Economic Impact of 30 Years of Military Rule in Indonesia and Pakistan

General Suharto stepped down 15 years ago tomorrow. Here's an excerpt of today's New York Times story on the Indonesian strongman's legacy:

"Mr. Suharto’s spirit continues to loom over modern-day Indonesia. He brought the country back from the brink of political, social and economic calamity in the mid-1960s, dramatically reduced poverty and by the early 1990s had turned Indonesia into one of the Asian tiger economies. But he also governed with an iron fist, sending his jackbooted military into separatist-minded regions, jailing and exiling political enemies, quashing democratic institutions and the news media, and presiding over what some claim is one of the most corrupt governments in modern history.....Tuesday is the 15th anniversary of Mr. Suharto’s resignation as president.  .... Since then, Indonesia has undergone a dramatic transformation toward democracy and now has open elections and the world’s 16th-largest economy. Yet corruption remains endemic, crime is higher than during Mr. Suharto’s “New Order” regime, and Jakarta and other large cities have chronic traffic problems".

Both Indonesia and Pakistan have each seen about 30 years of military rule.  So why has Indonesia become an Asian tiger economy and Pakistan has not?

One possible explanation is that while there was 32 years uninterrupted military rule with sustained development in Indonesia, Pakistan has seen three stints of high growth under military generals in 1960s, 1980s and 2000s separated by  three periods of slow or very slow growth under civilian rule in 1950s, 1970s and 1990s. Pakistani military rulers have also been less ruthless and more benevolent than Gen Suharto.

Pakistan has also experienced economic and social progress comparable to Indonesia's during periods of military rule. There has been much better governance and significantly faster rates of economic and social development during military rule than under civilian leaders. Many economists persuasively argue  that Pakistan would have developed as fast as South Korea had the Ayub era policies continued uninterrupted for another decade or two.

Pakistan's first  military dictator General Ayub Khan's period is labeled by Pakistani economist Dr. Ishrat Husain as "the Golden Sixties". General Ayub Khan pushed central planning with a state-driven national industrial policy.  Countries like Malaysia and South Korea saw Pakistan as a model for export-led growth, according to Prof Stephen Cohen. In fact, South Korea sought to emulate Pakistan's development strategy and copied Pakistan's second "Five-Year Plan".

Here's how Dr. Husain recalls Pakistan of 1960s:

"The manufacturing sector expanded by 9 percent annually and various new industries were set up. Agriculture grew at a respectable rate of 4 percent with the introduction of Green Revolution technology. Governance improved with a major expansion in the government’s capacity for policy analysis, design and implementation, as well as the far-reaching process of institution building. The Pakistani polity evolved from what political scientists called a “soft state” to a “developmental” one that had acquired the semblance of political legitimacy. By 1969, Pakistan’s manufactured exports were higher than the exports of Thailand, Malaysia and Indonesia combined. Though speculative, it is possible that, had the economic policies and programs of the Ayub regime continued over the next two decades, Pakistan would have emerged as another miracle economy."

Pakistanis have found that each time a military ruler has been forced out and replaced by a civilian government led by politicians, both the economic and the social indicators have suffered. For example, Pakistan's decade of 1990s under the PPP and the PML rule is remember by economists as the lost decade. It was followed by a rebound of robust social and economic development during the Musharraf period from year 2000 to 2007.

In the 1990s, economic growth plummeted to between 3% and 4%, poverty rose to 33%, inflation was in double digits and the foreign debt mounted to nearly the entire GDP of Pakistan as the governments of Benazir Bhutto (PPP) and Nawaz Sharif (PML) played musical chairs. Before Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. In 1999 Pakistan’s total public debt as percentage of GDP was the highest in South Asia – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1% & 528.3% respectively in 1998) and India (47.2% & 384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% & 264.8% respectively in 1998) and India (44.0% & 358.4% respectively in 1998).

The year 1999 brought a bloodless coup led by General Pervez Musharraf, ushering in an era of accelerated economic growth that led to more than doubling of the national GDP, and dramatic expansion in Pakistan's urban middle class. Pakistan became one of the four fastest growing economies in the Asian region during 2000-07 with its growth averaging 7.0 per cent per year for most of this period. As a result of strong economic growth, Pakistan succeeded in reducing poverty by one-half, creating almost 13 million jobs, halving the country's debt burden, raising foreign exchange reserves to a comfortable position and propping the country's exchange rate, restoring investors' confidence and most importantly, taking Pakistan out of the IMF Program.

The above facts were acknowledged by the last PPP government in a Memorandum of Economic and Financial Policies (MEFP) for 2008/09-2009/10, while signing agreement with the IMF on November 20, 2008. The document clearly (but grudgingly) acknowledged that "Pakistan's economy witnessed a major economic transformation in the last decade. The country's real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during 2000-07". It further acknowledged that "the volume of international trade increased from $20 billion to nearly $60 billion. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government's social policies contributed to a reduction in poverty and improvement in many social indicators". (see MEFP, November 20, 2008, Para 1)

In addition to faster economic growth, Pakistan's human development index (HDI) also grew at an average rate of 2.7% per year under President Musharraf from 2000 to 2007, and then its pace slowed to 0.7% per year in 2008 to 2012 under elected politicians, according to the 2013 Human Development Report titled “The Rise of the South: Human Progress in a Diverse World”. Overall, Pakistan's human development score rose by 18.9% during Musharraf years and increased just 3.4% under elected leadership since 2008. The news on the human development front got even worse in the last three years, with HDI growth slowing down as low as 0.59% — a paltry average annual increase of under 0.20 per cent.

Going further back to the  decade of 1990s when the civilian leadership of the country alternated between PML (N) and PPP,  the increase in Pakistan's HDI was 9.3% from 1990 to 2000, less than half of the HDI gain of 18.9% on Musharraf's watch from 2000 to 2007.




Acceleration of HDI growth during Musharraf years was not an accident.  Not only did Musharraf's policies accelerate economic growth, helped create 13 million new jobs, cut poverty in half and halved the country's total debt burden in the period from 2000 to 2007, his government also ensured significant investment and focus on education and health care. In 2011, a Pakistani government commission on education found that public funding for education has been cut from 2.5% of GDP in 2007 to just 1.5% - less than the annual subsidy given to the various PSUs including Pakistan Steel and PIA, both of which  continue to sustain huge losses due to patronage-based hiring.


Why is it that the military rulers have consistently delivered better economic and social results while the politicians have not been able to mach them? To put it all in perspective, let's recall how late Dr. Mahbub ul-Haq, the renowned Pakistani economist who is credited with the idea of UNDP's human development index (HDI), explained the corrosive impact of political patronage on economic policy in Pakistan.

In a 10/12/1988 interview with Professor Anatol Lieven of King's College and quoted in a recent book "Pakistan-A Hard Country", here is what Dr. Haq said:
"Growth in Pakistan has never translated into budgetary security because of the way our political system works. We could be collecting twice as much in revenue - even India collects 50% more than we do - and spending the money on infrastructure and education. But agriculture in Pakistan pays no tax because the landed gentry controls politics and therefore has a grip on every government. Businessman are given state loans and then allowed to default on them in return for favors to politicians and parties. Politicians protect corrupt officials so they can both share the proceeds.

And every time a new political government comes in they have to distribute huge amounts of state money and jobs as rewards to politicians who have supported them, and short term populist measures to try to convince the people that their election promises meant something, which leaves nothing for long-term development. As far as development is concerned, our system has all the worst features of oligarchy and democracy put together.



That is why only technocratic, non-political governments in Pakistan have ever been able to increase revenues. But they can not stay in power for long because they have no political support...For the same reason we have not been able to deregulate the economy as much as I wanted, despite seven years of trying, because the politicians and officials both like the system Bhutto (Late Prime Minister Zulfikar Ali Bhutto) put in place. It suits them both very well, because it gave them lots of lucrative state-sponsored jobs in industry and banking to take for themselves or distribute to their relatives and supporters."
To summarize, there is insufficient revenue collected by the state of Pakistan, and the diversion of this very limited revenue to political patronage fosters dependence on foreign aid and impinges on the nation's sovereignty. It also seriously harms Pakistan's ability to invest in education, health care and infrastructure development in terms of school and hospital buildings, roads, rails, and water and energy projects for Pakistan's future.

Discussing the politics of patronage in Pakistan, Professor Lieven, the author of "Pakistan-A Hard Country", sees a silver lining to it by describing the difference between Nigeria and Pakistan in the following words:
"Rather than being eaten by a pride of lions, or even torn apart by a flock of vultures, the fate of Pakistan's national resources more closely resembles being nibbled away by a horde of mice (and the occasional large rat). The effect on the resources, and on the state's ability to do things, are just the same, but more of the results are plowed back into the society, rather than making their way straight to bank accounts in the West. This is an important difference between Pakistan and Nigeria, for example."
I personally see no better explanation for the boom under President Musharraf in 2000-2007, followed by current economic crisis since 2008, than the prevailing system of political patronage continuing to trump good public policy almost 23 years after late Dr. Mehboob ul Haq described it so well.

Having just voted and elected new leaders in general elections on May 11, it is important that the voters demand an explanation from the new leadership for their extremely poor performance in the social sector in the past. Without accountability, these politicians will continue to ignore the badly needed investments required to develop the nation's human resources for a better tomorrow. Forcing the political leaders to prioritize social sector development is the best way to launch Pakistan on a faster trajectory.

Here's a video discussion on the subject recorded on Pakistan's independence day:



Wide Angle Zoom: Formation and Future of Pakistan by wbt-tv

Related Links:

Haq's Musings

General Suharto Passes On

The Idea of Pakistan By Stephen Cohen

Saving Pakistan's Education

Political Patronage Trumps Public Policy in Pakistan

Dr. Ata-ur-Rehman Defends Pakistan's Higher Education Reforms

Twelve Years Since Musharraf's Coup

Musharraf's Legacy

Pakistan's Economic Performance 2008-2010

Role of Politics in Pakistan Economy

India and Pakistan Compared in 2011

Musharraf's Coup Revived Pakistan's Economy

What If Musharraf Had Said No?

Comments

Riaz Haq said…
Here's a Xinhua report on transfer of power in Pakistan:

Pakistan's interim government will transfer power to the new government on June 5, a cabinet minister said Monday.

Information Minister Arif Nizami said that the interim government will relinquish responsibilities on the same day.

Talking to newsmen in Islamabad, Nizami said the members-elect of the National Assembly will take oath on June 1.

Caretaker Prime Minister Mir Hazar Khan Khoso has sent an advice to the president to summon the Assembly on Saturday, the prime minister office said.

The elections for the Speaker of National Assembly and Deputy Speaker will be held on June 3 through secret ballot. Nizami said outgoing Speaker Dr. Fehmida Mirza will chair these sessions till the oath of the new Speaker of the House.

He said the new Speaker may reschedule the further program but most probably the elections for the Leader of the House will be held on June 4.

It is for the first time that a caretaker set-up conducted free, fair and transparent elections, he said.

According to the constitution, the caretaker government is bound to summon the house up to June 2 in which newly elected members will take oath.

The house after completing this process will elect new prime minister.

Pakistan Muslim League-Nawaz (PML-N) which won a landslide victory in the May 11 elections has nominated Nawaz Sharif as candidate for the leader of the house while Pakistan Tehrik-e- Insaf or PTI has nominated Javed Hashmi for the slot.

Pakistan Peoples Party has decided to sit on opposition benches. It has not yet decided to take part in the race for the leader of the house.


http://news.xinhuanet.com/english/world/2013-05/28/c_132412236.htm
Riaz Haq said…
Here's a book review of "How Asia Works" by Amb Maleeha Lodhi published in The News:

An important new book explains why some countries have become economic tigers in East Asia while others are relative failures or paper tigers. ‘How Asia Works’ by Joe Studwell is a bold and insightful work that is essential reading for anyone interested in understanding the ingredients for economic success in this continent.

It challenges much conventional wisdom in the development debate. Most significantly the book questions key tenets of the so-called Washington consensus, which prescribes free market ‘solutions’ for all economies regardless of their level of development. Studwell establishes that a nation’s development destiny is shaped most decisively by government action and policies. History, writes the author, shows that markets are created, shaped and re-shaped by political power.
---------------
At the very outset, Studwell identifies three critical interventions that successful east-Asian countries and China (after 1978) employed to achieve accelerated economic development. The first, “often ignored”, and now “off the political agenda” in developing countries, is land reform. This restructured agriculture into highly labour-intensive household farming. In the early phase of development, with the necessary institutional support, this helped to generate a surplus, create markets and unlock great social mobility.

The second intervention, as countries cannot sustain growth only on agriculture and must transition to the next phase, is to direct entrepreneurs and investment to industrial manufacturing. Manufacturing allows for trade and technology learning. And trade, says the author, is essential for rapid economic development. Studwell then demonstrates – while challenging the champions of free trade – how nurturing and protection, along with instituting “export discipline”, builds the capacity to compete globally. Manufacturing policy is a key determinant of success he says, as an infant industry strategy offers the quickest route to restructuring the economy towards more value-added activities.

Holding that development is quintessentially a political undertaking, the author sees the relationship between the state and private entrepreneurs as a critical variable. History, he writes, teaches that governments should not run everything themselves. But governments have to use their power and the right policy tools to make private entrepreneurs do what industrial development requires.

The third intervention necessary for accelerated development is in the financial sector, aimed at directing capital initially to intensive, small scale agriculture and to manufacturing rather than services. Studwell argues persuasively that it was the close alignment of finance with agriculture and industrial policy objectives that produced north-east Asia’s economic success.

Detailing the role of financial policy, he illustrates how premature bank deregulation exacted a high price in Thailand and Indonesia. China, on the other hand, and other north-east Asian countries resisted that, instead using financial management to serve development needs and an accelerated economic learning process.


http://www.thenews.com.pk/Todays-News-9-211468-Asian-tigers-and-paper-tigers
Riaz Haq said…
Here's a News Op Ed by Dr. Ata ur Rehman Khan on Musharraf's time in office:

In the agricultural sector a number of important irrigation projects were initiated. The Diamer Bhasha Dam was launched. The Mangla Dam was raised by 30 feet increasing 2.9 maf water storage capacity and 100MW electricity. A number of new dams and canals were built (Mirani Dam for Balochistan, Subukzai Dam for Balochistan and Gomal Zam Dam for KP; Kachi Canal from Taunsa to Dera Bugti and Jhal Magsi to irrigate 713,000 acres of barren cotton producing land, the Thal Canal for Punjab, Rainee Canal for Sindh).

Overall three million acres of barren land were brought under cultivation. The Right Bank Outfall Drain (RBOD) was constructed through Sindh, thereby saving Indus River and Manchar Lake (Sind) from pollution. The steps taken led to an increase in wheat production from 14 million tons to 22 million tons, and increase in cotton production from nine million bales to 13 million bales.

Price control was exercised on essential items. The prices of edible household items (flour, naan, milk, tea, sugar, meat, vegetable oil etc) have tripled or quadrupled in the last five years. A rotational loan system was introduced through banks for poor farmers and loan facility for farmers increased from Rs35 billion through ZTBL only, to Rs160 billion from all other private banks.

Overall 2900MW of electricity was added to national generation capacity. The new energy projects initiated included the Ghazi Barotha hydro electricity project (1600MW), the Chashma-II nuclear electricity plant (300MW). The Neelum-Jhelum hydroelectricity project was initiated (1800 MW), the Satpara Power project in Skardu, and the Naltar power project in Gilgit.

A true revolution was brought about in the telecommunications sector. The number of mobile phones increased from 600,000 in the year 2000 to over 7 crore in 2006. Tele-density was increased from 2.9 percent to over 70 percent, and millions of jobs were created in the telecom sector. The IT sector also saw a phenomenal growth with internet connectivity spreading rapidly, particularly during 2000-2003 from 40 cities to over 2000 towns of Pakistan.

Fibre optic connectivity increased from 30 cities to over 1500 towns of Pakistan in the same period. The bandwidth cost of two megabytes was reduced sharply from $86,000 to $3,000 per month. Pakistan’s first satellite PakSat 1 was placed in space. Industry prospered as never before and industrial growth was in double figures throughout the nine-year period.

A revolution was brought about in the higher education sector with the establishment of the Higher Education Commission. The annual allocation for higher education was increased from only Rs500 million in 2000 to Rs28 billion in 2008, thereby laying the foundations of the development of a strong knowledge economy. Student enrolment in universities increased from 270,000 to 900,000 and the number of universities and degree awarding institutes increased from 57 in 2000 to 137 by 2008.

This rapid transformation deeply worried India and a detailed presentation was given to the Indian prime minister on July 22 about the dramatic progress in Pakistan.

A number of steps were taken to strengthen democracy at the grassroots. A large number of new TV channels were allowed and the media given full freedom. The local government system was launched to empower the people through a third tier of government. Women were empowered politically through reserved seats at all tiers of government. Minorities were provided with the system of joint electorate. ....


http://www.thenews.com.pk/Todays-News-9-222331-Lest-we-forget
Riaz Haq said…
Reformer-in-chief: In conversation with Dr Ishrat Husain

http://herald.dawn.com/news/1153435

Ali. How do you compare the economic policies of different civilian and military regimes in the recent past?

Husain. I would say 2000–2002, when we had a cabinet of technocrats, was the best period of economic management in Pakistan’s history. It was during that period that all the tough reforms – including those in the structure and administration of taxes – were introduced. The period between 2003 and 2006 was reasonably good because the momentum for growth had been created earlier. International confidence in Pakistan’s economy was high and the Foreign Direct Investment flows were at their peak.

The turning point came in 2007, with the announcement of elections, judicial issues and the Lal Masjid episode. In 2008, there was tension between Musharraf and the army on the one hand, and the new civilian government on the other. The government in power between 2008 and 2013 did not pay much attention to economic management. It changed five finance ministers and five governors of the central bank. When the ship is in turbulent waters, you need strong hands on the wheel to bring it to shore safely. We had an economy in trouble between 2008 and 2013 but there was no one minding the store. That created a lot of problems. We did not even implement conditionalities of the International Monetary Fund loan programme.

The current government at least has a very clearly designated steward of the economy. You may disagree with him, but at least we all know somebody is minding the store.

Ali. Why can’t we catch tax evaders?

Husain. When Abdullah Yusuf was heading the Federal Board of Revenue (FBR), tax administration was doing well. The moment the government removed him, the whole process turned topsy-turvy.

Also read: Altaf Hussain: Politics on mute

Let me give you a very specific example. The FBR had a merit-based selection process for key postings in the customs and income tax departments. Those selected were given double the usual salary. As a result of this policy, very good people were selected as regional tax officers and they started generating additional revenues.

The new government came in 2008, and the FBR officials who were not hired for those posts went to politicians and said that they were being treated unfairly. The government doubled the salaries of all the officials irrespective of their merit or performance and the old culture was restored. If the merit-based, performance-related evaluation process and compensation system was allowed to continue, I can tell you things would have improved.
Riaz Haq said…
Via @NPR: Phillip Reeve on train ride thru #Pakistan finds the Army is very popular in the country.

http://www.npr.org/2016/11/23/503108897/after-27-hours-our-train-ride-through-pakistan-ends-in-karachi

REEVES: Glacier - that's the Siachen Glacier, the world's highest battlefield. It's a giant sweep of ice and snow nearly 20,000 feet up in the Himalayan Mountains. A standoff between the Pakistani and Indian armies has been going on there for more than 30 years. There's been intermittent fighting. But the real killers are the weather and the altitude. Life up there is very harsh, says Ali.

ALI: (Through interpreter) There's very little oxygen. Breathing is difficult, and you never feel like eating. There are many hardships.

REEVES: Extreme cold and also avalanches have claimed many hundreds of lives over the years. Ali worries about frostbite.

ALI: (Through interpreter) You can get frostbite on the ear, on the nose, on the fingers. If you get it on any part of the body, then it must be amputated, as there's no cure.

REEVES: Ali's in good spirits today. He's heading home on our train to his wife to begin one month's leave. He set off from the mountains four days ago and still has one more day of travel. Ali's 24 and a sepoy. That's the same as a private. He signed up for the Pakistani military at 17 but didn't want to.

ALI: (Through interpreter) I joined because my father ordered me.

REEVES: Ali says he really wanted to be in the Navy. But now, he's gotten used to the army and the tough conditions.

ALI: (Through interpreter) Despite all that, I now enjoy it.

REEVES: People on our train seem to treat Ali with much respect. Pakistanis we've met on this journey are profoundly disillusioned with their government yet strongly approve of their army. Their nation's spent roughly half of its history and some of its darkest years under military dictatorship, yet some Pakistanis say they'd be happy to get rid of their elected civilian government and be ruled by generals again. Zaman Saeed's an anti-narcotics official and a passenger on this train.

ZAMAN SAEED: (Through interpreter) It would be better. Pakistan would improve.

REEVES: Saeed would like the military to run the country, but just for a few years.

SAEED: (Through interpreter) They should spend three years sorting out all crocodiles who commit corruption and destroy Pakistan. After that, there's no harm restoring democracy.

REEVES: Pakistanis tend to revere their military because they believe it's done a great job reducing violence in recent years by driving the Pakistani Taliban out of the mountains bordering Afghanistan and going after militant outfits in Karachi. The army's harsh tactics cause deep resentment in some areas, though, like Balochistan province, where there's a separatist insurgency.

But we're traveling through Pakistan's heartland - the provinces of Punjab and Sindh. Here, the army has many fans. And a sharp surge in tensions with the old foe, India, seems to be making the military even more popular. Twenty-seven hours after setting out, we're arriving.

The outskirts of Karachi look pretty shabby - lots of slums, narrow alleys, lots of trash on the ground, motorbikes trying to squeeze their way down these tiny lanes, animals, washing hanging out, lots of little kids wandering about.

(SOUNDBITE OF TRAIN BRAKING)

REEVES: Our train draws in. This is the giant metropolis, the port city that makes most of the money that fuels Pakistan's economy.

There we are - Karachi.

The platform's crowded with porters in long, dark-green robes, carrying baggage on their heads. That conversation on the train about an army takeover has left me wanting to learn more. Could Pakistan's military really rule again one day? I get a cab to the Karachi Press Club. The club has a history of challenging dictators. It doesn't allow anyone in military uniform through its doors.

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