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    Have we lost the race?

    By Shahid Javed Burki

    A GREAT deal is being said and written about the operation in Kargil and its impact on the larger Kashmir problem. The debate in Pakistan has raised a number of issues; many questions have been asked but most remain unanswered. What was the purpose of the operation; what was expected to be achieved? Who did the planning for the operation; who were the fighters who occupied the Kargil heights; who suffered the most casualties, army personnel or Kashmiri freedom fighters? Were the civilian authorities consulted before the operation was launched; was the economic impact of the operation investigated?

    The Indians, it would seem, are engaged in a similar debate but with one major difference. Their discourse also covers economics. This is what Kuldip Nayar, a seasoned Indian journalist, wrote about the change in thinking in his own country after the Kargil episode: "Economics has ceased to exist in the country. Every wasteful expenditure is computed under the head of Kargil. Every superfluous activity is attributed to Kargil." On the Pakistani side of the border, very little is being said about the economic consequences of the Kargil operation. In fact, Kargil or not, there is very little debate in the country about the direction the Pakistani economy is taking or should be taking.

    At this time we should be asking ourselves a number of important questions pertaining to Pakistan's economic future. With a perceptible slow-down in the rate of growth of the Pakistani economy in recent years, and with a sharp upturn in the Indian economic performance since 1991, are we losing ground to our neighbour on the economic front? If the answer to this question is yes then we should be asking ourselves a follow-up question: What should or could be done to restore the economic balance between the two countries? Few people would dispute the assertion that if we seriously lag behind India in economic development, all the hand wringing of the past several months about Kargil and Kashmir will be of little use.

    Let us first take a look at some facts. For the first forty years after independence, the Indian economy was performing poorly. Its own economists had begun to lament the fact that India could not accelerate the increase in its gross domestic product (GDP) beyond what they themselves called the "Hindu rate of growth." Pakistan, on the other hand, was growing at a healthy rate. While the Indian GDP increased at the annual rate of less than 4 per cent between 1947 and 1991, the Pakistani economy expanded at the rate of over 6 per cent a year. Even though Pakistan's population was increasing at a rate one percentage point higher than that of India - at 3 per cent a year compared with India's 2 per cent - per capita incomes in Pakistan were increasing by a considerably wider margin.

    It was not surprising, therefore, that about a quarter century after the two countries gained independence, Pakistan's income per capita crossed that of India. In 1991, the World Bank estimated Pakistan's income per head at $405 compared with $370 in India. The divergence in incomes when measured in terms of the purchasing power parity (PPP), was even greater. Economists regard PPP estimates as more reliable for inter-country comparisons. This approach measures what one dollar can buy in various countries. The PPP estimate for Pakistan in 1991 was $1,950 compared with $1,150 for India. In other words, an average citizen of Pakistan was 70 per cent richer than his (and, presumably, also her) counterpart in India.

    For Pakistan, the increasing divergence in growth performance was very satisfying. After all, in the 1940s, while Mohammad Ali Jinnah was campaigning for the creation of an independent homeland for the Muslims of British India, the Hindu leadership had labelled his idea as economically unviable. They just could not see how the poorest segments of British India - and these happened to be populated by Muslims - could be separated from the Indian mainland and survive economically. Pakistan had not only survived; 44 years after achieving independence, it had become much more prosperous than India.

    A higher GDP growth in Pakistan had inevitably translated into a relatively low incidence of poverty. In the early 1990s, only 17 per cent of the Pakistani population was classified as poor compared to 32 per cent for India. At that time, Pakistan's population was estimated at 116 million, while that of India had reached 867 million. This meant that there were 20 million absolute poor in Pakistan. India, on the other hand, had 277 million people living in abject poverty. In 1991, while India's population was seven times larger than that of Pakistan's, it had fourteen times more poor people.

    The problem of poverty seemed much more intractable for India than for Pakistan. Tens of millions of India's poor were crowded in its large cities. Calcutta, Bombay - even Delhi - had hundreds of thousands of homeless people sleeping on the pavements. Pakistan's larger cities had few signs of visible poverty. A large proportion of Pakistan's poor lived in the rural areas where poverty was less a cause of economic forces than the result of the weight of social structures associated with feudalism and tribalism. If this could be changed, Pakistan could also set free the rural people who remained caught in poverty. In the late 1980s and early 1990s, Pakistan seemed to have won the economic race in the subcontinent.

    Pakistanis were euphoric at the performance of their country over a period of 40 years. Unfortunately, the Pakistani bubble was pricked in the early 1990s. There was at that time, and to Pakistan's disadvantage, a remarkable change in the economic situation of the two countries over the last ten years. Since India introduced deep structural reforms in 1991, its economy has picked up considerably. The rate of growth increased to a sustainable 6 to 7 per cent a year; since 1990, the GDP increased by an impressive 6.1 per cent a year. As the rate of growth of population during the same period was 2 per cent, per capita income in India increased by 4.1 per cent a year. In 1998, average Indian income was 38 per cent higher than in 1990.

    During the same time, Pakistan's economic performance deteriorated significantly. Over the last eight years, the economy grew at the rate of 4.1 per cent a year. With the population increasing by 2.8 per cent a year in the same period, income per head grew by only 1.3 per cent per annum. In 1998, Pakistan's income per head was only 11 per cent higher than in 1990. At this time, given the structure of the economy, Pakistan's sustainable rate of growth is of the order of 3.5 per cent a year, less than one percentage point more than the increase in population.

    What would be the impact of these trends on the relative economic strengths of India and Pakistan? In 1998, India's per capita income was only slightly less than that of Pakistan - $430 compared to $480. Measured in terms of the purchasing power parity (PPP), however, India's income per head in 1998 was estimated to have crossed that of Pakistan. The latest PPP measure for Pakistan, as estimated by the World Bank, is at $1560 compared to $1661 for India.

    If the present trends continue, income per head of the Indian population is likely to increase by 5 per cent a year, while that of Pakistan will grow by only 1.50 per cent. In other words, Indian incomes will grow at a rate more than three times those of Pakistan. At these rates, Indian incomes will double in fourteen years; by the year 2013, India could have a per capita income of $900. Pakistan's income per head of its more rapidly growing population will double in 47 years. In 2013, with the present trends maintained, the average income of Pakistani citizens will be only $580, almost one-half of India's. This is obviously not a happy outcome for the people of this country.

    Economic performance should not necessarily be viewed from a competitive perspective. It is not of great consequence for the people of Pakistan whether they are doing better or less well than the people of India, or those living in Bangladesh, or those who are citizens of Sri Lanka. The numbers presented above are meant to illustrate only one point: that having done well for more than four decades, Pakistan's economic situation has been deteriorating for the last ten years. This decline is vividly underscored by a comparison with India's recent performance. What is the reason for this?

    It is easy - and also tempting - to place the blame for Pakistani's poor performance on the shoulders of one administration or the other. Those who opposed Pakistan People's Party blamed Benazir Bhutto's stewardship of the economy for the country's present malaise. Those in opposition to the Pakistani Muslim League hold Mian Nawaz Sharif responsible for Pakistan's current economic difficulties. Both views are short-sighted. Instead, we should take a careful look at the performance of the Pakistani economy over the past 52 years.

    Only by casting the country's performance in a longer-term framework will we be able to identify the sets of policies that could help us out of the present difficult economic situation. One important conclusion that emerges from this historical overview is that whereas India has successfully addressed some of its structural problems, Pakistan has failed to tackle those that inhibit the rapid growth and modernization of its economy. There are today a number of problems with the structure of the Pakistani economy. These must be resolved or else the country will continue to see a rapid deterioration in its economy.

    A study of the past highlights three important facts about the Pakistani economy. One, the high rates of growth of the first forty years after independence were not structural in the sense that they were not supported by the economy's internal dynamics. Instead, they were the consequence of a significant amount of foreign savings that became available to the country in the mid-fifties. In 1954, Pakistan signed the Mutual Defence Agreement with the United States, and became eligible for large flows of economic and military assistance. For a decade, these flows underwrote critical investments, including those made in the Indus Water Replacement Works. Foreign aid was suspended after the war with India in 1965.