Free AIOU Solved Assignment Code 4659 Spring 2023
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Course: Economic Development of Pakistan–I (4659)
Semester: Spring, 2023
Assignment No. 1
Q.1 Compare and identify the role of central bank and commercial banks in the field of economic development.
In developing economies, however, this is not so simple. Here a case is often made for entry of the central bank in some selected fields to promote the development of the economy; besides ensuring the growth of a sound banking structure to cope with the increasing needs of credit. Commercial bankers take this as an encroachment on their field.
They argue that the major part of the Central Bank’s funds comprise the reserves of the commercial banks meant for safeguarding their safety (liquidity). It would be immoral on the part of the central bank to compete in business with the commercial banks with their money. In view of the co-operation that the central bank often seeks from commercial banks for carrying out its policies, the central bank should not invite hostility from them by giving them unjust competition through its special privileges as the bankers’ bank and the banker of the government.
In spite of these arguments, opinion has gone in favour of undertaking of some commercial business by the central bank, especially in underdeveloped economies. A small amount of business can hardly affect the liquidity position of the ‘creator of liquidity’. It is not at all necessary that the central bank uses the commercial banks’ funds for this. It can set up a separate department for commercial business and create resources also.
In fact, it may organize a special agent bank as its favoured child for doing the arduous business necessary for economic development often avoided by commercial banks. Further, if the central bank feels that the steering wheel of credit control in its banks is loose and not functioning satisfactory, it may gain an edge of manoeuvrability by keeping in touch with the market through a limited amount of business.
Besides, in an agriculturally depressed economy like India, the central bank may take up the onus of developing a bill market, granting direct loans, or discounting good bills of exchange. As regards direct loans, it may be a bit difficult to democrat clearly the central bank’s field vis-a-vis that of the commercial banks.
The difficulty is removed if the central bank, while doing ordinary commercial business keeps in mind that in its operations, the public interest and not profit-earning motive, prevails; what it can get done through commercial banks it never undertakes doing itself.
The various quantitative and qualitative instruments of credit control should be judiciously used by the central bank. No doubt, the bank has the drastic weapons of reserve ratio requirements, open market operations or changes in the bank rate, etc. but none of them is fool-proof.
After all, it is bank official on the spot who can judge between the credits asked for socially desirable productive purposes or credit being taken in the name of bona-fide purposes, but to be used for some anti-social actions. Unless the commercial bank and the central bank provide willing co-operation, the one will be weakened and the other will be frustrated. This is why moral persuasion must be preferred now to direct action.
The relationship between the commercial banks and the central bank has to be based on reciprocity. The commercial banks should conform to the spirit of central bank directives rather than letters. On the other side, the central bank should invariably satisfy the genuine needs of the commercial banks in times of stresses and strains. A moral code of conduct between the two will have to be evolved, accepted and followed.
The central bank has been described as the “lender of last resort,” which means it is responsible for providing its nation’s economy with funds when commercial banks cannot cover a supply shortage. In other words, the central bank prevents the country’s banking system from failing.
However, the primary goal of central banks is to provide their countries’ currencies with price stability by controlling inflation. A central bank also acts as the regulatory authority of a country’s monetary policy and is the sole provider and printer of notes and coins in circulation.
Time has proved that the central bank can best function in these capacities by remaining independent from government fiscal policy and therefore uninfluenced by the political concerns of any regime. A central bank should also be completely divested of any commercial banking interests.
- Central banks carry out a nation’s monetary policy and control its money supply, often mandated with maintaining low inflation and steady GDP growth.
- On a macro basis, central banks influence interest rates and participate in open market operations to control the cost of borrowing and lending throughout an economy.
- Central banks also operate on a micro-scale, setting the commercial banks’ reserve ratio and acting as lender of last resort when necessary.
Historically, the role of the central bank has been growing, some may argue, since the establishment of the Bank of England in 1694.1 It is, however, generally agreed upon that the concept of the modern central bank did not appear until the 20th century, in response to problems in commercial banking systems.
Between 1870 and 1914, when world currencies were pegged to the gold standard (GS), maintaining price stability was a lot easier because the amount of gold available was limited. Consequently, monetary expansion could not occur simply from a political decision to print more money, so inflation was easier to control. The central bank at that time was primarily responsible for maintaining the convertibility of gold into currency; it issued notes based on a country’s reserves of gold.
At the outbreak of World War I, the GS was abandoned, and it became apparent that, in times of crisis, governments facing budget deficits (because it costs money to wage war) and needing greater resources would order the printing of more money. As governments did so, they encountered inflation.
After the war, many governments opted to go back to the GS to try to stabilize their economies. With this rose the awareness of the importance of the central bank’s independence from any political party or administration.
During the unsettling times of the Great Depression and the aftermath of World War II, world governments predominantly favored a return to a central bank dependent on the political decision-making process. This view emerged mostly from the need to establish control over war-shattered economies; furthermore, newly independent nations opted to keep control over all aspects of their countries—a backlash against colonialism.
The rise of managed economies in the Eastern Bloc was also responsible for increased government interference in the macroeconomy. Eventually, however, the independence of the central bank from the government came back into fashion in Western economies and has prevailed as the optimal way to achieve a liberal and stable economic regime.
AIOU Solved Assignment Code 4659 Spring 2023
Q.2 Highlight major differences and similarities amongst development theories. Also explain their contributions and limitations to the process of development.
Economic growth has raised living standards around the world. However, modern economies have lost sight of the fact that the standard metric of economic growth, gross domestic product (GDP), merely measures the size of a nation’s economy and doesn’t reflect a nation’s welfare. Yet policymakers and economists often treat GDP, or GDP per capita in some cases, as an all-encompassing unit to signify a nation’s development, combining its economic prosperity and societal well-being. As a result, policies that result in economic growth are seen to be beneficial for society.
We know now that the story is not so simple – that focusing exclusively on GDP and economic gain to measure development ignores the negative effects of economic growth on society, such as climate change and income inequality. It’s time to acknowledge the limitations of GDP and expand our measure development so that it takes into account a society’s quality of life.
A number of countries are starting to do this. India, for instance, where we both work advising the government, is developing an Ease of Living Index, which measures quality of life, economic ability and sustainability.
When our measures of development go beyond an inimical fixation towards higher production, our policy interventions will become more aligned with the aspects of life that citizens truly value, and society will be better served. But before we attempt to improve upon the concept of GDP, it is instructive to understand its roots.
The origins of GDP
Like many of the ubiquitous inventions that surround us, the modern conception of GDP was a product of war. While Simon Kuznets is often credited with the invention of GDP (since he attempted to estimate the national income of the United States in 1932 to understand the full extent of the Great Depression), the modern definition of GDP was developed by John Maynard Keynes during the second world war.
In 1940, one year into the war with Germany, Keynes, who was working in the UK Treasury, published an essay complaining about the inadequacy of economic statistics to calculate what the British economy could produce with the available resources. He argued that such data paucity made it difficult to estimate Britain’s capacity for mobilization and conflict.
According to him, the estimate of national income should be the sum of private consumption, investment and government spending. He rejected Kuznets’ version, which included government income, but not spending, in his calculation. Keynes realized that if the government’s wartime procurement was not considered as demand in calculating national income, GDP would fall despite actual economic growth taking place. His method of calculating GDP, including government spending into a country’s income, which was driven by wartime necessities, soon found acceptance around the world even after the war was over. It continues to this day.
How GDP falls short
But a measure created to assess wartime production capabilities of a nation has obvious drawbacks in peacetime. For one, GDP by definition is an aggregate measure that includes the value of goods and services produced in an economy over a certain period of time. There is no scope for the positive or negative effects created in the process of production and development.
For example, GDP takes a positive count of the cars we produce but does not account for the emissions they generate; it adds the value of the sugar-laced beverages we sell but fails to subtract the health problems they cause; it includes the value of building new cities but does not discount for the vital forests they replace. As Robert Kennedy put it in his famous election speech in 1968, “it [GDP] measures everything in short, except that which makes life worthwhile.”
Environmental degradation is a significant externality that the measure of GDP has failed to reflect. The production of more goods adds to an economy’s GDP irrespective of the environmental damage suffered because of it. So, according to GDP, a country like India is considered to be on the growth path, even though Delhi’s winters are increasingly filled with smog and Bengaluru’s lakes are more prone to fires. Modern economies need a better measure of welfare that takes these externalities into account to obtain a truer reflection of development. Broadening the scope of assessment to include externalities would help in creating a policy focus on addressing them.
GDP also fails to capture the distribution of income across society – something that is becoming more pertinent in today’s world with rising inequality levels in the developed and developing world alike. It cannot differentiate between an unequal and an egalitarian society if they have similar economic sizes. As rising inequality is resulting in a rise in societal discontentment and increased polarization, policymakers will need to account for these issues when assessing development.
Another aspect of modern economies that makes GDP anachronistic is its disproportionate focus on what is produced. Today’s societies are increasingly driven by the growing service economy – from the grocery shopping on Amazon to the cabs booked on Uber. As the quality of experience is superseding relentless production, the notion of GDP is quickly falling out of place. We live in a world where social media delivers troves of information and entertainment at no price at all, the value for which cannot be encapsulated by simplistic figures. Our measure of economic growth and development also needs to adapt to these changes in order to give a more accurate picture of the modern economy.
Economists have had an enormous impact on trade policy, and they provide a strong rationale for free trade and for removal of trade barriers. Although the objective of a trade agreement is to liberalize trade, the actual provisions are heavily shaped by domestic and international political realities. The world has changed enormously from the time when David Ricardo proposed the law of comparative advantage, and in recent decades economists have modified their theories to account for trade in factors of production, such as capital and labor, the growth of supply chains that today dominate much of world trade, and the success of neomercantilist countries in achieving rapid growth.
Almost all Western economists today believe in the desirability of free trade, and this is the philosophy advocated by international institutions such as the World Bank, the International Monetary Fund, and the World Trade Organization (WTO). And this was the view after World War II, when Western leaders launched the General Agreement on Tariffs and Trade (GATT) in 1947.
However, economic theory has evolved substantially since the time of Adam Smith, and it has evolved rapidly since the GATT was founded. To understand U.S. trade agreements and how they should proceed in the future, it is important to review economic theory and see how it has evolved and where it is today.
In the seventeenth and eighteenth centuries, the predominant thinking was that a successful nation should export more than it imports and that the trade surplus should be used to expand the nation’s treasure, primarily gold and silver. This would allow the country to have a bigger and more powerful army and navy and more colonies.
One of the better-known advocates of this philosophy, known as mercantilism, was Thomas Mun, a director of the British East India Company. In a letter written in the 1630s to his son, he said: “The ordinary means therefore to increase our wealth and treasure is by Foreign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value. . . . By this order duly kept in our trading, . . . that part of our stock which is not returned to us in wares must necessarily be brought home in treasure.”
Mercantilists believed that governments should promote exports and that governments should control economic activity and place restrictions on imports if needed to ensure an export surplus. Obviously, not all nations could have an export surplus, but mercantilists believed this was the goal and that successful nations would gain at the expense of those less successful. Ideally, a nation would export finished goods and import raw materials, under mercantilist theory, thereby maximizing domestic employment.
Then Adam Smith challenged this prevailing thinking in The Wealth of Nations published in 1776. Smith argued that when one nation is more efficient than another country in producing a product, while the other nation is more efficient at producing another product, then both nations could benefit through trade. This would enable each nation to specialize in producing the product where it had an absolute advantage, and thereby increase total production over what it would be without trade. This insight implied very different policies than mercantilism. It implied less government involvement in the economy and a reduction of barriers to trade.
The Theory of Comparative Advantage
Thirty-one years after The Wealth of Nations was published, David Ricardo introduced an extremely important modification to the theory in his On the Principles of Political Economy and Taxation, published in 1817. Ricardo observed that trade will occur between nations even where one country has an absolute advantage in producing all the products traded.
Ricardo showed that what was important was the comparative advantage of each nation in production. The theory of comparative advantage holds that even if one nation can produce all goods more cheaply than can another nation, both nations can still trade under conditions where each benefits. Under this theory, what matters is relative efficiency.
Economists sometimes compare this to the situation where even though a lawyer might be more proficient at both law and typing than the secretary, it would still pay the lawyer to have the secretary handle the typing to allow more time for the higher-paying legal work. Similarly, if each country specializes in the products where it is comparatively more efficient, total production will be higher and consumers will have more goods to utilize.
Smith and Ricardo considered only labor as a “factor of production.” In the early 1900s, this theory was further developed by two Swedish economists, Bertil Heckscher and Eli Ohlin, who considered several factors of production. The so-called Heckscher-Ohlin theory basically holds that a country will export those commodities that are produced by the factor that it has in relative abundance and that it will import products whose production requires factors of production where it has relatively less abundance. This situation is often portrayed in economics textbooks as a simplified model of two countries (England and Portugal) and two products (textiles and wine). In this simplified portrayal, England has relatively abundant capital and Portugal has relatively abundant labor, and textiles are relatively capital intensive whereas wine is relatively labor intensive. With these conditions, both nations would be better off if they freely traded, and under such a situation of free trade, England would export textiles and import wine. This would maximize efficiency, resulting in more total production of textiles and wine and cheaper prices for consumers than would be the case without trade. Through empirical studies and mathematical models, economists almost universally believe that this model holds equally well for multiple products and multiple countries.
In fact, economists consider this law of comparative advantage to be fundamental. As Dominick Salvatore says in his basic economics textbook International Economics, the law of comparative advantage remains “one of the most important and still unchallenged laws of economics. . . . The law of comparative advantage is the cornerstone of the pure theory of international trade.”
The law of comparative advantage also holds equally well for many factors of production. In addition to labor and capital, other factors of production include natural resources such as land and technology, and these can be subdivided. For example, land can be land for mining or land for farming, or technology for making cars or computer chips, or skilled and unskilled labor. Additionally, over time factor endowments may change. For example, natural resources, such as coal reserves, may be used up, or a country’s educational system may be improved, thereby providing a more highly skilled labor force.
Furthermore, some products do not utilize the same factors of production over their life cycle. For example, when computers were first introduced, they were incredibly capital intensive and required highly skilled labor. Over time, as volume increased, costs came down and computers could be mass produced. Initially, the United States had a comparative advantage in production; but today, when computers are mass produced by relatively unskilled labor, the comparative advantage has shifted to countries with abundant cheap labor. And still other products may use different factors of production in different countries. For example, cotton production is highly mechanized in the United States but is very labor intensive in Africa. The fact that factors of production may change does not nullify the theory of comparative advantage; it just means that the mix of products that a nation can produce relatively more efficiently than its trade partners may change.
Traditional economic theories expounded by Ricardo and Heckscher-Ohlin are based on a number of important assumptions, such as perfect competition with no artificial barriers imposed by governments. A second assumption is that production occurs under diminishing or constant returns to scale, that is, the costs of producing each additional unit are the same or higher as production increases. For example, to increase his wheat crop, a farmer may be forced to use less-fertile land or pay more for laborers to harvest the wheat, thereby increasing the cost of each additional unit produced.
Another key assumption of traditional economic theory is that basic factors of production—such as land, labor, and capital—are not traded across borders. Although Ohlin believed that such basic factors of production were not traded, he argued that the relative returns to factors of production between countries would tend to be equalized as goods are traded between the countries. Subsequently, Samuelson argued that factor prices would in fact be equalized under free trade conditions, and this is known in economics as the factor price equalization theorem. This might mean, for example, that international trade would cause wage rates for unskilled workers to fall in the high-wage country in relation to the rents available from capital and to the same level as wages in the low wage country, and for wages to rise in relation to the rents available from capital in the low-wage country and equal to the level of the country where labor was less abundant. (The implications of this are important and are explored further in chapter 8.)
In static terms, the law of comparative advantage holds that all nations can benefit from free trade because of the increased output available for consumers as a result of more efficient production. James Jackson of the Congressional Research Service describes the benefits as follows: Trade liberalization, “by reducing foreign barriers to U.S. exports and by removing U.S. barriers to foreign goods and services, helps to strengthen those industries that are the most competitive and productive and to reinforce the shifting of labor and capital from less productive endeavors to more productive economic activities.”
Many economists, however, believe that the dynamic benefits of free trade may be greater than the static benefits. Dynamic benefits, for example, include the pressure on companies to be more efficient to meet foreign competition, the transfer of skills and knowledge, the introduction of new products, and the potential positive impact of the greater adoption of commercial law. Thus trade can affect both what is produced (static effects) and how it is produced (dynamic effects).
Terms of Trade
Another important concept in international trade theory is the concept of “terms of trade.” This refers to the amount of exports needed to obtain a given amount of imports, with the fewer amount of exports needed the better for the country. The terms of trade can shift, either benefiting a country or reducing its welfare.
Assume that the United States exports aircraft to Japan and imports televisions, and that one airplane can purchase 1,000 televisions. If one airplane now can purchase 2,000 televisions, the United States will be better off ; alternatively, its welfare is diminished if it can only purchase 500 televisions with a single airplane.
A number of factors can affect the terms of trade, including changes in demand or supply, or government policy. In the example given just above, if Japanese demand for aircraft increases, the terms of trade will shift in the United States’ favor because it can demand more televisions for each airplane. Alternatively, if the Japanese begin producing aircraft, the terms of trade will shift in Japan’s favor, because the supply of aircraft will now be larger and the Japanese will have alternative sources of supply.
Under certain conditions, improvements in a country’s productivity can worsen its terms of trade. For example, if Japanese manufacturers of televisions become more efficient and reduce sale prices, Japan’s terms of trade will worsen as it will take more televisions to exchange for the airplane.
A country can also adopt a beggar-thy-neighbor stance by deliberately turning the terms of trade in its favor through the imposition of an optimum tariff or through currency manipulation. In his economics textbook, Dominick Salvatore defines an optimum tariff as
that rate of tariff that maximizes the net benefit resulting from the improvement in the nation’s terms of trade against the negative effect resulting from reduction in the volume of trade. . . . As the terms of trade of the nation imposing the tariff improve, those of the trade partner deteriorate, since they are the inverse. . . . Facing both a lower volume of trade and deteriorating terms of trade, the trade partner’s welfare definitely declines. As a result, the trade partner is likely to retaliate. . . . Note that even when the trade partner does not retaliate when one nation imposes the optimum tariff, the gains of the tariff-imposing nation are less than the losses of the trade partner, so that the world as a whole is worse off than under free trade. It is in this sense that free trade maximizes world welfare.
If both countries play this game, both will be worse off. However, if only one country pursues this strategy, it can gain at its partner’s expense.
The Economic Effects of Trade Liberalization
The objective of reducing barriers to trade, of course, is to increase the level of trade, which is expected to improve economic well-being. Economists often measure economic well-being in terms of the share of total output of goods and services (i.e., gross domestic product, GDP) that the country produces per person on average. GDP is the best measurement of economic well-being available, but it has significant conceptual difficulties. As Joseph Stiglitz notes, the measurement of GDP fails “to capture some of the factors that make a difference in people’s lives and contribute to their happiness, such as security, leisure, income distribution and a clean environment—including the kinds of factors which growth itself needs to be sustainable.” Moreover, GDP does not distinguish between “good growth” and “bad growth”; for example, if a company dumps waste in a river as a by-product of its manufacturing, both the manufacturing and the subsequent cleaning up of the river contribute to the measurement of GDP.
As the result of a multilateral round of trade negotiations under the GATT/WTO, tariffs are reduced during a transition period but are not completely eliminated. In the United States’ bilateral or regional free trade agreements (FTAs), however, parties to the agreement completely eliminate almost all tariffs on trade with each other, generally over a transition period, which may be five to ten years.
Although reducing barriers to trade generally represents a move toward free trade, there are situations when reducing a tariff can actually increase the effective rate of protection for a domestic industry. Jacob Viner gives an example: “Let us suppose that there are import duties both on wool and on woolen cloth, but that no wool is produced at home despite the duty. Removing the duty on wool while leaving the duty unchanged on the woolen cloth results in increased protection for the cloth industry while having no significance for wool-raising.”
AIOU Solved Assignment 1 Code 4659 Spring 2023
Q.3 Analyze and compare five years plans of Pakistan.
History of Economic Planning in Pakistan
The history of national economic planning in Pakistan is divided in the following periods:
- Period of economic coordination (1947-53)
- Period of planning board (1953-58)
- Period of Planning Commission (1958-68)
- Period of decline of Planning Commission (1968-77)
- Period of revival of Planning Commission (1978-88)
- Period of (1988-98)
- Period of restructuring of economy (1999-2008)
- Period of economic coordination (1947 – 1953): Pakistan’s first planning board was established in 1950 with main emphasis on agriculture. Unfortunately, that plan was not well implemented on time. There were no targets fixed for the plan and the planning machinery was so weak to tackle with implementation. Therefore, the economic planning efforts during this period was a complete failure.
- Period of planning board (1953 – 1958): The planning board of Pakistan was renamed as Planning Commission in 1953. The planning commission was facing the following serious problems:
- Shortage of trained staff,
- Non-availability of accurate and reliable data,
- Uncertain conditions in the planning machinery
- It was regarded as a rivalry between Ministry of Finance and the State Bank of Pakistan
- Political instability
- Annual economic planning was never seriously followed
- Most of the economic advices were rejected by implementing authorities
- Economic priorities were not given due importance
- Budget decisions were also distorted
During this period, the First Five-Year Plan was made. Its implementation suffered due to rapid changes in government and a lack of political support.
- Period of planning commission (1958 – 1968): The third period of the planning process began in October 1958 with the assumption of power by the military government of Ayub Khan. The new regime chooses to make economic development through a marked economy and reliance of the private sector as its primary objective. The new government gave proper attention to achieve the following targets:
- Rapid industrialisation in the country,
- Removal of food shortage,
- Removal of political instability, and
- To overcome the problem of deficit of balance of payment.
The status of the Planning Commission was raised to a Division in the President’s secretariat. The President himself assumed the chairmanship of the Planning Commission and Deputy Chairman, with the ex-officio status of a minister, was made the operational head of the Commission. Provincial planning department was organised. The Planning Commission was also provided the secretariat for National Economic Council (NEC) which looked after the day-to-day work of NEC and was also responsible for final approval for annual development.
During this period the Second Five-Year Plan (1960-65) was made. It was so successful that Pakistan led to an example for hunger nations of the world. But unfortunately Pakistan had to fight war against India in 1965. Then there was a hue and cry against Ayub government and another government got the power.
- Period of decline of planning commission (1968 – 1977): This is the period of decline of Planning Commission as an important decision-making body coincided with the fall of Ayub Khan’s government. During the Yahya Khan period (1969 – 1971), the serious planning on national level was completely ignored. The Third Five-Year Plan (1965 – 1970) was virtually abandoned by the Yahya Khan’s government. In 1970, the Fourth Five-Year Plan (1970 – 1975) was made and it was also a big failure because of the worst political conditions and instable government policies. In 1972, the newly elected government of Z. A. Bhutto decided to run the economy through annual planning, rather than through a comprehensive five-year plan. During the same year, the Planning Commission was placed directly under the control of Ministry of Finance as a Division. During the period from 1972 to 1977, the Planning Commission, with very less powers, have very few favourable economic decisions. In other words, the Planning Commission was powerless and ineffective.
- Period of revival of planning commission (1978 – 1988): After taking charge of the government, the Zia-ul-Haq’s regime emphasised on the needs of five-year plans. In early 1980s, the Zia government took steps to revive the Planning Commission as an effective and authoritative economic decision-making body.
During this period, two Five-Year Plans were formulated, i.e., Fifth and Sixth. In 1978, the Fifth Five-Year Plan to cover the period of 1978 – 1983 was published. But the Government failed to pursue the plan mainly because of uncertain political as well as economic conditions at that time. The Sixth Five-Year Plan was formulated in 1983 to cover the period 1983 – 1988. At that time, Dr. Mahbub-ul-Haq was the Finance Minister. He formulated the plan and because of his great efforts, this plan was a success. During his tenure, the Planning Commission has played a vital role in effectively formulating and implementing the economic planning. Not only the Sixth Five-Year Plan, but also the annual plans were formulated by the Planning Commission.
- The period of (1988 – 1999): The period of 1988 to 1999 the period of political and economic instability. During this period, four elected governments were dismissed by the President on the charges of corruption. The role of Planning Commission was over-shadowed by political decisions. Its role was just limited to the preparation and submission of reports. It has nothing to do with the implementation of planning.
The Seventh Five-Year Plan was formulated during the Zia-ul-Haq period. But after his death, in 1988, the newly elected government of Benazir Bhutto took over the charge and so the Seventh Five-Year Plan has never been implemented. After the fall of Benazir’s government in 1990, Nawaz Sharif’s government came into power. During his tenure, he introduced privatisation, deregulation, and economic reform aimed at reducing structural impediments to sound economic development. His top priority was to denationalise some 115 public industrial enterprises, abolishing the government’s monopoly in the financial sector, and selling utilities to private interests. Although the Nawaz Sharif government made considerable progress in liberalising the economy, but it failed to address the problem of a growing budget deficit, which in turn led to a loss of confidence in the government on the part of foreign aid donors. In 1993, the Nawaz Sharif government was dismissed by the President on the charges of corruption. In the parliamentary elections of 1993, Benazir Bhutto, once again, became the Prime Minister of Pakistan. Meanwhile, the so-called Seventh Five-Year Plan period came to an end. In 1994, the Planning Commission publish the Eighth Five-Year Plan to cover the period 1993 – 1998. In November 1996, once again, the PPP government was dismissed by the President on corruption charges. The parliamentary election was held in 1997 and, once again, Mian Nawaz Sharif elected as the Prime Minister of Pakistan. The targets of Eighth Five-Year Plan were also not well achieved. For example, the target of wheat was set at 18.3 million tons which could not be achieved by 1996-97 when its actual production was 16.6 million tons. It was achieved in the last year of the plan but it again slipped down to 17.8 million tons in the following year. Similarly the target of non-traditional oilseeds, grape and mustard was set at 0.4 million tons which was far below the national requirements. Likewise, the projected plan period target of agricultural credit of Rs 80.5 billion could not be achieved as the maximum credit given during the plan period was Rs 37.7 billion and most of which went to the influential feudal lords and politicians rather than to the common farmers. The Ninth Five-Year Plan was formulated by Nawaz Sharif government to cover the period 1998-2003. Following were the priorities of Ninth Five-Year Plan:
(a) Maintenance of fiscal deficit at a sustainable level,
(b) Maintenance of GDP growth at 7% p.a.
(c) Investment in physical infrastructure,
(d) Export-led industrialisation,
(e) End of agriculture-water dichotomy,
(f) Developing a civil society, etc.
- Period of restructuring of economy (1999 – 2008): In October 1999, the Nawaz Sharif government was dismissed with the military coup by Chief of Army Staff, General Pervez Musharraf. The entire country was in a state of jeopardy. Before that, the businessmen have already lost their confidence due to economic instability with the Nuclear Test, freezing of foreign currency accounts, devaluation of rupee, and the Kargil War in 1998. Therefore, the targets of Ninth Five-Year Plan were never been well implemented.
The era of General Pervez Musharraf is known as the era of economic and political restructuring. During this era, the economy grew at an average growth rate of 5.1% (started from 2.6% in 2000-01 to 8.4% in 2004-05). President General Pervez Musharraf invited Mr. Shaukat Aziz to take charge of the Ministry of Finance in November 1999. He very quickly assembled a team of highly trained economists and extremely talented civil servants. To address the issue of the severe macroeconomic crisis and place the economy on a path of sustained higher growth, financial stability, and improved external balance of payments, the economic team launched a comprehensive set of economic stabilization and structural reform measures. The government believed that macroeconomic stability was vital for achieving higher and sustained economic growth, creating employment opportunities and preventing people from falling below the poverty line. It is with this view that a series of structural reform measures were initiated in such areas as privatisation and deregulation, trade liberalization, banking sector reform, capital market reform, tax system and tax administration reform, agriculture sector reform etc. As a result, Pakistan’s economy started showing signs of improvement by 2000-01 well before 9/11. Manufacturing sector grew 11% in 2000-01 against 3.6% in 1998-99, revenue collection increased to Rs. 396 billion against Rs. 308 billion, debt servicing declined from 64% to 57% of total revenue, export increased from $ 7.8 billion to $ 9.2 billion. These are undeniable facts and well documented in official publications. These improvements had taken place much before 9/11.
The present economic team under the stewardship of Shaukat Aziz has not only salvaged a near bankrupt economy but has put it on a path of sustained high growth with financial stability and considerably improved external balance of payments. Much has been done in the past five years. The country has witnessed a decline in poverty to 24% in 2008 and other improvements in social indicators. The up-gradation of Pakistan in the Human Development Index of the UNDP of 2005 was a vindication of the policies pursued by the government during this period.
In 2005, the Government authorised the Planning Commission to issue the Tenth Five-Year Plan namely ‘Medium Term Development Framework 2005-10’. The Medium Term Development Framework (MTDF) 2005-10 had been conceived in the light of recent socio-economic performance of the country, continuing supportive public policies and challenges and opportunities emerging from the global economy. Wide-ranging economic and financial reforms have made the economy open, liberalised and market friendly. As a result, private sector has begun to play an active role in shaping structural changes in the economy. The principal objective of the MTDF was to attain high growth of 8.2 percent by the terminal year 2009-10 with a sustained annual average growth of 7.6 percent during the five-year period without compromising macroeconomic stability. The second key objective was to achieve higher level of investment to meet the targeted growth and to effectively address the perennial issues of poverty reduction, employment generation, better access to basic necessities of life including quality education and skill development for up grading the human resources, better health and environment for the common man. The third crucial objective was to attract foreign investment to a level required to become a fast growing economy like Malaysia. Last but not the least, the MTDF would focus on growth which is just and equitable.
The plan had also anticipated the share of manufacturing sector in GDP to increase from 18.3% in 2004-05 to 23.9% in 2009-10. It was also anticipated that the production base would be expanded through the development of engineering goods, electronics, chemicals and other hi-tech industries. The Government was also anticipating fastest growth of IT/Telecom sector. Pakistan had seen an explosive growth in IT/Telecom sector in the last few years. The number of mobile phones achieved their 2007 targets two years earlier, and the recent deregulation of LDI, WLL and other sections had served to provide faster, better and wider coverage, all at lower cost. Nearly 60,000 IT professionals were operating in the country with an annual turnover of Rs. 12 billion of which 15% was exported. The plan had also estimated that major exports (gross) would increase from Rs. 14.05 billion in 2004-05 to Rs. 28.12 billion in 2009-10.
The MTDF projected a rising growth rate for the agriculture sector from 4.8% in 2005-06 to 5.6% in the last year of the plan, i.e., 2009-10. The production of meat (beef, mutton, poultry meat) was anticipated to increase from 2,275 thousand tonnes in 2004-05 to 3,124 thousand tonnes in 2009-10, and milk production from 29,472 thousand tonnes in 2004-05 to 43,304 thousand tonnes in 2009-10. The production of fisheries was projected at an average annual growth rate of 4.8 per cent. The fish production increase was projected from 574 thousand tonnes in 2004-05 to 725 thousand tonnes in 2009-10.
With the fall of Musharraf’s Government in August 2008, the MTDF 2005-10 failed to attract the new Government’s attention, and never been prioritized by the Government, therefore, most of its targets were failed to achieve.
The chapter of Short-Term Economic Planning in Pakistan closed with the last MTDF 2005-10.
Planning Machinery in Pakistan
Following are the planning agencies in Pakistan:
National Economic Council (NEC):
The planning machinery in Pakistan is headed by the NEC as the supreme policy making body in the economic sphere. It has the President as the Chairman and all Federal Ministers, incharge of development ministries and provincial governors as members. In addition, a number of other persons are invited to attend the meetings of the NEC as and when the agenda relates to matters concerning them.
Functions of NEC:
(a) To review the overall economic situation in the country
(b) To formulate plans with respect to financial, commercial and economic policies and economic development
(c) To approve the Five-Year Plans (MTDF), the Annual Development Plans (ADP), provincial development schemes in the public sector above a certain financial limit and all non-profit projects.
It may appoint committees or bodies of experts as may be necessary to assist the council in the performance of its functions. NEC discusses different cases and makes decisions. To ensure implementation of the decisions, the secretary of each Ministry is expected to keep a record of all the decisions conveyed to him and to watch the progress of action until it is completed. The Cabinet Secretary is also expected to watch the implementation of the council decisions.
Executive Committee of NEC (ECNEC):
The body directly below the NEC is the ECNEC. It is headed by the Federal Minister for Finance, Planning and Development. Its members include all Federal Ministers incharge of development ministries, provincial governors or their nominees and provincial ministers, incharge of planning and development departments.
(a) To set up development schemes (both in the public and private sectors) pending their submission to the NEC.
(b) To allow moderate changes in the plan and sectoral adjustments within the overall plan allocation.
(c) To supervise the implementation of economic policies laid down by the Cabinet and the NEC.
Annual Plan Coordination Committee (APCC):
Another body concerned with economic policy is the APCC which is a purely advisory body responsible for advising the Cabinet and the NEC regarding the coordination of policies. It is headed by the Secretary General, Finance, Planning and Economic Coordination. All federal secretaries of development ministries, heads of provincial planning and development departments and heads of the State Bank, the Board of Industrial Management and PIDC are its members.
Central Development Working Party (CDWP):
Below ECNEC is the CDWP which is responsible for the scrutiny and sanction of development projects. The Secretary, Planning Division, is the president of CDWP. Its members include federal secretaries of the concerned departments, federal finance secretary and chairman of the provincial planning and development departments.
The development schemes of federal ministers costing over Rs. 10 million and of the provincial governments costing over Rs. 50 million are submitted to CDWP for approval.
The responsibility for the overall economic evaluation of Annual Plans remains with the Planning Division which places a report each year before the NEC evaluating economic achievements and failures. Mid-Plan reviews outlining the progress of the Five Year Plan are also published by the Planning Commission.
A Critical Appraisal of Planning Machinery in Pakistan
Following are main hindrances in the way of effective planning in Pakistan:
(a) Administrative obstacles of planning: One major obstacle which has stood in the way of establishing a sound, efficient and independent planning authority is the lack of an effective administrative machinery as this has greatly limited the tasks of development policy and planning. Some of the factors which still continue to be major hindrances and act as administrative obstacles and bottlenecks to planning are discussed below:
(i) Lack of competent personnel: One of the major obstacles in the way of an effective planning machinery is the lack of competent personnel. Good and highly qualified economists, technicians, planners, etc. do not join government service because of lack salaries and facilities.
(ii) Dilatory procedures: In Pakistan, documents and files must follow a prescribed series of steps through administrative layers. It has been pointed out that often there seems to be a disposition to shift the file and documents from one office to another, or from one ministry to another. The resultant delays are sometimes unbelievably long.
(iii) Lack of coordination: In many cases, the coordination of development activities has been extremely difficult because responsibility for different aspects of a project or programme are divided among many ministries and agencies. So it becomes, sometimes, very difficult to carry on programme according to policy.
(b) Inadequate preparatory work on projects: When a potentially desirable project has to be identified, a feasibility study has to be made to determine whether it is practicable and justified. A feasibility study involves a detailed examination of the economic, technical, financial, commercial and organisational aspects of a project.
According to Planning Commission of Pakistan, preparatory work on public projects in the country was frequently lacking. So due to inadequate preparatory work on projects, our plans have been failed in achieving their targets.
(c) Lack of implementation of plans: A major reason for the lack of implementation of the country’s various five year plans has been the widespread failure of the governments of the day to maintain discipline, implicit in their plan. What is planned and what is done in many cases bears little relationship to each other. At times it almost appears that plans are prepared by a planning agency in one corner of a government and policy is made by various bodies in other corners.
(d) Lack of evaluation of plan progress and project implementation: Flexibility is an essential element of development planning because in many cases changes in economic conditions make deviations from original plan unavoidable. A central planning agency must, therefore, constantly review and assess progress in relation to events.
Unfortunately, whenever evaluation has been prepared by the country’s planning authorities, they have been issued long after the end of the period to which they refer. In many cases the mid-term reviews of five year plans have been published almost near the end of the plan period and the final reviews of the plan have come long after the new plan have been launched and, therefore, been of little use to formulating targets and policies for the new plan. The need for a good reporting system on plan and project implementation is, therefore, an essential prerequisite for a good evaluation system.
An Operational Approach to Plan/Project Appraisal
A development plan is essentially a forward looking policy framework which envisages a concrete and prioritised but somewhat flexible programme of action to be launched in a dynamic situation to attain specified economic and social objectives. A plan or a programme / project is ultimately as good as its implementation since it is the actual achievement of the results in line with the targets and not merely the targets set or the resources allocated that determine the degree of success or failure of the plan / programme as well as its impact on the socio-economic life of the people. Thus, it is clear that only the technically, financially and economically sound and viable projects, if properly executed in a coordinated manner, can provide a strong edifice for the successful implementation of the plan.
Most of the developing countries still need to further evolve their development planning processes by redefining their national objectives and searching for alternative strategies, programmes and projects because it has been realised by most of them by now that the development planning adopted so far could not achieve the desired results especially in the areas of social development and income distribution. Recent international experience also shows conclusively that the formulation of technically sound, economically viable and administratively feasible programmes / projects, their proper appraisal, implementation and management are amongst the palpably weaker areas of development planning. In numerous instances, projects included in the development plans have either not been optimally implemented or even if implemented, have failed to yield the expected results on time. Similarly, such other factors like deliberate under-estimating of costs and over-pitching of targets at the approval stage, coupled with recent increase in input prices, have adversely affected the overall plan implementation in most of the LDCs.
In recent years, increasing attention is being devoted to more systematic processes of planning and decision making as a means of addressing the concerns of developing countries about the pace and pattern of economic growth, the failure to achieve planned objectives, and the continuing financial and economic crises. This approach has reinforced the case for greater depth in and a more systematic and inter-related approach to the monitoring, evaluation and follow-up of all public policy actions. This renewed urge is shared both by national as well as international agencies in order to up-grade the developing countries’ status.
The United Nations International Development Strategy (UNIDS), therefore, emphasises that, to provide increasing opportunities to all people for a better life, it is essential in the development planning to bring about more equitable distribution of income and wealth for promoting both social justice and efficiency of production, to raise substantially the level of employment, to achieve a greater degree of income security, to expand and improve facilities for education, health, nutrition, housing and social welfare, and to safeguard the environment. The International Development Strategy emphasises the importance of national evaluation system. According to UNIDS, every developing country is needed to establish a reliable and independent evaluation machinery or strengthening the existing one, in order to ensure the implementation of development programmes.
Plan Preparation and Implementation Cycle:
The process of development appraisal and performance evaluation is an intrinsic component of planning. The standard plan preparation and plan implementation cycle includes:
(a) Establishment of goals, objectives and targets;
(b) Formulation of strategies;
(c) Formulation of operating plans composed of policies and specific measures necessary to achieve the real targets;
(d) Implementation of policies and measures to the plan;
(e) Monitoring and evaluation of performance (both financial and physical) against targets;
(f) Adjustment of targets and/or plans as may be indicated by actual accomplishments and related developments.
AIOU Solved Assignment 2 Code 4659 Spring 2023
Q.4 Discuss the major obstacles which are great hurdles in the way to economic progress.
A country’s economic development is usually indicated by an increase in citizens’ quality of life. ‘Quality of life’ is often measured using the Human Development Index, which is an economic model that considers intrinsic personal factors not considered in economic growth, such as literacy rates, life expectancy, and poverty rates.
What is the difference between Economic Growth and Development? We will start by defining Economic growth and development. Having economic growth without economic development is possible.
Economic growth in an economy is demonstrated by an outward shift in its Production Possibility Curve (PPC). Another way to define growth is the increase in a country’s total output or Gross Domestic Product (GDP). It is the increase in a country’s production.
Economic Growth Occurs When
- There is a discovery of new mineral/metal deposits.
- There is an increase in the number of people in the workforce or the quality of the workforce improves. For example, through training and education.
- There is an increase in capital and machinery.
- There is an improvement in technology.
Economic Development Occurs When
Measures of economic development will look at:
- An increase in real income per head – GDP per capita.
- The increase in levels of literacy and education standards.
- Improvement in the quality and availability of housing.
- Improvement in levels of environmental standards.
- Increased life expectancy.
Development alleviates people from low standards of living into proper employment with suitable shelter. Economic Growth does not take into account the depletion of natural resources, which might lead to pollution, congestion & disease. Development, however, is concerned with sustainability, which means meeting the needs of the present without compromising future needs.
A. Economic Growth Definition
Economic Growth is an increase in a country’s output.
B. Economic Development Definition
Economic Development is an improvement in factors such as health, education, literacy rates, and a decline in poverty levels.
Poverty has come down most when inequality has fallen, and there is high economic growth. Initial low levels of inequality are associated with more negative elasticities of poverty reduction concerning growth. Higher initial inequality results in less effect on poverty with an increase in economic growth.
1. Savings Rate
The marginal savings rate changes with decreasing or increasing income. The marginal savings rate is the fractional decrease in saving that results from a decrease in income.
2. Credit Market Constraints
The poor can’t get loans.
3. Political Economy
Governments pursue poor policies (redistribution policies) trying to reduce inequality, which results in high inflation, high deficit, and lower growth. However, there doesn’t seem to any relationship between inequality and economic growth empirically. But, higher economic growth leads to lower levels of poverty (not the same as inequality)
The positive growth of people’s income and no change in income leads to a decrease in the poverty level.
AIOU Solved Assignment Code 4659 Autumn 2023
Q.5 Highlight the major factors of economic development during 1960s in Pakistan.
Since Indian independence in 1947, the economy of Pakistan has emerged as a semi-industrialized one, the on textiles, agriculture, and food production, though recent years have seen a push towards technological diversification. Pakistan’s GDP growth has been gradually on the rise since 2012 and the country has made significant improvements in its provision of energy and security. However, decades of corruption and internal political conflict have usually led to low levels of foreign investment and underdevelopment.
Historically, the land forming modern-day Pakistan was home to the ancient Indus Valley Civilization from 2800 BC to 1800 BC, and evidence suggests that its inhabitants were skilled traders. Although the subcontinent enjoyed economic prosperity during the Mughal era, growth steadily declined during the British colonial period. Since independence, economic growth has meant an increase in average income of about 150 percent from 1950 to 1996, But Pakistan like many other developing countries, has not been able to narrow the gap between itself and rich industrial nations, which have grown faster on a per head basis. Per capita GNP growth rate from 1985 to 1995 was only 1.2 percent per annum, substantially lower than India (3.2), Bangladesh (2.1), and Sri Lanka (2.6). The inflation rate in Pakistan has averaged 7.99 percent from 1957 until 2015, reaching an all-time high of 37.81 percent in December 1973 and a record low of -10.32 percent in February 1959. Pakistan suffered its only economic decline in GDP between 1951 and 1952.
Overall, Pakistan has maintained a fairly healthy and functional economy in the face of several wars, changing demographics, and transfers of power between civilian and military regimes, growing at an impressive rate of 6 percent per annum in the first four decades of its existence. During the 1960s, Pakistan was seen as a model of economic development around the world, and there was much praise for its rapid progress. Many countries sought to emulate Pakistan’s economic planning strategy, including South Korea, which replicated the city of Karachi‘s second “Five-Year Plan.”
After gaining the right to collect revenue in Bengal in 1765, the East India Company largely ceased importing gold and silver, which it had hitherto used to pay for goods shipped back to Britain. In addition, as under Mughal rule, land revenue collected in the Bengal Presidency helped finance the company’s wars in other part of India. Consequently, in the period 1760–1800, Bengal’s money supply was greatly diminished; furthermore, the closing of some local mints and close supervision of the rest, the fixing of exchange rates, and the standardization of coinage, paradoxically, added to the economic downturn.
During the period 1780–1860, India’s status shifted from being an exporter of processed goods for which it received payment in bullion, to being an exporter of raw materials and a buyer of manufactured goods. Fine cotton and silk had been the main exports from India to markets in Europe, Asia, and Africa in the 1750s. Yet, by the second quarter of the 19th century, raw materials, which chiefly consisted of raw cotton, opium, and indigo, accounted for most of India’s exports. In addition, from the late 18th century, the British cotton mill industry began to lobby the government to both tax Indian imports and allow access to markets in India. Starting in the 1830s, British textiles began to appear in—and soon inundate—Indian markets, with the value of textile imports growing from £5.2 million 1850 to £18.4 million in 1896.
While British colonial rule stabilized institutions and strengthened law and order to a large extent, British foreign policy stifled India’s trade with the rest of the world. The British built an advanced network of railways, telegraphs, and a modern bureaucratic system that is still in place today. However, the infrastructure they created was mainly geared towards the exploitation of local resources, and left the economy stagnant, stalled industrial development, and resulted in an agricultural output that was unable to feed a rapidly accelerating population. The common public in British India was subject to frequent famines, had one of the world’s lowest life expectancies, suffered from pervasive malnutrition, and was largely illiterate.
Economic growth during the 1950s averaged 3.1 percent per annum, and the decade was marked by both political and macroeconomic instability and a shortage of resources to meet the nation’s needs. After the State Bank of Pakistan was founded in 1948, a currency dispute between India and Pakistan broke out in 1949. Trade relations were strained until the issue was resolved in mid-1950. Monsoon floods between 1951–52 and 1952-53 created further economic problems, as did uneven development between East and West Pakistan.
Pakistan’s economy was quickly revitalized under Ayub Khan, with economic growth averaging 5.82 percent during his eleven years in office from 27 October 1958 to 25 March 1969. Manufacturing growth in Pakistan during this time was 8.51 percent, far outpacing any other time in Pakistani history. Pakistan established its first automobile and cement industries, and the government constructed several dams, (notably Tarbela Dam and Mangla Dam), canals, and power stations, in addition to launching Pakistan’s space program.
Along with heavy investment in manufacturing, Ayub’s policies focused on boosting Pakistan’s agricultural sector. Land reforms, the consolidation of holdings, and strict measures against hoarding were combined with rural credit programs and work programs, higher procurement prices, augmented allocations for agriculture, and improved seeds as part of the green revolution. Tax collection was low, averaging less than 10 percent of GDP. The Export Bonus Vouchers Scheme (1959) and tax incentives stimulated new industrial entrepreneurs and exporters. Bonus vouchers facilitated access to foreign exchange for imports of industrial machinery and raw materials. Tax concessions were also offered for investment in less-developed areas. These measures had important consequences in bringing industry to Punjab and gave rise to a new class of small industrialists.
Some academics have argued that while HYV technology enabled a sharp acceleration in agricultural growth, it was accompanied by social polarization and increased interpersonal and interregional inequality. Mahbub ul Haq blamed the concentration of economic power to 23 families who were dominating the financial and economic life of the country by controlling 66 percent of industrial assets and 87 percent of banking.
In 1959, the country began the construction of its new capital city. A Greek firm of architects, Konstantinos Apostolos Doxiadis, designed the master plan of the city based on a grid plan which was triangular in shape with its apex towards the Margalla Hills. The capital was not moved directly from Karachi to Islamabad; it was first shifted temporarily to Rawalpindi in the early sixties and then to Islamabad when the essential development work was completed in 1966.