India and Pakistan: A tale of two economies10 min read . Updated: 17 Sep 2016, 11:27 PM IST
Until a decade ago, Pakistan's per capita income was superior to India's, despite the latter's vaunted growth story. How did things change?
Karachi is a brown city. It’s not just the arid landscape that dominates it. In part it is the male version of the ubiquitous national dress—salwar-kameez—worn in pastel shades. Mostly, it is the colour of the public and commercial architecture, betraying signs of an economic boom that was aborted by the early 1990s, before monuments of glass and steel came into style.
Nowhere is it more apparent than Karachi’s Jinnah international Airport, the biggest one in the country. It completed its last expansion almost a quarter-century back. And it shows, especially if you have flown in from the swanky new airports in Delhi or Mumbai.
Coming from India to Pakistan (or the other way round), the first natural instinct is to compare and contrast things with home. At first glance, apart from the Urdu signage, not much seems to separate Karachi from Delhi. It is a cliché, but people are really like us—and once they know you are from India, can be uncommonly kind and generous.
Roads are rather wider and smoother actually—but traffic signals are not much more than polite requests. The motorway-like city roads of Islamabad might give you the false impression that you are in a developed country.
Houses in the posh ‘Defence’ area of Karachi, named after the army-run upscale property developer—Defence Housing Authority, or DHA—can give South Delhi bungalows a run for their money in opulence and taste.
On the other hand, there is not much in the way of public transport, especially when compared to the Delhi Metro or Mumbai’s local trains. The spectacularly and lovingly decorated public buses—I was told that a bus or lorry owner may end up spending a princely sum of 10 lakh Pakistani rupees (about Rs6 lakh) on decoration alone—in Karachi are small and ramshackle, used only by those with no other option.
But nothing drives home the leap Indian cities have made more than the modern office complexes that have come up over the past two decades.
Good old days
It didn’t have to be like that. A decade ago, Pakistan’s per capita income was still much higher, despite India’s vaunted growth story, reflecting a lead consolidated over the preceding four decades.
Even as some Indians enviously heard and read stories of fancy imported cars on Pakistani roads and lamented the pre-1991 socialist choices of our leaders, a closer look suggests that there was not much to differentiate between the two when it came to policy.
Specific policies aside, it is surprising how similar the policy cycles have been on the both sides of the Radcliffe Line.
Pakistan had started on the back foot at its inception. After Partition, not only did India have the advantage of inheriting public institutions that had to be built from scratch in Pakistan, but India was left with a disproportionately larger share of the urban population, industry and transportation infrastructure.
But it wasn’t all bad for Pakistan. What it lacked in state capacity and industry, it made up in the lion’s share of the fertile, irrigated land of Punjab. Important raw materials, such as cotton and jute, were also plentiful in both Punjab in West Pakistan and Bengal in East Pakistan.
Policymaking during the 1950s and ’60s was basically the same on both sides. The essential elements of central planning, state-led and foreign-aid-financed industrialization, and import substitution were espoused by the leaders in both Karachi and New Delhi.
Soviet Russia was an inspiration for both. In fact, Pakistan started with the five-year planning system before India, but its first one collapsed in 1953 for lack of funds. Attempts to revive it fell victim to the emerging differences between the Bengali and Punjabi leaderships, sowing the seeds for Bengali disenchantment and eventually separation.
Meanwhile, India had stolen a march with a successful first five-year plan that surpassed its growth target and initiated large public infrastructure programmes.
Contrary to the popular perception today, independent India had started with a relatively liberal and open economic policy regime. While controls and quotas were there from the start (a remnant of the World War II economy), their implementation was fairly relaxed.
Amid Pakistan’s political chaos—it had seven different prime ministers in its first 11 years of existence—army commander-in-chief Ayub Khan imposed military rule in October 1958. Whatever the political and institutional consequences of martial rule may have been, General Khan ushered in the golden period of the Pakistani economy.
State capacity expanded, while the government invested heavily in infrastructure and heavy industry. Most importantly, an agricultural revolution was initiated—much before India was compelled to—and auxiliary industries to support a more industrialized agriculture came up in West Punjab.
Pakistan was not only achieving self-sufficiency, but had also become home to a burgeoning export industry, especially in textiles. Islamabad was relaxing its licensing regime while Nehru was embarking on his leftward tilt.
Foreign aid played an important role in the economies of both countries at that time. A more market-friendly economic regime and picking the right horse in the Cold War worked well for Pakistan. This was perhaps the first time when the policy frameworks started diverging.
By the middle of the 1960s, Indian socialism was being weighed against Pakistani pragmatism (as was Indian democracy with Chinese totalitarianism) and the latter was winning the race for foreign investment.
The world’s celebration of Pakistani economic growth at that time was also driven by the fact that foreign advice was readily accepted and implemented. All you needed was the nod of the General.
In India though, foreign technocrats ran into resistance from the democratic process and a sizeable cadre of local economists. Thus, the academic research and World Bank reports of that time were quite favourable to Pakistan.
However, the absence of effective land reforms and the development of West Punjab increased inequalities in Pakistani society—and more crucially, between West and East Pakistan.
Some two dozen families were said to own the whole country and the economic growth had failed to make a dent on social indicators. Yahya Khan’s failure to prevent the creation of Bangladesh not only overturned military rule but also Ayub Khan’s economic regime, replaced by Zulfikar Ali Bhutto’s populism.
Populist-nationalism was at its peak in the global south at that time—from Latin America to Africa, from Arabia to Asia. Indira Gandhi was at the height of her powers, and her radical populism phase was in full swing, in 1971 when Bhutto came to power as president.
Indira’s “garibi hatao" was matched by Bhutto’s “roti, kapda aur makan". Redistribution and equity came to the forefront of policymaking and, once again, policy regimes in India and Pakistan converged.
Within a year of becoming president, Bhutto nationalized the banking system, insurance companies and all major industries. Like Indira’s economic vandalism, Bhutto’s populism was destructive for Pakistan. Private investment collapsed, foreign investment flew out of the country and incomes contracted. Inequality increased rather than decreased, while galloping inflation hurt the most vulnerable.
Both countries were engulfed in civil disorder by the middle of the decade. While India suffered the Emergency and eventually the Janata government, Pakistan got Zia-ul-Haq’s dictatorship and Bhutto’s death.
Even before the Emergency, a rethink of the restrictive economic regime had started in India and some baby steps were taken during the Emergency to ease restrictions. The Janata government tinkered with it a little bit. Only in the 1980s, though, did India finally start chipping away at its economic control and command regime.
With Zia’s entry in 1977, Pakistan ended its affair with socialism at around the same time. Defence spending, American aid inflows (after the Soviet invasion of Afghanistan) and liberalization of industrial controls, among other things, helped revive and stabilize the economy.
At the expense of stating the obvious, this in no way mitigates Zia’s destructive legacy of religious fanaticism and terrorism the whole world is still living with. In fact, the sectarian violence, and the emergence of religious political parties that came with Zia’s politics, and the drug and Kalashnikov culture that came with Pakistan’s involvement in the Afghan War, was the undoing of Pakistani society and its economic prosperity.
As in India, the economic liberalization of the 1980s in Pakistan was accompanied by large fiscal deficits. Pakistan was forced to go to the International Monetary Fund (IMF) in 1988—two years before India had to approach the Fund in strikingly similar circumstances. What happened next led to the relative—and it’s only relative—prosperity of India and the stagnation of Pakistan.
There was a clamour for deep and radical free-market reforms in both countries. Those were the years of the Washington Consensus. Both countries implemented some radical free-market reforms in 1991, though the process somewhat stalled in the following years.
The arc of Indian economic policy and development over the last quarter-century is a familiar one and doesn’t need repetition. While India made some striking gains and eventually became the darling of the global investor community, Pakistan became a laggard. Why?
It can’t be just be the instability at the top. Between Zia’s death in 1988 and Pervez Musharraf’s October 1999 coup, Pakistan had nine different governments. Well, India had eight. What was different was how the political institutions and participants reacted to this instability.
The conflicts of Mandir-Masjid-Mandal, divisive and violent as they surely were, seem to have been managed relatively calmly by Indian political institutions when one compares it with how the situation evolved across the border.
Political rivals were not exiled, or jailed, or bumped off. Despite the occasional bloody riot, cities did not descend into a spiral of violence. Contrast that with Karachi. Fears of “target killings", that very Karachi phrase, can be heard in hushed tones in drawing rooms even today. (The equanimity of Karachiites, having internalized the violence, can be unnerving to outsiders, even to fellow Pakistanis.)
Chaos begets chaos, which begets dictatorship. The sociopolitical chaos of the 1980s and the ’90s led to chaotic and fitful policymaking and economic slowdown. While the Pakistani economy grew by an average of about 7% during the 1980s, the rate was down to just below 4% in the ’90s—per capita income even contracted during a couple of years. Amid the chaos rose another dictator.
For all his sins, and there are many, Musharraf is probably the most liberal leader Pakistan has ever had—both economically and socially.
Following an orthodox economic programme, the economy crept out of the 1990s rut and grew by an average of more than 5% before the great financial crisis struck and Musharraf was toppled. Society was also opened up and stuff wasn’t summarily banned at the drop of a hat—it is his legacy that you can find books as damning of Pakistan as Gary Bass’s The Blood Telegram or Christine Fair’s Fighting to the End in an ordinary Karachi bookstore.
Since the revival of democracy, governance has been patchy and the economy is now recovering from a crisis. The country was reclassified as an emerging market by the MSCI earlier this year and it successfully completed the final IMF review of a three-year assistance programme in August. Growth prospects look rosier, though reforms seem to have slowed down.
Meanwhile, India has tasted economic success and overtaken Pakistan on most indicators. In 1990, the per capita income (using 2011 constant prices) in India was 1,773 PPP US dollars, just 58% of Pakistan’s. It took India two whole decades to catch up and now we have lead of 20%.
But these figures hide the heterogeneity in income levels within the country, and India continues to have a much higher percentage of its population living under poverty. The contrast is starker when it comes to incidence of absolute poverty, and India has a lot of ground to cover.
A familiar churn
Keeping policy details aside, this stylized cycle of well-intentioned state-led development, to visceral populism, to corrective reforms, to the economic set-up of the present day has been very similar for both India and Pakistan. So perhaps economic historians should focus less on individuals and leaders, for ideas have a force of their own and economic development frameworks seem to work as fads.
Moreover, the different outcomes for the two neighbours makes it clear that the quality of Indian institutions and their ability to bend but not break under the weight of social divisions and instability have had a much more decisive role in determining our fortunes.
Ankit Mital is an economist and a lapsed academic. He is currently writing a book on the 1991 economic crisis and liberalization.
His Twitter handle is @Molto_Vivace_88
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