the city of Lahore. This was a severe blow to the civilian government in

Pakistan and led to the serious military involvement in the politics of the country. Governor

General, Ghulam Muhammad took advantage of the situation and dismissed the Nazimuddin government and in his place appointed Muhammad Ali Bogra as new Prime Minister. It is a sad commentary on the civilian leadership of the country that no serious protest took place against this step of Ghulam Muhammad and hold of the non democratic forces over the politics of

Pakistan was confirmed (Maluka, 1995).

Later on when the parliament tried to limit the powers of Governor General, he dismissed it too, resulting in the creation of political vacuum in the country. This step was challenged in the higher courts of the country but the court headed by Justice Munir upholds the decision of the

Governor General. Now with his handpicked Prime Minister and Parliament Malik Ghulam

Muhammad had no one to challenge his authority but his health did not last long and he had to

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resign from the post of Governor General. The legacy of Ghulam Muhammad was full of dark chapters. He left behind a government which was completely in the hands civilian and military bureaucrats. After his resignation a bureaucrat from East Pakistan Iskender Mirza took over the post of Governor General. The government of Muhammad Ali Bogra also did not last long and he was dismissed by Iskender Mirza. Chaudhry Muhammad Ali another bureaucrat was appointed as Prime Minister in place of Muhammad Ali Bogra (Maluka, 1995).

The only positive contribution of this era was the promulgation of the Constitution of 1956. This constitution did attempt to solve successfully many long standing issues of politics of Pakistan such as the role of religion. But the question of provincial representation was solved rather artificially. Making one province out of the four provinces of West Pakistan was never going to be welcomed by the smaller provinces and this decision was perceived as an attempt to extinguish the voice of these areas. Further by adopting the principle of parity the genuine rights of East Pakistan were subdued (Maluka, 1995).

From the promulgation of the constitution and the imposition of martial law there is hardly a period of two years and during this period a game of musical chairs was being played in Karachi

(then capital). Four different persons served as the Prime Minister of the country. At long last

General Ayub Khan who in the early 50’s was included in the cabinet as Defense Minister imposed martial law and abrogated the constitution (Shah Sabir, 2014, April 16).

If one goes through the names of Prime Ministers and Governor Generals who served the country in its first eleven years one finds so many names of bureaucrats both civilian and military. These people did not represent anyone. They came into power because political

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institutions of the country especially the political parties were weak and did not have solid base among the masses.

5.2 Pakistan Second Phase 1958 to 1971

The second phase was era of General Ayub Khan’s military government. The initial response of the common man towards the martial law government was very positive. People appreciated martial law because they were very frustrated with the politicians and had given up hope of ever finding a stable government in Pakistan. The military too initially performed very well the daily chores of the government. But it was in the long term that problems arose. In the paragraphs below we present an overview of the merits and demerits of Ayub Khan’s rule.

Ayub Khan introduced well thought out economic planning. The second five year plan is still regarded as the most successful five year plan in the economic history of Pakistan. During his tenure the Indus Water Treaty was signed with India thus signaling an end to the thorny problem of water sharing. As a result of this Treaty huge dams like Mangla and Tarbela were constructed which still are an important source of water and power for Pakistan. He also worked for establishing sound industrial base for the country and institutions like PIDC were formed. In foreign policy he laid the foundation of good relations with China. His government was the most liberal and secular government in the history of Pakistan. Another important area was the development of Islamabad the capital of Pakistan ( Hussain, 1999).

Pakistan took nine years for developing a constitution but that was allowed to function only for two years and then it was abrogated by Ayub Khan. This set a precedent which was followed by later dictators to good effect. He established direct military rule and laid the foundations of

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Military Inc due to which it can rightly be said that every country has an army but we have an army which has a country. Now we come to the issue of East Pakistan which was very badly handled by Ayub government. Ayub government adopted policies which led to the concentration of wealth in few hands ( so called 22 families) and overwhelming majority of these hands did not belong to East Pakistan resultantly East Pakistan felt aggrieved and alienated. Many Governors of East Pakistan were from West Pakistan while no person belonging to East Pakistan ever appointed as Governor of West Pakistan (Amjad,1976; Haq,1976).

The most damaging event for Ayub government was the Kashmir adventure of 1965 from where the downfall of his government was started. Ayub Khan also gave the country constitution of

1962 which was based on Presidential form of government and proposed elections on the system of basic democracy. When he resigned in 1969 his constitution and basic democrat system went with him and no one remember them today. In foreign policy he placed Pakistan firmly in

American camp with not very good consequences. He who came into power claiming to the common man that he will enable them to get rid of corrupt and inefficient politicians himself became president of a faction of Muslim League and involved into the dirty business of politics

(Baxter, 1971).

Legacy of Ayub Khan loomed large over the whole tenure of Yahya Khan. First of all since

Yahya Khan just like his predecessor abrogated the constitution of 1962 therefore Pakistan did not have a constitution and did not even have a broad consensus on the issues involved in constitution making. There were sharp differences between East and West wing. While East

Pakistan was demanding maximum provincial autonomy under Six Point formula of Sheikh

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Mujeeb ur Rehman the West Pakistani elite was in no mood of allowing them anything close to that.

Yahya Khan did not promulgate a full fledge constitution but did issue a Legal Framework Order whereby the principle of parity was done away with and one unit was abolished and original provinces of West Pakistan were restored (Khan,1997; Baxter, 1971).. The first ever national elections were held in 1970. The results of the elections were unexpected for most of the political pundits who were predicting no clear majority for any political party instead from East Pakistan

Awami League emerged as the clear majority party while in the West wing PPP emerged as the majority party but having less number of seats than Awami League (Baxter,1971).

First session of National Assembly was due to be held in March 1971 in Dhaka (Al Mujahid,

1971; Baxter,1971). West Pakistani elite including army, bureaucracy, their political leadership

(PPP) and most important of all General Yahya Khan did not want to transfer power to East

Pakistan and that too on the basis of Sheikh Mujib ur Rehman’s Six point formula so Islamabad government postponed the National Assembly session for indefinite period. East Pakistan leadership and people at large took it as betrayal of their mandate and Sheikh Mujib ur Rehman announced the establishment of independent government of Bangladesh.

General Yahya subsequently resigned and gave the power to the leader of PPP Zulfikar Ali

Bhutto (Jaffrelot, 2004).

5.3 Pakistan Third Phase 1971-1977 (Zulfikar Ali Bhutto)

The most important contribution of Bhutto to Pakistan society and politics was the awakening of common man. He energized the public the way no one has ever done before. He gave voice to

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the man on the street and brought about a revolution in the political culture of the country. He took over power at a very critical juncture of Pakistan history. Half of the country was lost and more than ninety thousand prisoners of war in Indian custody ( Wolpert,1993). He managed to sign an honorable agreement, under the circumstances, with India and got all POW’s released.

Within two years of taking over power he gave Pakistan a constitution which despite all troubles has stood the test for time for forty years. Many people friendly reforms were introduced.

Students were given special privileges and new labor laws were introduced. Trade union activities were encouraged.

Many important projects were completed during the period like Pakistan Steel Mills, Port Qasim and Heavy Mechanical Complex to name a few. Bhutto was also the founder of Pakistan’s nuclear program. In foreign policy where as foreign minister he laid the foundation of friendly relations with China now as Prime Minister he explored new avenues in relations with Islamic countries. He convened a summit of all Muslim leaders of the world in Lahore and also made efforts to form a block of third world countries (Wolpert, 1993).

Bhutto’s role in East Pakistan crisis was not very positive to say the least. It’s right that he did not have power which was in the hands of Yahya Khan who should have transferred it to Mujib

Ur Rehman. But Bhutto also did not concede defeat which he should have done according to democratic norms. He sided with the West Pakistani elite in denying the Bengalis their right of self determination. He backed the Pakistan military operation in East Pakistan in fact one of the leading figure in that operation General Tikka Khan held senior positions in Bhutto’s government. Bhutto was not as accommodative of opposition in the parliament as a democratic leader should be. He never accepted the mandate given to opposition parties in the then NWFP

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and Baluchistan. A military operation was conducted in Baluchistan which had serious consequences for democracy in Pakistan as it allowed the military to get back the position they had lost after East Pakistan crisis (Wolpert, 1993).

Although his intentions were good but all students of economic history of Pakistan agree that nationalization of industries, banks and educational institutions had a negative impact on the economic development of the country. It reversed the industrialization process initiated in the

1960’s and discouraged Pakistan’s developing private sector. Although privatization of state owned enterprises are in progress for the last twenty years but still more work needs to be done to create investor friendly environment in the country.

Now the event comes which determined the fate of Pakistan and Bhutto i.e. the holding of general elections in 1977. Bhutto failed to keep the elections free from rigging allegations and when opposition alliance PNA resorted to agitation Bhutto again used army and imposed martial law in major cities of the country. Law and order broke down across Pakistan and General Zia took full advantage of it and in a bloodless coup dismissed the Bhutto government and imposed martial law throughout the country (Wolpert, 1993).

5.4 Pakistan Fourth Phase 1977-1988 (General Zia ul Haq)

General Zia era was a dark period for Pakistan. First of all the involvement of military in the political and economic spheres of the country which started in the Ayub and Yahya period was taken to the new heights and their role was institutionalized. He had overthrown an elected ccxviii

government therefore he imposed severe restrictions on the freedom of press and no one in the country could publicly criticize him. He imprisoned the deposed Prime Minister and later hanged him for allegedly ordering the murder of a political opponent after a sham trial. At the time of imposing martial law he had promised the nation that general elections will be held within 90 days but he kept postponing them for one or the other reason. His government had lost all sympathies of the people and he knew that if elections are held PPP would win the elections therefore even when he allowed the elections to be held in 1985 no political party was allowed to contest and elections were held on no party basis. General Zia completely changed the basic concept of the constitution of 1973 by imposing eighth amendment on the nation and empowering the President to dismiss the Prime Minister, the cabinet and the assemblies (Kundi

& Jahangir, 2002). General Zia could not even tolerate his own handpicked Prime Minister and dismissed Muhammad Khan Junejo in 1988 by using powers given to him in eighth amendment

(Maluka, 1995).

The General Zia era would always be remembered for the involvement Pakistan in Afghan war from which we have not disentangled ourselves yet. In search of strategic depth Zia allowed free hands to the Afghan Mujahedeen. Weapons and US dollars received from USA to combat communism were freely provided to Afghans. No restrictions were placed on the movement of

Afghan refugees and that turned the whole country an ammunition depot and led to the growth of

Kalashnikov culture. That also fundamentally changed the ethnic makeup of Baluchistan, KP and

Karachi. Most of the help was provided through ISI and other organs of army that increased phenomenally the powers and influence of these institutions. A major chunk of assistance was also provided through religious parties of Pakistan. This and Zia so called Islamization policies greatly increased the influence of these parties which culminated into growth of Islamic ccxix

fundamentalism and extremism. Because of lack of public support Zia could not make any fundamental changes in the laws and practices of the country (like economy) and Islamise them as he wanted to do. He only managed to make a few cosmetics changes and introduced some draconian laws like Hudood Ordinance and Blasphemy law (Maluka, 1995). In the name of

Islam he placed severe restrictions on entertainment, arts and culture.

In the economic sphere he discontinued the policy of nationalization of Z A Bhutto. But he could not take any bold steps towards privatization and his era can be termed as a period of economic standstill.

One major and beneficial byproduct of Zia Afghan policy was the breakup of USSR and independence of central Asian Muslim states but for this Pakistanis had to pay a very heavy price and is still paying after thirty four years of the conflict.

4.5 Pakistan Fifth Phase-Democratic Transition (1988 to 1999)

Nine Prime Ministers and five Presidents ruled Pakistan during 1988 to 1999.In terms of number of Prime Ministers and Presidents this era is very much similar to the formative phase but in essence it should be termed as Post Zia period. The influence he had carved out for bureaucracy both military and civil in the politics of Pakistan and the powers he had given to an indirectly elected President ensured that the people’s representatives were always at the mercy of these real power holders. Needless to say that politician also did not help their cause.

Elections were held in 1988 the first since 1977. The establishment ensured that PPP could not take clear majority. Even when it had to ask Benazir Bhutto to form government it forced her to agree to their choice of President i.e. Ghulam Ishaq Khan, Foreign Minister Sahibzada Yakoob

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Khan and Chief Minister Punjab Mian Nawaz Sharif. Thus the hands of PPP government were tied even before it started working. And it was never allowed to work while Nawaz Sharif ruled

Punjab in the cities of Sindh PPP had to contend with MQM. An unfriendly establishment and a hard to please President made life miserable for Benazir. And within a period of less than two years the government of PPP was dismissed by President Ghulam Ishaq Khan using the powers vested in him under Article 58(2)b of the constitution of Pakistan (Maluka,1995).

A caretaker Prime Minister Ghulam Mustapha Jatoi was appointed whose duty was to hold the free and fair elections in time. Elections were held in time but how free and fair they were, is anybody guess. An alliance of political parties IJI was formed by the agencies of the country and all efforts were made to not to allow PPP to come back into power (Maluka,1995). Desired results were achieved and IJI managed to win clear majority in the National Assembly.

As a result of 1990 elections Mian Nawaz Sharif assumed the office of Prime Minister of

Pakistan. The most significant aspect of this era was brisk activity in the economic sector. Nawaz

Sharif started privatization of state owned enterprises and such popular schemes like yellow cab.

But despite being favorite of establishment before coming to power he could not maintain good relations with them. President Ghulam Ishaq Khan blamed Nawaz Sharif for the death of the then

Chief of Army Staff Asif Nawaz Janjua. These views were also shared by the widow of the Late

General. Ghulam Ishaq Khan also wanted to be nominated as the Presidential candidate of the

Pakistan Muslim League in the upcoming Presidential elections. But Nawaz Sharif had other ideas as he wanted a President who should obediently follow him ( Maluka,1995).

When difference grew deeper President Ghulam Ishaq Khan dismissed Nawaz Sharif using the powers vested in him under infamous Article 58(2)b and appointed Mir Balkh Sher Mazari as

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care taker Prime Minister. Nawaz Sharif challenged the dismissal in the Supreme Court of

Pakistan who decided in favor of Nawaz Sharif and he resumed the office of Prime Minister. But the crisis could not be solved and the rebellious Punjab province refused to follow the instructions of federal government and the President appointed Governor of the Province dismissed the Punjab Assembly twice. Military had to intervene albeit while remaining in background. Under a military brokered deal both the President and Prime Minister had to resign and the acting President Wasim Sajjad appointed Moeen Qureshi as the new caretaker Prime

Minister (Maluka,1995).

In 1993 new general elections were held as a result of which PPP again formed the government.

This time around PPP was in a much better position than it was in 1988. They had their own man

Farooq Ahmed Khan Leghari elected as President and in Punjab province their allies formed the provincial government. But PPP government could not perform well and did not do anything worth mentioning. They carried out a lengthy Police operation against the MQM in Karachi.

Although this operation was started by Nawaz Sharif but Benazir conducted it more vigorously.

Law and order in the port city deteriorated. It got worse as time passed and culminated in the murder of Murtaza Bhutto (the brother of sitting Prime Minister ).

Benazir completely lost composure and her government was dismissed by Farooq Lagari and

Malik Meraj Khalid was appointed as caretaker Prime Minister (Javed & Javed, 2012).

Elections were held in 1996 and Pakistan Muslim League emerged as the clear winner taking two third majorities in the parliament so enjoying the power to change the constitution as it wishes. Mian Nawaz Sharif again became the Prime Minister of the country. By using his two third majorities he changed the constitution to his liking and removed the contentious Article

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58(2b) thus eliminating the power of the President to dismiss Prime Minister and Parliament.

(Kundi & Jahangir, 2002).

He started many development projects like construction of motorway linking Lahore to

Islamabad but failed to build working relationship with other pillars of power like judiciary and presidency. Involved in a deep power struggle with the then Chief Justice of Supreme Court-

Justice Sajjad Ali Shah- he even caused his party members to physically attack Supreme Court just when it was due to hear case against him. Later on Mian Nawaz Sharif managed to create rift in the ranks of judiciary and both Chief Justice and the then President Farooq Lagari, who was supporting the Chief Justice, had to resign (Javed & Javed, 2012; Singh, 2008).

By appointing his chosen people at the post of President and Chief Justice, Mian Nawaz Sharif was left with one competitor only i.e. armed forces of Pakistan. As a first step to counter that force he tried to build good relationship with India. He invited Indian Prime Minister to visit

Pakistan. Indian Prime Minister did visit Pakistan but military chief was not present among the welcoming party. Instead he started military operation in Kashmir about which as per Nawaz

Sharif he was not informed. Serious differences arose between the two authorities and when the

Prime Minister tried to dismiss army chief the army refused to listen to him and General Pervaiz

Musharraf imposed martial law in the country (Javed & Javed, 2012).

4.6 Pakistan Sixth Phase-Military Rule 1999 to 2008 (General Pervaiz Musharraf)

General Pervaiz Musharraf imposed relatively mild martial law in the country. He called himself

Chief Executive instead of Chief Martial Law Administrator. Media was relatively free from restrictions and first private television channel was opened during his regime. He allowed Nawaz

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Sharif and his family members to go abroad while the courts had sentenced him to prison. The

Supreme Court of Pakistan allowed him to continue for three years and to make necessary changes in the constitution (Javed & Javed, 2012; Musharraf, 2006).

On September 11,2001World Trade Tower bombing took place which made the strategic location of Pakistan as the shortest possible route to Afghanistan all the more important.

Musharraf decided to side with USA on its war on terror.

He brought about many changes in the constitution including the power of the President to dismiss government and assemblies. As per the instructions of Supreme Court elections took place in 2002. These were not fully representative elections as Musharraf did not allow leadership of both PPP and PML-N to come back to country. He created a new political group called PML-Q. An alliance of religious political parties MMA was also established. Definitely these elections were not going to be free and fair and as predicted PML-Q and MMA managed to win majority of seats and formed government both at center and provinces (Khan & Wazir,

2011).

First Mir Zafarullah Khan Jamali and then Chaudhry Shujaat Husain took over power as Prime

Minister for short periods but everyone knew where the real power belonged. Then Mr. Shaukat

Aziz who was earlier Finance Minister became Prime Minister. This era was of relative peace and prosperity but everything shattered when the President tried to dismiss the Chief Justice of

Pakistan Iftikhar Muhammad Chaudhry. Justice Chaudhry refused to resign and Musharraf filed a reference in Supreme Judicial Council. This crisis lingered on and on November 3, 2007

Musharraf imposed emergency and tried to curb media and judiciary (Rohde, 2007, November 4)

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He dismissed a large number of Judges and appointed his handpicked persons on important positions of judiciary.

This crisis weakened Musharraf and he had to resign and allow PPP and PML-N leadership back in the country ahead of elections. In elections of 2008 PPP and PML-N emerged as leading parties. PPP formed the government in the centre and PML-N in Punjab.

4.7 Pakistan Seventh Phase from 2008 till now( Post Musharraf Era)

During election campaign of 2008 Benazir Bhutto returned to the country and she addressed to many election rallies. But she was assassinated while she was returning from the public meeting at Rawalpindi. After her assassination her husband Asif Ali Zardari took the leadership of PPP and was elected President of the country after the resignation of Musharraf. The National

Assembly elected Yousuf Raza Gilani as the new Prime Minister of the country.

The most important issue facing the new government was the restoration of Judiciary. While opposition parties and the dismissed judges pressed for unconditional restoration Zardari was reluctant because he apprehended that Judiciary has soft corners for PML-N and further because cases would be opened against him. After a lapse of quite some time and under pressure from opposition parties and army he did have to restore the Judges but by then damage had been done and the remaining term of PPP government was wasted in appearing before different courts.

Prime Minister Yousuf Raza Gilani was sentenced for contempt of court and he lost his post and membership of the Parliament and was also debarred from holding public office for five years.

The new Prime Minister Raja Pervaiz Ashraf barely survived the similar fate and Zardari had to concede defeat and had to write a letter to Swiss authorities for reopening of cases against him.

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On the constitutional front Zardari government took many commendable steps like removing the power of the President to dismiss government and assemblies (Mohsin, 2010, April 1), devolving powers to the provinces and removing restrictions on the Prime Minister to hold office only for two terms. But on the economic front things were not as good. Pakistan was facing serious power shortages for which nothing was done by the government. Overall economic indicators were also not portraying good shape of Pakistan economy.

In 2013 general elections were held and on the basis of performance the people voted against the

PPP government and elected a PML-N government both in Islamabad and Punjab. Imran Khan’s

Pakistan Tehreek e Insaf also performed well and managed to establish government in KP. PPP was restricted to Sindh province only.

4.8 Feudal Influence in The Political Governance of Pakistan

From independence till now Pakistani federal and provincial assemblies have been dominated by feudal lords (Hussain, 1999; Human Development in South Asia,1999; Keefer, Narayan &

Vishwanath, 2003; Shafqat, 1998). They are not confined to any one single political party. They are present in all major political parties of Pakistan including PPP and PML(N). These feudal lords have strong influence on all policy setting since independence till now.

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Here we give some details about feudal lords, there presence in politics and how it is shaping

Pakistan’s political and economic governance and helping these feudal lords to make further concentration of wealth.

We collected data with the support of Aqeel Abbas Jafri’s book on “Pakistan Kay Siasi

Waderay” (1995) , in which major political families and their presence in Provincial and

National Assemblies was highlighted. Though, this political and feudal family data covers elections up to 1990, nevertheless, it reflects the trend and presence of major feudal families in

Pakistani politics. There is no change in this trend and same feudal families are present in provincial and national assemblies after 1990 election till 2013. The seats in national assembly and provincial assembly are held by one member of the family or the other but remains in the same family. The feudal family list consists of eighty families as given in Table 5.2. These feudal families belong to all four provinces of Pakistan. Sometime, it is also possible that feudal lords have other revenue generation facilities and have to remove feudal tag off them, but the background is still feudal mind set.

Table 5.2 Feudal Families in National and Provincial Assemblies of Pakistan

Family National Provincial Family National Provincial

Name Assembly Assembly Name Assembly Assembly

Mohammad Arbab 5 14 Zai 1 4

Tareen 6 7 Mian Gul 4

Tanoli 4 2 Hoti 4 3

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Jadon 3 9 Alpial 4 3

Khattak 6 9 Baber Pithan 1 3

Sherpao 2 5 Pracha 2 7

Gandapur 5 Tiwana 2 6

Janjua 10 1 Abbasi 9 3

Chatha 7 6 Qureshi 7 8

Chaudry 5 6 Khattar 1 3

Cheema 8 12 Khar 11 10

Dareshak 1 6 Kharal 6 8

Dasti 2 4 Khosa 1 10

Daha 3 3 Gardezi 4 9

Rokhri 3 6 Gilani 10

Raees 2 4 Laghari 3 9

Makhdom Sardar 4 2 Zaday 3 6

Syed 10 8 Mazari 9 7

Pathan 6 12 Mokal 1 5

Pir Pagara 2 4 Nawabzaday 2 8

Pir Zada 3 2 Watto 5 5

Talpoor 9 13 Arbab-Sind 3 7

Shah Tharparker 1 4 Unar 6

Jam 4 4 Bijarani 6 8

Jamot 5 Bhutto 17 4

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Jatoi 12 14 Makhdom 8 8

Cahndya 6 7 Mehar 5 12

Shah- Shah- Khairpur 11 10 Nawabshah 6 9

Syed-Sun 1 5 Wasan 4 6

Somro 8 8 Haroon 4 1

Qazi 4 3 Achekzai 4 3

Khoro 2 9 Bazenjo 2 5

Lond 6 1 Bugti 3 11

Shah-Mutyari 4 3 Jam 4 6

Jamali 6 6 Khosa 2 10

Jogezai 5 2 Khitran 3 7

Mohammad Khan of Qalat 1 1 Hasni 4 1

Rund 3 2 Mree 3 2

Raeesani 1 4 Magsi 4 8

Zehri 3 7 Mengal 2 4

Source: Aqeel Ahmed Jafri(1995): Compiled by author Another important area is the composition of cabinet, where major political, economic and social decisions are taken. Here, again, we observe that feudal lords are in majority as compared to other areas like business men, lawyers etc. Look at the cabinet of Mohammad Khan Junejo which consisted of twelve feudal lords during the tenure of 1985 to 1988, then Benazir Bhutto regime had fifteen feudal lords in her cabinet, and in her next term, she had seventeen feudal lords. Nevertheless Nawaz Sharif has less feudal lords as compared to Benazir Bhutto regime, but still majority in cabinet belongs to feudal class. When feudal lords are in majority in cabinet, ccxxix

they do not let the government take any decision against their interest. In this way they carefully watch all policies, and if anything goes against their status quo, they fully oppose it.

It is evident from above Table 5.2 that feudal lords are always present in provincial and federal parliament, and their presence is continued in all cabinets. Whenever, army in Pakistan takes control of the country and establishes political parties and conducts elections, these feudal lords are there too; they are also present in local bodies’ elections. Local landlords play very important role in local politics and become part of local body elections whenever held in Pakistan. These feudal lords also have strong relations with military, judiciary, police and bureaucracy.

Sometime these feudal lords and their relatives are present in military, police and bureaucracy who help them to multiply their influence in all directions. One thing we observed that purpose of these relations, contacts and presence in politics is to strengthen themselves and obtain maximum benefits from their contacts and relations. District management is generally appointed in their constituency on the recommendation of tribal chief and not on merit basis. These landlords have created their own states within a state. They rule their people with impunity.

People who are legislators, policy makers, decision takers and most important thing, most of them and their family have long history of stay in politics, sometime in provincial assemblies and sometime in national assemblies and senate. As discussed earlier when army takesover control of country, similar faces present to help them. Despite this long history of similar family and feudal landlords, businessmen in national assemblies, they are unable to improve overall governance of country in economic and social sectors. Take another example where feudal lords can do a lot but they never try to improve this area in Pakistan, and this is education in their own constituencies. Feudal lords do not encourage their people to get education and neither provide

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infrastructure facilities for their people. In this way feudal lords are producing less capable people which effects on the economic productivity, as well as causing other social issues. Basic education for people can increase their wages as well as these people can bring agricultural innovation in their areas.

There are plenty of examples where politicians and policy makers are involved in rent seeking activities in Pakistan. Many villagers in Pakistan give vote to the Sufi mystic’s whom they and their ancestors respect and dedicated their lives for them. Whatever these Sufis do, farmers and villagers have no concern, because they are illiterate and have no concern with implementation of rules, polices, economy in short and long run. Their main concern is that these respected people will save them here in this world as well as in the life after death. Following names are very popular in politics as well as from Sufi point of view in Pakistan as presented in Table 5.3.

Table 5.3 Sufi Family Name in Pakistani Politics

Sufi Family Name National Provincial Assembly Assembly

Gandapur 5

Syed 10 8

PirPagara 2 4

Pirzada 3 2

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Gardezi 4 9

Gilani 10

Makhdom Zaday 3 6

Makhdom 8 8

Qureshi 2 8

Military, bureaucrats and businessmen also have interest in landowning because it has become a status symbol in Pakistan. They do not only keep themselves engaged in their professional work and business but they also want to enjoy the status of a landowner. The distribution of land in

Pakistan is highly skewed and this gives strength to feudalism. Pakistan government tried to discourage this skewed distribution and enacted land reform act in Ayub and Bhutto era but couldn’t achieve success.

As above discussion highlights that political governance is a major problem for Pakistan from its independence.

On the basis of above discussion about Pakistan’s political governance and influence of feudalism on political governance as well as issue of concentration of wealth we have established the following proposition:

Proposition 2

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“Feudalism leads to excess control on political governance”

We provide evidence of their presence in National Assembly of Pakistan as given below in Table

5.4

Table No.5.4 Social Class Background of National Assembly Members

199 199 199 1985 1988 0 3 7

Landlords and Tribal Leaders 157 156 106 129 126

Businessmen/Industrialists 54 20 38 37 39

Urban Professionals 18 9 46 26 32

Religious Leaders 6 15 11 8 3

Retired Military Officers 7 3 5 2

Others 3 3 3 2

238 207 207 208 204

FigureSource: 5.1 Saeed Feudal Shafqat Influence (1998) in Parliament

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Table 5.4 and Figure 5.1 show that landlords and tribal leaders always play dominant role in

Pakistani politics. They have very significant majority in all national assemblies of Pakistan.

They take advantage of their majority in assemblies and keep all economic policies and decisions in their control which help them to continue rent seeking activities.

In Table 5.5 we further provide details of feudal lords and other professional people’s presence in cabinet from 1985 to 1998 in Pakistan.

Table No 5.5 Feudal Influence in Pakistani Cabinet

Feudal Business Lawyers/ General women Other total Professional M.K. Junejo 1985– 88 12 3 8 2 1 1 27

Benazir Bhutto 1988– 90 15 1 14 3 4 7 44

Nawaz Sharif 1990– 93 12 9 12 1 4 39

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Benazir Bhutto 1993– 96 17 3 13 2 1 3 39

Nawaz Sharif 1997 8 6 8 1 2 1 26 Source: Saeed Shafqat (1998)

Figure 5.2 Feudal Influences in Pakistani Cabinet

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Now with the help of above discussion, we can establish the following corollary:

Corollary 2

“ Wealth concentration in Pakistan leads to poor economic governance”

This accumulation of wealth by feudal lords without any economic transactions help them to get more returns as well as other benefits that they obtained through political influence as presented in equation 6.4. These politicians use their political influence and keep economic policies in their favor, hence in Pakistan we suggest that governance is poor due to wealth concentration. This can be written as follows:

From equation (4.7) ccxxxvi

Gov  K0  K1WCNC Where Gov = Governance WCNC = Wealth Concentration

We further suggest that poor governance leads to more income inequality. This can be written as follows:

INEQ   1Gov------(5.1) Where

INEQ = Inequality

Gov = Governance

As we established in equation (4.7)

INEQ    1 (K0  K1WCNC )

INEQ    1K0   1K1WCNC

INEQ  L0  L1WCNC ------(5.2)

Where WCNC = Wealth Concentration

Lo    1K0 and L1   1K1

Chapter 6 Impact of Bad Political Governance on Pakistan’s Economic Governance

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Bad political governance has a direct negative impact on Pakistan’s economy. Few significant areas are discussed here.

6.1 Corruption in Pakistan

There is hardly any department in Pakistan where corruption does not exist (Human

Development in South Asia, 1999; Hussain, 1999; Rehman, 2006). Tax collecting agencies is one of the major areas where corruption is prevailing directly as well as indirectly. For example various exemptions and anomalies are given to different sectors of economy which further elevates corruption in this department. Income Tax Ordinance 1984 amended in 1996 has a list of 160 exemptions in which agriculture sector has exemptions from tax and host of other areas and items. There are various other areas where taxes are fully or partly exempted. Where partly exempted areas are concerned, no rates are disclosed in tax system. Export duties and tax rebates are other areas where loopholes exist and businessman take advantage with the help of bureaucrats and as a result government suffer huge losses in revenue collection.

Corruption in tax system in Pakistan exists both at the policy level and operational level. At policy level, it arises because both in the Income Tax Law and Sales Tax Law, there are provisions which empower the federal government to make changes in the schedules of these laws as and when necessary. This delegation of power has been recently declared ultra vires to the constitution by the Hon. High Court on the ground, that powers to legislate only, rests with the legislature and cannot be delegated to the federal government.

FBR has been issuing SROs under this delegated power in income tax law in order to either exempt any income or change the Withholding Tax (WHT) rate or to change the application of

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any of the provisions of the law. In Sales Tax Law, FBR can either reduce the sales tax rate or give exemption to any taxable supplies. Some corrupt practices can happen here if a lobby pays senior FBR officers for getting any of these reliefs.

Another area of corruption is at operational level. Here it is either due to complexity/ambiguity in the law, where the taxpayers can pay bribe to get the interpretation of that ambiguity in their favour at the time of assessments; or it is due to tax audits and monitoring where the bribe can be paid so that the audit proceedings could be hushed up. Even to avoid being picked for audit bribe can be paid.

Corruption in Benazir Income Support Programme (BISP) was reported by many sectors. A report was published in The News that USAID has stopped $75 million support of the BISP program because of dissatisfaction of overall BISP program. USAID has further stopped $286 million fund which they committed for various projects. Dawn on September 01,2013 reported that corruption, irregularities and mismanagement were reported in BISP program by two audit reports. These audit reports were prepared by Federal Directorate of Audit Report for the year

2012-13 and the Auditor General of Pakistan Audit Report. Both reports found heavy loss to government due to BISP program.

PML(N) new government took control of Pakistan in 2013, approved special bailout package for

Pakistan International Airline (PIA) Rs.100.5 billion which is a significant burden on Pakistan’s economy. PIA as state enterprise announced more losses in 2012 as compared to 2011 and reached to Rs. 157 billion accumulated loss. This enterprise is also defamed for mismanagement, irregularities, corruption and poor efficiency. Every year government spends huge amount on this company, consequently putting pressure on fiscal side (Rehman, 2006).

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Another state enterprise which causes huge losses to the economy of Pakistan is Pakistan Steel

Mill. Pakistan Steel Mill (PSM) was established in 1975 with the capacity of 1.1 million tons per annum with the support of former Soviet Union. Pakistan demand of steel is approximately

4.5 million tons per annum. Pakistan Steel Mills contributes a major part of steel requirement of country development. Overstaffing, corruption, mismanagements and political influences reduced the output of Pakistan Steel Mills and is currently producing less than ten percent of its installed capacity and suffering huge losses, consequently unable to pay even salaries of its staff.

Government decided to privatize PSM and thus a major part of land attached with PSM was also offered for sale. To complete the privatization process government appointed M/S Sadar-ud-din

Associates for the evaluation of land who evaluated Rs. 10 to Rs.11 million per acre while it is observed that the market value of this land is far more than evaluated (Rehman, 2006).

Privatization Commission appointed Citigroup Global Market Ltd. to sell 75% shares of PSM.

The Citigroup prepared a report with the help of information provided by PSM and various assumptions taken by Citigroup, nevertheless these assumptions had no reasonable accuracy and were based on personal judgments. On the basis of this report Privatization Commission set the price. Bidding process was held on 31st March, 2006 and Privatization Commission declared successful bidder and accepted the bid price of Rs.16.8 per share which translated into Rs. 21 billion. To make the bidding process successful, the buyer was also given certain benefits like whole stock in trade, bank balance was also be handed over to the buyer. Under the rule of

Privatization Commission 2001, the matter should have been sent for approval to cabinet which was not done in this case and letter of approval was issued to the highest bidder.

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The whole case was put forward and heard by Pakistan Supreme Court which announced short term order on 23rd June 2006 and declared this share purchase agreement void and of no legal effect. It is clear from whole exercise of privatization process of PSM that the intention was not to realize real value of PSM but to give benefits to bidder and earn commission on the whole process. It is observed and calculated by various experts that benefits of around Rs. 17.67 billion has been given, price per share should have been around Rs.25.17 to Rs.32.67 rather than

Rs.16.80 (Rehman, 2006).

Pakistan Agricultural Storage and Services Corporation (PASSCO) suffered losses of Rs.2.5 billion during 2007, amount of loss rather reducing in coming year increased in 2008 to Rs. 3.4 billion and then on rising track, in 2009 Rs.3.3 billion, in 2010 Rs.13.8 billion and close to

Rs.14.1 billion in 2011. These losses are reflecting inefficiency, mismanagement and corruption of this department. Trading Corporation of Pakistan(TCP) is also very popular for inefficiency and corruption while working as principal trading arm of the government of Pakistan. There are many cases pending in court against various allegations on TCP (Rehman, 2006).

Utility Stores Corporation (USC) whose sole objective is to provide essential and other items of general use to public at subsidized rates is also on the list of defame due to corruption scandals

(Corruption of Rs. 250m in Utility Stores Corporation unearthed, The News, 2015).

Story does not end here; there are many departments like police, custom, education, health and host of other areas where poor efficiency, corruption and political influence is wide spread.

6.2 National Reconciliation Ordinance (NRO)

National Reconciliation Ordinance (NRO) through which many politicians, bureaucrats and many others in Pakistan benefitted and granted amnesty from corruption, murder, embezzlement, ccxli

terrorism and money laundering. This ordinance was issued by General Pervez Musharraf as

President of Pakistan on 5 October 2007. Through this ordinance cases on 8041 people between

1 January 1986 and 12 October 1999 were withdrawn. This list includes very popular politicians from all popular parties in Pakistan. In this list are serving and former ministers, provincial and federal secretaries, employees of state enterprises, ex-chief secretaries and many provincial and national assemblies member are also included. Large number of bureaucrats took advantage of this ordinance and freed themselves from various charges. A very interesting thing in this list is that bureaucrats exceeded politicians whose cases were withdrawn. This ordinance was issued in a country which is as per Transparency International, one of the worst corrupt courtiers in the world and all World Bank governance indicators are negative.

The Express Tribune on September 26, 2010 reports that NRO list includes more than 70 beneficiaries who are currently working in various government departments including Oil and

Gas Development Company Ltd. (OGDCL), Federal Investigation Agency (FIA), very respectable National Database Registration Authority (NADRA) and host of other ministries.

Even there are many people working in FBR which is main tax collection body in Pakistan.

6.3 Corruption and Shadow Economy in Pakistan

As discussed by Schneider (2007) that in developing countries shadow economy and corruption complement each other. Looking shadow economy in terms of percentage of GDP of Pakistan ccxlii

on year to year basis, as calculated by Schneider (2007) and given in Table 6.1, Pakistan shadow economy percentage in 1999-00 is 36.8 reached to 39.5 percent of GDP in 2004-05. It is evident that weak rule of law and due to corrupt officials, a major portion of Pakistan’s economy is functioning underground. Even India and Bangladesh shadow economy percentage of GDP is below Pakistan level. When we compare shadow economy position with prevailing corruption in

Pakistan as Corruption Perception Index produced by Transparency International for 2005 reported Pakistan ranked at 144 out of 158 countries, it is evident that in Pakistan corruption and shadow economy are working as complement as suggested by Schneider (2007). Pakistan falls in top 15 most corrupt countries in the world. This ranking is not so only in 2005 but when we look at Pakistan ranking for the last decade, similar pattern of corruption ranking exists in

Pakistan. As also argued by( Dreher & Schneider, 2010) that in low income countries corruption increases with larger share of shadow economy and thus data of shadow economy of Pakistan shows change with upward direction in shadow economy.

Table 6.1 Pakistan Shadow Economy % of GDP

Year % of GDP 1999-00 36.8 2001-02 37.9 2002-03 38.7 2003-04 39.2 2004-05 39.5 Source: Schneider (2007)

Figure 6.1 Shadow Economy of Pakistan

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6.4 Bank Loan Defaulters in Pakistan

There is a long history of plundering money by various influential persons who have access to cash flow of financial institutions, borrow money, use it for their own purpose, live lavish lives and then write off these loans and again apply to get fund. List is very long in which political leaders, parliamentarians, bureaucrats, businessmen and army retired persons, and feudal families are included.

Of course these lists are not complete because in Pakistan, highly influential people can hide through various means along with and with the help of political association. However least these list of loan defaulters reflect poor governance position in Pakistan that how people’s money are looted by politicians, bureaucrats and businessmen. The first ever list of loan defaulters was published not by a regular politician, but a caretaker government of Mr. Moeen Qureshi in 1993.

Later Mr. Meraj Khalid and Benazir Bhutto regime also published list of loan defaulters.

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These people and their companies are very important from various angles. These are not only loan defaulter but most of these people and their companies belong to business families, whose story starts from Dr. Mehbub ul Haq 22 family, politicians, feudal lords and stock market tycoons. The list of loan defaulters published by Prime Minister Moin Qureshi in 1993 consists of those families name who are very popular in Pakistan stock market and have many companies listed in Karachi Stock Exchange. When we compare this list of loan defaulters with the industrial houses of 1971, three names are very prominent including Adamjee, Saigol and Fancy.

We observe that people are same who are continuously part of elite class and they are in a highly influential position to take maximum advantage, whatsoever, they can get from Pakistan. These groups are engaged in business in Pakistan and through their contact and relations with political parties, they are able to take loans from financial sector. They use this money for their own benefit and then default. This situation is not related to any particular decade or any specific regime but it is an ongoing process as highlighted by recent NRO case discussed above where many cases on politicians and bureaucrats have been removed against corruption and malpractices.

When we compare list of the year 1993 loan defaulters ( see Appendix A Table No.6) with loan defaulters list of 1996 ( see Appendix A,Table No.7) which have been published during the regime of Benazir Bhutto, we observe that not only new names added in the list of defaulters but some of old names also continue like Ittefaq, Tawakkal, Fazalsons, Naqvi, Habib, Adamjee and

Hashwani.

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Similar list of loan defaulters with some new additions were published in 1997 (see Appendix A,

Table No.8). In this list total loan amount defaulted increased from Rs. 18,466 million to Rs.

25,836 million. Number of groups and individual increased, earlier in 1996 seventeen groups were reported which reached to twenty four in 1997.

In February 2011, the State Bank of Pakistan sent a list of 1300 loan defaulters to PPP and PML-

N to decide what to do about the loan recovery from these people, because it could be possible that some of them are really in trouble and some are intentionally or habitually defaulters. Total loans written off is around Rs.254 billion and there is almost ten to twenty percent obtained on the basis of political associations and now the political parties should decide with the help of independent commission who are willful defaulters who are still wealthy and can pay loans. The list consists of two different scenarios related to pre and post privatization from the period starting from 1971 to 2009. It is generally criticized that most of the loan were write off on the basis of political affiliations because most of the bank was nationalized and at the mercy of politicians. It is reported that bank waived Rs.108 billion actual loan while rest is related to interest payment.

Dawn 27 Dec, 2009 reports that they received a list of defaulter including political leaders, businessmen, journalists and army officers who are among the list of 3300 people who waived

Rs. 153.5 billion loan from eleven financial institutions from 1999 to 2007. We present (see

Appendix A, Table No.9) this list with name of banks and amount waived to various parties.

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As mentioned earlier that SBP list of loan defaulters included many groups and people. Here we present (see Appendix A, Table No.10) major beneficiaries of loans and amount waived by SBP.

Politicians through their influence and pressure on commercial banks obtain loans for themselves and associates for very inefficient projects and without proper collateral which is one of the reason of huge non performing loans (NPL). Supreme Court has asked to State Bank of Pakistan to provide list of loan defaulters. When we look at the loan defaulters list, it is evident that various politicians and their family members as well as their friends and associates are involved. Sometime these loans are provided at subsidized rate like agriculture loan etc.

Prominent leader and member of National Assembly Chaudhry Shujaat Hussain, Pervaiz Elahi and Wajahat Husaain, Mansoor Elahi, Sabah Elahi and other family members’ Punjab Sugar

Mills, Khanewal, waived loan of Rs37.9million. Sardar Jaffar Khan Leghari Rs338,000 and

Tehmina Durrani Rs105.9 million. Similarly, Barex Ltd of Lahore owned by senior journalist

Mujeebur Rehman Shami and other family members got Rs3.89million loan written off.

Many of above firms were listed on stock exchange or belong to prominent business families who have long history of business engagement in Pakistan like Adamjee, Kohinoor, Fateh,

Tawwakal and Crescent. Some of these groups are still engaged in business activities in Pakistan and have listed firms at Karachi Stock Exchange.

General Musharaf regime on November 16, 1999 launched a drive against influential and powerful loan defaulters and recovered Rs. 8 billion form total defaulted amount of Rs. 146 billion. SBP Governor Mr. Mukhtar Nabi Qureshi states that around 325 defaulters owe more than Rs. 100 million each consist of total amount of around Rs. 72 billion. 590 members of

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national and provincial assemblies were also included in the list of defaulters of Rs. 9.64 billion and most of these loans were taken from Agricultural Development Bank of Pakistan (ADBP).

HBL recovered Rs. 1.629 billion out of Rs. 41 billion non performing loans. In the HBL list of defaulters included Super Spun, Fazal Group and Tawakkal Group. NBP recovered Rs.915 million out of Rs. 23.5 billion in which Rs. 2.7 billion belonged to Mehran Bank.UBL recovered

Rs. 800 million out of 21.65 billion . MCB recovered Rs. 1 billion out of Rs. 9 billion non performing loans

In Mushraf era another plan were made against defaulters and a long list given to National

Accountability Bureau (NAB) to recover loan, list included name from famous feudal and business families like Farooqis, Legharis, Dreshaks, Saigols, Khokhars, Magsis, Kakars,

Rehman, Mians, Jaffar, Leghari and Malik Asad Khan, two very close relatives of President

Farooq Leghari. Indus Sugar, a company owned by former MPA of the PML(Q) Nasrullah

Dareshak, had Rs.820 million in loans written off through eight different banks.

Various people arrested on November 17, 1999 in which parliamentarians, industrialists and high officers of armed forces included. They are former minister like Islamuddin Shaikh, Punjab chief minister Manzoor Wattoo, Air Marshal (retd.) Waqar Azim, former member of National

Assembly Jafar Leghari, Nawaz Khokhar, Nadir Ali Magsi ,Agha Siraj Durrani, Anwar Saifullah and in businessmen Asif Saigol, Nasim Saigol, Zakaria Ghani and Abdul Shakoor Kalodi. Some arrested on November 18th including Naveed Qamar, Agha Shahabuddin and Waqar Akhter paganwala.

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National Accountability Bureau ( NAB) present a long list of 248 politicians and bureaucrats who are alleged to plundered billions of rupees but were cleared by NAB under the NRO ( national reconciliation order).

From the above discussion and review of loan defaulter’s list, it is evident that those who are most of the time part of National and Provincial Assemblies in Pakistan, also responsible of making rules and regulations, prepare policies to strengthen economy, improve governance of country are themselves, their relatives, associates are engage in rent seeking activities, hence they are responsible for bad governance of the country.

6.5 Development Work in Constituencies

As we discussed earlier that fiscal deficit is one of the economic problem faced by Pakistan.

Government spends money but not where it is more needed, instead of, it is incurred where political benefit may be obtained like basic health facility, light and clean water not available but road and park constructed. Politicians with their influence pass budget for development expenditure in their constituency, substantial amount of this allocated budget misused in the form of corruption, low quality of material and construction work, bribes to government inspection people to pass and approved development work. Due to low quality of material and poor management, soon these developed work deteriorated and another budget approved for repairing and maintenance, which are again not properly utilized, consequently huge losses suffered by

Pakistan economy. On the other hand this development work is not done for the benefit of local public, rather feudal politicians use it for own purpose and contracts are given to those who are their supporters to favor them so that they can get their support in political campaign. These

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development works in different constituencies are only putting pressure on fiscal side of government economic management.

6.6 Overstaffing in State Owned Enterprises

The fact is Pakistan’s political parties are based on few influential elites and feudal families who have to get more benefit for themselves and for their supporters when they come to power rather than strengthening various public institutions ( Marco,2009). These politicians appoint their relatives, political supporters, and smaller parties people with whom make alliances in various state owned enterprises like PIA, Steel Mill, Nationalized Banks, State Bank of Pakistan, Oil and

Gas Development Corporation ( OGDC) ,Sui Southern Gas Company (SSGC) , Sui Northern

Gas Company (SNGC) , Pakistan State Oil (PSO), Pakistan Trading Corporation (PTC), Karachi

Electric Supply Corporation (KESC) , Water and Power Development Authority (WAPDA) and host of other enterprises. This creation of employment to support their voters/worker not only put burden on the economic performance of the enterprise but also effected on the efficiency of the enterprises. These employment is not created at only low level of job but at senior level of company, even at director level similar type of practice is continue which provide them various benefits financially in terms of bribes and socially too. These employees are appointed on higher wages as compared to their ability which is causing loss to enterprises. To overcome this loss and to continue hiring and appointment on political ground, government provides various incentives in terms of subsidies and writing off loans, hence putting more pressure on fiscal side, consequently fiscal deficit further deteriorated.

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6.7 Political Appointment in State Owned Enterprises and Bureaucracy

Politicians appoint their relatives and known people in bureaucracy so that when time comes these people help them in their rent seeking activities as well as support them when developing economic and business policies. When army took control of country through coup, they also appoint their persons in various civil bureaucracy departments. In this way bureaucracy has become a tool for various groups to get their benefits (Tanwir & Fennell, 2010). Feudal lords appoint their sons, cousins and other relatives in bureaucracy to strengthen their position and power in various departments as well as in their own constituency through appointment in district management group.

There are plenty of examples available in Pakistan which highlights issue of poor governance in terms of politically motivated appointment in various organizations, for example:

Dunya News reported on (1-05-2013) that son in law of former prime minister Raja Pervez

Ashraf was appointed in Pak China Investment Company Limited (PCICL). This was challenged in court on the ground that Mr. Shah Nawaz’s appointment is under political pressure violating rules and regulations and court declared his appointment illegal.

SBP governor Mr. Anwar Yasin appointed Mr. Ashraf Muhammad Wathra as deputy governor.

Election Commission of Pakistan objected that Mr. Ashraf Muhammad Wathra was working in

NBP for last couple of years on senior position and it is alleged that NBP has sanctioned loans on political grounds without adequate collateral, now being a deputy governor in SBP, he may create obstruction on loan defaulters’ cases. Supreme Court of Pakistan gave order to remove

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Mr. Ashraf Wathra as deputy governor State Bank of Pakistan. Tribune observed that many political appointments were made by former prime minister during the last days of his government like Mahmood Mandviwalla, a cousin of former finance minister Saleem

Mandviwalla, appointed as director in SBP board.

The News reported on Wednesday, May 15, 2013 that a petition was filed by an advocate Mr.

Faisal Iqbal Khan in Islamabad High Court that political appointment during the PPP government in last five years caused loss of almost Rs.1800 billion to government. Various people has been appointed at key post of public sector enterprises, corporations and authorities like Securities and Exchange Commission of Pakistan, National Electric Power Regulatory

Authority, National Bank of Pakistan, State Bank of Pakistan, Pakistan Telecommunication

Authority ; Competition Commission of Pakistan; Pakistan Railways ; Pakistan International

Airlines ;Zarai Taraqiati Bank Ltd ; Sui Northern Gas Pipelines Ltd ; Karachi Port Trust

;Pakistan Electronic Media Regulatory Authority; Federal Board of Revenue ; Pakistan Steel

Mills ; Capital Development Authority; House Building Finance Corporation ; National

Database and Registration Authority; Sui Southern Gas Company Ltd ; Federal Ombudsman and a lot of other public sector organizations, enterprises, companies, corporations, regulatory bodies etc.

6.8 Grants and Subsidies for Political Benefits

Government in Pakistan gives various forms of grants and subsidies to take favor from their supporters. This work is done through various schemes without considering any long term benefit. These schemes are planned to get kickbacks from supplier, pay higher cost to acquire it without any transparent mechanism which make sure that the amount spending on these schemes

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are justified. For example Yellow Cab Scheme, Benazir Income Support Program, Lap Top scheme etc.

Yellow Cab Scheme was launched by PML(N) Nawaz Sharif government in 1992. The objective of this Yellow Cab Scheme was to provide taxi service facility to young unemployed people of

Pakistan. But basically this scheme was utilized by elite class for their benefits. After receiving these cars, most of the people converted these taxis into private vehicles. On the other hand, many vehicles owner never turned up to the bank to pay their installment. In this way, this scheme put lot of economic pressure on nationalized commercial banks which provided loans for this scheme.

Benazir Income Support Programmed (BISP) was launched by Prime Minister Yousuf Raza

Gilani in 2008 who was heading PPP government. The objective of the scheme was to alleviate poverty from the society. BISP plan was to provide support to those women who belong to lowest income group. This program is also criticized that grants of BISP are distributed on the basis of nepotism. Plan was made and launched in minister’s own constituencies who were given forms to distribute in their areas. They gave forms to those people who will support them in next election. It is also observed that present regime ministers and assembly members’ constituencies receive more grants compared to other areas. Billion of rupees spent on this program during last five years but no investigation carried out by government to evaluate BISP.

In Pakistan political office holder provides various facilities and benefits to its supporters, workers and voters. One of the way which is used for this purpose is to exempt various industries from taxes in which their relatives, associates are engaged. Through tax exemptions, government

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suffers huge revenue losses. Another way that is used in Pakistan by politicians is through SRO culture.

6.9 SRO ( Statutory Regulatory Order) Culture in Pakistan

Finance Minister Ishaq Dar stated in his 2013/2014 federal budget speech that exemptions and concessions given to importers are causing Rs.100 billion annual losses to national economy.

One of the governance issue faced by Pakistan is SRO(Statutory Regulatory Orders) culture.

These SRO are issued for various sectors and in specific cases related to income tax, sales tax and federal excise duty. SRO is a main source of discrimination, corruption and deliberate manipulation in budgets. Sometime SROs are issued on the instructions of the government and sometimes FBR decides on its own. FBR in Pakistan is habitual of issuing SROs. The main objective of issuing SRO’s from time to time is to provide various benefits to influential people in Pakistan. SRO’s issues to business tycoons in Pakistan who are politically connected and in this way government suffer billions of rupees every year. Sometimes even when a government is completing its tenure, it issues SRO to give benefits to people who are politically important for them in upcoming elections without consultation of business community at large. Public

Accounts Committee observed that FBR has so far issued 4500 SROs to grant favors to various groups in Pakistan. According to Customs Act of 1969, Parliament has delegated power to issue

SRO’s to FBR, but this power is misused by FBR and rather than facilitating the people, only elite class got benefits of around Rs. 650 billion tax exemptions and concessions. In most cases

SRO’s are issued for specific company rather than specific sectors, for example, SRO 57(I)

/2012 issued in January 2012 to reduce the turnover tax from 1% to 0.5% but this advantage is

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only given to PIA, poultry industry which benefitted PIA of around Rs.500 million. When various benefits are allowed to those who do not deserve it, it creates hurdle in development and welfare work which could benefit to common citizens in Pakistan.

Above discussion about mismanagement of fiscal side makes it clear that there is severe pressure on fiscal expenditure side and to fill and to reduce budget deficit government seeks domestic and international loans. Local loan put pressure on financial sector and funds which should be used by economy for productive purposes through investment in various efficient sectors are wasted.

On the other hand to obtain loan from domestic market government pays high interest rate which discourage banks and depositors to invest in other risky venture. When they can get handsome return by depositing money in schemes offered by government of Pakistan like

Defense Saving Certificate (DSC), National Saving Scheme (NSS) and Pakistan Investment

Bond (PIB), depositors avoid investing in capital market. Banks also do not participate in investment projects because they can invest heavily in government securities and earn substantial profit from it without facing any risk.

6.10 Cartel in Pakistan

In Pakistan economy various cartel functions which manipulate prices and earn huge profit. Most famous of them are sugar, cement, oil and stock broker cartel. These cartels have cross ownership in different companies like Attock group of companies owns Attock Refinery, Attock

Petroleum and National Refinery. PSO, Caltex and Shell have Pakistan Refinery. Cement cartel in which D.G. Khan cement, Cherat cement, Lucky and various other cement companies included. Cement cartel manipulated prices of cement and earned huge profit. Sugar cartel managed to increase the price of sugar from Rs.20 per Kg. to Rs.40 per Kg. in few months

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duration which was later challenged in Supreme Court of Pakistan but till then sugar cartel had done their work and made huge money. In stock market Jehangir Siddiqui, Aqeel Karim Dhedi and Arif Habib are key players and are also involved in various stock market scandals.

They have strong links with regulatory authorities and receive clean chit after few years of investigations.

6.11 Foreign Direct Investment

Poor political governance is reflected through poor direct investment in Pakistan. When we look at direct investment of last five years as given below in Table 6.2, it shows a continuous declining trend. This declining trend indicates that poor economic performance, law and order situation and unstable political setup creates obstructions in foreign investment in Pakistan.

Table No. 6.2 Direct Investment in Pakistan 2007-2012

Year $ in million

2007-08 5410

2008-09 3720

2009-10 2151

2010-11 1635

2011-12 821

Source: Various Economic Survey of Pakistan

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Figure 6.2 Direct Investments in Pakistan

From the Global Competitiveness Index (GCI) ranking of Pakistan, it is understandable that ruling elites do not have vision to make Pakistan prosper by boosting economic growth.

Corruption is widespread and government is unable to control it, rule of law exist in books but there is no implementation of it. Property rights are so weak that there are plenty of incidents in which ghost land and investment schemes, from time to time advertised in Pakistan, earned billion of rupees from poor and innocent people by these fraudulent scheme and ran away without any check. Public resources are used by government officials for their personal purposes.

Political leaders appoint their relatives and political supporters in different public sector enterprises like PIA, Steel Mill, OGDC, PPL and number of other enterprises. Amount to be

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spent on infrastructure do not spend on project but rather go in the pockets of contractors and bureaucrats as well as politicians. Rule of law is only applied on common man who does not have money to buy corrupt officials or pay in courts and in some cases rules are framed to give benefit to few like NRO case discussed above.

Hence, we conclude that when there is no improvement in basic pillars of competitiveness then economic deterioration is imminent.

6.12 Macroeconomic Instability

We assume that when real GDP growth is not stable, then economy suffers macroeconomic instability. We take Pakistan real GDP data from 1951 to 2012 as presented below in Table 6.3 which shows that real GDP of Pakistan is very volatile and throughout the period there is not a single decade when GDP is stable. Look at the Figure 6.3 which shows continuous volatility in

Pakistan real GDP.

Table No. 6.3 Real GDP of Pakistan (1951- 2010)

Year GDP Year GDP Year GDP Year GDP

1951 3.9 1952 -1.8 1953 1.7 1954 10.2

1955 2 1956 3.5 1957 3 1958 2.5

1959 5.5 1960 0.9 1961 4.9 1962 6

1963 7.2 1964 6.5 1965 9.4 1966 7.6

1967 3.1 1968 6.8 1969 6.5 1970 9.8

1971 1.2 1972 2.3 1973 6.8 1974 7.5

1975 3.9 1976 3.3 1977 2.8 1978 7.7

1979 5.5 1980 7.3 1981 6.4 1982 7.6

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1983 6.8 1984 4 1985 8.7 1986 6.4

1987 5.8 1988 6.4 1989 4.8 1990 4.6

1991 5.6 1992 7.7 1993 2.3 1994 4.5

1995 4.1 1996 6.6 1997 1.7 1998 3.5

1999 4.2 2000 3.9 2001 2 2002 3.1

2003 4.7 2004 7.5 2005 9 2006 5.8

2007 6.8 2008 7.2 2009 -1.6 2010 3.8

2011 2012

Source: Various Economic Survey of Pakistan Figure 6.3 Real GDP from 1951 to 2010

6.13 Liquidity Problems

We observe that return on bonds continue to rise as the government keeps borrowing.

Government is unable to manage its expenditures with the support of revenue generated by it. To cclix

overcome this problem, government borrow loan from local as well as international market, so its negative impact is visible on borrowing both on domestic and international level. We present total debt of Pakistan from 1971 to 2010 in Table 6.4(a) and Table 6.4(b). Figure 6.4 shows that total debt of Pakistan is continuously increasing and political regimes are unable to control it.

We present another Table 6.5 and Figure 6.5 of domestic debt of government of Pakistan from

1960 to 2010. Domestic debt is also on rising side. When government of Pakistan is unable to obtain international loan, it moves to local market to get loan, raises interest rate to attract depositors, consequently domestic loan increases debt servicing cost of Pakistan.

Pakistan debt position remains unsustainable throughout the period from 1960 till now as shown in Table 6.4. Though in 2000’s government tried to reduce debt position but it seems that it was a transitory period and debts raised again. We also present Defense Saving Certificate (DSC) rates which is one of the major saving certificates used by government of Pakistan to borrow fund through National Saving Scheme from domestic market. Return on bond is important for economic policy makers and they need to put attention on interest rate. When we look at the rate of DSC’s rates as given in Table 6.6 and Figure 6.6 from 1966 to 1996 it was on rise, after 1996 government became aware of the mismanagement in DSC’s rates and compared it with other economy rate and then decided to keep it in line with other rates. First they linked it with the policy rate of State Bank of Pakistan, hence this rate was corrected and adjusted in line with

SBP discount rate and government also decided to review National Saving Schemes(NSS) rates on quarterly basis, because of which rate decline from 1999 to 2004 but later on as liquidity problem rises and government raises policy rate, consequently it raises DSC rates again. Since as per IMF condition government do not want to borrow more funds from SBP, so government rather rely on non-banking sources of financing to meet its fiscal deficit. cclx

Table No. 6.4(a) Total Debt of Pakistan (1971-1991)

Total Debt(in Total Debt(in Total Debt(in Year millions) Year millions) Year millions)

1971 Rs.26,096 1978 Rs.97,965 1985 Rs.441,325

1972 49,271 1979 117,354 1986 548,694

1973 50,147 1980 127,492 1987 624,162

1974 55,475 1981 227,394 1988 741,649

1975 59,102 1982 289,396 1989 885,881

1976 74,148 1983 324,359 1990 1,016,434

1977 86,279 1984 372,252 1991 1,163,041

Source: Various Economic Survey of Pakistan

Table No. 6.4(b) Total Debt of Pakistan (1992-2010)

Total Debt(in Total Debt(in Total Debt(in Year millions) Year millions) Year millions)

1992 Rs.1,358,561 1999 Rs.3,847,140 2006 Rs.6,049,017

1993 1,643,179 2000 4,358,162 2007 6,659,846

1994 1,855,782 2001 4,780,244 2008 8,806,502

1995 2,152,503 2002 4,322,528 2009 10,534,917

1996 2,455,637 2003 4,486,604 2010 10,702,169

1997 2,849,168 2004 5,192,533 2011

1998 3,176,640 2005 5,532,264 2012

Source: Various Economic Survey of Pakistan cclxi

Figure 6.4 Total Debt of Pakistan (1971-2012)

12000

10000

8000

6000

4000

2000

0

1993 2003 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1995 1997 1999 2001 2005 2007 2009

Table No. 6.5 Domestic Debt of Pakistan (1960-2010)

Total Debt(in Total Debt(in Total Debt(in Year millions) Year millions) Year millions)

1960 Rs.4,413.50 1977 Rs.35,344.30 1994 Rs.697,468.20

1961 5,384.10 1978 41,741.30 1995 794,205.20

1962 5,535.60 1979 53,469.10 1996 907,263.30

1963 6,000.10 1980 60,838.70 1997 1,048,077.00

1964 6,507.90 1981 59,125.30 1998 1,190,186.60

1965 6,875.30 1982 82,883.00 1999 1,392,594.30

1966 8,020.50 1983 105,362.80 2000 1,646,623.70

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1967 8,461.30 1984 126,870.90 2001 1,801,985.50

1968 8,956.30 1985 155,408.10 2002 1,760,366.60

1969 9,198.90 1986 203,205.80 2003 1,881,066.30

1970 11,011.60 1987 249,188.90 2004 2,012,805.40

1971 13,595.70 1988 289,457.90 2005 2,178,119.60

1972 17,124.90 1989 332,524.30 2006 2,337,402.40

1973 19,812.30 1990 378,890.20 2007 2,610,351.60

1974 18,618.90 1991 445,041.30 2008 3,274,680.10

1975 22,520.80 1992 524,566.30 2009 3,860,674.60

1976 28,702.10 1993 605,184.80 2010 4,654,038.70

Source: Various Economic Survey of Pakistan

Figure 6.5 Domestic Debt of Pakistan

5000

4500

4000

3500

3000

2500

2000

1500

1000

500

0

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Table No. 6.6 Defense Saving Certificate(DSC) Rates

Year Rate% Year Rate% Year Rate%

1966 7.18 May-2000 14.01 Jun-06 10.03

1972 8.45 Jul-01 15.01 Jun-07 10.15

1974 11.61 Jan-02 14.13 Jun-08 12.15

1975 13.35 Jul-02 11.61 Oct-10 12.6

1977 14.58 Jan-03 10.03 Jan-11 13.55

1981 15.6 Jul-03 8.5 Oct-11 12.68

1993 16 Jan-04 7.96 Jan-12 11.9

1996 18.04 Jun-04 8.15 April 2012 12.33

1999 15.97 Jul-04 8.2 Jul-12 12.68

2000 15.01 Jul-05 9.46

Source: Various Economic Survey of Pakistan

Figure 6.6 DSC Rates

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6.14 Current Account Deficit

Not only debts of government of Pakistan but behavior of current account deficit are also important to understand policy issues. Current account deficit is very important as it may be used as a leading indicator for the understanding of the behavior of economy. Current account deficit is a major macroeconomic problem faced by Pakistan. In case of Pakistan it is continuously on negative side as shown by Table 6.7. Growing current account deficit and public debt can create financial crisis for Pakistan. Current account deficit is financed by the government by borrowing or printing money. In case of borrowing , government crowding out private investment and in case of printing money inflation will be on higher side. As discussed earlier that Pakistan debt is continuously rising at domestic as well as international level which increasing debt servicing cost. On the other hand Pakistan continuously faces negative current account balance. Rising current account deficit forces the government to further increase borrowing and to increase

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borrowing, government will increase interest rate which will further increases inflation and so on.

Table No. 6.7 Current Account Deficit of Pakistan (1949-2010)

Amount(in Amount (in Amount (in Year millions) Year millions) Year millions)

FY 49 Rs.-191.6 FY 70 Rs.-383.7 FY 91 Rs.-1,415.70

FY 50 -113.9 FY 71 -405 FY 92 -2,297.40

FY 51 53 FY 72 -23.5 FY 93 -3,111.60

FY 52 13.3 FY 73 21 FY 94 -1,725.80

FY 53 159 FY 74 -327.9 FY 95 -2,224.90

FY 54 157.5 FY 75 -1,057.40 FY 96 -3,063.20

FY 55 53.7 FY 76 -918.2 FY 97 -3,522.10

FY 56 165.5 FY 77 -1,154.50 FY 98 -1,418.60

FY 57 3.1 FY 78 -1,471.70 FY 99 -1,596.50

FY 58 -132 FY 79 -1,950.70 FY 00 -1,691.80

FY 59 -53.2 FY 80 -2,345.10 FY 01 -1,476.00

FY 60 -129.8 FY 81 -2,422.50 FY 02 -1,145.90

FY 61 -291.8 FY 82 -3,108.50 FY 03 -1,015.50

FY 62 -265.9 FY 83 -2,635.60 FY 04 -2,876.90

FY 63 -330.2 FY 84 -2,899.10 FY 05 -6,183.80

FY 64 -447.7 FY 85 -3,381.30 FY 06 -12,010.90

FY 65 -623.2 FY 86 -2,516.60 FY 07 -13,405.80

FY 66 -313.2 FY 87 -1,603.30 FY 08 -20,196.70

FY 67 -478.9 FY 88 -1,890.10 FY 09 -16,891.20

FY 68 -321.5 FY 89 -2,333.80 FY 10 -15,163.00

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FY 69 -348.1 FY 90 -1,922.00

Source: Various Economic Survey of Pakistan

Figure 6.7 Current Account Deficit of Pakistan (1949- 2010)

6.15 Fiscal Deficit of Pakistan

Large fiscal deficit continues to pose a serious threat to macro-economic stability. Macro- economic stability is always a problem for Pakistan economy and persistent fiscal deficit further aggravate the situation. We define macro-economic instability by the inconsistency in the growth rate of real GDP as presented here. Real GDP from 1951 to 2010 was never stable as indicated by the graph. The empirical literatures have showed evidences that due to large fiscal deficits

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inflation and interest rate will rise and investment will reduce. A fiscal deficit is also positively correlated with current account deficits.

Pakistan’s economy experienced high fiscal deficit for over three decades and consequently high debt too. We present fiscal deficit data of Pakistan from 1979 to 2010 in Table 6.8 as well as its graph in Figure 6.8.

Table No. 6.8 Fiscal Deficit of Pakistan(1979-2010)

Amount(in Amount(in Amount(in Year millions) Year millions) Year millions)

1979 Rs.23,419 1990 Rs.89,772 2001 Rs.336,097

1980 26,689 1991 123,586 2002 501,136

1981 23,377 1992 168,028 2003 352,424

1982 28,149 1993 157,143 2004 348,942

1983 40,008 1994 171,187 2005 370,996

1984 42,825 1995 198,167 2006 475,043

1985 53,805 1996 257,675 2007 541,359

1986 67,292 1997 297,127 2008 975,124

1987 66,873 1998 273,186 2009 990,456

1988 95,278 1999 343,491 2010 1,180,350

1989 95,520 2000 353,710

Source: Various Economic Survey of Pakistan

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Figure 6.8 Fiscal Deficit of Pakistan

During 1980’s fiscal deficit of Pakistan was on average around 6.5 percent of GDP. That slightly reduced in 1990-91 but later on it further increased. It’s difficult for Pakistan to achieve fiscal deficit target because of slow growth of revenue collection, losses of the state owned enterprises as well as heavy public spending from government side. Since government need billions of rupees to manage loss making state owned enterprises, it looks difficult for government to improve fiscal deficit issue.

To cover the resource gap government increased its borrowing both form internal and external sources. This borrowing is further creating trouble for Pakistan through high debt servicing cost. cclxix

It is generally observed that main reason of high fiscal deficit is inability of the government to increase its revenue sources as shows by tax revenue collection of last one decade given in Table

6.9 below. Tax revenue in terms of percentage of GDP remained around 9 percent and the government can not improve it. On the other hand government does not have control over its expenditures.

Although IMF SBA (Stand-By Agreement) program of 2008 support Pakistan’s fiscal deficit issue but in spite of IMF SBA support fiscal deficit increased from 3.3 percent of GDP to 6.6 percent during the period from 2005-11. In similar period debt to GDP ratio decline from 62.6 percent to 59.4 percent, but both fiscal deficit and debt to GDP ratio was higher than other developing countries.

Table No. 6.9 Tax Revenue Collection (% of GDP)

Year Tax Revenue in billions % of GDP

2000-01 Rs.392.3 9.4

2001-02 403.9 9.2

2002-03 460.6 9.6

2003-04 518.8 9.2

2004-05 588.4 8.9

2005-06 713.4 9.4

2006-07 847.2 9.7

2007-08 1007.2 9.8

2008-09 1161.1 9.1

2009-10 1327 8.9

Source: Various Economic Survey of Pakistan cclxx

For a sound fiscal policy it is necessary to keep fiscal deficit at lower side to avoid economic instability and to get benefit of growth but Pakistan can not achieve it because of persistent fiscal deficit and mode of financing adopted for it. From 1990’s till today Pakistan faces serious macroeconomic imbalance and one of the reasons is fiscal deficit. The consequences are clear,

Pakistan is facing serious low level of public and private investment and growth problem and mounting pressure of public debt. Look at the credit taken by private sector in last thirty years as given in Table 6.10 below. During the last three decades Pakistan faced army rule as well as political government but there were very few occasions when private sector showed more interest to borrow fund for investment, otherwise private sector credit position remains dull.

Look at the credit obtained during 1999 and 2002 when Pakistan faced coup and September 11 event, due to political unstable situation, credit for investment decline which later increased as army rule strengthened its position. From 2008 onward as political government was again unstable, and despite lower interest rate compared to previous years, private sector did not show any improvement in borrowing and credit demand from private sector remained downward which is clear indication of poor investment activity. Pakistan due to its low credit to private sector ranked 142 out of 179 countries in 2011. Banks are also not developing credit support environment and they moved towards risk free government securities.

Table No. 6.10 Credit to Private Sector in Pakistan (% of GDP)

Year % of GDP Year % of GDP Year % of GDP

1980 23.41 1991 22.32 2002 21.67

1981 24.04 1992 23.62 2003 24.6

1982 24.7 1993 24.55 2004 28.74

1983 26.38 1994 24.01 2005 28.65

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1984 24.22 1995 24.21 2006 28.94

1985 27.78 1996 24.69 2007 29.66

1986 29.79 1997 24.65 2008 29.84

1987 27.64 1998 25.11 2009 23.57

1988 26.37 1999 25.47 2010 21.5

1989 24.91 2000 22.34 2011 18.37

1990 24.16 2001 21.78

Source: Index Mundi

During the period from 2007-12 Pakistan faced many challenges including power crisis, lower tax to GDP ratio, inflationary pressure, floods, , high fiscal deficit and escalating public debt at a very high interest rate, high growth in subsidies and as usual expenditure overrunning revenue.

In 2007-08 fiscal deficits was 7.3 percent which reduced to 5.2 percent in 2008-09 with the support of IMF plan but fiscal deficit again increased in 2010-11 to 6.5 percent due to high amount of subsidies, lower revenue and high spending on defence. To cover fiscal deficit

Pakistan is heavily borrowing from internal and external sources which is putting pressure on interest payment. When we review Pakistan fiscal position in terms of key fiscal indicators like revenue, expenditure and fiscal deficit, position is quiet volatile (see Appendix B, Table B4). It further shows that in the last twenty years Pakistan faced severe fiscal deficit problem and couldn’t get rid of it.

The main reason of expenditure volatility is subsidies provided for electricity and interest payment as well as subsidies provided to Public Sector Enterprises which consume huge amount of government revenue. When we look at the revenue side from 2006-07 to 2009-10 it is almost cclxxii

constant but expenditure side is volatile causing changes in fiscal deficit but in 2010-11 to 2012-

13 revenue side also showed reducing trend which further aggravated fiscal deficit position.

Another problem with reference to fiscal deficit is that its financing are mostly done by domestic sources from the banking sector at a higher rate than foreign loan which not only increases government debt servicing cost as well as also shows government inability to get cash inflow from external sources (see Appendix B, Table B5 and B6). There is only one year of 2006-07 when government received substantial amount form privatization process but very meager amount in 2008-09.

In Pakistan we observe that there are multiple causes of fiscal deficit, for example, a lot of money is spent on infrastructure development of influential feudal landlords who through their political association take approval of various construction projects for their constituency but not for the benefit of public. The actual objective is either to use this construction for their personal benefit or take approval of project for some relatives or for someone from whom bribes have already been taken. The amount received for any project will be as per standard quality of any project but similar amount will not be spent on project, hence project quality suffers. There are plenty of examples available where school, clinic etc. constructed on government spending and after sometime they use it for their own purpose. Another way through which government spending increases without benefiting public is when political parties, feudal lords and influential politicians appoint their people in various government department in excess of need of that department in which Pakistan Steel Mill, PIA, Pakistan Railway and host of other department are important to mention. On the other hand, reason of fiscal deficit is excessive government spending on public sector enterprises like Pakistan Railway, PIA, Pakistan Steel Mills,

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WAPDA/PEPCO to cover their losses, to keep them operational and for debt servicing cost, pensions etc.

6.16 Energy Crisis in Pakistan

To understand governance problem in Pakistan and its economic consequences, energy crisis in

Pakistan is an excellent example. This is very significant part of our study which highlights the poor governance and lack of vision of politicians as well as policy makers bureaucrats. We discuss it here in detail to understand this most important economic mismanagement by policy makers.

Daily Times on October 28, 2010 observed that Government of Pakistan do not follow and implement its policies because of which foreign investors were unhappy as all the power purchase agreements were re-opened and criminal action was initiated against Hubco (Ali &

Beg, 2007; Malik, 2012).

Daily Times news is not only one, there are plenty of other incidents when Pakistan did not fulfill its commitment and put itself in trouble. This news may also be taken as a background of crisis for a country whose population has crossed 200 million and being a developing country energy needs are high but ironically Pakistan facing serious energy shortages while global oil prices are on upward trend and putting negative burden on Pakistan’s balance of payment.

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In Pakistan we face a lack of consistency in economic policies of various governments. When a government is removed or completes its tenure the succeeding government feels itself duty bound to change the policies of the previous government. In this context we can refer to the policy of Independent Power Projects which was started by government of PPP but was reversed once government of PML came into power. According to this policy private investors were invited to invest in projects in power sector. Electricity thus produced would then by purchased by WAPADA at an agreed price. Investors’ response was very good which can be judged by the very fact that today not less than 25 per cent of the total electricity generation capacity of the country rests with IPP’s. This includes big projects like HUBCO and KAPCO. But PML government, soon after taking over, started to renegotiate the contracts on the pretext that price set was too high. Investigations were also conducted to determine whether any bribes were paid to get the contracts signed (Ali & Beg, 2007). It is failure of the government to implement successive agreements led to the loss of Pakistan’s credibility among the international financial community (Ali & Beg, 2007). Pakistan is facing severe energy crisis. Government didn’t make any plan to improve performance and governance of power sector (Malik, 2012).

Pakistan is facing energy crisis and the gap between supply and demand is worsening day by day and shows negative effect on economy. Various policies introduced by government but couldn’t achieve results. New Captive Power Producers (N-CPPs) planned in 2009 to improve energy position in country. This policy required investors to set up generating plants on new machines on built, owned and operated basis. It was agreed that sale and purchase of new captive power will be through bilateral agreement between power producer and the power purchasers. Various groups from power sectors, cement and textile sectors made huge investment totaling $120 million in captive power projects. cclxxv

Earlier on 15th June 2007 NEPRA issued a public notice asking captive power producer to sell power to buyers at mutually agreed rates minimizing regulatory contracts. In February 2012,

NEPRA change its earlier notice of 2007 and asked all distribution companies to file power acquisition requests. Distribution companies filed the power acquisition requests and NEPRA granted approvals by reducing various components of the tariff which was given under 2009 policy violating laws and regulations. NEPRA compared N-CPPs to IPPs which have larger power producing capacity and covered under a separate regime. It is not clear why tariff which was approved under 2009 policy revised downward which causes financial losses to the investors. Now investor has no other option except raise contractual disputes or shut down their plant which will further aggravate crisis. This may be taken as one of the various incidents where governance problem is evident.

We observe that this energy crisis is mainly due to poor governance as highlighted by Malik

(2012). Energy crisis is due to lack of vision, poor and inadequate policies and inefficient management of the sector. The whole sector is poorly managed, for example, lack of generation capacity, poor transmission and distribution system, rising tariffs, circular debt, high distribution losses, inefficient shifting from low cost hydel to high cost thermal generation. These problems show that there is serious crisis of governance. Government established a power regulatory authority NEPRA but there are many other institutions working in similar area without proper coordination, hence delay in planning and implementations of policies (Malik, 2012).

6.16.1 Lack of Vision in Energy Management

In 1984 electricity generated from Hydel was 59.3% which shrunk to 45% in 1990 and rest was produced by thermal. Load shedding started in 1980s because of shortage of supply as compared

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to demand, though WAPDA forecasted it but couldn’t work to improve the situation before crisis began. In 1986 WAPDA forecasted that they are facing shortage of electricity in the months of November and December, on the other hand KESC had surplus electricity in these months WAPDA decided to take electricity from KESE in the months of November and

December and in return WAPDA planned to provide electricity to KESC in the month of June and July and instructed the KESC to close generation in these two months. From here load shedding started which now become a major crisis for Pakistan and one of the main reasons of economic slowdown in Pakistan.

It was at this time in 1988 that government of Pakistan decided to attract private sector participation. Independent Power Project (IPP) was required to produce electricity to provide to national grid system and will not use it for themselves (Ali & Beg, 2007).

In July 1992, the government of Pakistan made a strategic plan to privatized WAPDA in steps and decided to invite private sector to build and operate new plants. WAPDA generation, transmission, dispatch and distribution work had to be separated and privatized. To give support to this program the World Bank approved the US$150 million Private Sector Energy

Development Project (PSEDP 1) in June 1988 and provided $250 million in November 1994 for

The Second Private Sector Energy Development Project (PSEDP II). The Objectives of PSEDP I and II were to support for the promotion of private sector investment in energy, creation of vehicle for financing and establishment of new institutions for approval of private energy investments. With the help of $1.6 billion, 1292 MW Hub Power Project (Hubco) was established in 1991,which was the first private power project in Pakistan. This project was financed by USA, UK, Japan, Italy and France under the Pakistan Energy Development Fund as

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well as World Bank. The Pakistan Electric Power Company (PEPCO) was formed in 1992 to carry forward reforms in the power sector (Ali & Beg, 2007).

Pakistan developed new policy for private power in 1994 when it decided to deregulate economy. This policy is referred as 1994 Private Power Policy which incorporated all pervious polices. 1994 policy was successful and attracted 34 projects for more than 9000 MW. 20 IPPs with installed capacity of 4500 MW reached to financial close and total investment reached to

$5.3 billion including 25% financing by foreign equity (Ali & Beg, 2007; Malik, 2012).

Though 1994 policy showed improvement in investment but some projects were too small, fuel selection was not appropriate and heavily dependent on fuel oil rather than on gas and other efficient technology. There was no clear mechanism from government side to prioritize projects.

Projects selection was not transparent and political influence was evident with heavy criticism of corruption. Slow pace in the privatization of WAPDA and monopoly of public sector transmission and distribution as well as increasing fuel prices further created problems for 1994 policy. WAPDA was facing cash flow problems because they were purchasing electricity from

IPP and IPP tariffs were indexed with US Dollar. This issue couple with devaluation of Pakistani

Rupee and decline in economic growth aggravated the payment position of WAPDA to IPPs.

The decision to bring in IPPs resulted in increased power generation costs because capital and generation cost of IPPs is very high (Ali & Beg, 2007; Malik, 2012).

As of June 2010, 27 IPPs were operational, and had an installed capacity of 6,870 MW. There was general perception that IPPs are earning handsome profit and charging higher rates as compared to international market. From here government discouraged investment in IPP projects and encouraged natural gas projects (at that time, it was estimated that Pakistan has surplus gas

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supply which can fulfilled our requirement for next hundred years). Now government established various committees to lower IPP payments which created fear that government would not honor its contracts. Another interesting point is that every new government blames the previous government for high cost of power, and as a result, the IPP program became highly politicized.

The poor initial handling of corruption allegations contributed to the erosion of investor confidence in Pakistan, and foreign investment flowed to a trickle exacerbating the wider economic crisis in the country (Ali & Beg, 2007).

Pakistan also has sizable quantity of coal reserves. One of the most important reserves of coal was discovered in 1992 in Thar region of Sindh province. The total reserves are of approximately 175 million tons. Sindh Coal Authority was established in 1993 to exploit these and other coal reserves found in Sindh province. Sindh government claimed that these reserves can be used for generating electricity and they are enough to make Pakistan self sufficient in power generation. Sindh government also claimed that production of electricity by coal found in

Thar area would also provide supplemental benefits to various other industries. But powerful oil lobby is against this project. In Pakistan, this lobby is very strong and it is against any project which would reduce the country’s dependence on oil.

It has been more than two decades since the reserves were discovered but for reasons best known to the political leaders and bureaucrats, the whole scheme is still in doldrums. Governments have come and gone, faces changed but no one paid attention to these national resources.

Interestingly the initial work on this project was started in the early 90's. But such was the political wrangling of that time that when the government changed, so did the national priorities.

Projects are scrapped only on the basis of political affiliation and even a project as important as

Thar Coal was not spared. cclxxix

An agreement was made between the Chinese National Mechanical Import and Export

Corporation and the Government of Pakistan. The Chinese firm Shenhua was to establish a coal- fired power generation plant in Thatta, with an investment of about USD 200 million. Initially the capacity of the proposed plant was to be 100 megawatt but the plan was to increase it rapidly to 200 megawatt. Government of Pakistan decided to change the proposed price to 5.49 cent per unit from 5.75 cent per unit. The Chinese company disagreed and without any further negotiations wound up the project and left. Why it happened? Either it is the strong petroleum lobby which is creating hurdles or some other quarters didn’t receive their commission on this project. There is no doubt that the Petroleum lobby is very strong in Pakistan and it is against their interest to allow any other means of power generation except oil. This lobby is major beneficiary of the increasing oil bill that is estimated to be more than Rs. 15 billion annually.

Government decided to use coal resources and planned a project of 100 MW power from gasification of coal under the supervision of Dr. Sammar Mubarak and who is also member of

Planning Commission of Pakistan. Government invested Rs. 984 million on this project and planned to invest 100 million dollars more on this project but did not release this fund and later a member of Planning Commission of Pakistan objected on this project that this project is not feasible. Supporters of this project argue that currently the power generated by Independent

Power Producers cost about Rs 14 per unit while power generated through coal will cost Rs 4 to

5 per unit. They argue that cost to produce electricity through coal is cheaper as compared to thermal and even hydel.

It is generally believed that oil producing lobby with the support of government officials are discouraging this project. Since NEPRA determine price in Pakistan and is federal institution.

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Sind government made a contract with Chinese company who proposed to use coal and offered

8 cent per unit price which would remain fixed for seven years. NEPRA proposed after their calculation that it should be 6 cent per unit which was not accepted by Chinese company and they refused to work on this project. Right now price is offered 18 cent per unit.

After 2008 elections, PPP government came into power. By then Pakistan was facing a serious shortage of electricity. Pakistan total installed production capacity was 20,000 mega watts which was still short by 4,000 mega watt. Due to this both WAPDA and KESC resorted to long hours of load shedding of both their commercial and domestic consumers.

There were various reasons for this shortfall. First of all successive Pakistani governments failed to make investment in new power generation projects. Secondly, distribution system of both

WAPDA and KESC were very poor. Thirdly, due to power theft these organizations had huge line losses which were in many cases as high as 40 per cent of total production.

Due to huge line losses distribution companies were unable to collect funds and consequently were not paying IPP’s on a timely basis (Malik, 2012). . On the other hand oil prices in international market were also rising steadily. This caused circular debt problem when IPP’s were forced to produce far below their installed capacity as they were unable to pay their ever rising fuel bills. At this juncture the PPP government came with the idea of Rental Power

Projects (RPP). The idea of RPP’s was first launched by the government of Prime Minister

Shaukat Aziz.

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It is not clear what the government plans were for the RPP’s since fuel supply was short and existing power stations were working below full capacity. In these circumstances how the government planned to meet the fuel requirements of the RPP’s. As per the agreements signed with the foreign parties a hefty amount was to be paid to them for which no planning was seemed to be in hand. In this respect the case of the Turkish Karkey power plant is worth mentioning.

The plant was supposed to provide 230 mega watts of electricity while in reality it provided only

30 mega watts. Just as RPP’s providing less than expected amount of electricity, they were also providing it at a huge cost to the exchequre when no transparent system was in place for determining the tariff structure. The electricity provided by the Turkish plant was costing the government 41 Rupees per kilo watt hour.

Even some of the elements in the government were also against this scheme. One important voice against this project was of then Finance Minister Shaukat Tareen who opposed the project on the basis that it will increase reliance of the country on imported fuel. It will increase country’s import bill which will have negative repercussions for the exchange rate of Pak

Rupees. It was estimated that commissioning of RPP’s will increase the furnace oil requirement of the country from 35,000 tons to 45,000 tons.

After going through the arguments of both sides we can easily conclude that this scheme was launched without proper planning. The system of awarding contract was not transparent and no proper feasibility study was done. Later on Supreme Court of Pakistan also reached the same conclusion.

If we go through the history of Pakistan in the last thirty years we notice that our governments have not learnt any lesson. The most economical source of producing electricity for a country

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like Pakistan is water. We completed some important projects like Tarbela and Mangla in the sixties and seventies but since then no significant project has been installed. The only note worthy hydro power project completed in the last thirty years is 1450 megawatt Ghazi Barotha and we have nothing else to show in this respect. The other attractive source of producing electricity is coal but we have done nothing in this area also and Pakistan does not produce even one per cent of its total electricity generation through coal. However, when we look around in our neighborhood China and India produce more than seventy per cent of their energy requirement from coal.

10.6.2 Issues of Good Governance in Energy Sector

From the detail discussion in previous pages it is apparent that Pakistan faces a critical shortage of energy. This shortage is affecting productivity and efficiency of every sector of the society.

Whether they are the farmers in the field or workers in the big industries located in the large cities of the country they cannot perform to their optimum when facing such acute shortage of the basic means of production. Our politicians cannot agree on any important hydro power project and our policy makers cannot device a policy suited to the needs of the country. The basic reason is that they are not interested in the basic development of the country. All they care for are their perks and perquisites. Various initiatives taken by the governments in the energy sector clearly show that they lacked vision and foresight (Haq, & Hussain, Khalid ,2008).

6.17 Capital Market of Pakistan

When Pakistan is facing many problems in economic and business side due to poor governance, it is also reflected through capital market functioning. Table 6.11 and 6.12 shows that total listed

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companies in 1992 at KSE was 628 which increased to 782 in 1996 but after 1996 there is continuous decline in total number of companies listed at KSE. We present here data from 2000 to 2012-13 in Table 6.11 and 6.12 which shows the fact that in listed companies is on decline.

When we compare from 1996 when 782 companies was registered and now 571 companies are listed in 2012. There are around 27 percent companies delisted from KSE. During 2003 to 2007 new IPOs were in double digit, otherwise only few companies offered for subscription.

Table No. 6.11 Profile of Karachi Stock Exchange from 2001-2013

Year Listed New IPO Year Listed New IPO Co. Co. 2012-13 571 2011-12 591 3

2010-11 639 1 2009-10 652 8

2008-09 651 8 2007-08 652 7

2006-07 658 16 2005-06 658 14

2004-05 659 15 2003-04 668 16

2002-03 702 2 2001-02 712 4

2000-01 747 4

Source: Economic Survey of Pakistan

Table 6.12 Listed Companies of KSE(1992 to 2000)

Year Listed Co. Year Listed Co.

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2000 762 1999 765

1998 773 1997 781

1996 782 1995 764

1994 724 1993 653

1992 628

Source: Global Stock Markets Factbook

Figure 6.9 Listed Companies of Karachi Stock Exchange (1993-2012)

Source: Prepared by author

A personal goods (textile sector) is the largest sector of KSE consist of 178 companies as per

Economic Survey of Pakistan 2012-13. Listed capital Rs. 49,995.58 million and market

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capitalization of Rs. 257,457 million and this sector suffering loss after tax of Rs. 5605.55 million. There is not a single Blue Chip company belonged to textile sector.

Look at the number of companies delisted from KSE in Table 6.13. Total 92 textile sector companies delisted due to various reasons from KSE, in this way textile sector is major contributor to reduce total number of companies at KSE.

Table No.6.13 Delisted Companies of Textile Sector in Pakistan(1991-2013)

Year Delisted Textile Sector Companies

2013 1 2012 30 2011 2 2010 3 2008 1 2007 3 2006 2 2005 5 2004 9 2003 1 2002 12 2001 4 2000 4 1999 2 1998 3

1996 4 1993 5 1991 1 Total 92

Source: Karachi Stock Exchange

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We compile data of textile sector companies and observe that a major portion of textile sector listed companies do not pay dividend. These companies earn profit but rather than distribute to shareholder as dividend, they accumulate these profit. Table 6.14 shows that in 2008, out of 175 companies of textile sector, only 34 paid dividend which is only 24 percent of total companies and rest did not pay dividend.

Table No. 6.14 Textile Sector Dividend Payment Behavior

Year 2008 2009 2010 2011 2012

No. of Companies Paid Dividend 34 33 67 64 60

No. of Companies not paid 141 142 108 111 115

Co. in % Dividend Paid 24% 23% 62% 58% 52%

Source: Karachi Stock Exchange

The concentration of shareholding is another important factor in Pakistani listed companies.

Fifty random companies as computed by (Cheema, Bari & Saddique,2003) is presented here to understand that in fifty randomly selected companies from Karachi Stock Exchange, the top three shareholders have more than fifty percent holding in company. Top five shareholders have more than sixty percent holding in company as given in Table 6.15 below.

Table No. 6.15 50 Random Companies of Karachi Stock Exchange: Ownership Concentration

Mean Median Minimum Maximum S.D

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Top 3 52 50.7 2.5 96.8 21

Top 5 62.39 64.23 3.5 99 21.17

Source: Cheema, Bari and Saddique (2003)

We present another data in Table 6.16 gathered by ( Cheema, Bari & Saddique,2003) in which

Karachi Stock Exchange’s pattern of shareholding presented. Here when we combine family ownership and associated companies of family members, clear concentration of ownership is visible in textile as well as non textile sector.

Table No. 6.16 Pattern of Shareholdings in Pakistan

Investor Type Textile Non Textile

Family members holdings 29.3 9.1

NIT/ICP 8.4 11.1

Financial Institutions 5.1 8.2

Foreign Investors 1.9 14.3

Joint Stock Companies 23.2 16.9

Associated Companies of the 17.4 21.4 family members

Source: Cheema, Bari & Saddique (2003).

Karachi Stock Exchange(KSE) managing director and regulatory authority of capital market

Securities and Exchange Commission of Pakistan (SECP) claimed that KSE performance is far better than other international market and stock market investors earn windfall profit by

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investing in stock market. Real picture is not the same, market is inefficient and prices of many company’s stock rises without any justification. Few players make money by inflating prices and then prices fell back to previous position and even sometime below the par value of Rs.10. Take for example Jahangir Siddiqui Company Ltd.( JSCL), a company owned by Jahangir Siddiqui group. Price of JSCL on January 3, 2007 was Rs. 155 which reaches to Rs. 1067.8 on December

31st 2007, this stock gives 589% gain in one year and most interesting thing is that, no specific reason behind this windfall profit. There is no justification behind the rise and fall of this stock price and small investors lost million of rupees in this and similar type of stock. When price rises of various stocks, fundamentally there is no major shift in earning and dividend of this stock and when fall again, various justification come forward but basic fundamentals of stock remains the same. Here we provide various companies stock prices with fall without any specific reason.

Table B7(see Appendix B) shows that decline in price ranges from 51% to 25% within a month.

This capital loss suffered by investors and incurred huge losses while there is no major shift in earning, dividend of these companies.

The giant players make profit from this rise and fall of stock prices when fundamentally there is no major shift in companies earning or dividend.

In 2005 crash of Pakistani stock market, investors deprived of around Rs.80 billion. Various brokerage houses who were involved in Badla scheme and wash trading were came forward to be investigated like Aqeel Karim Dhedi, Arif Habib Securities, Jehangir Siddiquie, DJM

Securities, KASB, Orix Bank, FDM Capital and First Capital Equities etc. Government done nothing to unearth reasons of bubble and burst happened between March 15 and April 21, 2005.

SECP did nothing to find causes and all data of offers and bids were removed from the computer

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records and USA firm Diligence couldn’t find anything. Table B7 (see Appendix B) shows decline of stock prices in very short time without any specific reason.

In 2008 stock market reached to all time high of 15,760 points on April 20, 2008 and then prices suddenly came down and index down by 55 percent in four months time and finally on August

20,2008 a “floor” was set at the level of 9144 points, below which index was not allowed to go and due to which small investors and foreigners trapped and couldn’t exit the market.

Nobody accepted this mishap and traders, brokers and regulators are putting blame on each other. This floor remained for 108 days and lifted on December 14, 2008. Market started with panic and came down to the level of 4782 points in less than fifteen sessions.

Pakistan corporate sector market capitalization fell from Rs. 2.881 trillion on August 8th 2008 to

Rs. 1.578 trillion on January 24, 2009. Major losses were suffered by small investors. Regulators couldn’t identify perpetrators and no accountability was fixed for this bubble and bust again.

Eight brokers were expelled and two directors were declared defaulters. One director left country without claims of billions of rupees and still untraceable. Membership of few defaulter brokers cancelled including Prudential Securities, Eastern Capital, MKA Securities, Capital One Equities and Click Trade. As per market retail traders and small investors, nothing will happen and they feel that these securities agencies will again emerge in capital market after some time by changing their name and few directors. These crashes and bubble and bust as well as price manipulation shook the confidence of small traders and growth of capital market is in doubt.

6.18 International Governance Indicators and Pakistan Ranking

Good governance is very important for growth and prosperity of any country. Human development, economic growth and social development in any society is directly related to its ccxc

governance mechanism, features and how it is managed by its people. Where good governance lacks, society faces multiple issues, both from economic and social point of view. When we look at Pakistan since independence in 1947, governance has always remained a problem for this country and all governance indicators, measured by various international agencies by taking multiple variables shows very dismal picture. Here we give a brief discussion on various international governance indicators measured by various institutions and governance status of

Pakistan.

6.18.1 Worldwide Governance Indicators

We collected information on governance issue in Pakistan from various international institutions, worked on different dimensions related to governance and relevant matters. First we take

Worldwide Governance Indicators (WGI) developed by World Bank. As discussed earlier

Kaufmann and Kraay (2008) developed six broad dimensions of governance perception indicators covering 209 countries with scale of approximately in the range of -2.5 to +2.5 with higher values related to better outcomes. Kaufmann and Kraay (2008) also scaled in percentile rank starting from 0 to 100 for all countries. Lower percentile shows poor governance.

These six governance indicators are not independent of one another. Take for example, if better and improved accountability is provided by the government, it means less corruption. Effective government can arrange better rules and regulations environment. Due to this reason these six governance indicators show strong positive correlation across countries.

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Now we look at the governance position of Pakistan using these six aggregate indicators during the last fifteen years as prepared by World Bank. We compiled data from 1996 to 2011 for all six governance indicators related to Pakistan in Table 6.17(a) and 6.17 (b). From 1996 to 2011 there is not a single year when Pakistan’s any governance indicator moved from negative to positive. There is a consistent negative value coming for all governance indicators. Voice and

Accountability indicator obtained negative 0.67 score in 1996 which further deteriorated during

2000 to 2004 period. Later it somehow improved but remained negative 0.83 in 2001. Political

Stability and Absence of Violence shows worst position as compared to other indicators.

Political Stability and Absence of Violence obtained negative 1.21 score in 1996 and shows continuous upward movement and reached to negative 2.7 score in 2011.

Table No. 6.17 (a)Worldwide Governance Indicators of Pakistan

Political Stability and Voice and Accountability Absence of Violence year Estimate Rank Estimate Rank 1996 -0.67 29.33 -1.21 13 1998 -0.64 31.25 -1.18 13 2000 -1.31 11.06 -1.14 14 2002 -1.22 14.42 -1.71 6 2003 -1.26 12.98 -1.59 7 2004 -1.23 14.9 -1.56 7 2005 -1.06 16.83 -1.76 5 2006 -0.93 22.6 -2.05 2 2007 -0.99 14 -2.43 1 2008 -0.89 22.6 -2.58 1 2009 -0.89 23.22 -2.69 1 2010 -0.84 26.54 -2.73 0 2011 -0.83 26.29 -2.70 0

Source: World Bank 2011

Table No. 6.17(b) Worldwide Governance Indicators of Pakistan

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Control of Govt. Effectiveness Regulatory quality Rule of Law Corruption Year Estimate Rank Estimate Rank Estimate Rank Estimate Rank 1996 -0.59 31.00 -0.45 31.00 -0.66 29.00 -1.15 9.00 1998 -0.45 36.00 -0.49 28.00 -0.76 24.88 -0.96 16.00 2000 -0.58 31.00 -0.73 21.00 -0.94 21.57 -0.82 22.00 2002 -0.39 41.00 -0.79 21.00 -0.75 28.23 -0.92 22.00 2003 -0.39 40.00 -0.73 23.00 -0.73 28.23 -0.73 27.00 2004 -0.45 40.00 -0.88 18.00 -0.83 20.57 -1.06 13.00 2005 -0.42 40.00 -0.61 26.00 -0.88 21.53 -1.05 14.00 2006 -0.36 42.00 -0.44 36.00 -0.83 23.44 -0.76 23.00 2007 -0.45 40.00 -0.49 32.00 -0.89 19.62 -0.73 24.00 2008 -0.68 29.00 -0.56 32.00 -0.97 19.23 -0.81 22.00 2009 -0.78 24.00 -0.55 33.00 -0.89 20.85 -1.09 12.00 2010 -0.77 26.00 -0.58 31.00 -0.79 25.59 -1.11 12.00 2011 -0.82 22.00 -0.61 30.00 -0.90 20.66 -1.00 16.00

Source: World Bank 2011

6.18.2 World Freedom Report Ranking Another index which is prepared by Fraser Institute in favor of economic freedom and measures policies and institutions followed by country is Economic Freedom of the World. This index used forty two variables to prepare a comprehensive index. This index covers five broad areas including size of government, legal system and property rights, sound money, freedom to trade internationally and regulation.

First is size of government which has four main parts covering government consumption, transfer and subsidies, private investment as compared to government investment and income as well as payroll taxes. Overall, first component analyzes how countries distribute goods and services and other resources, either based on political decision or on personal choice and markets. Second component is legal system and property rights which covers how government provide protection to a person’s property which is necessary element of civil society and without

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proper implementation of rules and regulations this is not possible. Third component is related to sound money which is vital for trade, property value. Country’s monetary policy and inflation are important to determine access of sound money by public and business people. This component covers money growth, inflation volatility, current inflation and access to foreign currency accounts. Fourth component is freedom to trade internationally which plays significant role in the freedom of exchange across national boundaries. This component covers tariffs, regulatory trade barriers, black market exchange rates and control on mobility of capital and people. Fifth, last component is related to regulation which covers credit market regulations, labor market regulations and business regulations.

First, we compare Pakistan’s ranking with other South Asian countries as given in Economic

Freedom of the World. Ranking position given in Table 6.18 below for the year 2010 shows that

Pakistan ranked 111 out of 144 countries ranking. Pakistan is in the last quarter of ranking and fourth in South Asian countries with similar score in ranking with India. Ranking positions highlight the fact that other countries in South Asia are better in above stated five main components as compared to Pakistan.

Table 6.18 World Economic Freedom Ranking 2010 (South Asian Countries)

Country Name Ranking out of 144 Countries

Pakistan 111(6.26)

India 111(6.26)

Bangladesh 109(6.34)

Nepal 110(6.33)

Sri Lanka 100(6.48)

Source: Prepared by author

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Table 6.19 Pakistan Ranking in Five Components of World Economic Freedom Report Ranking

Year Size of Legal System Sound Freedom Regulation Government and Property Money to trade Rights internationally

2010 8.68 (4) 4.27 (117) 6.04 (131) 5.87 (133) 6.44 (107) Source: World Freedom Report(2010) The first component in Table 6.19 shows Pakistan ranking at 4 which indicates that country heavily relies on political decisions rather than market forces. Various short term decisions taken by different regimes in Pakistan like subsidies given to state enterprises rather than restructuring or privatizing these institutions due to which Pakistan losses billions of rupees on annual basis. Yellow cab scheme introduced by the government of Nawaz Sharif, which was financed by commercial banks and later on minimal amount was recovered from those who took advantage of this scheme and took taxies to use for commercial purposes. Foreign exchange accounts were seized by Nawaz Sharif government which discouraged local and foreign investors to trust on government rules and regulations and consistency of policies.

Implementation of legal system, protection of property rights are very important for effective and efficient operation of markets and to develop confidence of investors that their contracts will be enforced and their property rights will be protected. Pakistan ranking at 117 shows poor performance in this area and highlights the issues in judicial system and implementation of legal system which is available in books of laws but not practically implemented by government, hence low confidence in government protection of investors property rights.

In other two areas Pakistan further declined in its ranking position and ranked at 131 and 133, indicates very poor management of monetary issues specially inflation and supply of money ccxcv

management in market. We conclude that Pakistan overall ranking is poor due to poor governance, mismanagement and rent seeking activities of government.

6.18.3 United Nations Human Development Index

We assume that overall good governance in any country works for the betterment and improvement of human development situation in that country. In the World Bank’s governance indicators as prepared by Kaufman, Pakistan shows very poor position in all six governance indicators and when we look at the Human Development Index (HDI), Pakistan presents a very dismal picture. These HDI ranking is prepared by Human Development Report and published by

United Nations Development Programme (UNDP). Here we present Human Development Index ranking of Pakistan for various years as shown in Table 6.20(a), 6.20 (b) and compares it with other South Asian countries. It shows that Pakistan is always ranked in the last quartile in all human development progress areas.

When we compare HDI ranking of neighboring countries and other South Asian countries,

Pakistan is ranked lower than Sri Lanka and India. In 1995 Pakistan was at better position than

Bangladesh as Pakistan was ranked at 128 and Bangladesh was ranked at 146 out of 174 countries but with the passage of time Bangladesh improved its ranking and in 2011 it was ranked only one country behind Pakistan, and in 2012 it was on equal rank with Pakistan, hence we can argue that as compared to Pakistan, Bangladesh improved its ranking in this region. On the other hand when we compare South Asian region with other regions of the world, only one region scored below South Asian region and that is Sub-Saharan Africa. Table 6.21 shows that from 1995 till 2012, South Asian region scored just above Sub-Saharan region and Pakistan is very close in ranking with low human development Sub-Saharan African countries. Overall low

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HDI ranking of Pakistan as well as low ranking in all governance indicators of World Bank present very gloomy picture for Pakistan.

Table No. 6.20(a) United Nations Human Development Index Ranking (South Asian Countries)

Country 1995 Score 2000 Score 2005 Score Rank Rank Rank

Sri Lanka 97 0.704 84 0.733 93 0.751

India 134 0.439 128 0.563 127 0.602

Pakistan 128 0.483 135 0.522 135 0.527

Bangladesh 146 0.364 146 0.461 139 0.520

Nepal 151 0.343 144 0.474 136 0.526

Total countries 174 174 177

Source: Various UNDP Reports

Table No. 6.20(b) United Nations Human Development Index Ranking (South Asian Countries)

Country 2010 Score 2011 Score 2012 Score Rank Rank Rank

Sri Lanka 91 0.658 97 0.691 92 0.715

India 119 0.519 134 0.547 136 0.554

Pakistan 125 0.490 145 0.504 146 0.515

Bangladesh 129 0.469 146 0.500 146 0.515

Nepal 138 0.428 157 0.458 157 0.463

Total countries 169 187 186

Source: Various UNDP Reports

Table No. 6.21 Human Development Index Score of South Asian Countries and Sub-Saharan Countries

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Region 1995 2000 2005 2010 2011 2012

South Asia 0.453 0.51 0.628 0.516 0.548 0.558

Sub-Saharan 0.389 0.46 0.515 0.389 0.463 0.475 Africa

Source: Various UNDP Reports

6.18.4 Human Governance Index The Mahbub ul Haq Human Development Centre (MHHDC) was established in 1995. This centre published a report titled, Human Development in South Asia and developed a Human

Governance Index (HGI) for 58 countries, and in these 58 countries included South Asian countries too. Table 6.22 presents information about these South Asian countries. When we look at HGI status of Pakistan, it shows that Pakistan HGI rank is very low as compared to other countries. Pakistan appears in the last quarter of ranking and in South Asia, India has better rank than Pakistan. When we look at the three components of HGI, Pakistan ranking is poor than Sri

Lanka and India, only Bangladesh appears in ranking after Pakistan. In terms of Political governance Pakistan is poorly ranked as compared to India but better than Bangladesh and Sri

Lanka. On the other hand Civic Governance shows similar position, India is better in ranking while rest of the countries of South Asia appear below Pakistan. We can conclude that there is not even a single governance indicator in HGI where Pakistan shows better position in South

Asia. Out of 58 countries Pakistan ranked 52, it means only six countries left behind.

Table 6.22 Human Governance Index Ranking of South Asian Countries

Country Economic Political Civic Human Human Governance Governance Governance Governance Development

Pakistan 52 48 47 52 54

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India 51 31 41 42 52

Sri Lanka 47 56 50 53 41

Bangladesh 54 50 49 54 57

Source: (Human Development in South Asia,1999)( Rank out of 58 countries)

Human Development in South Asia (2012) presents Human Governance Index(HGI) for 51 low and medium human development countries as categorized by the UNDP. Pakistan is ranked 46th out of 51 countries. All other countries of South Asia including India, Sri Lanka and Bangladesh are better ranked than Pakistan. When we compare this ranking of 2010 reported in Human

Development in South Asia (2012) with the Human Development in South Asia (1999) ranking reported in 1999 as shown in Table 6.23, Sri Lanka and Bangladesh were ranked after Pakistan.

Now in 2012 their position is better than Pakistan and gap between India and Pakistan has widened.

Pakistan shows very poor performance in economic governance as compared to other South

Asian countries. In terms of political governance and civic governance, Pakistan is far below other South Asian countries. From this analysis and comparison of 1999 and 2010 data, it is understandable that Pakistan shows poor performance during the decade and is facing severe governance problem in all dimensions of life.

Table 6.23 Human Governance Index Score (Comparison of South Asian Countries)

Countries Economic Political Civic Human Human Governance Governance Governance Governance Governance Value Ranking

Pakistan 0.252 0.393 0.409 0.351 46

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India 0.317 0.606 0.723 0.549 18

Sri Lanka 0.339 0.502 0.478 0.440 39

Bangladesh 0.376 .450 .541 0.456 36

Source: Human Development in South Asia (2012)

We here also present the result of (Gilley, 2006) in which he worked on state legitimacy and in comparison (Gilley, 2006) kept Pakistan with Bangladesh as shown in the Table 6.24 below.

Look at the income level where Pakistan is showing better position than Bangladesh but in all other performance variable Pakistan position is quite low as compared to Bangladesh.

Table No. 6.24 Comparison of Pakistan and Bangladesh Governance Performance

Country Income Level Democracy Welfare Gain Governance Overall Rights Performance

Bangladesh $1610 3.04 5.14 2.43 3.43

Pakistan $1890 1.15 3.96 2.40 2.50

Source: Gilley (2006)

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Chapter 7 Root Causes of Incompetitiveness of Pakistan

Competitiveness is defined in terms of institutions, policies and factors determine the level of productivity of an economy. Economic governance of a country is important for growth and prosperity of the society. Poor political governance and short term visions of politicians caused problem in every sector of Pakistan’s economy. Here we discuss main problem areas causing incompetitiveness for Pakistan and how it is rated by International Institution.

7.1 Global Competitiveness Ranking of Pakistan

Pakistan has been ranked among bottom twenty of the 144 economies around the world in The

Global Competitiveness Report 2012-2013 released by World Economic Forum.

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World Economic Forum is preparing its Global Competitiveness Index (GCI) to analyze competitiveness since 2005. In this report World Economic Forum integrates microeconomic and macroeconomic factors and various other business aspects that determine national competitiveness. The ultimate objective of a competitive economy is to sustain growth. To determine competitiveness of any economy 12 pillars have been finalized and included in Global

Competitiveness Index (GCI).

Report present all pillars separately and each has its own significance but these separate pillars also linked with each other and reinforce each other, so it is possible that where any economy is weak in one area may be weak in another area due to impact of first one.

Further they subdivided all of the above basic pillars into three sub indexes. First is basic requirement index including institutions, infrastructure, macroeconomic environment, health and primary education, second sub index is Efficiency enhancers sub index including Higher education and training, Goods market efficiency, Labor market efficiency, Financial market development, Technological readiness and Market size, third sub index is Innovation and sophistication factors including Business sophistication and Innovation.

The latest report published by World Economic Forum for 2013-14. According to Global

Competitiveness Index Pakistan didn’t show any improvement in ranking but rather ranked down from its earlier rank of 124th out of 148 countries to 133. This is not first time that Pakistan slipped from its earlier rank, when we look at Pakistan’s rank in last couple of years, this downward trend is continue. Pakistan is at stage 1 of development as GCR 2012-13 and in previous reports Pakistan received similar stage of development. Pakistan rank is not declining in any one area but this downward trend is visible almost in all pillars.

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Table No. 7.1 Pakistan’s Ranking in The Global Competitiveness Report

Year Ranking

2007-08 92/131

2008-09 101/134

2009-10 101 /133

2010-11 123/ 139

2011-12 118/142

2012-13 124/144

Source: Various Global Competitiveness Report

Figure 7.1 Global Competitiveness Ranking of Pakistan

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The overall ranking from 2007 till 2012-13 is on decline, it means from global competitiveness point of view Pakistan is not showing any improvement in its overall ranking. When overall ranking is on decline, it indicates that various pillars that contributing to make this ranking possible are also showing dismal position related to Pakistan. There are three sub-sectors of the

Global Competitiveness Index including (i) basic requirement (ii)efficiency enhancer and (iii) innovation factor. In majority of indicators Pakistan’s lags behind the median and hence we can suggest that Pakistan is far behind in competitiveness. Pakistan is with Mongolia, Cambodia,

Nepal and Bangladesh. Large market size of Pakistan should give benefit but other pillars are not strong enough.

Table 7.2 Global Competitiveness Report Components: Pakistan ranking

Year Basic Efficiency Innovative

2012-13 134 98 75

2011-12 130 100 72

2010-11 132 95 76

2009-10 114 92 84

2008-09 110 89 85

Source: Various Global Competitiveness Report

In basic requirement of competitiveness Pakistan shows continuous decline which is highlighting the fact that basic driving force is lacking. ccciv

Table No. 7.3 Most Problematic Factors for Doing Business in Pakistan

The most problematic factors for doing business Score 2012-13

Corruption 17.0

Inefficient government bureaucracy 12.3

Policy instability 11.6

Government instability/coups 11.0

Inadequate supply of infrastructure 8.7

2011-12

Government instability/coups 12.8

Corruption 11.6

Policy instability 11.2

Inadequate supply of infrastructure 8.7

Inefficient government bureaucracy 8.3

2010-11 Score

Corruption 18.4

Government instability/coups 16.4

Policy instability 9.8

Inflation 9.6

Inefficient government bureaucracy 8.9

2009-10

Government instability/coups 19.2

Policy instability 13.3

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Corruption 11.5

Inflation 9.3

Access to financing 8.7

Inefficient government bureaucracy 8.1

2008-09 Score

Government instability/coups 13.7

Corruption. 13.1

Inefficient government bureaucracy 10.1

Inflation 10.0

Inadequate supply of infrastructure 8.5

Source: Various Global Competitiveness Report

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Global Competitiveness Report provides most problematic factors for doing business for all

Indexed countries. Pakistan is continuously showing key problem areas like government instability, policy instability and corruption, poor infrastructure and inefficient bureaucracy. All these problems and their consistency highlighting the fact that there are some issues of governance and mismanagement in Pakistan which unless and until addressed, it would be difficult for Pakistan to bring growth and prosperity for its people.

We observe that there are many problems faces by investors in Pakistan and there are plenty of examples and events present in Pakistan, for example, security threat, investors hiring own guard and taking help from private agencies to protect their business and property, giving money to various parties who provide guarantee that their business will remain safe, bribes to various government agencies. In poor political situation especially during the shift from one political government to another, many investors shift their capital elsewhere out of country to avoid extreme uncertainties. Even in Pakistan foreign direct investment slows down because of political uncertainties and lack of capability of the state to provide investment friendly environment.

We discussed in much detail about Pakistan political instability earlier that how civil government and army rule through coup govern Pakistan in last 65 years. When we discuss governance and implementation of rules and policies, bureaucrats form an integral part of government and governance system. Bureaucrats have very significant role in the delivery of good or bad governance, no doubt that policies should be set by politicians but in Pakistan most of the time this polity setting work is done by bureaucrats in various departments. Politicians seek help and support of bureaucracy because of lack of experience and required knowledge and skill of

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particular ministry. Bureaucracy understand the weakness, lack of education and rent seeking activities of politicians so they also demand in return from politicians when they provide support to them. Bureaucracy do not follow their own rules and regulations and most of the time engaged in setting rules and policies that can benefit them or to influential politicians who in turn can benefit these bureaucrats or their relatives and friends. Politicians and bureaucrats are so entangled in a web of corruption ad rent seeking activities that it is almost difficult to identify who is more corrupt. In Pakistan it is almost difficult to identify where actual policy is set by politicians or bureaucrats. Take for example National Reconciliation Ordinance (NRO) list in which both politicians and bureaucrats took advantage of their position and later settle their cases through this ordinance but one thing is interesting that in this list number of bureaucrats are more than politicians. One thing is also important here that when politicians and bureaucrats develop consensus on how to prepare policies and move them into their favor, situation is more uncomfortable for other people and business man and groups who are affected by these policies.

From Pakistan point of view corruption is considered as most alarming factor, on the other hand instable government policies, difficulty in accessing finance, poor infrastructure, highly inefficient government departments and bureaucracy and inflation are some of the areas need considerable improvement.

Government of Pakistan claim that government make business friendly economic policies and encourage private sector to come forward and invest in different sectors of the economy but real situation of doing business in Pakistan is quite alarming as highlighted by Global

Competitiveness Report. Global Competitiveness Report shows that Pakistan did not show any improvement in doing business and ranked 124 out of 144 ranking in 2012-13. In most

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problematic factors of doing business in Pakistan are corruption, inefficient government bureaucracy and policy instability. When we observe these factors, it is evident that all problems of corruption and policy instability may only be rectified by government policy makers which are feudal landlords, business tycoons as politicians. Government keeps regulatory power in their own hands on private and privatized firms. Feudal lords and dynastic politicians use inefficient and corrupt bureaucracy for their benefits, for allotment of industrial plot, issue of license and regulate and restrict entry, control over real state use by private sector for business growth and development, tax policy and closure of business in case of non-compliance of any rules and regulations by private sector. This poor business environment practically discourages investors to come forward and invest in Pakistani economy. Another problem that face by Pakistan’s economy is attached with the above inadequate policies is that due to various kind of restrictions, heavy taxes and burdens on official economy, business men shift their attention towards unofficial economy to avoid taxes and other official restrictions.

Unofficial economy in Pakistan is around 39.5% of official GDP as report by (Schneider ,2007) in his paper. In 1999-2000 Pakistan unofficial economy was 36.8% of official GDP which increased to 39.5% in 2004-05. On the other hand India and Bangladesh have low level of unofficial economy as compared to Pakistan. Another work presented by (Buehn &

Schneider,2012) which covered 1999 to 2007 data of shadow economy around the world. In this data report of shadow economy Pakistan has average of 35.7% of official GDP as compared to

India and Bangladesh at 22.2% and 35.3% respectively. Average unofficial economy of South

Asia is at 25.1% while Pakistan stands at 35.7% much higher than South Asian average. When business men shift their investment to unofficial economy, government receives less taxes, hence less public good available for citizens. Low level of public good also reduces the efficiency of cccix

official sector which is evident from most problematic areas of doing business highlighted by

Global Competitiveness Report in 2012-13 in which inadequate supply of infrastructure is at fifth stage in Pakistan as shown in Table 7.3.

Jan 12, 2014 Dawn newspaper reported that corruption and mismanagement case against Benazir

Income Support Programme (BISP) is to be investigated by National Accountability Bureau

(NAB). Dawn on November 26, 2013 reported a very interesting case of corruption that NAB whose main work is to stop corruption from Pakistan and unearth cases of corruption of top bureaucrats, businessman and politicians itself processed cases against its own chief Mr. Qamar

Zaman Chaudry as per verdict of Supreme Court of Pakistan on National Insurance Company

Limited (NICL) case.

Table No. 7.4 Global Competitiveness Ranking of Pakistan: Component Wise(2008 to 2012-13)

Year 1 2 3 4 5 6

2012-13 115 116 139 117 124 97

2011-12 107 115 138 121 122 93

2010-11 112 110 133 123 123 91

2009-10 104 89 114 113 118 83

2008-09 95 85 116 116 123 100

Source: Various Global Competitiveness Report

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Year 7 8 9 10 11 12

2012-13 130 73 118 30 78 77

2011-12 136 70 115 30 76 75

2010-11 131 73 109 31 79 75

2009-10 124 64 104 30 81 79

2008-09 121 71 100 29 87 82

Source: Various Global Competitiveness Report

7.1.1 1st Pillar - Institutions

The first pillar of Global Competitiveness Report is related to institutions. Government of

Pakistan showed poor performance in the diversion of public funds and fell to 103rd in 2013 from

76th in 2012 (see Appendix C, Figure C1). Wastefulness of government spending also deteriorated and Pakistan has dropped to 116th rank as compared to 96th in 2012. One very important component is burden of government regulations, here too, Pakistan comedown to 82nd in 2013 from 62nd. As we have discussed earlier that Pakistan is prone to Statutory Regulatory

Orders (SROs) culture where government issued various SROs without proper legislation. This inefficiency is reflected in the rank of legal framework in challenging regulations where Pakistan has fallen 11 points and ranked at 108 in 2013.

In Pakistan performance of corporate boards did not improve as efficacy of corporate boards have fallen to 123rd in 2013 from 111th in 2012.shows that, Pakistan has shown poor performance on governments’ use of diversion of public funds from 76th in 2012 to 103rd in 2013.

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Protection of minority shareholders interest presented improvement from 83rd rank in 2012 to

73rd in 2013. Most alarming areas which posed problem for Pakistan are favoritism in decision of government officials, business cost of crime and violence, organized crime and business costs of terrorism ranked 130, 138, 141 and 144 respectively in year 2013. Law and order situation in

Pakistan and terrorism have biggest impact on the pillar of institutions.

7.1.2 2nd Pillar - Infrastructure

Investment in physical capital and infrastructure is critical for effective functioning of the economy. Pakistan’s overall infrastructure has deteriorated as reflected through 119th rank compared to 105th in 2012 (see Appendix C, Figure C2). Quality of railroad infrastructure has fallen from 66th rank to 75th. Quality of electricity supply dropped from126th rank to 135th in

2013.

7.1.3 3rd Pillar - Macroeconomic Environment

The overall competitiveness of a country depends on stable macroeconomic environment. In case of Pakistan all components of macroeconomic environment deteriorated in 2013-14 as compared to 2012-13. Government’s budget balance as percentage of GDP declined to 138th in 2013 from

125th (see Appendix C, Figure C3)

7.1.4 4th Pillar - Health and Primary Education

Healthy workforce in required for better productivity and improve competitiveness. Overall

Pakistan lost five points (see Appendix C, Figure C4)

7.1.5 5th Pillar - Higher Education and Training

In the area of higher education and training, Pakistan’s performance is not impressive. There is only minor improvements observed on the tertiary education enrolment indicator, where it cccxii

moved to 121st in 2013from 125th in the last year (see Appendix C, Figure C5). Secondary education enrollment ranking dropped from 131 to 136 in year 2013. While the quality of math and science education dropped to an alarming 104th in 2013 from 88th in 2012.

7.1.6 6th Pillar - Good Market Efficiency

Efficient goods market is vital for the right mix of products and services. Pakistan lost 12 points from 65th to 77th. Many components of this pillar like number of procedures to start a business, number of days to start a business dropped their ranks in 2013 (see Appendix C, Figure C6)

Effectiveness of anti-monopoly policy dropped from 71st to 85, effect of taxation on incentives to invest dropped from 72nd to 82nd. Imports as a percentage of GDP declined from 133 to 138th.

On the other hand there are few areas where Pakistan showed good performance like intensity of local competition, prevalence of trade barriers and rules and regulations to encourage foreign direct investment in Pakistan.

7.1.7 7th Pillar - Labor Market Efficiency

Labor Market Efficiency pillar has shown insights into the human resource face of the economy.

It is critical for economy that worker are placed to their effective position and received better incentives for their work. In this respect cooperation in labor-employer relations dropped from

90th to 105th in 2013. Hiring and firing practices declined to 35th from 21st. Pay and productivity declined to 86th from 73rd (see Appendix C, Figure C7). Pakistan is also among the worst countries to include women in its workforce, ranked at 144th among the 148 countries.

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7.1.8 8th Pillar - Financial Market Development

A well functioning financial market played very significant role in the development and growth of the economy. It provides opportunity to people to invest in those areas where they expected highest return. Both the financial market regulators have shown great improvements. This pillar showed improvement in 2013. Availability of financial services has improved from 95th to 88th.

Soundness of banks improved from 85th to 71st (see Appendix C, Figure C8). Regulation of securities exchanges also improved from 55th to 48th. However this gain has not able to improve the constantly declining the state of venture capital in Pakistan, slipping down to 77th.

7.1.9 9th Pillar - Technological Readiness

If firms have to compete and prosper in today’s world, adoption of technologies is essential to enhance productivity. Pakistan has shown significant gains on the technical readiness pillar, with the firm level technology absorption (81), availability of latest technologies (79), firm-level technology absorption (81). A minor improvement is visible in the international Internet bandwidth which is important for knowledge based economy with ranks gaining from 108th last year to 101st this year (see Appendix C, Figure C9).

7.1.10 10th Pillar - Market Size

Markets size allow firms to take advantage of economies of scale and in this respect Pakistan is maintaining its regional competitiveness advantage on the domestic market size index at 27th while foreign market size declined to 63rd from 58th of last year (see Appendix C, Figure C10).

7.1.11 11th Pillar - Business Sophistication

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Business sophistication showed mixed result, some components maintained its last ranking like nature of competitive advantage (84). Willingness to delegate authority declined from 94th to

122nd in 2013(see Appendix C, Figure C11), showed corporate insecurity from large investors to professional managements, especially in the family owned businesses.

7.1.12 12th Pillar - Innovation

This pillar is mainly related to innovation based on new technology. Standard of living can be improved by technological innovation. The university-industry collaboration for research and development has been declined from 81st to 98th in 2013(see Appendix C, Figure C12). This decline indicates that industry is more dependable on replicating products rather than creating new products and services. Companies spending on research and development have fallen from

51st to 75th in 2013 which is very alarming. Pakistan has shown improvements on capacity for innovation by improving 11 points.

Pakistan basic weakness is visible in institutions, infrastructure and macroeconomic environment. When we analyze Pakistan’s last five years of Global Competitiveness Index ranking. There is no sign of improvement in Pakistan’s ranking during the last five years while other countries in Asian region are showing improvement. Pakistan is lagging behind. In overall ranking in 2007-08, 38 countries were after Pakistan while in 2012-13 only 23 countries left after

Pakistan which shows downward performance in various competitiveness areas.

Generally Asia and Pacific is one of the fastest growing regions in the world but there are some countries in which Pakistan is also included are far behind. Other countries are Bangladesh which is ranked at 118 and Nepal ranked at 125.

Registration of any business in Pakistan is a daunting task. The regulatory authority to register any business is SECP which require a very detailed procedure to register a firm. Annual cccxv

compliance fee is highest in the region, even it is cheaper to register a firm in other European country and USA as compared to Pakistan. Startup procedure required in Pakistan including necessary permits and licenses as ranked by World Bank shows no improvement in Pakistan. In

2003 Pakistan score was 11 which only reduce to 10 in almost ten years.

Hence we conclude that in those countries where governance is weak, competitiveness in various basic areas is also poor. Similar situation is present in Pakistan. All governance indicators for

Pakistan are negative from last eighteen years and continuous poor performance in all basic pillars in competitiveness as discussed above.

After this detailed discussion on various economic governance issues, we developed proposition

No.3 as follows:

Proposition 3

“Good governance leads to better business competitiveness and investment pattern in a country”

Hence we can develop equation as follows:

COMP  o 1Gov ------(7.1)

Where COMP = Competitiveness Gov = Governance As we established in equation (4.7) that

Gov  K0  K1WCNC

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COMP  o 1 (K0  K1WCNC )

COMP o 1K0  1K1WCNC

COMP  M o  M1WCNC ------(7.2)

Where M o  o 1K0 and M1 1K1

Hence

Corollary 3

“Bad economic governance hampers the business competitiveness and investment pattern in a country”

Poor policies as evident from GCI, inefficient and corrupt bureaucracy, inadequate infrastructure, illegitimacy of rule of law and protection of property right are all sign of poor governance. When we look at the most problematic areas of doing business in Pakistan, one of the most consistent problems is instability of government. To understand and evaluate Pakistan poor political governance, we examine in first chapter the history of political governance to look how and what kind of political system evolved. We focus on exploring the important factors responsible for bad political governance in Pakistan which leads to poor and weak governance.

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Chapter 8 Success of a Country and Governance Issue

Failed State Index Ranking is prepared by The Fund for Peace on annual basis covering around

178 nations worldwide. This index is based on three primary sources using comprehensive social science methodology. This data is critically reviewed and then obtain to decide ranking of failed state. The Fund for Peace uses millions of documents for analysis and then finally decide ranking of countries. They use twelve key points ( mainly covers 100 sub-indicators) on the basis of which failed state ranking developed on annual basis every year. High score in Failed State Index shows poor position and greater instability and lower score indicates better performance. In similar way low ranking means poor and instable position. Scores are given out of ten.

Look at Pakistan ranking from 2005 to 2013 in Table 8.1 below. In 2005 Pakistan ranked 34 out of 76 countries ranked by Failed State Index but after 2005 when number of countries increased and reached to 146, Pakistan shows sharp decline and reaches to number 9. After 2006 Pakistan couldn’t improve its position and remains around last fifteen very poor performed and instable countries in the world.

Table No.8.1

Pakistan Failed State Index Ranking Year Pakistan Rank Total Countries Ranked 2005 34 76 2006 9 146 2007 12 176 2008 9 177 2009 10 177 cccxviii

2010 10 177 2011 12 177 2012 13 177 2013 13 177

Source: Prepared by author

Figure 8.1 Pakistan Failed State Index Ranking (2005-2013)

Source: Prepared by author In twelve key points Pakistan score is quite alarming, in four areas Pakistan score more than nine out of ten like Refugees and IDPs, Group Grievances, Security Apparatus and External

Intervention. It does not mean that rest key points are good, all key points have around seven and high score. When we compare Poverty and Economic Decline indicator which highlights economic position of a country including purchasing power, GDP, unemployment and deficit

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with other social sector indicator, we observe that Pakistan score 7.5 in Poverty and Economic

Decline which is far better than Group Grievances and Demographic Pressures which help us to understand that Pakistan faces governance issue more severely than economic problems.

Table No. 8.2 Pakistan Failed State Index Ranking(Twelve Key Points Position 2005-2013)

n Total nt

Flight

Group Group Public

Rights

Human Human Human

Uneven Uneven

Decline

Security Security

External External

Services

ed Elites ed

and IDPs and

Refugees Refugees

Economic Economic Year Grievance Apparatus

Interventio

Factionaliz

Legitimacy Legitimacy State of the

Developme

Demograph

ic Pressures

Poverty and and Poverty 2005 89.4 5 5 6.9 8 9 3.3 9.8 7.5 8.1 9 9.3 8.5 2006 103.1 9.3 9.3 8.6 8.1 8.9 7.0 8.5 7.5 8.5 9.1 9.1 9.2 2007 100.1 8.2 8.5 9.0 8.1 8.5 5.8 8.7 7.1 8.7 9.5 9.5 8.5 2008 103.8 8.0 8.6 9.5 8.1 8.8 6.2 9.5 7.1 9.5 9.6 9.8 9.1 2009 104.1 8.3 8.6 9.6 8.3 8.8 6.4 9.1 7.5 8.9 9.5 9.6 9.5 2010 102.5 8.1 8.9 9.4 7.9 8.4 6.2 8.9 7.3 8.9 9.7 9.5 9.3 2011 102.3 8.8 9.2 9.3 7.5 8.5 6.6 8.6 7.3 8.7 9.4 9.1 9.3 2012 101.6 8.5 9.0 9.6 7.2 8.2 7.2 8.3 7.0 8.6 9.3 9.1 9.4 2013 102.9 8.9 9.1 9.7 6.9 7.9 7.5 8.4 7.3 8.7 9.8 9.2 9.6 Source: Prepared by author: Failed State Index (various reports)

Pakistan as per Failed State Index ranking in 2013 fall in high alert countries and other countries in terms of ranking surrounding Pakistan are given in Table 8.3 below. Most of the countries are from Africa except Iraq and Afghanistan.

Table 8.3: Countries Surrounding Pakistan in Failed State Index Ranking-2013

Country Rank Score

Chad 5 109

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Yemen 6 107

Afghanistan 7 106.7

Haiti 8 105.8

Central African Republic 9 105.3

Zimbabwe 10 105.2

Iraq 11 103.9

Cote dIvoire 12 103.5

Pakistan 13 102.9

Guinea 14 101.3

Guinea Bissau 15 101.1

Nigeria 16 100.7

Source: Failed State Index 2013 We discuss in above chapters the governance position of Pakistan in terms of political and economic point of view. Later we discuss and show Failed State Ranking and Pakistan’s overall position in this ranking in last nine years and reaches to this proposition that:

Proposition 4

“Sustainability of an autonomous status of a state depend on the Economic Governance”

As per this proposition if country has good governance then there are more chances that country will have more success in various economic sectors. This can be written as follows:

Success   o 1Gov ------(8.1)

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As we established in equation (4.7) that :

Gov  K0  K1WCNC

Success   o 1 (K0  K1WCNC )

Success   o 1K0 1K1WCNC

Success  No  N1WCNC ------(8.2)

Where No   o 1K0 and N1  1K1

Hence

Corollary 4

“Due to bad economic governance state may be failed”

Corollary 5

“Feudalism determine the pattern of economic governance”

Corollary 6

“The continuation of feudalism may lead to failure of state”

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GOVERNANCE MODEL

Figure No. 8.2

High Wealth (+) (+) Concentration

Feudalism (-) Income Inequality

(-) (-) Good

Governance (+)

(+)

Success of State Business

Competitiveness (+) and Investmentcccxxiii Trends

(-)

Derived from Propositions

Derived from Corollaries

We present our model above in Figure 8.2 which describes the whole issue. Wealth concentration negatively impact on governance of Pakistan. When governance in Pakistan is poor, it is giving support to enhance inequality of income in the society. Good governance of a country positively impact in the business competitiveness of the country as well as success of the country. Hence we conclude that wealth concentration not only negatively impacting on business competitiveness in the country but also increasing inequality of income in the society. This wealth concentration is also negatively impacting on success of the country.

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Chapter 9 Empirical Results

As noted in the introduction, this thesis contribution is to investigate the relation between governance of a country and its impact on business competitiveness. We showed in our model

Figure 8.2 that feudalism leads to concentration of wealth as well as leads to bad governance.

Since no such data is available in Pakistan which help us to quantify wealth of feudal lords.

There is no government record where such data is available. Through corollary 2 we have proved that wealth concentration leads to poor economic governance. We empirically tested by developing methodology that wealth concentration leads to bad governance. We expect negative relation between these two variables.

To test this empirically, we take world wealth concentration Gini as available in (Davies,

Sandström, Shorrocks & Wolff, 2011) paper which estimated on the basis of global household wealth based on household balance sheet and survey on the year 2000. The Gini coefficient measure unequal distribution or concentration of various information like wealth and income within an economy. The coefficient begins at 0 and ends at 1. If value is close to 1 means greater cccxxv

inequality. It is based on the concept of Lorenz curve with the help of which distributions of any information is presented graphically. This data of global wealth concentration is compiled for

229 countries.

To measure governance, we take six governance indicators score as proposed by Kaufmann and

Kraay (2008) from WWGI for the year 2000. Various researchers used World Bank Governance

Indicators, World Economic Forum, Transparency International and many other indexes to work on various segments of governance and economic and social issues like (Anderson &

Marcouiller, 2002; Breton, 2004; Brunetti & Weder, 1995; De Groot, Linders, Rietveld &

Subramanian, 2004; Dollar & Kraay, 2003; Easterly & Levine, 2003; Gwartney, Holcombe &

Lawson, 2004; Isham, Woolcock, Pritchett & Busby, 2005; Rigobon & Rodrik, 2005;

Treisman, 2000).

Hence following the above researchers, we used Worldwide Governance Indicators to understand governance issue and its relationship with wealth concentration. For some countries data is not available in wealth concentration Gini and some countries data is not available in

WWGI, hence finally 156 counties are used to calculate correlation between wealth Gini and governance indicators. Here we present correlation between wealth concentration Gini and six governance indicators in Table 9.1.

Table 9.1 Correlation between Wealth Inequality Gini and Governance Indicators

Voice Political Govt. Regulatory Rule Corruption Wealth Correlation -.143 -.167* - -.162* -.203* -.188* Gini .226** Sig. (2- .081 .043 .006 .048 .013 .022 tailed)

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Table 9.1 shows the result of correlation among governance indicators and wealth inequality which is significant at 1% and 5% except voice which is significant at 10%. All governance indicators have significant negative relation as per researcher expectation, hence researcher concludes that when a state has bad governance, wealth inequality is on higher side.

Further we regressed wealth concentration Gini on average of six governance indicators.

Table No.9.2(a) Regression Result of Wealth Concentration and Governance Indicators

R R Square F Sig.

.223 .050 8.093 .005

Table No. 9.2(b) Coefficients

Unstandardized Standardized Coefficients Coefficients

Std. Model B Error Beta t Sig.

(Constant) .745 .313 2.378 .019

W GINI -.022 .008 -.223 -2.845 .005

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Table 9.2(a) reports the basic model summary on how wealth concentration affects governance.

The dependent variable is governance and independent variable is wealth concentration Gini.

Independent variable has negative effect on governance as shown in Table 9.2(b). This result suggests that wealth concentration has negative and significant effect on governance of a state.

From the above result it is evident that wealth inequality has governance issue. When we take

Pakistan as a case, situation is worse because all governance indicators of Pakistan are on negative side. Wealth inequality is much more in Pakistan as compared to data presented by government authorities because wealth data in Pakistan in terms of Household Balance Sheet does not show real picture. Those who accumulate wealth discourage policies that revealed this wealth. They concealed this information from government agencies, hence successfully reduce their wealth. They have good contact with policy makers and sometime they are themselves policy makers, hence do not let anyone to make policies which go against their intentions. In case of Pakistan agriculture tax is best example which no government so far imposed because majority of policy makers are themselves landlords.

Here we present correlation results between governance indicators and various international institutions ranking specifically related to various governance issues like Transparency

International, World Freedom Report etc.

Transparency International have been producing ‘corruption perception index’ since 1995. At initial stage, it covered only 41 countries but in 2011 it covered 183 countries.

We collected Corruption perception index data for the year 2011 and World Bank’s Governance

Index of 2011. First of all we removed those countries which were available in World Bank’s

Governance Index but not covered by Transparency International Index and finally reached to cccxxviii

182 observations. As per theoretical understanding, there should be negative relation between corruption perception index and governance indicators. This is based on this perception that poor governance leads to higher corruption in society.

Our correlation result confirms this understanding and we find significant negative relation between Corruption Perception Index of TI and World Bank’s Governance Index as shown below in Table 9.3

Table No. 9.3 Correlation between Governance Indicators and TI Corruption Perception Index

Rule Govt. Req. of Voice Political Eff. Quality Law Corruption CPI Pearson -.758 -.778 -.923 -.854 -.938 -.943 Correlation Sig. .000 .000 .000 .000 .000 .000

We observed that world economic freedom is addressing the issue of how country is managing herself from political, legal, macroeconomic, trade and regulation point of view. This is also possible that various measures have been taken by government in terms of rules and regulations to address these issues but due to lack of implementation, no benefit has been achieved by country. This is important in case of Pakistan where in books rules and regulations are available

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but when time comes to implement them, various ways and means are used to avoid its proper implementation.

We also observed that when overall country governance is fragile then it is almost difficult for any country to show progress in macroeconomic, trade and other rules and regulation areas. To explore association among various governance indicators and economic freedom index, we calculate correlation by taking 2011 World Governance Indicators from World Bank source as developed by Kaufmann and Kraay (2008) and World Economic Freedom Report Index ranking and find very strong positive correlation as shown in Table 9.4 below.

Each variable of governance indicators is positively significant with World Economic Freedom ranking that shows that better governance reflects better performance in political, legal, macroeconomic, trade and regulations areas hence strengthen overall business, social and political environment in any country. This further support our understanding that governance of a country plays significant role in the solution of various economic and social issues.

Easton and Walker (1997) used Economic Freedom Report from 1975 to 1995 to find correlation between government enterprises and ability of the market to set prices and found strong positive correlation between public ownership and market intervention. Croissant (2004) used Freedom House data to find association of political and civil freedom with economic development.

Since some countries data is not available either in WWGI or in Economic Freedom Ranking, therefore finally we have 143 observations to calculate correlation.

Table 9.4 Correlation between Governance Indicators and World Freedom Report Ranking

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Voice Political Govt. Regulatory Rule of Corruption Stability Effectiveness Quality Law

Correlation 0.593 0.632 0.766 0.844 0.753 0.717

Sig. .000 .000 .000 .000 .000 .000

As it has been discussed by Perotti (1996) , Aghion, Caroli, and Garcia-Penalosa (1999);

Davies, Shorrocks, Sandstrom,and Wolff (2007); Davies, Sandström, Shorrocks, and Wolff

(2007); Davies and Shorrocks (2005) in various papers that wealth inequality data for many countries are not available, so researchers generally use income inequality as proxy for wealth inequality and they also find strong correlation between income inequality and wealth inequality. We gathered data for income inequality from World Bank and wealth inequality Gini coefficient data as provided by (Davies, Sandström, Shorrocks & Wolff, 2011). Both information is finally available for 130 countries. Data of income inequality Gini is not available for all countries in 2011, so we selected closest year for which income Gini for a country is available and relate it with wealth Gini. We checked the relationship which is first presented by a Figure No. 9.1 below. Figure 9.1 shows that wealth inequality is on higher side at all level of income inequality as well as showing same trend as income inequality presenting. We find correlation between income inequality and wealth inequality as shown in Table 9.5 which confirms previous researchers findings that there is strong positive correlation between income inequality and wealth inequality. Similar result was found by (Ortiz, I., & Cummins, M. 2011).

Figure No. 9.1 Relation between Income Inequality and Wealth Inequality

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Source: by author

Table 9.5 Correlation between Wealth Inequality and Income Inequality

Income Gini

Wealth Gini Pearson Correlation .612 Sig. .000

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Quality of correlation between income inequality and wealth inequality shows the degree of similarity between these two variables. This initial comparison shows strong evidence of association between income inequality and wealth inequality.

Good governance and effective institutions are necessary for reducing inequality. Governance has become core issue of discussion at every platform. Good governance is very significant for growth, economic development, and investment, reduction in inequality and to strengthen institutions as well. It is important that benefits of growth should be distributed equitably in any economy so that all citizens get growth benefits. Inequality rises in Pakistan because of poor governance. In Pakistan institutions are weak, vulnerable to political disruption, corrupt and have poor capacity of decision making and policy setting. Public sector offices are badly managed with over-employment, low skilled and limited resources.

Economic growth is associated with lower inequality provided equitable distribution. We are interested in inequality because it creates many other economic and social problems like lower investment and growth in society as argued by (Gradstein, 2007) with the support of data from

World Bank and International Country Risk Guide (ICRG) panel data that bad governance and inequality are significantly correlated. Gradstein (2007) found significant negative correlation in governance quality and income inequality in the range of -0.20 to -0.45. Correlation between

Gini coefficient and ICRG index showed -0.439. Gradstein (2007) result further showed high correlation among rule of law, control of corruption and income inequality. Hellman and

Kaufmann (2003) used Business Environment and Enterprise Performance Survey (BEEPS) data on the quality of institutions, security of property rights with inequality. Knack and Zak (2003) also used ICRG and Worldwide Governance Indicators as dependent variable and showed that

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trust can be raised by taking freedom of communication, education, formal institutions that help to reduce income inequality. Akçay (2006) used Human Development Index (HDI) and

Transparency International Corruption Perception Index, Kaufmann Corruption Index and

ICRG’s Corruption Index and found negative correlation between corruption indexes and Human

Development Index. Shen and Williamson (2005) worked on Corruption Perception Index and various social and economic indicators like political rights, press freedom, economic freedom and state strength and found significant correlation with corruption. Gilley (2006) took various indexes including Worldwide governance index to determine state legitimacy and used correlation to find legitimacy variables.

There are various researchers who did not directly take Worldwide Governance Indicators to measure governance but took various other variables to measure governance and showed association in governance and various economic and social development outcomes like

(Rajkumar & Swaroop 2008; Bulte, Damania, & Deacon, 2005). Holmberg, Rothstein, and

Nasiritousi (2009) used Quality of Government Institute’s data bank and World Bank’s Rule of

Law Index and Transparency International’s Corruption Perception Index and another World

Bank’s Government Effectiveness Index and found strong correlation among these variables as well as positive correlation between Quality of Government and social outcome variables.

Following these researchers, we use income inequality and WWGI to understand relationship between governance and income inequality.

We earlier suggested that bad governance negatively impact on income inequality in a country.

We take data of governance indicators from World Bank’s The Worldwide Governance

Indicators of 2011 which covers 215 countries and Gini coefficient of income inequality for 213

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countries. Since Gini coefficient of various countries are not available for the year 2011, so we selected closest data available of Gini coefficient. On the other hand all countries income inequality Gini coefficient is not available when we compare it with governance indicators data.

After comparing both data sources, we are able to gather data for 156 countries for which both governance indicators and income inequality Gini coefficient are available.

Table 9.6 below exhibits correlations between income inequality (Gini coefficient) and governance indicators.

Table No. 9.6 Correlation between Income Inequality and Governance Indicators

GOVER REG

VOICE POLITICAL EFF QUALITY LAW CURROPTION Gini -.136 -.058 -.284** -.274** -.282** -.202*

Sig. (2-tailed) .090 .471 .000 .001 .000 .011

Table 9.6 shows negative correlation between governance indicators and income inequality as per our understanding. The result shows that governance mechanism has association with income inequality in a society. All correlation coefficients have negative sign indicating that inequality rises when governance is poor. Only Political Stability is not significant while Absence of

Violence indicator is significant at 10%. Nevertheless both variables supported theoretical understanding of negative association with governance indicators. Thomas, M. A. (2010) argued that variable which are used to show relationship should be consistent with the theoretical prediction about that relationship.

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From the above result as shown in Table 9.6 we reached to this conclusion that governance has impact on income inequality and where governance of a state improves, helps to reduce inequality as also observed by Gradstein (2007) that in those economies where governance is poor, inequality is on higher side. Various evidence in this regard obtained by Persson and

Tabellini (1991); Alesina and Rodrik (1994) from cross countries research and concluded that inequality is harmful and causes of various adverse economic and social outcomes and reduces growth. Kaufmann and Kraay (2003) showed that quality of governance and per capita income are strongly positively correlated across the countries. Kaufmann and Kraay (2003) took three measures of governance i.e. rule of law, control of corruption and voice and accountability against per capita GDP. Huther and Shah (2005) used World Bank (1992) booklet of

Governance and Development and argued in support of their work that high correlation exist between quality of governance and per capita income as well as there is no African country in the top governance category.

Buhmann, Rainwater, Schmaus, & Smeeding (1988) used Luxembourg Income Study (LIS) database to explore correlation between income inequality and size of family. Vega-Gordillo and

Alvarez-Arce (2003) explored causality among economic freedom, growth and democracy and for this purpose used Freedom House annual survey data. Feld and Voigt (2003) used

International Country Risk Guide (ICRG), Economic Freedom Index, Economist Intelligence

Unit and explored correlation between judicial independence, rule of law, transparency and property rights. Donchev and Ujhelyi (2014) worked on Interregional Crime and Victimization

Survey (ICVS) of United Nations with World Bank’s Control of Corruption Index (WB), ICRG and CPI found high correlation among WB, ICRG and CPI while low correlation with ICVS.

Now we regress income inequality on governance indicators and expect negative relation.

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Table 9.7(a) reports basic model summary on how governance affects income inequality. The dependent variable is income inequality and independent variable is governance. Independent variable has negative effect on income inequality as shown in Table 9.7(b). This result helps us to understand that governance has negative and significant effect on income inequality of a state.

Table 9.7(a) (b) Regression Result of Income Inequality and Governance Indictors

Table No.9.7(a) Model Summary

R R Square F Sig. .223a .050 8.093 .005a

Table No. 9.7(b) Coefficientsa

Unstandardized Standardized Coefficients Coefficients Std. Model B Error Beta t Sig. (Constant) 40.012 .734 54.495 .000

GOV -2.316 .814 -.223 -2.845 .005

When we look at the most problematic areas of doing business in Pakistan, one of the most consistent problem is instability of government. To understand and evaluate Pakistan’s poor political governance, we examined history of political governance in chapter 7 to look how and what kind of political system evolved. We focused on exploring the important factors responsible for bad political governance in Pakistan which leads to poor and weak governance. Further we examined Pakistan’s economic position and business competitiveness in chapter 7 where we showed that economic governance of Pakistan is poor and there are various economic areas cccxxxvii

where Pakistan does not show any improvement in last many years. For example tax to GDP ratio is still very poor, tax base couldn’t be improved, no serious work done to impose tax on agricultural sector and corruption in various government department is still on higher side.

We proposed (Proposition No. 3) that good governance leads to better business competitiveness and investment pattern in a country.

To test this proposition, we collected governance indicators as developed by Kaufman and available in World Bank data set for the year 2011 and in those countries where data for 2011 not available, more recent year is taken. We also take WCI ranking as given in The Global

Competitiveness Report of 2011-12. We expect negative correlation between governance indicators and competitiveness because in those countries where governance indicators will be good should show high ranking in competitiveness. We find significant and negative relation between GCI and World Governance Indicators which is understandable as shown in Table 9.8.

Porta and Shleifer (2008) used World Economic Forum Survey (2006-07) i.e. Global

Competitiveness Report and World Bank firm level survey to explore unofficial economy and economic development. Porta and Shleifer (2008) used basic correlation as well as comparative analysis of the characteristics of unofficial and official firms in various developing countries.

Table 9.8 Correlation between Governance Indicators and Global Competitiveness Ranking

Voice Political Government Regularit Rule

and Acc Stability Eff. y Quality of law Corruption

Correlati -.496 -.626 -.829 -.757 -.814 -.755 on

Sig. .000 .000 .000 .000 .000 .000

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Hence we conclude that in those countries where governance is weak, competitiveness in various basic areas is also poor. Similar situation is present in Pakistan. All governance indexes for

Pakistan is negative from last eighteen years and continuous poor performance in all basic pillars in competitiveness as discussed in chapter 7.

This section examined whether good governance can affect competitiveness of a state. Now we regress governance indicators on business competitiveness. Table 9.9(a) summarizes the model summary. The dependent variable is business competitiveness and independent variable is governance . Independent variable has negative effect on competitiveness as shown in Table

9.9(b). This result further support researcher understanding that governance of a state has significant effect on business competitiveness of a state. This shows that good governance leads to better business competitiveness.

Table No. 9.9(a) (b) Regression Result of Business Competitiveness and Governance Indicators

Table No.9.9(a) Model Summary

R R Square F Sig. .770a .592 194.704 .000a

Table No.9.9(b) Coefficients

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Standardized Unstandardized Coefficients Coefficients Model B Std. Error Beta t Sig. (Constant) 74.438 2.263 32.900 .000

GOV -36.228 2.596 -.770 -13.954 .000

We argued in Proposition No. 4 that sustainability of an autonomous status of a state depends on the economic governance. When governance mechanism is sound, rules and regulations are business friendly and practically implemented, investor invests and economy grows and vice versa.

We selected Failed State Index to show success of a country, as prepared on annual basis by

The Fund for Peace and computed its correlation with Worldwide Governance Indicators. We understand that whenever governance indicators are weak in any country, there are more chances that country should be high in Failed State Index. To check our understanding, we take Failed

State Index of 2011 and Worldwide Governance Indicators of 2011. By comparing both data, we eliminate countries for which anyone information is not available and finally reached to 174 countries data.

As Table 9.10 shows correlation result that all indicators have significantly and positively correlated with Failed State Index ranking. This result indicates that whenever governance indicators are weak, countries show high ranking in Failed State and success of a country is imminent.

Table 9.10 Correlations between Governance Indicators and Failed State Ranking

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Govt. Rule

Rank Voice Political Eff. Regulatory of law Corruption Rank Pearson 1 .762 .821 .841 .810 .863 .815 Correlation Sig. (2- .000 .000 .000 .000 .000 .000

tailed)

We further regressed success of a country on governance indicators. Table 9.11(a) and (b) shows that result is significant and coefficient is positive, indicates that good governance leads to success of a country.

Table No. 9.11(a) (b) Regression Result of Success of Country and Governance Indicators

Table No.9.11(a) Model Summary

R R Square F Sig. .887 .787 634.473 .000

Table No. 9.11(b) Coefficientsa

Unstandardized Standardized Coefficients Coefficients Std. Model B Error Beta t Sig. (Constant) 94.750 1.808 52.416 .000

Gov 50.103 1.989 .887 25.189 .000

The above empirical results show that wealth and income inequality have negative impact on governance of the state and poor governance leads to incompetitiveness in business sector as well as may cause to failure of the state.

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Chapter 10 Conclusion and Recommendations

Pakistan faces weak political governance and considered a fragile state due to unstable political government. Various coalitions have been formed to rule the country but all groups are interested in their own benefits, consequently emerged as unstable coalitions. During the last couple of decades, the government is dominated by feudal lords and rural elites who based on biradri

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system to hold political control (Marco, 2009). In Pakistan political parties do not hold internal elections and two most popular parties’ chairperson were elected on patron-client basis, for example, Mr. Nawaz Sharif of PML(N) and late Benazir Bhutto of PPP. Though externally, leaders of political parties portray a democratic face, within the party they are not prone to listen to dissent or to develop a succession plan outside their sons and daughters. A business family is another group which controls most of the country’s industry and businesses. In tribal areas,

Baluchistan, Southern Punjab and at several other places tribal leaders prevail who have no interest in sound business and economy management but rather what benefits they can get for themselves.

In Pakistan we have shown that feudal lords have higher accumulation of wealth without any economic transaction. They are also earning higher return on their wealth which in turn helps them to accumulate more wealth as compared to other people in the society. In this way concentration of wealth is increasing in society and income inequality as well. To strengthen their position in society and to keep their influence on economic policies of government, feudal lords are very active in politics. They have had a very strong presence in provincial and national parliament since creation of Pakistan in 1947. There has been no change in political faces in

Pakistan, along with dynastic politics. With the passage of time these feudal families new generation has entered in politics and controls state without any positive change in the governance of country.

Regional political forces which are full of feudal lords have marginalized national interest and encourage formulation and implementation of policies reflecting their individual interests. The power to form government rests in rural Pakistan where majority of the voters live, and politics

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in rural areas is dominated by feudal lords, makhdooms, pirs etc. These landlords are engaged in politics of country as well as have large interest in businesses and economy. When government changes, same group of people emerge and make alliance with new government. Major political parties are dynastic fiefdoms of powerful political families. Despite claim that Pakistan has democratic elections, feudal lords have unequal power structure. Despite feudal lord continuous existence on Pakistani political platform, parliament is weak, bureaucracy and judiciary are corrupt and inefficient. A large size of federal ministers, advisers and special assistants enjoy high perks and benefits.

Feudal lords have strong presence in provincial and national assemblies as well as in the cabinet of Pakistan which help them to control all economic policies in their favor. No doubt that these politicians come in power with the help of poor people but then make policies to strengthen themselves and engage in rent seeking activities. Decision making processes are in the hands of parliamentarians, some of the legislators are not well educated and can not understand and implement sound economic policies, consequently affects country’s economic progress.

Government is spending much of its budget in unproductive areas rather than productive and essential areas. Government is unable to manage its financial matters as reflected by fiscal deficit and mounting debt. People who are looking after various government departments are inefficient with lack of proper education and training. When merit will not be followed in appointments of various key positions of government departments, consequently policies will be planned and developed to give favor to those who appointed them and not for the benefit of general public. In Pakistan many regimes have kept themselves engaged in production and trade activities which only create inefficiencies, corruption and rent for few elites.

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Influential politicians use their discretionary power to change rules and policies to get personal benefits such as allocation of special quotas, permits, license for themselves and for their relatives and associates. Through their influence they get licenses to setup sugar mills and other industrial units. They take loans at subsidized rates and then through influence compel financial institutions to write them off. Various benefits have been obtained from government in the name of rural development work and these funds have never been utilized properly. These feudal lords also became industrialists and have substantial share in industrial sector of Pakistan. In Pakistan, agricultural sector has tax exemption and due to loop holes in the system, many landlords set up their industries and hide their income in agricultural sector. On the other hand, it has also been observed that many industrialists have invested huge amount in agricultural sector to hide their industrial income.

Landlords do not pay tax on their agricultural income, on the other hand they are also obtaining various benefits from government. All these activities of landlords put heavy pressure on fiscal side and government faces fiscal deficit. To overcome the issue of fiscal deficit government raises tax rate on urban salaried class as well as on corporate sector. In Pakistan corporate sector is paying higher tax rate as compared to other countries. This high tax on salaried class puts extra burden on middle class and the benefit goes to feudal lords and landlords who belong to the richest class in Pakistan.

One of the best example of keeping economic policies in their favor is agricultural tax which is one the major part of GDP of Pakistan but no adequate tax has been imposed on this sector by any regime so far. Direct taxation on agriculture is very meager part of overall direct taxation revenue of federal and provincial government. These feudal lords are not interested in making

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comprehensive economic policies for people. This is reflected through total working days of the budget session in Pakistan which is one of the lowest in the world. In Pakistan parliament discusses and approves annual budget on average in twelve days.

Plenty of examples are present in Pakistan which indicate governance failure, like energy crisis, low and stagnant tax to GDP ratio, high debt burden, high incidence of tax evasion, regressive tax system, high losses of public sector enterprises, burden of subsidies, high corruption and misappropriation in development fund and posting of inefficient people in public sector enterprises. Corruption and patronage is present in all government offices from lower to top level. Poor performance, delayed cases and corruption in the lower courts have not been improved. Fiscal deficit is on the higher side which puts pressure on the incumbent government to borrow more funds from internal and external sources.

Poor governance is reflected through government inability to generate sufficient revenue to cover expenditures resulting in high budget deficit. Government imposes indirect taxes on public rather than putting emphasis on direct taxation which shifts burden from rich class to poor people.

Huge corruption in Pakistan Railway, massive financial fraud in the National Assembly

Employees Cooperative Housing Society and fake degree issue of parliamentarians shows lack of accountability of politicians. Allotment of urban land by KDA, CDA and LDA to influential people at highly subsidized rates, conversion of agricultural land into industrial land and then sold at high margin of profit are few examples of rent seeking activities of politicians.

Rule of law is not abided and feudal lords make amendments in law whenever it creates hurdles in their rent seeking activities. SRO culture is one the example where ordinance is issued without parliament approval whenever required to get benefits.

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Bureaucrats have become politicized. Bureaucratic transfers, postings and promotions are in the hand of politicians and they use this opportunity for their rent seeking activities. They keep their trusted persons in various government departments who help them to make policies in their favor. This has deteriorated quality of public service administration. Lack of transparency and accountability is evident in every public service department.

Bureaucracy and military are also part of political game and whenever they get opportunity; they take control of the country. Army does not restrict itself for the security of the state but rather intervene in political affairs of the country. Military interventions are always able to circumvent the constitution of Pakistan. Judiciary always supports military interventions and when military rule ends, judiciary condemns it and supports the civilians and provides space for civilian misadventures. This is evident from the last 65 years of Pakistan’s history where around half of the time army has directly ruled the country. On the other hand when military in Pakistan does not rule directly, it has military backed civilian government. Military in Pakistan has also very strong economic power in terms of estate and industrial network. Military has very influential role in all policies developed by the government irrespective of whether these policies are related to business and economics or internal and external security issues. In some cases feudal lords, bureaucrats are interlinked, like bureaucrats have become president or hold key political position in Pakistan, in other cases army officers after retirement become part of political setup. These patrimonial elite have used their control on political, economic and social resources to maintain and benefit from their position of authority.

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Government of Pakistan is not answerable to any economic policy it designs, such as nationalization, poor management and lack of transparency in privatization process, energy policy, textile vision 2005 etc.

Above discussion leads to this conclusion that governance of the country is poor and feudal lords are the people who determine the governance of the country. Political misgovernance has had a damaging impact on economy of Pakistan. Excessive debt, high fiscal deficit, high inflation, low tax to GDP ratio, high trade deficit, lack of adequate capital formation and severe energy crisis are some of the economic challenges faced by Pakistan from decades.

Economic policies as develop by government are not in the favor of Pakistan as many economic indicators are negative or showing poor performance. For example, managing foreign exchange reserve is a process that assures the sufficient foreign assets are available to support confidently for the development of monetary and exchange rate policies. Every country practices reserve management to immune itself from shock. The fall in the reserve requirement balance from eight weeks of import bill is clear indication of state failure, though Pakistan is not below this level but heading towards it due to its poor economic management and lack of strategy. Deteriorated foreign exchange reserve due to high debt payment, growth of imports, stagnant exports, declining foreign inflows, poor privatization proceeds, inability of governments to obtain international debt and declining grant assistance are the main reasons behind this declining trend.

Pakistan budget deficit, another severe economic mismanagement faced by Pakistan due to higher growth in government expenditure (increases in debt servicing, inefficient subsidies and ineffective development expenditure) as well as low growth in tax collection is higher than its

GDP. On the other hand, cheaper external financing which was earlier available to Pakistan is

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either no longer accessible now or its flow is declining. Non bank borrowing has also declined.

Now government is mainly dependent on domestic banking system from where it is covering its deficit at a higher cost as well as crowding out the private sector. There is a general consensus that increase in budget deficit reduces growth and if a country faces higher budget deficit which exceeds a certain level then it is difficult for the country to sustain.

Pakistan’s mounting debt will remain a major problem unless correction is made in fiscal policy.

The rising debt will further increase debt servicing cost of Pakistan which can put Pakistan in a financial crisis. High inflation will persist if government continues to borrow from State Bank of

Pakistan (SBP) and commercial banks.

State Bank of Pakistan is not independent to take monetary policy decision, it is done by

Ministry of Finance. Ministry of Finance takes monetary policy decision under the influence of political leaders to provide benefits to them, in this way it does not reflect true picture of the economy. Industrial policy has increasingly become part of the process of political containment rather than economic planning.

This thesis examined the impact of feudalism on wealth concentration as well as on governance of a country, business competitiveness and success of a country. We develop a model through which we show that in Pakistan feudal lords accumulate more wealth than other people and also negatively impact on governance of Pakistan through their existence in national assemblies and cabinet. Bad governance increases income inequality in society as well as adversely impact on business competitiveness of Pakistan and place it as unsuccessful country.

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Pakistan presents an overall weak governance in every walk of life which is indicated by all international governance measurement indicators developed by World Bank, Fraser Institute,

World Economic Forum, Fragile State Index Ranking, United Nations Human Development,

Transparency International etc. whoever takes position in government, whether belong to civilians or army officers have been able to use their position for personal gain for themselves as well as for their relatives and friends. Civilians and army, whenever took control of the country have made amendments in constitution for their vested interests.

Judiciary, though claims independence from the influence of politicians and army, in fact, most of the time, play a subservient role. In lower courts, corruption is widespread.

The essence of governance is the perception that one could not commit crime and get away with it. This essence of governance does not exist in Pakistan, here law enforcing agencies are mostly appointed on political grounds or by giving bribes so corruption and political influence discourage them to work for justice and fair play. Good governance is only possible when institutions are strong and work for the enforcement of rules and regulations. The potential in agriculture, industrial and energy sector is abundant but due to lack of good governance, these sectors are held hostage to various powerful influential groups. Pakistan is facing heavy political control of economic activity as major politicians and their relatives are in politics as well as have substantial participation in business, trade and industry. These politicians make policies that support them through heavy subsidization of selected businesses and industrial sector and almost complete exemption of taxes in certain sectors, such as agricultural sector.

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Recommendations

Studying the political economy of Pakistan is an interesting pursuit. Most problems emanate not due to lack of resources, but more because of mismanagement and rent seeking activities of various groups engaged in the governance of Pakistan. Feudal lords are engaged in business as well as in politics. They are regulator and regulated too, so policies developed for own benefits rather than for the people of Pakistan. Policy making is hostage to emotionalism and directed towards own benefits. Economic growth is hindered by monopolies, mafias, corruptions which do not provide a competitive even playing ground.

It is suggested that:

 We realize that improvement in governance is not a single day task, it cannot be achieved

at once and it is not related to any one department or one institution. It’s a process that

will establish equality, effective management of economic resources, effective and

efficient bureaucracy restrains corruption and improves quality of life. To achieve good

governance strong political will and commitment will be needed. International financial

institution, UNDP is working and giving guidelines to improve governance but

government should not only consider their recommendations, we should also work and

understand the local ground realities and environment as well as institutional capacity.

Civil society, impartial media, NGOs participation is necessary. However it is important

to understand that as times passes, situation will aggravate and more things would need to

be done. For example in the case of Pakistan, there is, at present no work in the area of

land reform.

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 For sustainable revival of the state, we should avoid all groups/segments of the society

who directly or indirectly affect the constitution for their own benefit.

 Reduce power of the influential segment who are affecting law making process.

 Constitutional amendment is required to encourage polices which improve the overall

governance of the country.

 Reform in the political process is required to discourage monopoly of the ruling elites.

 Economic decision should be kept separate from political influence and for this purpose

constitutional amendment is suggested.

 Government should follow consistent economic policies over a longer period of time

which should be free from regime change to develop investor confidence.

 Taxation policy should be revisited which should be based on equity and consider interest

of common people rather than influential groups of the society. Tax on corporation

should be reduced to improve the overall health of corporate sector and economy as well.

This will help to bring investment in Pakistan.

 Monetary system should be independent. Saving and investment trend is too inadequate

despite high GDP growth rate. This require serious attention of policy makers.

 Government needs prudent economic management to deal with fiscal deficit issue.

Pakistan should make policies that increase exports and discourage import to reduce the

gap of current account deficit.

 Subsidies to state enterprises should be discouraged which are used by influential groups

for their own benefits.

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 Policies to encourage private sector participation should be developed. It should

encourage that much part of the government should be run by private sector.

 Agricultural sector is one of the main components of Pakistan’s GDP. This sector is

directly and indirectly linked with various other sectors of the economy. To accelerate

economic growth, policy makers should devise policies that help to improve agriculture

sector.

 Government should broaden tax base. Tax to GDP ratio should improve. Increase in tax

revenue will also help government to reduce its borrowing which will reduce its overall

borrowing cost and reduce interest rate at domestic level. Reform should come in indirect

taxation policy in Pakistan. Heavy reliance on indirect taxation in Pakistan is one the

main obstacles in achieving economic development and adversely affects poor people.

 Pakistan has a complex registration process to start a business. This procedure needs

reform. Number of government departments to fulfill requirement to start business should

be minimized to create more friendly environment for new business. This will encourage

investment in Pakistan.

 Wealth tax net should be broadened to bring more wealthy people within tax ambit.

 Good judicial system required in Pakistan which can enforce contracts effectively and

efficiently.

 Reform is needed in regulatory procedure and it is very necessary to strengthen the

regulatory institutions.

 Governance may be improved by effective participation of political leaders, civil society

along with evolution of institutions.

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 Politicization of the economy should be reduced and government should encourage small

business formation to help economy grow.

 Corruption is difficult to remove from society but by spending on education and

increasing more literate people in society it is possible to develop a sense of moral

obligation and hence may help to reduce corruption.

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Appendix A

Table No.1 Wealthy Families in Pakistan-1970

Listed Assets Listed Assets No. Name (millions) No. Name (millions) 1 Dawood Rs. 557.8 22 Dada Rs.48

2 Saigol 529.8 23 Hyesons 68.4

3 Adamjee 437.6 24 Premier 77.3

Hussain 4 Jalil 419.8 25 Ibrahim 88

5 Colony 325.4 26 Monnoo 79.9

Maula 6 Fancy 280.4 27 Bakash 58.9

7 Valika 320 28 Adam 45.1

8 Bawany 237.4 29 A K Khan 74.9

9 Crescent 199.7 30 Ghani 41.2

10 Wazir Ali 132.7 31 Rangoonwala 44.5

11 Gandhara 153.2 32 Harijanss 61

12 Isphani 90.8 33 Shafi 60.2

13 Habib 128.1 34 Fakir Chand 59

14 Khyber 127.5 35 Hasham 53.9

15 Nishat 64.6 36 Dadabhoy 53.9

16 Beco 113.8 37 Shahnawaz 52.7

17 Gul Ahmad 21.1 38 Fateh 48

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18 Arag 32.4 39 Noon 36

19 Hafiz 100 40 Hoti 40.6

Dost 20 Karim 95.4 41 Mohammad 20.4

21 Milwala 96 42 Farooq 36.7

Source: White (1974)

Table No.2 Wealthy Families of Pakistan in 1990s

Assets (in Assets ( in S. No. Group millions) S. No. Group millions)

1 Habib Rs.5781 13 Adamjee Rs.1141

2 Crescent 4237 14 Al-Noor 1124

3 Dawood 3265 15 Ghulam Farooq 1091

4 Saigol 2618 16 Gul Ahmad 1066

5 Wazir Ali 2279 17 Ghani 1034

6 Nishat 2279 18 Pakland 1006

7 Saphire 1755 19 Atlas 956

8 Lakson 1559 20 Hashwani 808

9 Fazalsons 1384 21 Service 734

10 Gandhara 1344 22 Colony 728

11 Dewan 1344 23 Fazal 719

12 Bawany 1213 24 Fateh 458

25 Ittefaq 398

Source: The Monthly Herald June 1990.

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Table No.3 Wealthy Families of Pakistan in 1997

Manufacturing Assets( in Financial Total Assets ( S.No. Name millions) Assets in millions)

1 Nishat Rs.27,792 Rs.165,145 Rs.192,937

2 Saigol 15,202 9,004 24,206

3 Crescent 10,586 12,353 22,939

4 Dewan 10,113 10,113

5 Ittefaq 10,000 10,000

6 Chakwal 9,264 5,530 14,794

7 Habib 7,612 4,657 12,269

8 Saphire/ Gulistan 7,583 4,657 12,240

Gul Ahmad/ Al- 9 Karam 5,220 915 6,135

10 Packages 5,168 12,822 17,990

11 Chakwal 4,592 5,530 10,122

12 Atlas 4,359 2,555 6,914

13 Hashwani 4,251 382 4,633

14 Bibojee-Saifullah 3,806 637 4,443

15 Dawood 3,780 1,605 5,385

16 Monnoos 3,605 3,605

17 Fecto 3,542 3,542

18 Lakson 2,876 2,876

19 Gatron 2,870 2,870

20 Fateh 2,843 2,843

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21 Sargodha 2,743 2,743

22 Al-Noor 2,573 2,573

23 Ghulam Farooq 2,465 2,465

24 Ibrahim 2,333 336 2,669

25 United 2,237 3,644 5,881

26 Bawany 2,189 53 2,242

27 Zahoor 2,178 2,178

28 Schon 2,038 2,259 4,297

29 Dadabhoy 2,016 151 2,167

30 Jehangir Elahi 2,038 2,038

31 Fazalsons 2,000 2,000

32 Rupali 1,910 12,833 14,743

33 Service 1,707 1,707

34 Yunus Bros 1,689 997 2,686

35 Tawkkal 1,678 644 2,322

36 Sitara 1,619 1,619

37 Colony 1,620 94 1,714

38 Premier 1,501 1,501

39 Shahnawaz 1,299 1,299

Sunshine/ 40 Sunrays 1,265 1,265

41 Fazal/ Fatima 1,263 1,263

42 Calico 1,235 1,235

43 Tata 1,060 102 1,162

44 Raja 1,020 1,020

45 Nagina 1,013 1,013

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Source: The Monthly Herald June 1997

Table No.4 Wealthy Families in 70s and 90s

1. Dawood 2. Dawood 3. Adamjee 4. Adamjee 5. Bawany 6. Bawany 7. Habib 8. Habib 9. Gul Ahmad 10. Gul Ahmad 11. Farooq

Table No.5 Wealthy Families of Pakistan in 2013

No. Name Worth Industry

1 Mian Mohammed Mansha( £2.5billion Banking, Textile, Mansha group) Hospitality, & Investments

2 Malik Riaz Hussain £2 billion Property developer, Malls, Hotel

3 Mian Muhammad Sharif (Sharif £1.5 billion Politics, Sugar, Family) Textile & Steel Mills, Construction, Property Developers & Malls

4 Asif Ali Zardari £1.2 billion Politics

5 Sir Anwar Pervaiz £1 billion Cash & Carry, Real Estate, Manufacturing, Banking & Investments

6 Saddaruddin Hashwani (Hashoo £600 Million Business Man

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Group)

7 Shahid Hussain (Service Group) £500 Million Business Man

8 Iqbal Z. Ahmed (Associated £500 Million Oil and Gas Group)

9 Rafiq Habib & Rasheed Habib £500 Million Banking and Investments

10 Abdul Razzaq Yakoub & £450 Million Business Man family

11 Sultan Ali Lakhani & family £450 Million Business Man (The Lakson Group)

12 Aqeel Karim Dhedi £400 Million Business Man

13 Nasir Schon & family £400 Million Business Man

14 Mian Mohammed Latif £400 Million Business Man (Chenab Group)

15 Sheikh Abid Hussain alias Seth £350 Million Business Man Abid (The Abid Group)

16 Haji Abdul Ghafoor & Haji £350million Business Man Bashir Ahmed (Sitara Group)

17 Tariq Saigol & Nasim Saigol £350million Business Man

18 Dewan Yousuf Farooqui (The £350million Business Man Dewan Group)

19 Razzaq Dawood (The Dawood £350million Business Man Group)

20 The Sheikhani Family

£350million Business Man

21 Byram Dinshawji Avari £260million Business Man

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22 Shimmy Querishi £260million Business Man

23 Mukhtar Ahmed (Ibrahim £260million Business Man Group)

24 Sherazi Family (The Atlas £260million Business Man Group)

25 Atiq Raza £250million I.T & Software

26 Faruque Khan £240million Business Man

27 Rafiq Rangoonwala (cupola £240million Business Man Group)

28 Syed Family (The Packages £230million Businessman Group)

29 Ghulam Hassan Khan £220million Business Man

30 Saif Family (The Saif Group) £220million Business Man

31 Jehangir Elahi £220million Business Man

32 Afzal & Akmal Kushi £200million Clothing Business

33 Noon family £200million Business Man

34 Mian Abdullah (The Sapphire £190million Business Man Group)

35 Nabeel Chaudhry £180million Real Estate

36 Aneel Mussarat £180million Real Estate

37 Nazir Family £170million Businessman

38 Shahzad Family £170million Business Man

39 Zafar Iqbal Khwaja £150million Business Man

40 Chaudhry Brethern £150million Business Man

41 Saddiq & Sons £140million Business Man

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42 Hassan Ahmed £130million Telecommunication

43 Younis Brothers £120million Business Man

44 Safi Qureshi £120million IT/Software

45 Kasim Dada £110million Business Man

46 Mohammad Khan £100million Business Man

47 Safi Qureshi £100million Real Estate

48 Ishaq Dar & Sons £100 million Politics / Financial & Consultancy Services, & Real Estate

49 Afzal Kahn £100 million Automobile

50 Shaf Rasul £82million Real Estate / Computers

51 Nazim Khan £80million Business Man

52 Tahir Mohsan £80million Business Man

53 Abdul Bhati £75million Business Man

54 Adalat Chaudhary £75million Business man

55 Younis Sheikh £75million Business Man

56 Chaudrey Zameer £75million Business Man

57 Humayun Akhtar Khan & £75million Businessman / family Politics

58 Mo Chaudhry £70million Business Man

59 Azeem Ibrahim £50million Business Man

60 Maqbool Rasul £50million Properties / Rent Videos

61 Johngir & Babbar Saddiq £25million Food

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62 Nasir Awan £25million Wholesale Distributer

63 Mumtaz Khan Akbar £25million Restaurants / Food

64 Tariq Farid £25million Food

65 Mohammad Sarwar £20million Cash and Carry / Politics

66 Shahid khaqan Abassi £20million Airline / Politics

Source: Pakistan Affairs 2013

Table No. 6 Bank Loan Defaulters Business Groups/Individuals in Pakistan-1993

Name Amount(Rs.in millions)

Fazalsons Rs.2,164

Hyesons 1,174

Habib Group 850

Naqvi Group 676

Tawakal 479

Adamjee Group 198

Dadabhoy Group 191

Hashwani Group 49

Fancy Group 41 Phalia Sugar, Punjab Sugar & Sapco Limited 110

Iteffaq Group against Iteffaq Foundry 83

Saifullah's 37 Zardari Group ccclxxxv

7 Source: Rehman (2006).

Table No 7 Loan Defaulters Groups/Individuals in Pakistan -1996

AMOUNT AMOUNT BORROWED DEFAULT NAME in millions Ittefaq Rs.3,675 Rs.2,891 Fazalsons 3,475 3,475 Tawakkal 1,768 1,464 Bela Chemicals 1,259 1,217 Abdul Shakoor Kalodia 1,215 1,215 Naqvi 1,213 1,060 Zahur 1,035 905 Ghani 1,023 985 Arabian Sea Enterprise 950 913 Hyesons 750 725 Chaudri Cables 716 684 Farooq A Sheikh 632 632 Habib 615 615 Bawany-Alnoor 601 485 Chaudry Shujaat 544 381 Dawood 540 325 Adamjee 526 494 TOTAL 20,537 18,466 Source: Rehman (2006).

Table No.8 Loan Defaulters in Pakistan-1997

Name Amount in millions

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Ittefaq Rs. 3,013

Tawakkal 2,956

Fazalsons 2,800

Bela Chemicals 2,339

Chaudri Shujaat 1,557

Abdul Shakoor Koladia 1,254

Fauzi Ali Kazim 1,159

Saigol 1,086

Naqvi 1,056

Zahur 1,028

Abdullah Al-Rajaih 1,031

Ghani 903

Habib 845

Adamjee 832

Hashwani 640

Arabian Sea Enterprise 626

Sargodha 581

United 501

Chakwal 441

Dawood 376

Bawany-Alnoor 352

Fateh 213

Packages 166

Colony 81

TOTAL 25,836

Source: Rehman (2006) ccclxxxvii

Table No. 9 Loan Waived by Banks-2009

Name of Bank No. of People loan Loan Waived waived Bank of Punjab 630 Rs.60.8 billion IDBP 485 59.55 billion NBP 1088 23.5 billion Zari Taraqqiati Bank 556 1.88 billion First Woman Bank 139 782.8 million SME Bank 204 279.7 m Bank of Khyber 98 499.3 m Pak Lybya 48 896.9 m Pak Kuwait Inv. Co. 22 63.4 m Saudi Pak. Industrial & 31 169.4 m Agricultural Inv. Co. Pak Oman Inv. Co. 1 1.78 m Source: Rehman (2006)

Table No. 10 Major Beneficiaries of Loans Waived by Banks-2009

Beneficiaries Amount Waived Siraj Steel of Muridke Rs1.412 billion Mohib Textile Mills of Multan Road, Lahore 1.117billion Maj-Gen Mian Abul Qayyum (retd.) of Qurel 900 million ccclxxxviii

Cassette Adamjee Garments, Adamjee International and 239millio Golden Valley Trading, Adamjee Karachi Kohinoor Looms of Raiwind, Lahore 945million Mekran Fisheries 961million Quality Steel Works of Manghopir Road, 981million Karachi Pakistan Fertilizer of Gulshan-i-Iqbal, Karachi 323million Associated Industries Garments of Nazimabad, 406 million Karachi Fateh Textile Mills of Hyderabad 352million Metropolitan Steel Corporation 747million Adamjee Industries of Karachi 448million Glamour Textile Mills of Abid Majid Road, 533 million Lahore Allied Textile Mills of Larkana 296 million Anand Textiles Mills 279 million First Tawakal Modaraba of Shaheen Road, 628 million Karachi National Garments of Lahore 335 million Salahuddin Sahaf and Wahiduddin Sahaf’s 317 million dyeing & finishing, and food industries Haleem Ghouri and Karik Ghouri of Aleem 187 million Sons Oberoi Textile Mills 260 million Taymur Spinning Mills of Lahore 185 million Sampak Paper & Board of Lahore 216 million Okara Textile Mills 126 million Khairpur Textile Mills 146 million

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Techno Glass Industries of Lahore 215 million Metropolitan Steel Corporation of Karachi 190 million Bhittai Food Industries 248 million Malik Food Industries 367 million General Dairies 246 million Fruit Sap Ltd 242 million Crescent Standard Investment Bank of Lahore 370 million Aries Global 316 million Aghosh Public School 285 million Source: Rehman (2006)

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Appendix B Table No. B1 Companies nationalized in Pakistan 1970

Family Group Company Name Name

Steel Corporation of Pakistan Fancy

Hyeson's Steel Hyesons

Ali Automobiles Jaffer Bros

Kandawala Industries

ROK Industries

Haroon Industries Haroon

Wazir Ali Industries Packages

Gandhara Industries Bibojee

Indus Chemical and Industries

Valika Cement Valika

Karachi Gas Fancy

Valika Chemicals Valika

Fancy-Jaffer Karachi Electric Bros

National Refinery

Pakistan Fertilizer Corporation Jaffer Bros

BECO C.M.Latif

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M.K.Foundary

Ittefaq Foundry Ittefaq

Rana Tractors

United Chemicals Saigol

Pakistan Cement Saigol

Ismaeel Cement Colony

Central Iron and Steel Works

Valika Steel Works Valika

Jaffer Steel Corporation Jaffer Bros

Pakistan Progressive Cement Wah Colony

Pakistan progressive Cement Dandot Colony

Rawal Pindi Electrics

Modern Steel Muredke

Multan Electric Supply Colony

Karim Industries Nowshehra Nishat

Source: (Rehman, 2006)

Table No. B2

Purpose-Wise Advances for Agriculture to Pakistan Farmers 1971-1976

Purpose 1970-71 1971-72 1972-73 1973-74 1974-75 1975- March 76

Seasonal 106 135.3 472.5 1234.6 933.8 517.19 inputs

Draught 23.9 36 98.9 330.6 187.8 98.5 animals

Dairy 11.8 15.8 50.3 252 37.4 4.7

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Farming

Poultry 2.5 8.1 7.9 21.3 19.8 5.7 Farming

Marine 2.5 .5 8.3 52.3 39.7 34.9 Fisheries

Tube wells 187.5 184.1 264.2 513.3 862.7 365.5

Tractors 551.6 374.1 436.5 803 1395.4 2201

Other 41.2 46.1 352.4 948.6 486.5 236.7

Source: Rashid (1978) Table No. B3

Industrial investment in Non-Public Sector 1970-75

Year Investment I in million

1970-71 122.4

1971-72 101.6

1972-73 70.8

1973-74 64.5

1974-75 98.2 at 25% inflation rate

Source: Rashid (1978)

Table No. B4 Fiscal Indicators as Percent of GDP

Year Real GDP Fiscal Deficit% Expenditure% Revenue% Growth%

FY1992 5.4 9.5 25.6 16.9

FY1992 7.6 8.7 26.5 19.2

FY1993 2.1 8.1 26.2 18.1

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FY1994 4.4 5.9 23.4 17.5

FY1995 5.1 5.6 22.9 17.3

FY1996 6.6 6.5 24.4 17.9

FY1997 1.7 6.4 22.3 15.8

FY1998 3.5 7.7 23.7 16

FY1999 4.2 5 22 15.9

FY2000 3.9 5.4 18.9 13.4

2001-02 1.8 4.3 17.4 13.1

2002-03 3.1 4.3 18.5 14.0

2003-04 4.7 3.7 18.8 14.8

2004-05 7.5 2.3 16.5 14.2

2005-06 9.0 3.3 16.8 13.8

2006-07 5.8 4.3 18.4 14.1

2007-08 6.8 4.4 20.6 14.9

2008-09 3.7 7.6 22.2 14.6

2009-10 1.7 5.3 19.9 14.5

2010-11 3.1 6.3 20.3 14.0

2011-12 3.0 5.9 19.2 12.5

2012-13 B 3.7 4.0 18.0 13.9

Source: Economic Survey of Pakistan 2011-12

Table No. B5 Fiscal Deficit Financing

July – July –March July –March July – March 2010-11 2011-12 March 2009-10 2012-13

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Overall Fiscal Rs.-625.8 Rs.-850.6 Rs.-894.9 Rs.-1046 Deficit

Financing of Fiscal Deficit

External 92.6 134.5 47.4 -4.1 Sources

Domestic 533.3 716.1 847.5 1050.3

Bank 210.9 412.6 443.8 856.7

Non-Bank 322.5 303.5 403.7 193.7

Table No. B6 Fiscal Deficit Financing

2005-06 2006-07 2007-08 July –March 2008-09

Overall Fiscal Rs.-327 Rs.-377 Rs.-777.2 Rs.-680.4 Deficit

Financing of 681.4 Fiscal Deficit

External 148.5 147 151.3 149.7 Sources

Domestic 179.1 159 626 529.5

Bank 66.8 102 520 305.6

Non-Bank 22.3 57 104 223.8

Privatization 90 71 0 1.3 Proceeds

2004-05 2003-04

Overall Fiscal Rs.-217 Rs.134.5

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Deficit

Financing of Fiscal Deficit

External 120.4 -4.5 Sources

Domestic 96.6 139

Bank 60.2 63.7

Non-Bank 8.1 64.1

Privatization 28.3 11.2 Proceeds

Source: Various Economic Survey of Pakistan Table No. B7 Decline in Prices of Stocks at KSE from 15 March 2005 to 19 April 2005

Date OGDC NBP DGKC PSO PPL FFBL PTC

15-Mar-05 189.75 161.75 80.6 488.9 314.9 40.7 87.9

16-Mar-05 186 161 76.6 469.85 299.2 38.75 86.6

17-Mar-05 176.7 152.95 72.8 435.95 284.25 36.85 83.65

18-Mar-05 167.9 145.35 70.5 451 273 35.05 86

21-Mar-05 159.55 138.1 67 445 265 33.3 81.7

22-Mar-05 151.6 131.2 63.65 422.75 251.75 31.65 75.75

24-Mar-05 144.05 124.65 60.5 401.65 239.2 30.1 72

25-Mar-05 136.85 118.45 57.5 381.6 227.25 28.6 68.4

28-Mar-05 130.05 112.55 54.65 362.55 215.9 27.2 65

29-Mar-05 123.55 113.8 58.7 389.7 222 29.2 68.9

30-Mar-05 117.4 122 63.1 418.9 237 31.35 73.9

31-Mar-05 111.55 115.9 59.95 398 225.15 29.8 70.25

01-Apr-05 106 114.6 62.35 422 213.9 29.6 66.75

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04-Apr-05 113.95 123.15 67 453.65 229.9 31.8 71.75

05-Apr-05 111 121.55 64 431 218.45 30.5 68.2

06-Apr-05 105.8 119.9 62.75 417 207.55 29.75 66.25

07-Apr-05 110.7 120.5 67.45 427.8 213.75 30.4 67.7

08-Apr-05 106 118.25 65.9 415 210 30.1 64.35

11-Apr-05 100.7 112.35 62.65 394.25 199.5 28.6 61.15

12-Apr-05 95.7 106.75 59.55 374.55 189.55 27.2 58.1

13-Apr-05 96 113 64 393 186 29.2 60.15

14-Apr-05 97 120 65.8 389 182 31.35 60

15-Apr-05 104 106.15 66.5 399 192.95 32.35 63.4

18-Apr-05 97.55 100.85 63.2 379.05 183.35 30.75 60.25

19-Apr-05 92.7 95.85 60.05 360.1 174.2 29.25 57.25

15-Mar-05 189.75 161.75 80.6 488.9 314.9 40.7 87.9

16-Mar-05 186 161 76.6 469.85 299.2 38.75 86.6

17-Mar-05 176.7 152.95 72.8 435.95 284.25 36.85 83.65

18-Mar-05 167.9 145.35 70.5 451 273 35.05 86

21-Mar-05 159.55 138.1 67 445 265 33.3 81.7

22-Mar-05 151.6 131.2 63.65 422.75 251.75 31.65 75.75

24-Mar-05 144.05 124.65 60.5 401.65 239.2 30.1 72

25-Mar-05 136.85 118.45 57.5 381.6 227.25 28.6 68.4

28-Mar-05 130.05 112.55 54.65 362.55 215.9 27.2 65

29-Mar-05 123.55 113.8 58.7 389.7 222 29.2 68.9

30-Mar-05 117.4 122 63.1 418.9 237 31.35 73.9

31-Mar-05 111.55 115.9 59.95 398 225.15 29.8 70.25

01-Apr-05 106 114.6 62.35 422 213.9 29.6 66.75

04-Apr-05 113.95 123.15 67 453.65 229.9 31.8 71.75

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05-Apr-05 111 121.55 64 431 218.45 30.5 68.2

06-Apr-05 105.8 119.9 62.75 417 207.55 29.75 66.25

07-Apr-05 110.7 120.5 67.45 427.8 213.75 30.4 67.7

08-Apr-05 106 118.25 65.9 415 210 30.1 64.35

11-Apr-05 100.7 112.35 62.65 394.25 199.5 28.6 61.15

12-Apr-05 95.7 106.75 59.55 374.55 189.55 27.2 58.1

13-Apr-05 96 113 64 393 186 29.2 60.15

14-Apr-05 97 120 65.8 389 182 31.35 60

15-Apr-05 104 106.15 66.5 399 192.95 32.35 63.4

18-Apr-05 97.55 100.85 63.2 379.05 183.35 30.75 60.25

19-Apr-05 92.7 95.85 60.05 360.1 174.2 29.25 57.25

14-Apr-05 189.75 161.75 80.6 488.9 314.9 40.7 87.9

15-Apr-05 186 161 76.6 469.85 299.2 38.75 86.6

18-Apr-05 176.7 152.95 72.8 435.95 284.25 36.85 83.65

19-Apr-05 167.9 145.35 70.5 451 273 35.05 86

Decline % -51% -41% -25% -26% -45% -28% -35%

Date BOP NML ICI

15-Mar-05 109.8 124 141.75

16-Mar-05 104.5 117.95 134.7

17-Mar-05 99.3 112.1 128

18-Mar-05 94.35 106.5 121.6

21-Mar-05 89.65 101.2 115.55

22-Mar-05 86 96.15 109.8

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24-Mar-05 81.7 91.35 104.35

25-Mar-05 77.65 86.8 99.15

28-Mar-05 77.5 82.5 94.2

29-Mar-05 69.4 84.15 93.35

30-Mar-05 74.6 90.4 100.35

31-Mar-05 73.25 86.9 95.35

01-Apr-05 77.9 84.5 90.6

04-Apr-05 83.7 90.8 97.35

05-Apr-05 83.5 87.95 97

06-Apr-05 82.75 87 99.7

07-Apr-05 83.05 88.1 98.7

08-Apr-05 81.9 84 95.05

11-Apr-05 77.85 79.8 90.3

12-Apr-05 74 75.85 85.8

13-Apr-05 78.4 78 87.5

14-Apr-05 81.9 80.5 88.5

15-Apr-05 85.75 84 95

18-Apr-05 81.5 79.8 92.5

19-Apr-05 77.45 75.85 84.1

15-Mar-05 109.8 124 141.75

16-Mar-05 104.5 117.95 134.7

17-Mar-05 99.3 112.1 128

18-Mar-05 94.35 106.5 121.6

21-Mar-05 89.65 101.2 115.55

22-Mar-05 86 96.15 109.8

24-Mar-05 81.7 91.35 104.35

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25-Mar-05 77.65 86.8 99.15

28-Mar-05 77.5 82.5 94.2

29-Mar-05 69.4 84.15 93.35

30-Mar-05 74.6 90.4 100.35

31-Mar-05 73.25 86.9 95.35

01-Apr-05 77.9 84.5 90.6

04-Apr-05 83.7 90.8 97.35

05-Apr-05 83.5 87.95 97

06-Apr-05 82.75 87 99.7

07-Apr-05 83.05 88.1 98.7

08-Apr-05 81.9 84 95.05

11-Apr-05 77.85 79.8 90.3

12-Apr-05 74 75.85 85.8

13-Apr-05 78.4 78 87.5

14-Apr-05 81.9 80.5 88.5

15-Apr-05 85.75 84 95

18-Apr-05 81.5 79.8 92.5

19-Apr-05 77.45 75.85 84.1

14-Apr-05 109.8 124 141.75

15-Apr-05 104.5 117.95 134.7

18-Apr-05 99.3 112.1 128

19-Apr-05 94.35 106.5 121.6

Decline % -29% -39% -41%

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Appendix C

Figure C1 1st Pillar- Institutions

Figure C2 2nd Pillars - Infrastructure

cdi

Figure C3 3rd Pillars - Macroeconomic Environment:

cdii

Figure C4 4th Pillars - Health and Primary Education

Figure C5 5th Pillar-Higher Education and Training

Figure C6 6th Pillars - Good Market Efficiency

cdiii

Figure C7 7th Pillar - Labor Market Efficiency

cdiv

Figure C8 8th Pillar - Financial Market Development

Figure C9 9th Pillar - Technological Readiness

cdv

Figure C10 10th Pillar - Market Size

Figure C11 11th Pillar - Business Sophistication

Figure C12 12th Pillar - Innovation

cdvi

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