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Pak Eco Ebad

The document discusses different types of economies including free market, command, and mixed economies. It also provides an overview of the major sectors in Pakistan's economy - agriculture, industry, and services - and discusses some historical phases and current issues facing Pakistan's economy.

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0% found this document useful (0 votes)
15 views24 pages

Pak Eco Ebad

The document discusses different types of economies including free market, command, and mixed economies. It also provides an overview of the major sectors in Pakistan's economy - agriculture, industry, and services - and discusses some historical phases and current issues facing Pakistan's economy.

Uploaded by

Ebad Afridi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Types of economics.

What Is Economics?

Economics is a social science that focuses on the production, distribution, and consumption of goods
and services. The study of economics is primarily concerned with analyzing the choices that individuals,
businesses, governments, and nations make to allocate limited resources. Economics has ramifications
on a wide range of other fields, including politics, psychology, business, and law.

KEY TAKEAWAYS

 Economics is the study of how people allocate scarce resources for production, distribution, and
consumption, both individually and collectively.
 The field of economics is connected with and has ramifications on many others, such as politics,
government, law, and business.
 The two branches of economics are microeconomics and macroeconomics.
 Economics focuses on efficiency in production and exchange.
 Gross Domestic Product (GDP) and the Consumer Price Index (CPI) are two of the most widely
used economic indicators.

1. Microeconomics

Microeconomics studies how individual consumers and firms make decisions to allocate resources.
Whether a single person, a household, or a business, economists may analyze how these entities
respond to changes in price and why they demand what they do at particular price levels.

Microeconomics analyzes how and why goods are valued differently, how individuals make financial
decisions, and how they trade, coordinate, and cooperate.

Within the dynamics of supply and demand, the costs of producing goods and services, and how labor is
divided and allocated, microeconomics studies how businesses are organized and how individuals
approach uncertainty and risk in their decision-making.

2. Macroeconomics

Macroeconomics is the branch of economics that studies the behavior and performance of an economy
as a whole. Its primary focus is recurrent economic cycles and broad economic growth and
development.

It focuses on foreign trade, government fiscal and monetary policy, unemployment rates, the level of
inflation, interest rates, the growth of total production output, and business cycles that result in
expansions, booms, recessions, and depressions.

Using aggregate indicators, economists use macroeconomic models to help formulate economic policies
and strategies.
What is Economy?

An economy is complex structure of interdependent producers and consumers


having beneficial role for each other. Different types of economies work globally
with their pros and cons. Recessions and disorders in every type of economy leaves
no one perfect. Free market, command and mixed are the three types of economies
discussed in literature.
Types of Economies
• Free Market Economy
• Command Economy
• Free and Command Economy (Mixed Economy)
Free-Market Economies
In such economies, which are mostly capitalist economies, firms and individuals
decide about their own economic interests in a better way. Exchange of goods
occurs in a competitive environment which brings a fair price in market for goods
and services. In this type of economy individuals and businesses make their own
economic decisions and they usually seen in democratic states. Such economies
lead toward more economic development and growth as is evident in the case of
Europe, North America and Tiger nations.
Command Economies
Such economies are controlled by central hand (government) of the state, so these
are planned, controlled and managed centrally. The production and consumption
activities are controlled to achieve certain economic and security objectives, like
to maintain a monopoly within or outside the boundaries of the country. In these
types of economies all major decisions are taken by the central government.
Usually these economies exist in communist or authoritarian states. The examples
of such economies are Russia and China which have their own success and failure
stories.
Free and Command Economy
This type of economy keeps the character of the both above types. It blends the
elements of both and presents a better way to cope with new emerging economic
and social problems. In free market economies state plays restrictive role in
correcting economic problems like Monetary and Fiscal Policy in the form of
fixation of prices, subsidies and tariff policies.
Comparison of different types of Economies
There is no absolute consensus about which type of economy is the best. One can
easily find the best one by comparing the economic performance of different
systems in the past. Since the industrial revolution, the world economies with free
andcommand markets have witnessed many peaks and troughs. The peak existed
till thestart of 20th century in the form of rapid economic growth coupled with
economic development. But the subsequent depressions of 1930’s and the later
ones in the same century and in 21st century have posed questions on the validity
of both systems i.e. Command and Free Market. The integration of capitalist
economies through International Financial institutions has turned the bad into
worse.
Introduction to the Economy of Pakistan
At the time of independence Pakistan’s economy, which was having nothing to
survive has made his way in the line of developing country through many
experiments in political and economic history. The economy had witnessed
relatively free market system at one time (mostly in democratic government
periods like 1988 to 1999 and 2008 to on till now) and command at the time of
1971 to 1977 and all dictatorship eras. For this reason, the economic history of
Pakistan becomes more interesting. Despite having so much turbulent time,
Pakistan has witnessed the time of fastest growth in South Asia region. But the
inconsistent policies and narratives of every government failed this state many
times. These variable policies are still freezing the Pakistan to live among the
developing world. Beside this, the linkage with international monetary institutions
during 80’s also started to engulf the economic independence of the country and
has trapped this country in to debt trap. Pakistan is rich in every type of resources,
but the situation is getting worse with every passing day. Despite of having vast
reserves of coal, oil, gold, gas and many other valuable minerals, Pakistan is
depending on international aid for its economicand social revival. The share of
different sectors in the economy has been changed much since independence.
Pakistan has also a large pool of human resource which can be turned into
productive one by adopting a wise policy. Now the agriculture is sharing almost
21% in GDP which was more than 50% at the time of creation of this state in 1947.
Whereas, the industrial and services sectors have gained in their share in GDP up
to 20.9% and 57.7% respectively from 8.03% and 39.3% in 1947. The trade
account remained in deficit during most of the years in history and is still in the
same condition due to more dependence on imports. The excessive dependence on
imports and shortage in energy sector has also disturbed our foreign exchange
reserves. The continuous devaluation of Pakistani rupee was also result of these
economic problems. Public debt, to manage the economy, is rising sharply as it
reached more than 60% of GDP. It is evident from the above discussion that
Pakistan’s economy has a lot of problems, so an integrated economic, social and
political framework is needed. Major Sectors of Pakistan Economy
The major sectors of the Pakistan economy are:
• Agriculture
• Industry
• Services
Agriculture Sector
Agriculture sector is the only largest sector of our economy, contributing 21% of
gross domestic product, employing 44% of total labor force, sharing 65% of
exports. Agriculture sector of Pakistan economy is stagnant, and its growth rate is
slow. It is unable to meet the requirements of a fast expanding industry and rapidly
multiplying population. The sector has a drawback that it has a volatile nature.
The most important problem of agriculture sector is low productivity per acre and
per worker.
Industrial Sector
The most distinctive feature of a modern developed country is its strong industrial
base. If a country lags in industrial growth, it cannot hope to make progress in
other fields such as agriculture, transport, energy or education. It is the
manufacturing sector, which can provide employment opportunities to rising
population. Manufacturing is the second largest sector of Pakistan economy, with
21% share in GDP. It employs 14% of total labor force. Rate of growth of this
sector during 2014- 15 was very low at 3.62%.
It is divided into two parts
• Large scale manufacturing
• Small scale manufacturing (Small and Medium Enterprises, SMEs)
During the past half century, Pakistan made good progress in textiles, sugar,
fertilizer, cigarettes, cement, engineering goods, plastics, electrical goods, paper,
beverages, etc. However, this growth was slow so it failed to ensure higher
incomes for the rising population..
Major Problems of industrial sector are:
• Low Productivity Poor quality products
• Limited Capacity Shortage of Capital
• Energy Shortage Lack of Advanced Know-how

Services Sector
Services sector of Pakistan economy is quite a large sector as it contributes to the
extent of 58% in the GDP. It has many sub-sectors like transportation,
communication and storage, retail and wholesale trade, insurance and finance,
housing services (ownership & dwelling), general government services (Public
administration & defense) and many other private services. All these sub-sectors
have vital role in the economy of Pakistan. Generally, without services sector
economy of any country cannot run. This sector absorbs the major labor force of
the country.

Historical over view of Pakistan Economy


The over-time review of the economy is divided into various phases and discussed
below.

1 Fifties Era: 1947 to 1958


The era marked the government of Liaqat Ali Khan and initiation of first Five
years plan. There was currency war between Pakistan and India that was the
highlight of this era in 1949. In 1950 the relations were restored, and trade
resumed.
Political and Economic situation
Early years of Pakistan’s independence were the years of battle for economic and
political survival. Economic fragility and political hangover was putting a question
mark on its survival. On the political side, different multidimensional crises found
home in Pakistan and became worse with every passing year. Political rift in
different provinces was also posing even bigger challenges to the leadership of the
country. At the time of independence, Pakistan was predominantly an agrarian
economy because it was contributing more than 50% to GDP and the industry was
almost absent except few units. Besides, absence of needed infrastructure was also
Challenging the economic sovereignty of Pakistan. Shortage of industry moved the
government to make policies for its development. Thus, agriculture was ignored
during the initial years. The growth pattern clearly depicts that agriculture growth
rate was half of the population growth rate.

Growth Era: 1958 to 1969


The second decade of Pakistan’s history remained under the dictatorial regime of
Field Marshal Ayub Khan. General Ayub also gave Pakistan its second
constitution in 1962. The decade of 1960’s stands out as the decade with the robust
presentation. The Second Five Year Plan (1960-1965) had initially set an objective
of GDP development of 20% more than five years contrasted and the modest
objective of 15% in the First Five Year Plan. The Third Plan (1965-1970) detailing
was embraced in a state of mind of incredible confidence and the yearly
development target was set at 6.5% for every annum. Early years of this decade
witnessed high growth rate in large scale manufacturing with the average for the
period 1960-1965 rising to a phenomenal 16.9%. In the second half of 1960’s the
GDP fell to 3.1% because of war with India. Be afterwards, a short time later it
kept on developing and came to up to 9.8% in 1970.During the second decade, it
became crystal clear that consistent growth in the economy strongly depends on
the integrated growth of industrial and agriculture sector.

Nationalization and Command Economy Era: 1971 to 1977


This era in the earlier years is marked by the autocratic era of President Yahya
Khan,who assumed the charge of President and Chief Martial Law Administrator
of Pakistan. President Yahya Khan issued the Legal Framework Order (LFO),
which was intended to serve as a guide for future power structure of the country.
In 1972, Mr. Bhutto lifted the Martial law after having an accord with the
opposition parties and gave an interim constitution. Z.A Bhutto started many
socialist economic reforms, soon after assuming the office, to improve the growth
of Pakistan’s economy. The main step in bringing these reforms was the initiation
of nationalism process. Firstly, the nationalization policy was introduced over large
firms and afterwards all private banks, small manufacturing units and colleges
were nationalized within two years.

The Second Military Government: 1978 to 1988


During the second half of the 1977, military government again entered in the
politics and Army Chief General Muhammad Zia-ul-Haq took over the
administration of Pakistan. During Zia-ul-Haq’s period, the economic growth rate
averaged at 6.6% per annum, the remittances increased substantially and
manufacturing sector grew at a faster pace at rate of 9%. The main reasons for
this high growth were the large public sector investment, introduction of
flexible exchange rate policy for the exporters. Special industrial zones were
established to attract private investment. The regular adjustment policy of
currency brought a positive impact on the trade of Pakistan. Beside these positive
impacts, the debt burden rose sharply as the interest payment increased from 1.9%
of GDP in 1976 to 4.9% of GDP in 1987. As part of Islamization policy, Zia
announced a plan for Islamic economic system and establish zakat institution
and interest free banking .

The Middling Nineties: 1988 to 1999


During next 10 years, Pakistan had four general elections. Benazir Bhutto,
daughter of Z.A Bhutto, and Nawaz Sharif both came to power twice after one and
other and more than one “caretaker” government came to run the state affairs. The
economy of Pakistan has remained under the clutches of IMF and World Bank
since 1988. All the economic policies like economic liberalization, stabilization
and structural adjustment was adopted under the directions of IMF and World
Bank. In real sense this was the loss of economic sovereignty of Pakistan. On the
instructions of IMF the government of Pakistan reduced its fiscal deficit to 4% of
GDP. In 1994-07 additional taxes of Rs.140 billion were levied and indirect taxes
increases. In 1996-07 the developmental expenditure decreased to Rs.85 billion.
Due to this reduction, the government raised the administered prices of utilities like
electricity, gas and petroleum products gradually. Privatization was also initiated
anddevaluation was witnessed of Pakistani rupee in that period.Due to these
policies, the economic development was badly influenced at macro level during
1990s. The causes of high inflation in that era were the high level of taxation,
growth in administered prices and devaluation of Pakistani rupee. The industry was
badly influenced by opening the economy internationally without any protective
measures which increased unemployment rate in Pakistan in 1990s

The Reforming Era: 1999 to 2007 Political and Economic Dimensions


General Pervaiz Musharraf got into power after suspending the constitution of
1973 and ousted Nawaz Sharif government on 12 October 1999 and nominated
himself as Chief Executive of the country. The main reasons for this take over
were economic bankruptcy, international isolation, the status of failed state,
political instability and vendetta. During the previous decade, opposition never left
room for better policies but tried to derail the process of institutional building.
During Musharraf’s era, the performance of the economy is regarded as having
mixed results. The success was largely due to the high inflow of foreign assistance.
This take over by a military dictator was applauded almost all over the country as
people of Pakistan were not happy with the performance of the political parties.
This era is also marked by many political crises which were the result of many
critical decisions taken by Musharraf. This era is also marked by the independence
of media and political socialization of the general public as well. Some analysts
support Musharraf for his liberal policies and some criticize him for his flawed and
short-sighted economic policies. Musharraf era’s economic growth was robust like
the previous autocratic rules. The average rate of GDP growth during this era was
5.3%. Musharraf’s liberal economic policies attracted many international investors
to invest in Pakistan. His policies re-established the investors’ confidence in
Pakistan economy and FDI increased to incredible levels. This investment showed
a fair growth in different sectors of Pakistan economy. Musharraf’s policy of
import led growth created economic bubble in the Pakistan’s economy. Secondly,
the boost in industrial sector also lowered the unemployment level to a certain
extent and increased the exports. The establishment of different industrial and tax
free zones were also aimed at boosting the manufacturing sector. Infrastructure
was also given much importance and many roads were constructed for the better
transport facilities. The poverty also dropped according to some surveys but this
claim was challenged by some organizations. Foreign reserves showed positive
trend which improved Pakistan’s international standing. Stock market also touched
new heights of 1300 points from 700 points (Aslam 2001).
Hence, it is clear that the policies of this era showed positive results and negative
as well and no one can declare it as absolute success or failure.

Privatization Era: 2008 to 2013


The PPP’s tenure under Asif Ali Zardari was very critical in the sense that a
military dictator has just left the chief executive’s office. The rebirth of democracy
and to complete tenure was a big challenge in the face of multidimensional social,
economic and political problems existing in Pakistan. However, President Zardari
kept the democracy intact for five years and completed the first democratic era in
Pakistan’s history. This was a great achievement as it never happened in the past.
Beside all of this, Zardari also cleansed many impurities caused by martial law
regime. Zardari’s coalition with opposition parties provided the room for the
betterment of the country in true political sense. Firstly, he gave the presidential
powers to the parliament. Then he amended the constitution and the biggest
achievement was 18th amendment along with 19th and 20th amendments. The
18th amendment gave the provinces the political and economic autonomy which
rests in the base of a true democracy. In this era, Pakistan’s economy saw many
positive swings and negative as well. During PPP government, the country was
facing severe economic problems. The economic situation called for difficult
decision at micro and macro level. As a result of bold decisions, the stock markets
reached to newer heights. Macroeconomic stabilization program was also launched
in consultation with IMF in this era.

Macroeconomic Policy: Objectives and Instruments


Microeconomics and macroeconomics—the two major divisions of economics
—have different objectives to be pursued. The key microeconomic goals are the
efficient use of resources that are employed and the efficient distribution of
output. These two goals of microeconomics are encapsulated as ‘efficiency’
and ‘equity’. But macroeconomic goals are quite different because the overall
response of the economy must not match with the individual units. As
macroeconomics looks at the whole, its objectives are aggregative in character.
In other words, because of different level of aggregation, these two branches of
economics focuses on different economic objectives.

Macroeconomic Policy Objectives:

The macroeconomic policy objectives are the following:

(i) Full employment,

(ii) Price stability,

(iii) Economic growth,


(iv) Balance of payments equilibrium and exchange rate stability, and

(v) Social objectives.

(i) Full employment:

Performance of any government is judged in terms of goals of achieving full


employment and price stability. These two may be called the key indicators of
health of an economy. In other words, modern governments aim at reducing
both unemployment and inflation rates.Unemployment refers to involuntary
idleness of mainly labour force and other productive resources. Unemployment
(of labour) is closely related to the economy’s aggregate output. Higher the
unemployment rate, greater the divergence between actual aggregate output (or
GNP/CDP) and potential output. So, one of the objectives of macroeconomic
policy is to ensure full employment.The objective of full employment became
uppermost amongst the policymakers in the era of Great Depression when
unemployment rate in all the countries except the then social ist country, the
USSR, rose to a great height. It may be noted here that a free enterprise capi-
talist economy always exhibits full employment.But, Keynes said that the goal
of full employment may be a desirable one but impossible to achieve. Full
employment, thus, does not mean that nobody is unemployed. Even if 4 or 5 %.
of the total population remain unemployed, the country is said to be fully
employed. Full employment, though theoretically conceivable, is difficult to
attain in a market-driven economy. In view of this, full employment objective
is often translated into ‘high employment’ objective. This goal is desirable
indeed, but ‘how high’ should it be? One author has given an answer in the fol-
lowing way; “The goal for high employment should therefore be not to seek an
unemployment level of zero, but rather a level of above zero consistent with
full employment at which the demand for labour equals the supply of labour.
This level is called the natural rate of unemployment.”

(ii) Price stability:

No longer the attainment of full employment is considered as a macroeconomic


goal. The emphasis has shifted to price stability. By price stability we must not
mean an unchanging price level over time. Not necessarily, price increase is
unwelcome, particularly if it is restricted within a reasonable limit. In other
words, price fluctuations of a larger degree are always unwelcome.However, it
is difficult again to define the permissible or reasonable rate of inflation. But
sustained increase in price level as well as a falling price level produce
destabilizing effects on the economy. Therefore, one of the objectives of
macroeconomic policy is to ensure (relative) price level stability. This goal
prevents not only economic fluctuations but also helps in the attainment of a
steady growth of an economy.

(iii) Economic growth:

Economic growth in a market economy is never steady. These economies


experience ups and downs in their performance. This objective became
uppermost in the period following the World War II (1939-45). Economists call
such ups and downs in the economic performance as trade cycle/business cycle.
In the short run such fluctuations may exhibit depressions or prosperity
(boom).One of the important benchmarks to measure the performance of an
economy is the rate of increase in output over a period of time. There are three
major’ sources of economic growth, viz. (i) the growth of the labour force, (ii)
capital formation, and (iii) technological progress. A country seeks to achieve
higher economic growth over a long period so that the standards of living or the
quality of life of people, on an average, improve. It may be noted here that
while talking about higher economic growth, we take into account general,
social and environmental factors so that the needs of people of both present
generations and future generations can be met.However, promotion of higher
economic growth is often hampered by short run fluctuations in aggregate
output. In other words, one finds a conflict between the objectives of economic
growth and economic stability (in prices). In view of this conflict, it is said that
macroeconomic policy should promote economic growth with reasonable price
stability.

(iv) Balance of payments equilibrium and exchange rate stability:

From a macro- economic point of view, one can show that an international
transaction differs from domestic transaction in terms of (foreign) currency
exchange. Over a period of time, all countries aim at balanced flow of goods,
services and assets into and out of the country. Whenever this happens, total
international monetary reserves are viewed as stable.If a country’s exports
exceed imports, it then experiences a balance of payments surplus or
accumulation of reserves, like gold and foreign currency. When the country
loses reserves, it experiences balance of payments deficit (or imports exceed
exports). However, depletion of reserves reflects the unhealthy performance of
an economy and thus creates various problems. That is why every country aims
at building substantial volume of foreign exchange reserves.Anyway, the
accumulation of foreign exchange reserves is largely conditioned by the
exchange rate the rate at which one currency is exchanged for another currency
to carry out international transactions. The foreign exchange rate should be
stable as far as possible. This is what one may call it external stability in
price.External instability in prices hampers the smooth flow of goods and
services between nations. It also erodes the confidence of currency. However,
maintenance of external stability is no longer considered as the macroeconomic
policy objective as well as macroeconomic policy instrument.

(v) Social objectives:

Macroeconomic policy is also used to attain some social ends or social welfare.
This means that income distribution needs to be more fair and equitable. In a
capitalist market-based society some people get more than others. In order to
ensure social justice, policymakers use macroeconomic policy instruments.We
can add another social objective in our list. This is the goal of economic
freedom. This is characterized by the right of taking economic decisions by any
individual (rich or poor, high caste or low caste).

2. Macroeconomic Policy Instruments:

As our macroeconomic goals are not typically confined to “full employment”,


“price stability”, “rapid growth”, “BOP equilibrium and stability in foreign
exchange rate”, so our macroeconomic policy instruments include monetary
policy, fiscal policy, income policy in a narrow sense. But, in a broader sense,
these instruments should include policies relating to labor, tariff, agriculture,
anti-monopoly and other relevant ones that influence the macroeconomic goals
of a country. Confining our attention in a restricted way we intend to consider
two types of policy instruments the two “giants of the industry” monetary
(credit) policy and fiscal (budgetary) policy. These two policies are employed
toward altering aggregate demand so as to bring about a change in aggregate
output (GNP/GDP) and prices, wages and interest rates, etc., throughout the
economy.Monetary policy attempts to stabilize aggregate demand in the
economy by influencing the availability or price of money, i.e., the rate of
interest, in an economy.Monetary policy may be defined as a policy employing
the central bank’s control of the supply of money as an instrument for
achieving the macroeconomic goals.Fiscal policy, on the other hand, aims at
influencing aggregate demand by altering tax- expenditure-debt program of the
government. The credit for using this kind of fiscal policy in the 1930s goes to
J.M. Keynes who discredited the monetary policy as a means of attaining some
of the macro- economic goals—such as the goal of full employment.As fiscal
policy has come into scrutiny in terms of its effectiveness in achieving the
desired macroeconomic objectives, the same is true about the monetary policy.
One can see several rounds of ups and downs in the effectiveness of both these
policy instruments consequent upon criticisms and counter- criticisms in their
theoretical foundations.It may be pointed out here that as there are conflicts
among different macroeconomic goals, policymakers are in a dilemma in the
sense that neither of the policies can achieve desired goals. Hence the need for
additional policy measures like income policy, price control, etc. Further, while
the objectives represent economic, social and political value judgments they do
not normally enter the mainstream economic analysis. Ultimately, policymakers
and bureaucrats are blamed as troubleshooters

2nd slide; Development plans

Five-Year Plans for the National Economy of Pakistan:

The development plans were the series of nationwide centralized economic


plans and targets as part of the economic development initiatives. The plan was
conceived by the Ministry of Finance and were studied and developed by
the Economic Coordination Committee (ECC) based on the theory of Cost-of-
production value, and also covered the areas of Trickle-down system. The first
five-year plans were approved by the prime minister Ali Khan in 1950 for the
period of 1950–55; it was accepted in a view to serve in the rapid and
intensified industrialization, expansion of banking and financial services, with a
major focus on heavy industry.

First Five-Year Plans (1956-1961)


At the time of independence Pakistan was a relatively under-developed country as
production, transportation, trade and consumption yielded a very low standard of
living, with little opportunity for education, or economic advancement in the
country. The partition had a major effect on the country's existing economic
infrastructure that disrupted the wholesale transfers of population, trade and
business, channels of communication, industrial and commercial organization, and
the pressing need to establish new provisional governments. Economic
planning began in 1948 when Prime Minister Liaquat Ali Khan presented the first
Five-Year plans at the parliament of Pakistan on 8 July 1948. As part of this
programme, the State Bank of Pakistan was established to give a kick start to
banking services in the country. The major economic infrastructure was quickly
expanded and the hiring gap was filled as government revenue began to
rise. The currency war with India following the devaluation and Indian refusal to
recognize the Pakistani rupee in 1949 led to a deadlock in India-Pakistan trade.
In the middle of 1950, relations were restored when India and Pakistan resumed
trade, and in February 1951, India formally recognized Pakistan's currency after
entering in a new trade agreement. In 1953, the programme collapsed when
shortages of clothes, medicines and other essential consumer goods arose; there
was also a serious food shortage as a result of monsoon floods after 1951.Prime
Minister Khawaja Nazimuddin was forced to end the programme after requesting
economic assistance from the United States and other friendly countries. In
practice, this plan was not implemented because of its enormous size. The shortage
of technical knowledge also devastated the programme. The Awami League's
government also had shortage of foreign exchange to execute the plan, and was
unable to find outside assistance to fulfill its commitment to the first five-year
plans.

Second Five-Year Plans (1960–1965)


Despite the failure of the first five-year plans, the programmes were revived and
restated by the military government of President Ayub Khan. The second five-year
plans gave highest priority to heavy industrial development, and advancement in
literature and science, and had a single underlying purpose: "to advance the
country as far as possible, within the next five years. Further improvements were
made in railways, communications, and transportation. More attention was given
to private sector industrial development and agricultural industries; the second
five-year plans aimed to increase the national income by 20%. The unemployment
was tackled with the industrialisation of the country, and overall major industrial
development was carried out in West Pakistan while few in East. The Second Five-
Year Plan surpassed its major goals when all sectors showed substantial growth
which also encouraged private entrepreneurs to participate in those activities in
which a great deal of profit could be made, while the government acted in those
sectors of the economy where private business was reluctant to operate. This mix
of private enterprise and social responsibility was hailed as a model that other
developing countries could follow. The second five-year plans oversaw the
development of water and power utilities in East and West Pakistan and had energy
sector built with the help from private-sector. The financial services heavily
depended on the foreign investment and aid from the United States that hit the
economy.

Third Five-Year Plans (1965–1970)


After the 1965 Indo-Pakistani War over Kashmir, the level of foreign assistance
declined and economic constraints were imposed on Pakistan. The third five-year
plan was designed along the lines of its immediate predecessor, produced only
modest growth. The country had become urbanised by 1970 and only 10%
population lived in rural areas as compared to 1950. The third five-year plans
promoted the activities of private sector investment and tend to increase the
directly productive investment for the stable Financial sector development. The
third programme focused on Gross national product (GNP) growth which was
increased at 122% and had focused on the enhancing the capabilities of private
sector to operate in the country. The size of the third programme was determined in
the light of a careful evaluation of the recent experience under the second
programme. Although the third programme successfully ran for the first three years
of the Third Five-Year Plan, but at the end, the third programme proved to be even
more of a disappointment in terms of proclaimed production goals.

Fourth Five-Year Plans (1970–1975)


The fourth five-year plans were abandoned after the fall of Dhaka East-Pakistan.
Virtually, all fourth five-year planning was bypassed by the government of Prime
minister Zulfikar Ali Bhutto. Under Bhutto, only annual plans were prepared, and
they were largely ignored.The fourth five-year plan was replaced with
the nationalisation programme which featured an intense level of government-
ownership management on private entities. Only scientific aspects of fourth five-
year plans were adopted in a view to turn Pakistan into a major "scientific
superpower" in the world.

Fifth Five-Year Plans (1978–1983)


The Zia government accorded more importance to planning. The Fifth Five-Year
Plan (1978–83) was an attempt to stabilise the economy and improve the standard
of living of the poorest segment of the population. Increased defense expenditures
and a flood of refugees to Pakistan after the Soviet invasion of Afghanistan in
December 1979, as well as the sharp increase in international oil prices in 1979–
80, drew resources away from planned investments. Nevertheless, some of the
plan's goals were attained. Many of the controls on industry were liberalised or
abolished, the balance of payments deficit was kept under control, and Pakistan
became self-sufficient in all basic foodstuffs with the exception of edible oils. Yet
the plan failed to stimulate substantial private industrial investment and to raise
significantly the expenditure on rural infrastructure development.

Sixth Five-Year Plan (1983–88)


The sixth five-year plans represented a significant shift toward the private sector. It
was designed to tackle some of the major problems of the economy: low
investment and savings ratios; low agricultural productivity; heavy reliance on
imported energy; and low spending on health and education. The economy grew at
the targeted average of 6.5% during the plan period and would have exceeded the
target had it not been for severe droughts in 1986 and 1987.

Seventh Five-Year Plan (1988–93)


The Seven Year Plan will be introduced by Benazir Government. The seventh
plans provided for total public-sector spending of Rs350 billion. Of this total,
36.5% was designated for energy, 18% for transportation and communications, 9%
for water, 8% for physical infrastructure and housing, 7% for education, 5% for
industry and minerals, 4% for health, and 11% for other sectors. The plan gave
much greater emphasis than before to private investment in all sectors of the
economy. Total planned private investment was Rs292 billion, and the private-to-
public ratio of investment was expected to rise from 42:58 in FY 1988 to 48:52 in
FY 1993. It was also intended that public-sector corporations finance most of their
own investment programmes through profits and borrowing. In August 1991, the
government established a working group on private investment for the Eighth Five-
Year Plan (1993–98).

Eighth Five Year Plan (1993–98)


This group, which included leading industrialists, presidents of chambers of
commerce, and senior civil servants, submitted its report in late 1992. However, in
early 1994, the eighth plan had not yet been announced, mainly because the
successive changes of government in 1993 forced ministers to focus on short-term
issues. Instead, economic policy for FY 1994 was being guided by an annual plan.
From June 2004, the Planning Commission gave a new name to the Five Year Plan
– Medium Term Development Framework (MTDF). Thirty two Working Groups
then produced the MTDF 2005–2010.

3rd slide fiscal policy.

FISCAL POLICY:
By understanding fiscal policy, individuals can gain insights into how
governments manage their economies.
Definition & Explanation Of Fiscal Policy
Fiscal policy is the strategic use of taxation and government spending to shape
economic conditions and promote growth and stability. It is a critical tool that
governments use to stabilize their economies. It involves the management of
government revenue and expenditure to achieve specific economic objectives,
such as controlling inflation or reducing unemployment. By making changes in
taxes, public spending, and borrowing, fiscal policies aim to influence the overall
health and performance of an economy.

Government Revenue & Expenditure


At its core, fiscal policy revolves around how the government collects money
(revenue) and how it spends that money (expenditure). Governments generate
revenue through various means, including taxes on individuals and businesses,
tariffs on imported goods, fees for public services, and income from state-owned
enterprises. On the other hand, government expenditure encompasses a wide range
of areas such as infrastructure development, education, healthcare, defense
spending, social welfare programs, and more.

Economic Objectives
The primary purpose of implementing fiscal policies is to achieve specific
economic goals. These objectives can vary depending on the prevailing economic
conditions and priorities set by the government. Some common goals include:
1. Controlling Inflation
When prices rise too quickly across an economy (inflation), it can erode people's
purchasing power. Fiscal policies can be used to curb inflation by reducing
government spending or increasing taxes.
2. Reducing Unemployment
High levels of unemployment can be detrimental to both individuals and the
overall economy. Governments may implement expansionary fiscal policies that
involve increasing public spending or decreasing taxes to stimulate job creation.
3. Promoting Economic Growth
Fiscal policies play an important role in fostering economic growth by investing in
infrastructure projects or providing tax incentives for businesses.
4. Stabilizing Business Cycles
Economies go through periods of expansion (boom) followed by contraction
(recession). Fiscal policies can help smooth out these cycles by adjusting
government spending levels during different phases.
5. Promoting Macroeconomic Stability
One of the main goals of fiscal policy is to achieve macroeconomic stability. This
entails maintaining a balance between economic growth, low inflation, and stable
employment levels. To achieve this, fiscal policy can be used to stimulate demand
during periods of economic downturn or curb inflationary pressures when the
economy is overheating.
6.Income Redistribution
Fiscal policy also serves as a tool for income redistribution within society.
Governments can use taxation policies to collect revenue from higher-income
individuals or corporations and allocate it towards programs that benefit lower-
income groups. By doing so, fiscal policy aims to reduce income inequality and
promote economic equity.
7.Promoting Economic Equity
In addition to income redistribution, fiscal policy seeks to promote overall
economic equity within an economy. This involves ensuring that all individuals
have equal access to education, healthcare, and infrastructure development.
Through targeted spending on social welfare programs and public goods,
governments can address disparities in opportunities and improve living standards
for all citizens.
8.Ensuring Long-Term Sustainability
Sustainable growth is a critical goal of fiscal policy. Governments need to ensure
that their expenditure does not lead to unsustainable levels of debt or deficits over
time. By carefully managing spending patterns and revenue collection, fiscal
policy aims to maintain a healthy balance between short-term economic objectives
and long-term fiscal sustainability.

Tools Of Fiscal Policy


To implement fiscal policy effectively, governments have several tools at their
disposal. These tools allow them to influence the economy and achieve their
desired objectives. The key tools include:
1. Taxation
Governments can adjust tax rates or introduce new taxes to influence consumer
behavior, stimulate economic activity, or generate revenue.
2. Government Spending
By increasing or decreasing public spending, governments can directly impact
various sectors of the economy and drive growth.
3. Borrowing
Governments may borrow money by issuing bonds or taking loans from
international organizations to finance projects or cover budget deficits.

4. Fiscal Rules & Budgetary Constraints


Governments often set rules and constraints on fiscal policy to ensure responsible
financial management, such as maintaining a balanced budget or limiting debt
levels.

Importance Of Fiscal Policy In The Economy


Fiscal policy plays a vital role in shaping the economic conditions of a country.
By adjusting tax rates and government spending, it impacts economic stability and
growth.
Economic Stability
One of the key objectives of fiscal policy is to maintain price stability within an
economy. Through measures such as adjusting tax rates and government spending,
policymakers aim to prevent excessive inflation or deflation. When prices remain
stable, businesses and consumers make better-informed decisions about
their investment policy and purchasing power.
Stimulating Economic Activity
Fiscal policy has the power to stimulate or slow down economic activity
depending on the prevailing economic conditions. During times of recession or
low growth, governments may implement expansionary fiscal policies to boost
demand and encourage business investment. This could involve reducing taxes or
increasing government spending on infrastructure projects, which in turn creates
jobs and stimulates economic growth.
Boosting Employment Levels
Unemployment levels are closely tied to fiscal policies implemented by
governments. By increasing government spending on job creation programs or
providing incentives for businesses to hire more workers, fiscal policy can help
reduce unemployment rates. Conversely, during periods of high inflation or
overstimulation in the economy, policymakers may adopt contractionary fiscal
policies that aim to control inflation but might also result in temporary job losses.
Encouraging Investment
The implementation of favorable fiscal policies can have a positive impact on
business investment decisions. When tax rates are lowered for businesses or when
governments provide incentives for investment through subsidies or grants, it
encourages companies to expand their operations and invest in new projects. This
increased investment leads to job creation, technological advancements, and
overall economic growth.
Managing Business Cycles
Business cycles are the fluctuations in economic activity characterized by periods
of expansion followed by contractions. Fiscal policy plays a crucial role in
managing these cycles. During periods of economic downturn, expansionary fiscal
policies can help stimulate demand and lift the economy out of recession.
Conversely, during times of excessive growth, contractionary fiscal policies can
help prevent overheating and inflation.
Components Of Fiscal Policy
The implementation of fiscal policy involves various components that play a
crucial role in shaping the economy. These components include government
receipts, the direct tax code bill, disinvestment, and government expenditure.
1. Government Receipts
Government receipts refer to the funds collected by the government through
various sources such as taxes, fees, fines, and other revenue-generating activities.
These funds are essential as they finance public expenditures and enable the
government to carry out its functions effectively. Examples of government
receipts include income tax payments from individuals and corporations, sales tax
on goods and services, customs duties on imported goods, and fees charged for
licenses or permits. The collection of these funds is vital for maintaining public
infrastructure, providing essential services like healthcare and education, and
implementing various welfare programs.
2. Direct Tax Code Bill
The direct tax code bill is legislation that governs the levying and collection of
direct taxes charged on individuals or entities based on their income or profits. It
aims to simplify the existing tax structure by streamlining multiple tax laws into a
single comprehensive code. This bill plays a significant role in fiscal policy as it
determines how much revenue the government will generate from direct taxes like
income tax or corporate tax. By making amendments to this legislation,
governments can introduce changes in taxation rates or exemptions that can
impact individuals' disposable income or businesses' profitability.
3. Disinvestment
Disinvestment refers to the process of selling government-owned assets or shares
in public-sector enterprises to private entities or investors. This strategic move
allows governments to raise capital by monetizing their holdings in various
sectors such as energy, telecommunications, transportation, banking, and more.
By engaging in disinvestment activities, governments can unlock value from their
assets while also promoting competition and efficiency within industries
previously dominated by public sector enterprises. This revenue generated through
disinvestment can be utilized for funding developmental projects or reducing
fiscal deficits.
4. Government Expenditure
Government expenditure encompasses all spending by the state on various sectors
and programs. It plays a vital role in fiscal policy as it determines how public
funds are allocated to different areas such as infrastructure development,
healthcare, education, defense, social welfare programs, and more. The
government's spending decisions have a direct impact on the economy. For
example, increased investment in infrastructure can stimulate economic growth
and job creation. Similarly, allocating funds toward social welfare programs can
enhance the quality of life for citizens and reduce income inequality.
It is important for governments to strike a balance between different sectors while
formulating their expenditure plans. This ensures that resources are allocated
efficiently to address both short-term needs and long-term goals.

Types Of Fiscal Policies


Fiscal policies are strategies implemented by the government to manage the
economy. These policies play a vital role in influencing economic growth,
stabilizing inflation, and addressing unemployment. There are different types of
fiscal policies that governments can employ based on their economic goals and
challenges.
1. Expansionary Fiscal Policies
Expansionary fiscal policies are designed to stimulate economic growth during
periods of recession or slow economic activity. The primary objective is to
increase aggregate demand and boost consumer spending. This is achieved
through two main approaches:
Increased Government Spending
Governments may choose to increase their expenditure on various sectors such as
infrastructure development, education, healthcare, or defense. By injecting more
money into these areas, it aims to create more jobs and stimulate economic
activity.
Tax Cuts
Another way to implement expansionary fiscal policy is by reducing taxes for
individuals and businesses. When people have more disposable income due to
lower tax burdens, they tend to spend more on goods and services, which helps
stimulate the economy. Expansionary fiscal policies can be beneficial in jump-
starting an economy that is experiencing a downturn or recession. By increasing
government spending or reducing taxes, these policies encourage consumer
spending and business investment.
Drawbacks Of Expansionary Fiscal Policies
Inflation Risk: Increased government spending without proper control measures
can lead to excessive aggregate demand in the economy, potentially causing
inflation.
Budget Deficit: Implementing expansionary fiscal policies often requires
increased government borrowing or reduced revenue from taxes. This can result in
budget deficits if not managed effectively.

2. Contractionary Fiscal Policies


Contractionary fiscal policies are employed when there is a need to control
inflation or address excessive aggregate demand that could lead to an overheated
economy. Governments utilize two main methods for implementing
contractionary measures:
Reduced Government Spending
During periods of high inflation or excessive aggregate demand, governments may
opt to cut spending in various sectors. By reducing government expenditure, they
aim to decrease the overall demand in the economy.
Increased Taxes
Another approach is to raise taxes on individuals and businesses. Higher tax rates
reduce disposable income, which can help curb excessive spending and dampen
inflationary pressures. Contractionary fiscal policies are often used as a means of
reigning in an overheated economy or controlling inflation.

Drawbacks Of Contractionary Fiscal Policies


Economic Slowdown: The reduction in government spending and increased taxes
may lead to decreased consumer spending and business investment, potentially
resulting in an economic slowdown.
Unemployment: Contractionary fiscal policies can have adverse effects on
employment levels, as reduced government spending may lead to job losses in
certain sectors.

Mixed Fiscal Policies


Mixed fiscal policies refer to a combination of different approaches and measures
taken by the government to manage the economy. These policies typically involve
a mix of both expansionary and contractionary fiscal measures to achieve desired
economic outcomes. Mixed fiscal policies recognize that there is no one-size-fits-
all approach and that a combination of expansionary and contractionary measures
may be necessary depending on the prevailing economic conditions.
For example, during periods of recession or economic downturn, expansionary
fiscal policies may be implemented to stimulate economic activity and boost
employment. Conversely, during periods of high inflation or economic
overheating, contractionary fiscal policies may be employed to slow the economy
and prevent excessive price increases.
The effectiveness of mixed fiscal policies depends on various factors,
including the timing, magnitude, and duration of the measures implemented. It is
important for policymakers to carefully assess the economic situation and make
informed decisions to strike the right balance between expansionary and
contractionary measures. Additionally, coordination with other macroeconomic
policies, such as monetary policy, is crucial to ensure a cohesive and effective
approach to economic management.
One advantage of fiscal policy is that it allows governments to directly
influence specific sectors of the economy by allocating funds towards targeted
areas such as infrastructure development, education, healthcare, or defense. This
targeted approach can help address societal needs and promote long-term growth.
However, fiscal policy also has its limitations. Implementing changes in
government spending or taxation requires time and legislative approval, which can
lead to delays in response during economic crises. Excessive reliance on deficit
spending without proper management can result in a growing national debt
burden. Monetary policy offers flexibility in responding to economic conditions as
central banks can quickly implement changes to interest rates or liquidity levels.
This agility allows for more immediate responses to economic shocks or changing
market conditions. However, like fiscal policy, monetary policy also has
limitations. The effectiveness of monetary policy tools depends on the
transmission mechanism through which changes in interest rates or liquidity levels
impact the real economy. Factors such as bank lending practices and consumer
behavior can influence how effectively monetary policy measures translate into
actual economic outcomes.

Conclusion
Understanding the objectives and components of fiscal policy is essential for both
policymakers and citizens alike. The objectives include promoting economic
stability, achieving full employment, controlling inflation, and addressing income
inequality. The components of fiscal policy encompass government receipts,
direct tax code bills, disinvestment, and government expenditure.
Moreover, it is important to distinguish between different types of fiscal policies
such as expansionary and contractionary policies. To ensure a comprehensive
understanding of fiscal policy's impact on the economy, it is crucial to consider its
relationship with monetary policy as well.

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