Volume 5, No. 5, May 2023
Editor: Rashed Rahman
Ayub Khan’s ‘Decade of Development’ (1958-1968) is frequently described as the golden era of our economy. The high rates of growth and the expansion in the manufacturing base are cited as critical indicators in support of that narrative. However, there has seldom been a critical analysis of the economic and industrial policies followed during that period to determine why the process could not be sustained. The only explanation touted by most is that Bhutto’s nationalisation measures were a major setback that thwarted the growth momentum.
What is also often missed out is that many projects were initiated and completed prior to 1958 and, even more importantly, many of these projects continue to contribute to industrial growth. In this context, the pioneering role was played by the Pakistan Industrial Development Corporation (PIDC). The mandate of PIDC was to invest in projects in sectors where it was difficult to attract private capital. The list of such projects includes:
During the 1958-68 period, the focus was on expansion of the textile industry as this was considered the spearhead of future industrial/economic growth. However, the manner in which this policy was conceived and implemented is responsible for the current situation where we find that the export of our textile products both in terms of value and volume are lagging behind those of our competitors. A critical review of that policy follows.
The setting up of a textile unit was made subject to sanction by the government. The policy makers decided in their wisdom that a financially viable unit should consist of 12,500 spindles and 500 looms. In most cases looms were not set up and consequently the policy led to a proliferation of these relatively small spinning units. By international standards such units could not have been considered viable but they still managed to generate huge profits because of the multiple incentives provided by the government. These included subsidised procurement price of cotton, concessional financing, export subsidy, area-specific and time-bound tax exemption and reduced import duty on machinery imports. Initially, the sponsors were required to commit 40 percent equity contribution to the venture with the remaining 60 percent provided by state financial institutions. If the venture decided to operate as a listed company, 50 percent of the equity could be offered to the general public thus reducing the sponsors’ stake to a mere 20 percent. This was further diluted to 10 percent through over-invoicing of machinery imports.
The Bonus Voucher scheme creating a multiple exchange rate launched in 1959 was designed to provide a significant export incentive for manufactured exports, including export of cotton yarn. Exporters were provided ‘bonus vouchers’ equivalent to 20 percent of foreign exchange earned (later reduced to 10 percent). These vouchers could be traded in the market at a premium varying from 150 percent to 175 percent as these vouchers could be utilised for import of items subject to import restrictions. The implication of this arrangement was that the actual export subsidy was about 30 percent rather than the notified level of 10 percent. The overall effect of this mechanism was that export of cotton yarn yielded substantial profit even if the net export earning was less than if only raw cotton were to be exported at its prevailing international price. Thus, in the process, Pakistan was actually providing a subsidy to the textile manufacturers of our competitors! Additionally, the use of bonus vouchers to import banned items led to heavy under-invoicing of such imports and thus a loss to state revenue. In this environment the textile industry continued to prosper by merely expanding the spinning capacity rather than diversifying the product-mix or progressive value addition. Even more disturbing was the fact that the textile tycoons were under no compulsion to share their prosperity with the state (in terms of taxes), or with the minority shareholder (in terms of dividend distribution) or with workers (in terms of fair wages or social security benefits). According to one report all the textile companies taken together paid less tax than Citibank on its Pakistan-based operations. The corporate regulations of that era allowed public companies to appoint a ‘managing agent’ (typically a private company controlled by the sponsors). This facilitated the siphoning of profits as sales of the manufacturing company were conducted through the managing agent. Thus, a portion of distributable profits – at times a substantial amount – was transferred to the managing agent to the detriment of minority shareholders of the public company. Benefits for workers as provided under the Employees Social Security Ordinance and Workers’ Profit Participation Act were denied to all those workers who were, as a common practice, hired on contract basis.
 Salman Taseer: The Case Against Denationalisation (The Nation, May 12, 1991).
 This was abolished in 1972.
The cumulative effect of the policies discussed above was the creation of a powerful class of rentiers instead of entrepreneurs. This class also acquired a strong lobbying strength through their trade association, the All Pakistan Textile Mills Association (APTMA), which continues to seek state patronage, with considerable success. Our leading manufacturing sector, therefore, remained largely unprepared to capitalise on opportunities that emerged as a consequence of global developments in trade liberalisation.
Textile exports were regulated by the Multiple Fibre Agreement (MFA) that remained in operation for many years. Under the provisions of MFA, export of textile products was subject to quota restrictions imposed by importing countries, including the US and European Union (EU) members. This acted as a major constraint on expansion of exports and the justification of this arrangement invited criticism both from exporting countries and consumers of textile products in the importing countries. Consequently, consultations were initiated in 1984 to consider a review of MFA. The review process continued for almost two decades. As an interim measure, a partial relaxation of the quota regime was agreed to in 1995 when MFA was replaced by the Agreement on Textiles and Clothing (ATCD). This provided a positive signal to exporting countries that a consensus was likely to emerge eventually on the removal of all trade restrictions. The negotiations finally culminated in the abolition of MFA effective January 1, 2005. In anticipation of this development, most exporting countries began to modernise, expand and restructure their textile industry to maximise the potential benefits flowing from trade liberalisation. On reviewing the likely impact of this development, most analysts felt that the major beneficiaries were likely to be countries like China, India and Pakistan, being major producers of cotton. This premise was based on the expectation that these countries were better poised to expand their manufacturing base further and also go in for modernisation of manufacturing facilities and increasing their focus on value-added products. While China and India proved the punters right, we in Pakistan have continued to languish at the lower end of the export chain. In fact, some of the smaller competitors like Bangladesh, Vietnam, Hong Kong and even Thailand have benefited far more than us to capitalise on the freer trading environment. While Pakistan is no longer among the 10 largest exporters of textiles, Bangladesh has emerged as the third largest among the top textile exporters today. This is despite the fact that unlike Bangladesh, Pakistan continues to enjoy the benefit of import duty concessions in Europe under the GSP Plus scheme. The inability of the private sector to utilise emerging opportunities is aptly analysed by Shahid Kardar:
“The Pakistani tycoon is devoid of the basic characteristic of a true entrepreneur, that he is a risk taker. The Pakistani version of this specie was not only historically sponsored by the state, it is even today simply unwilling to undertake any risk. This is not the breed that would risk its wealth in any venture. Products of the permit raj cannot be expected to put at risk any of their capital. They pay their share of the project cost from the kickback on the plant and machinery funded from the loan provided by the public sector financial institutions. They have also never spent even a single rupee on research and development. They are keen to collaborate with foreigners, irrespective of what their foreign partners would dump on the domestic market. In a market protected against competition nothing can go wrong, every enterprise and technology will prosper.”
 Shahid Kardar: Business Tycoons – Today’s Free Marketeers (The Nation, May 23, 1991).
Any breakthrough in exports is unlikely unless there is a quantum improvement in the skill sets of workers as well as product diversification and upgrading. Another constraint faced by the sector is the security situation that has prevailed in the country in the last several decades. This has discouraged potential international buyers from visiting the country and establishing long term contacts. This, in turn, has made it even more difficult for our manufacturers and exporters to integrate with the global supply chain, a critical mechanism for export enhancement.
Substantial industrial investment during the Ayub era was also made in setting up sugar manufacturing plants. The financial viability was, however, dependent on a subsidised price of sugarcane and not on international competitiveness. Consequently, during years of surplus production, a government subsidy is required for export. The low yield of sugarcane production in Pakistan (at around 40 tons per hectare) and the imminent water shortage is casting a deep shadow on the future prospects of this industry.
Another area of investment was the transport sector. A tractor manufacturing plant (Rana Tractors) and a truck manufacturing plant (National Motors) were set up. However, it would be a misnomer to classify them as ‘manufacturing’ facilities. Both were merely assembly operations with virtually no local component. There was, therefore, neither any foreign exchange saving for the state, nor any price advantage for the consumer. Yet the assemblers were enabled to generate substantial profits.
According to the godfathers of the planning model put in place (the Harvard Advisory Group), the wealth creation during that phase was expected to lead to public welfare through the ‘trickle down’ effect. In fact, inequality in incomes across classes and regions increased sharply during this period. The Harvard team’s leading economist, Gustav Papanek, even justified this rising inequality:
“The problem of inequality exists, but its importance must be put in perspective. First of all, the inequalities in income contribute to the growth of the economy, which makes possible a real improvement for the lower income groups. The concentration of income in industry facilitates the high savings which finance development.”
 Papanek, Gustav: Pakistan’s Development – Social Goals and Private Incentives (Harvard University Press, 1967).
He conveniently ignored the fact that domestic savings as a percentage of GDP remained very low during that ‘golden decade’ (around 10 percent). In fact, according to one study, there was an increase in poverty levels during that period with no evidence of improvement in any of the other critical social indicators.
 SBP Staff Paper by Amjad Ali, January 2016.
 Sohail Malik as quoted by S. Akbar Zaidi : Issues in Pakistan’s Economy (Oxford University Press, 1999).
Yet Pakistan was hailed as an outstanding success story of growth and development – a model that other developing countries sought to emulate. In that context, we continue to refer to the visit of a South Korean delegation to Pakistan in the 1960s to study our planning model. Yes, such a delegation did visit Pakistan, but whether or not any of our policies were considered appropriate or feasible by the South Korean government is another story. Our opinion makers are happy to persist with the myth that South Korea owes its ‘economic miracle’ to what it learnt from Pakistan. The creation of this myth has an interesting background.
In 1981, the South Korean government posted one of its most senior diplomats, Mr Jay Hee Oh as their consul general to Islamabad. Mr Oh was given a one-point mission: to persuade Pakistan to establish full diplomatic relations with South Korea. At that time, the South Koreans were miffed by the fact that while Pakistan had established full diplomatic relations with North Korea, we had only consular level relations with South Korea. Mr Oh began to work on all fronts and quickly recognising the Pakistani psyche, he used his charm and diplomatic skills to massage our collective ego. His singular achievement was to ‘convince’ Pakistan about ‘South Korea’s debt to Pakistan’. In an address to the Lahore Chamber of Commerce and Industry, Mr Oh made the ‘revelation’ that South Koreans largely owe their success to Pakistan and referred to the visit of a South Korean delegation in the early 1960s to study our planning process. This statement was like music to Pakistani ears, and since then, it has been treated as gospel truth. Renowned economists, foremost intellectuals, journalists and even political leaders continue to harp on this. Meanwhile, Oh’s agenda was fulfilled in 1984 when Pakistan established full diplomatic relations with South Korea. Soon thereafter, Oh was recalled to Seoul and as a reward, he was elevated to the position of Vice-Minister of Foreign Affairs.
The reality, unpalatable for many in Pakistan, is that South Koreans did not ‘learn’ any lesson from us. The planning model followed by them or their economic and industrial policies have been quite different from ours. South Korea emerged on the map at the end of WWII as a US-occupied zone (the North was Soviet-occupied as agreed between the two war allies) after 35 years of Japanese colonialism. While this colonialism could be considered far harsher than western colonialism, it also led to the establishment and expansion of the industrial base of the country. At the end of that era, South Korea was considered as the most industrialised country in Asia after Japan. However, in 1950, the country was embroiled in a war with North Korea that caused colossal damage in terms of human lives as well as industrial assets and infrastructure. The hostilities ended in 1953 with the signing of the Armistice Agreement that divided the country into North and South Korea. South Korea under President Syngman Rhee faced the daunting task of rebuilding a shattered economy. During his rule, several significant steps were taken like land reforms and laying the foundations of an industrial base, but the impact remained limited.
 Weatherhead East Asia Institute, Columbia University.
The dynamics changed drastically with the assumption of power by President Park Chun-hee, who ruled from 1963 to 1979. He had a clear vision and a commitment to transform the economy. The path chosen was to start with labour-intensive industries like textiles, followed by capital-intensive, later graduating to skill-intensive and even later to technology- and knowledge-based industry like software development and digitalisation. The triggering factor that eventually led to the ‘Korean economic miracle’ was the successful implementation of the ambitious but well-conceived First Five Year Plan (1963-68) with the slogan ‘Modernisation of the fatherland’. While rapid industrialisation was the core of that plan, there was a high emphasis on infrastructure development as well as investment in human resources by expanding the network of higher education and skill development.
The key element in manufacturing industry was an export-orientation. This ensured the emergence of an internationally competitive industry from the very initial stage. The other important factor was investment in heavy and chemical industries. Heavy industry included steel making, power projects, shipbuilding and several others. In infrastructure projects, the most impressive was the Seoul-Pusan Expressway, which covered the entire length of the country. The planning model put in place, quite different from that of Pakistan, was such that it ensured effective monitoring of projects for minimising cost over-runs or time delays. The apex body for planning, the Economic Planning Board (EPB), was headed by the Deputy Prime Minister. The EPB was responsible for conceiving projects and also for resource allocation. Each of the relevant line ministries had a representative of EPB for purposes of coordination as well as to act as the eyes and years of EPB. The biggest challenge faced by the country was mobilising resources for execution of the ambitious plan. The country did not face much difficulty in securing loans and grants from the US, or from international financial institutions. Also, war reparations from Japan of around $ 500 million provided another source of funds. However, even at that early stage, it was realised that overdependence on foreign loans was not a viable long-term option. Consequently, a robust mechanism for mobilising internally generated resources was put in place. That included taxation measures and a comprehensive system of providing long term loans for financing both the private and public sector. The country also benefited from the high savings rate, given the high propensity to save across society. There was a conscious effort to conserve foreign exchange outflow by restricting imports mainly to industrial raw material.
When South Korea embarked on this journey, it was difficult to visualise that it would fast outstrip the pace of development of other Asian countries that had emerged from colonialism at about the same time. In the early 1960s, the country’s macro-economic indicators were worse than most other resource-rich countries in the region like Indonesia or Malaysia. South Korea’s natural resource endowment was and is virtually non-existent in terms of oil or gas, coal, iron, adequate arable land, or forestry. In fact, the constraint is far more telling as compared to even countries in South Asia. But at the same time, South Korean society has benefited from several inherent, though intangible advantages. It is a homogeneous society with no linguistic, ethnic, racial or regional differences that are common to many other countries in Asia. Again, religion has always been a non-issue. Yet another intangible benefit has been the quality of human resources. Even at the start of the development process, the literacy level (at over 70 percent) was about the highest in Asia, excluding Japan. Much more importantly, the work ethic and social consciousness of society has been a critical factor in determining the success of the development trajectory. An important contributory factor has been the sanctity of the principle of meritocracy. This is reflected not only in job selection but also in the education system. From very early years, university admission is strictly based on a national level competitive examination that determines the eligibility of students to specific universities as graded by the prestige that each university carries. This, obviously, is the most effective means of ensuring equal opportunity for all.
Despite long periods of military rule, the military establishment has shown remarkable restraint in appropriating any undue share of national resources to themselves. There are no housing schemes or land allotments or other lavish perquisites. The main reason is that a large part of their armed forces consists of conscripts, as every male member between the ages of 18 to 28 is required to perform compulsory military service for a period varying from 18 to 24 months, depending on the service branch. The conscripts are paid a nominal monthly stipend. Even after a massive increase in 2018, the amount is considerably less than the minimum wage and constitutes merely 10-12 percent of the current per capita income of the country. (In Pakistan, a newly recruited soldier is paid a monthly salary slightly higher than the legally authorised minimum wage and higher than the per capita income). The conscription system enables the South Korean government to utilise a large part of its massive defence budget (currently equivalent to about $ 40 billion) for defence procurement and production. In fact, the sharp increase in local defence production in recent years has generated substantial spin-off benefits for the economy.
The frugal pattern of the armed forces is equally visible on the civilian side. There is generally no concept of official residences, official cars, rest houses or guest houses. Only three government functionaries are entitled to an official residence: the President, the Prime Minister and the Foreign Minister. Even visiting heads of state are made to stay in designated hotels.
 The Strait Times, January 17, 2018.
The foregoing analysis underscores the fact that South Korea’s success story cannot be attributed to any quirk of fate or ‘learning from Pakistan’. It is the cumulative result of a comprehensive set of policies and effective implementation that has enabled the country to emerge from the ashes of the Korean War as the 10th largest economy in the world within just six decades. Many in Pakistan believe that no country in the world can move forward if society, and particularly the elite, is rife with corruption. Based on this premise, it is presumed that the progress achieved by South Korea would not have been possible if there were widespread corruption in the country.
The reality, however, has been quite different. In fact, there have been many blatant examples of large scale corruption, both at the government level and in large corporates. But at the same time, when the culprits were identified, the punishment has been quick and very harsh, thus providing an effective deterrent. The two Presidents following General Park, also former Generals, were convicted and sentenced to huge fines as well as long prison terms. Many years later, even the democratically elected President, Park Geon-hye (daughter of former President Park) was impeached by parliament. This was not only confirmed by the Supreme Court, she was convicted on charges of abuse of power, coercion and bribery, and sentenced to 25 years in prison and a fine of an amount equivalent to almost $ 18 million. Within the corporate world, the owners of the two major conglomerates, Daewoo and Samsung, were also convicted on corruption charges, as was the head of another of the largest companies, Hanbo Steel. These examples highlight the speed, effectiveness and independence of the justice system.
Can we in Pakistan learn any lessons from South Korea? Before responding to that important question, let me point out that of all the factors that have determined South Korea’s success story, a non-relevant factor is often mentioned by some opinion makers in Pakistan as an important catalyst: the long spell of military rule in that country. It needs to be emphasised that while General Park’s rule was accepted without any overt resistance, that was not so during the two successor regimes. In fact there was perpetual resistance, rising to a crescendo in 1980 with the ‘Gwangju Uprising’. This was suppressed with brutality, resulting in the reported death of 127 protesters. South Korean society does not view its praetorian past with pride but with remorse for not doing more to reverse the tide earlier. The long struggle for democratic rights has finally achieved its goal. And the current generation today feels proud of being citizens of a flourishing democracy.
In our case, it seems very difficult to follow the South Korean model. The fault lines in our governance, in our work ethic, in our individual and collective commitment, and above all, in our regressive mindset – clouded by the belief in perpetual international conspiracies against us – have continued to widen. We now seem to have reached a point that we can only hope for a miracle to happen. Yes, our faith healers continue to assure us that miracles do happen!
The writer has a Master’s in Finance & Economics from Boston University. He is a former CEO of PACRA, Pakistan’s Consul General/Commercial Counsellor in South Korea 1982-1987, and a recipient of the Sitara-e-Imtiaz.