A tale of 2 economies: India and Pakistan

When India and Pakistan became independent states after the Partition in 1947, they inherited a similar economic legacy of underinvestment and neglect from Britain. Their colonial economies were among the poorest in the world, and both nations saw strong growth and significant gains in education, healthcare, and other areas of development following their independence.

However, during the first four decades or so, Pakistan experienced faster growth rates than India, while India lagged behind. Around the 1990s, their roles reversed, and India surpassed Pakistan, eventually becoming the world’s third-largest economy by purchasing power and the “I” in BRICS.

What led to India’s growth spurt? Economics enables us to look at the grand political and economic changes in history and explain them, using economic factors. In other words, it is a branch of historical materialism. Decisions driven by economic factors shape societies and make them change.

Taking this definition of economics, I argue a big contributor to the different trajectory of the two economies lies in the evolution of their respective governments and institutions.

Post-Independence growth, led by Pakistan

After achieving independence, economic growth picked up, with both nations growing at a rate of 3 percent to 4 percent in the initial decade as the respective governments focused on developing their economies.

However, differences emerged soon after. While both economies were mostly under state control, India’s government restricted exports and implemented a protectionist trading policy in the 1960s that hindered growth. Pakistan, on the other hand, benefited from substantial trade from its East Pakistan region. Pakistan’s growth was further aided by the billions of dollars of military aid it received from the US, as well as donations from other oil-rich Muslim countries in the Middle East.

Pakistan’s growth rate accelerated to about 6 percent per year from 1961 to 1980, compared to 4 percent for India. However, Pakistan’s growth engine came to a halt in 1971 when East Pakistan broke away from West Pakistan and declared independence as Bangladesh.

To add insult to injury, its Prime Minister at the time Zulfiqar Ali Bhutto nationalized major industries in Pakistan which led to a bloated and ineffective public sector mired with corruption resulting in inefficient State-Owned Enterprises (SOEs) and overall loss of economic momentum.

India vaults ahead

In the 1990s, India’s growth rate accelerated to 6 percent per year, surpassing Pakistan’s 4 percent. Several factors contributed to this role reversal, including economic and political factors.

Compared to India, Pakistan has historically relied more on external sources of funding, having received $73 billion in foreign aid between 1960 and 2002. Today, Pakistan continues to rely on institutions such as the International Monetary Fund for crisis lending and foreign governments like China for aid and infrastructure development.

While this aid has provided a lifeline for Pakistan’s economy, it has also allowed the country to postpone much-needed reforms, such as expanding the tax base and addressing energy and infrastructure problems. As a result, Pakistan’s growth has not been as sustainable, and the country now carries a large debt burden. Undertaking these reforms could have put Pakistan on a more stable growth trajectory and encouraged greater foreign investment, in my opinion.

For instance, The South Koreans built a self-sustaining economy with a cumulative aid input from the US of only $15 billion since 1950 by avoiding confrontation with America and by cooperating with erstwhile enemy Japan. Pakistan received $40 billion in bilateral US aid over the same period. Instead of utilising aid as a catalyst for indigenous growth, Pakistan has ended up becoming dependent on aid. Donor funding serves as a substitute for revenue generation while wars and terrorism have deterred investment.

Air Marshal Nur Khan, a war hero and former Pakistan air force chief, had once likened Pakistan’s aid dependency to ‘taking opium’. Speaking to an American diplomat soon after the loss of East Pakistan in December 1971, he said, ‘Instead of using the country’s own resources to solve the country’s problems, the aid craver, like the opium craver, simply kept on begging to foreigners to bail him out of his difficulties.’

Nur Khan proposed ‘a Chinese style austerity programme’ for Pakistan although he doubted if ‘many Pakistanis had the conviction and dedication to put up with the sacrifice that such a programme would entail’. The problem was not so much receiving foreign aid as much as the country’s elite developed a dependence on it while postponing fundamental structural forms that the country needs badly even today.

India also received some aid from international organisations and a few countries like the US in the past, it did not rely on it to the extent that Pakistan did. Furthermore, India took a different approach in 1991 by reducing tariffs, liberalizing trade, facilitating the growth of domestic companies, and attracting more foreign investment.

These reforms paid off: By integrating India’s economy to the rest of the world, the reforms created market opportunities for Indian companies, made them more competitive, and that, in turn, led to higher growth rates for the overall economy.

Another way to measure the different paths is in gross domestic product per person. In 1990, India and Pakistan had almost identical per-capita GDPs, a little under US$370 per person. But by 2021, India’s had surged to $2,277, about 50% higher than Pakistan’s.

Epilogue

The divergent paths taken by India and Pakistan can be attributed largely to institutional development and politics. Pakistan has experienced almost constant political turmoil, with seven different governments in the decade from 1988 to 1998 alone, including both civilian and military administrations following coups. This instability has discouraged foreign investment and made it difficult to implement and maintain reforms.

Moreover, Pakistan’s military spending as a percentage of GDP has consistently been higher than India’s since independence. For instance, Pakistan’s poor performance in education is not a function of poverty but of according lower priority by successive governments. There are 43 countries in the world that are poorer than Pakistan on a per capita GDP basis but 24 of them send more children to primary school than Pakistan does.

Pakistan’s budgetary allocation for education — is abysmally low and actual expenditure—is even less. However, Pakistan spends around seven times more on its military than on primary education. According to one estimate, just one-fifth of Pakistan’s military budget would be sufficient to finance universal primary education.

In contrast, India has managed to maintain a stable democracy that, while far from being perfect, nonetheless has kept leaders accountable to the majority of the people. This has facilitated more inclusive growth and less reliance on foreign aid or institutions. In just one decade, India lifted more than 270 million people out of poverty and has less out of school children today than Pakistan despite having a population of 1.4 billion.

Given the current global challenges to democratic institutions, this history serves as a powerful reminder of its value.

Copyright Business Recorder, 2023