Impact Of Tariff Cuts On Pakistan: A Computable General Equilirium Analysis With Particular Focus On Main Exports And Regional Disparities

IMPACT OF TARIFF CUTS ON PAKISTAN: A COMPUTABLE
GENERAL EQUILIBRIUM ANALYSIS WITH PARTICULAR FOCUS
ON MAIN EXPORTS AND REGIONAL DISPARITIES

Muhammad Shoaib Butt
Bachelor of Arts, Graduate Diploma of Economics
Master of Applied Economics (Honours)
PMESA, AAIBF

Griffith Business School
GRIFFITH UNIVERSITY

Submitted in fulfilment of the requirements of the degree of Doctor of Philosophy

2006


To my mother, Amtul Hafiz (who passed away before the completion of my PhD
program), and father, Nazir Ahmad Butt, who dedicated their lives to educating their
children.


ABSTRACT
The history of Pakistan has been characterised by frequent military interventions in the
democratic governing process, diverse economic and trade policies pursued by different
autocratic and democratic governments, and regional conflicts and disparities which led to
the civil war of 1971 and the secession of the country’s majority wing—East Pakistan.
More recently, in common with other South Asian economies, Pakistan has embarked on an
extensive trade liberalisation program since the late 1980s, with across-the-board tariff
reductions being one of its key ingredients. This study critically reviews the political
economy of Pakistan and examines the likely impacts, in both the short run and long run, of

the comprehensive tariff cuts on the economy as a whole, its key industries, and its main
regions. In doing so, it utilises a computable general equilibrium (CGE) model of the
economy. The study highlights the effects of the tariff cuts on the country’s major exports,
and on the output and employment levels of various regions of Pakistan.
The review of Pakistan’s economy reveals a possible, positive relationship between trade
liberalisation and regional disparities under military regimes. By contrast, under truly
democratic governments, trade liberalisation has tended to be associated with reduced
disparities. CGE model simulations suggest that across-the-board tariff reductions increase
real GDP slightly in the short run but significantly in the long run. At the microeconomic
level, a striking implication of the tariff cuts is a persistent slowdown, or even a decline, in
cotton and textile related exports in the long run. Increases in regional disparities are also
likely. In the short run, the gap between the rates of output growth of the largest and most
developed region, Punjab, and two smaller and less developed regions—North West
Frontier Province (NWFP) and Balochistan—will probably rise sharply. In the long run, a
sustained increase in unemployment in another smaller region, Sindh, is predicted. The
study recommends a number of appropriate policy responses to these likely developments,
at the national as well as regional levels of government.

i


ACRONYMS AND ABBREVIATIONS
ADB

Asian Development Bank

AL
ATC

CPI

Awami League
Agreement on Textiles and
Clothing
Central Board of Revenue
Constant Elasticity of Substitution
Constant Elasticity of
Transformation
Computable General Equilibrium
Cost, Insurance and freight
Census of Manufacturing
Industries
Consumer Price Index

CV

Coefficient of Variation

PIDC

DFID

Department for International
Development
Export Bonus Scheme
Economic Revival Program
European Union
Equivalent Variation

PIDE

CBR
CES
CET
CGE
cif
CMI

EBS
ERP
EU
EV
FBS
FDI
F-G-T

Federal Bureau of Statistics
Foreign Direct Investment
Head Count, Poverty Gap and
Severity Ratios
FKIs
Foreign Capital Inflows
fob
Free on Board
FSP
Food Support Program
GATT General Agreement on Tariffs and
Trade
GTAP Global Trade Analysis Project
HAR

Header Array
HIES
Household Integrated Economic
Survey
IMF
International Monetary Fund
I-O
Input-Output
IRSA
Indus River System Authority
LES
Linear Expenditure System
MFA
Multi-Fibre Arrangement
MFN
Most Favoured Nation
MHDC Mahbub ul Haq Human
Development Centre

MIMAP Micro Impact of Macroeconomic
Adjustment Policies
MMRF Monash Multi-Regional Forecasting
MoF
Ministry of Finance
MRES
NGOs
NTBs

MONASH-regional equation system
Non-Government Organisations

Non-Tariff Barriers

NWFP
OGL
ORES

North West Frontier Province
Open General Licence
ORANI-Regional Equation System

PICIC

PSTC
REER
RES

Pakistan Industrial Credit and
Investment Corporation
Pakistan Industrial Development
Corporation
Pakistan Institute of Development
Economics
Pakistan Industrial Finance Corporation
Pakistan Poverty Alleviation Fund
Public Sector Enterprises
Pakistan Standard Industrial
Classification
Pakistan Standard Trade Classification
Real Effective Exchange Rate
Regional Equation Systems

Rs
SAM
SAPs
SBP

Rupees
Social Accounting Matrix
Structural Adjustment Programs
State Bank of Pakistan

SPS
SROs
SSA

Sanitary and Phytosanitary
Special Regulatory Orders
Systematic Sensitivity Analysis

TBT
TERM
TRIM
UR
US
WTO

Technical Barriers to Trade
The Enormous Regional Model
Trade Related Investment Measure
Uruguay Round

United States
World Trade Organisation

PIFC
PPAF
PSEs
PSIC

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STATEMENT OF ORIGINALITY
I declare that the contents of this thesis have not been previously submitted for a degree or
diploma in any university. To the best of my knowledge and belief, this thesis contains no
material previously published or written by another person except where due references
have been made in the thesis.

Muhammad Shoaib Butt
May 2006

iii


ACKNOWLEDGEMENTS
I would like to express my deepest respect and most sincere gratitude to my supervisors—
Professor Tom Nguyen and Associate Professor Jay Bandaralage—for their support and
encouragement, both in the fulfilment of this thesis and in developing my academic
interests generally. Their constructive criticism and comments from the initial conception
to the end of this work are highly appreciated. I am greatly indebted to their assistance and
understanding in matters of non-academic concern which have helped me endure some

difficult times during my study period.
My thanks and appreciation also go to my brother, Shahid Nazir Butt, and Mr Aftab
Ahmad, Chief Executive, Aftec (Pvt.) Limited, for their help in the data collection process.
I also owe many thanks to my friend Dr Tien Pham from the University of Queensland for
very productive and thought-provoking discussions on various aspects of CGE modelling.

SPECIAL ACKNOWLEDGEMENTS
A very special appreciation is due to my wife, Saima, not only for her constant
encouragement but also for her patience and understanding throughout my PhD studies. I
deeply appreciate the loneliness she endured for so long. I am also very grateful for her
help in compiling the massive database of the model developed in this study and
proofreading various drafts of the thesis. This work would not have been possible without
her love and support. Finally, I am indebted to my son, Uns, who cannot comprehend why
his dad had no time to play with him for such a long time. Hopefully, he will be able to
unravel this mystery sometime in the future.

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TABLE OF CONTENTS
ABSTRACT ................................................................................................................................................... I
ACRONYMS AND ABBREVIATIONS ...................................................................................................... II
STATEMENT OF ORIGINALITY .............................................................................................................. III
ACKNOWLEDGEMENTS.......................................................................................................................... IV
LIST OF BOXES .......................................................................................................................................... IX
LIST OF CHARTS ........................................................................................................................................ X
LIST OF FIGURES ...................................................................................................................................... XI
LIST OF TABLES ....................................................................................................................................... XII
CHAPTER 1: INTRODUCTION .................................................................................................................. 1
1.1:

1.2:
1.3:
1.4:
1.5:

BACKGROUND ................................................................................................................................... 1
MOTIVATION ...................................................................................................................................... 3
PURPOSE .............................................................................................................................................. 5
SPECIFIC RESEARCH OBJECTIVES................................................................................................. 5
OUTLINE OF STUDY .......................................................................................................................... 6

CHAPTER 2: POLITICAL SETUPS, TRADE REGIMES AND REGIONAL DISPARITIES.............. 7
2.1: INTRODUCTION ................................................................................................................................. 7
2.2: ANALYTICAL REVIEW OF TRADE POLICIES UNDER DIFFERENT POLITICAL REGIMES ... 8
2.2.1: Bureaucracy-Led Ad-hoc Trade Policies—1947-52...................................................................... 8
2.2.2: Bureaucracy-Led Highly Protected Trade Regime—1952-59....................................................... 9
2.2.3: Partial Trade Liberalisation under First Military Government—1959-71 ................................. 13
2.2.3.1: Pre-War Period—1959-65..................................................................................................................... 14
2.2.3.2: Post-War Period—1965-71 ................................................................................................................... 16
2.2.3.3: Whole Period—1959-71........................................................................................................................ 18

2.2.4: Partial Trade Liberalisation under First Democratic Government—1971-77............................ 19
2.2.5: Gradual Trade Liberalisation under Second Military Government—1977-88............................ 21
2.2.6: Consistent and Gradual Trade Liberalisation by Four Democratic Governments under
Structural Adjustment Programs—1988-99............................................................................................ 25
2.2.7: Vigorous Trade Liberalisation under Third Military Government—October 1999 Onwards..... 29
2.2.8: Trade Policy Areas Requiring Further Reform ........................................................................... 34
2.3: RATIONALE FOR A STUDY ON IMPACT OF TARIFF CUTS ON DOMESTIC INDUSTRY WITH
PARTICULAR FOCUS ON EXPORTS...................................................................................................... 35
2.4: REGIONAL DISPARITIES ................................................................................................................ 37

2.4.1: Regional Disparities Leading to Secession of East Pakistan....................................................... 38
2.4.2: Brief Overview of Current Regions of Pakistan .......................................................................... 39
2.4.3: Major Regional Conflicts ............................................................................................................ 41
2.4.4: Analysis of Regional Socioeconomic Conditions......................................................................... 43
2.4.5: Poverty Reduction Strategy of Current Military Government ..................................................... 49
2.5: INTERACTIONS BETWEEN POLITICAL SETUPS AND REGIONAL DISPARITIES, AND
RATIONALE FOR MODELLING IMPACT OF TARIFF CUTS ON REGIONAL DISPARITIES .......... 50
2.6: CHAPTER SUMMARY ...................................................................................................................... 54
CHAPTER 3: RATIONALE FOR A NEW CGE STUDY ON PAKISTAN............................................ 57
3.1: INTRODUCTION ............................................................................................................................... 57
3.2: JUSTIFICATION FOR USING CGE MODELLING APPROACH .................................................... 57
3.2.1: CGE Models versus Econometric Models ................................................................................... 57
3.2.2: CGE Models verses I-O Models .................................................................................................. 59
3.3: SURVEY OF CGE STUDIES ON PAKISTAN................................................................................... 60
3.3.1: General Characteristics of CGE Studies on Pakistan ................................................................. 61
3.3.2: Structural Characteristics of CGE Studies on Pakistan .............................................................. 63
3.3.3: Critical Review of Major CGE Studies on Pakistan.................................................................... 64
3.3.3.1: Absence of Focus on Impact of Trade Liberalisation on Regional Disparities...................................... 64
3.3.3.2: Poor Quality of Limited Number of Studies on Regional Issues........................................................... 65
3.3.3.3: Usage of Inadequate Databases ............................................................................................................. 66

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3.3.3.3.1: Absence of Pakistan in GTAP Database ....................................................................................... 66
3.3.3.3.2: Absence of Import Matrix in Database of Trade Liberalisation Studies ....................................... 67
3.3.3.4: Need to Use Latest I-O Table for Pakistan............................................................................................ 68
3.3.3.5: Highly Aggregated Industry and Export Results ................................................................................... 68
3.3.3.6: Lack of Explicit Information on Model Closures .................................................................................. 69
3.3.3.7: Little Focus on Sensitivity Analysis...................................................................................................... 69

3.3.3.8: Repetitive Applications of a Single Model to Analyse Trade Liberalisation......................................... 69
3.3.3.9: Contradictory Results of Some Studies on Trade Liberalisation ........................................................... 71

3.4: SALIENT FEATURES OF PROPOSED CGE STUDY IN LIGHT OF LITERATURE REVIEW ..... 71
3.5: CHAPTER SUMMARY ...................................................................................................................... 72
CHAPTER 4: STRUCTURE OF DATABASE AND MODEL................................................................. 74
4.1: INTRODUCTION ............................................................................................................................... 74
4.2: STRUCTURE OF DATABASE OF MODEL (PAKREG) .................................................................. 74
4.2.1: Main Database of Core Model .................................................................................................... 75
4.2.2: Parameters Required by Core Model .......................................................................................... 77
4.2.3: Database of Regional Extension.................................................................................................. 78
4.3: THEORETICAL STRUCTURE OF CORE MODEL.......................................................................... 78
4.3.1: Dimensions of Model ................................................................................................................... 80
4.3.2: Variables...................................................................................................................................... 83
4.3.3: Coefficients .................................................................................................................................. 84
4.3.4.: Equations of Model..................................................................................................................... 85
4.3.4.1: Structure of Production ......................................................................................................................... 86
4.3.4.2: Demands for Primary Factors................................................................................................................ 88
4.3.4.3: Demands for Intermediate Inputs .......................................................................................................... 89
4.3.4.4: Top Nest of Industry Input Demands, and Industry Output................................................................... 90
4.3.4.5: Demands for Investment ....................................................................................................................... 91
4.3.4.6: Household Demands ............................................................................................................................. 92
4.3.4.7: Export Demands.................................................................................................................................... 95
4.3.4.8: Government and Inventory Demands.................................................................................................... 95
4.3.4.9: Demands for Margin ............................................................................................................................. 96
4.3.4.10: Market-Clearing Equations ................................................................................................................. 96
4.3.4.11: Price System........................................................................................................................................ 98
4.3.4.12: Indirect Taxes...................................................................................................................................... 99
4.3.4.13: Trade Balance and other Aggregates................................................................................................... 99
4.3.4.14: Investment Allocation ........................................................................................................................100

4.3.4.15: Labour Market—Wage Setting Equation and Average Wage ............................................................101
4.3.4.16: Miscellaneous Equations ....................................................................................................................101

4.4: THEORETICAL STRUCTURE OF REGIONAL APPROACH OF PAKREG................................. 103
4.4.1 Selection of Most Appropriate Regional Modelling Approach ................................................... 103
4.4.1.1 Tops-Down Approach ...........................................................................................................................103
4.4.1.2 Bottoms-Up Approach...........................................................................................................................106
4.4.1.3 Selection of Tops-Down Approach .......................................................................................................108

4.4.2 Dimensions of Regional Extension of PAKREG ......................................................................... 110
4.4.3: Variables and Coefficients......................................................................................................... 111
4.4.4: Equations of Tops-Down Regional Extension ........................................................................... 112
4.4.4.1:
4.4.4.2:
4.4.4.3:
4.4.4.4:
4.4.4.5:
4.4.4.6:

Direct Demands by each Region ..........................................................................................................112
Demand for Margin..............................................................................................................................113
Determining Regional Share Variables ................................................................................................114
Three Constraints .................................................................................................................................115
Regional Wage Bills and Matrix of Contributions ...............................................................................116
Regional Advantage Matrix .................................................................................................................116

4.5: CLOSURES OF MODEL .................................................................................................................. 117
4.5.1: Short-Run Closure ..................................................................................................................... 118
4.5.2: Long-Run Closure...................................................................................................................... 120
4.6: CHAPTER SUMMARY .................................................................................................................... 122

CHAPTER 5: CONSTRUCTION OF DATABASE................................................................................. 124
5.1: INTRODUCTION ............................................................................................................................. 124
5.2: OUTLINE OF REQUIRED DATABASE ......................................................................................... 125
5.3 CONSTRUCTION OF DATABASE OF CORE MODEL................................................................... 128

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5.3.1: Primary Source of Database: I-O Table of Pakistan 1990-91 ................................................. 128
5.3.2: Systematic Construction of I-O Data Matrices.......................................................................... 131
5.3.2.1: Construction of Import Matrix 1990-91 ...............................................................................................141
5.3.2.1.1: Reconciliation of Classifications of I-O Table 1990-91 and Import-Matrix 1983-84 ..................141
5.3.2.1.2: Splitting Imports between Intermediate Usage and Final Demand ..............................................142
5.3.2.1.3: Disaggregation of Final Demand .................................................................................................144
5.3.2.1.4: Intermediate Usage Matrix...........................................................................................................144
5.3.2.1.5: Refining Import Matrix Using I-O Table 1990-91.......................................................................146
5.3.2.1.6: Refining Intermediate Usage of Import Matrix Using Census of Manufacturing Industries and
RAS ..............................................................................................................................................................147
5.3.2.2: Implementation of PAK.TAB to Produce I-O Matrices .......................................................................148
5.3.2.2.1: Construction of Vectors of Primary Factors.................................................................................148
5.3.2.2.2: Construction of Indirect Tax Matrices and Conversion of Data from Producers’ Prices to Basic
Prices ............................................................................................................................................................149
5.3.2.2.3: Construction of Margin Matrices .................................................................................................149
5.3.2.2.4: Construction of Capital Formation Matrices................................................................................150
5.3.2.2.4.1: First version of capital formation matrices ..........................................................................150
5.3.2.2.4.2: Final version of capital formation matrices..........................................................................150
5.3.2.2.5: Construction of MAKE Matrix ....................................................................................................151
5.3.2.2.6: Construction of Remaining Matrices at Basic Prices ...................................................................152

5.3.3: Elasticities and Parameters....................................................................................................... 152

5.3.3.1: Estimation of Frisch Parameter ............................................................................................................152
5.3.3.2: Allocation of Exports to ‘Main/Individual Exports’ and ‘Collective Exports’.....................................153
5.3.3.3: Estimates of Elasticities........................................................................................................................155

5.4: CONSTRUCTION OF DATABASE OF REGIONAL EXTENSION............................................... 158
5.4.1: Allocation of Commodities/Industries to National and Local Groups....................................... 159
5.4.2: Regional Industry Output Shares............................................................................................... 160
5.4.3: Regional Industry Investment Shares ........................................................................................ 164
5.4.4: Regional Commodity Consumption Shares ............................................................................... 165
5.4.4.1: Regional Consumption Shares Based on Original Data .......................................................................165
5.4.4.2: Regional Consumption Shares Based on Proxies .................................................................................166

5.4.5: Regional Commodity Export Shares.......................................................................................... 166
5.4.6: Regional Government Expenditure Shares................................................................................ 167
5.4.7: Regional Commodity Inventory Shares ..................................................................................... 171
5.5: CHAPTER SUMMARY .................................................................................................................... 171
CHAPTER 6: APPLICATION OF MODEL............................................................................................ 174
6.1: INTRODUCTION ............................................................................................................................. 174
6.2: SIMULATIONS AND CLOSURES .................................................................................................. 175
6.3: NATIONAL RESULTS..................................................................................................................... 177
6.3.1: Macroeconomic Results............................................................................................................. 177
6.3.1.1: Short-Run .............................................................................................................................................177
6.3.1.2: Long-Run .............................................................................................................................................181

6.3.2: Industry Results ......................................................................................................................... 184
6.3.2.1: Impact of Tariff Cuts on Imports..........................................................................................................186
6.3.2.1.1: Short-Run.....................................................................................................................................186
6.3.2.1.2: Long-Run .....................................................................................................................................192
6.3.2.2: Impact of Tariff Cuts on Domestic Industry Costs...............................................................................196
6.3.2.2.1: Short-Run.....................................................................................................................................196

6.3.2.2.2: Long-Run .....................................................................................................................................201
6.3.2.3: Impact of Tariff Cuts on Domestic Industry Output.............................................................................206
6.3.2.3.1: Short-Run.....................................................................................................................................206
6.3.2.3.2: Long-Run .....................................................................................................................................214
6.3.2.4: Impact of Tariff Cuts on Domestic Industry Employment ...................................................................224
6.3.2.4.1: Short-Run.....................................................................................................................................224
6.3.2.4.2: Long-Run .....................................................................................................................................228

6.4: REGIONAL RESULTS ..................................................................................................................... 233
6.4.1: Macroeconomic Results—Short-Run and Long-Run ................................................................. 234
6.4.2: Industry Results ......................................................................................................................... 236
6.4.2.1: Impact of Tariff Cuts on Regional Output............................................................................................236
6.4.2.1.1: Short-Run.....................................................................................................................................237
6.4.2.1.1.1: Local industry output ...........................................................................................................237

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6.4.2.1.1.2: Determinants of each region’s growth relative to national growth ......................................241
6.4.2.1.2: Long-Run .....................................................................................................................................245
6.4.2.1.2.1: Local industry output ...........................................................................................................245
6.4.2.1.2.2: Determinants of each region’s growth relative to national growth ......................................248
6.4.2.2: Impact of Tariff Cuts on Regional Industry Employment ....................................................................251
6.4.2.2.1: Short-Run.....................................................................................................................................251
6.4.2.2.2: Long-Run .....................................................................................................................................257

6.5: SYSTEMATIC SENSITIVITY ANALYSIS ..................................................................................... 260
6.6: CHAPTER SUMMARY .................................................................................................................... 264
CHAPTER 7: CONCLUSION ................................................................................................................... 270
7.1: INTRODUCTION ............................................................................................................................. 270

7.2: SUMMARY OF MAIN FINDINGS .................................................................................................. 270
7.3: POLICY IMPLICATIONS ................................................................................................................ 275
7.4: OTHER POSSIBLE APPLICATIONS OF MODEL ......................................................................... 277
7.4.1: Removal of Tariffs on Cement, Sugar, Livestock and Vegetables.............................................. 277
7.4.2: Revenue-Neutral Tariff-Cuts ..................................................................................................... 277
7.4.3: Structural Adjustment Programs ............................................................................................... 277
7.5: LIMITATIONS AND FUTURE RESEARCH................................................................................... 278
7.5.1: Linkage between Political Setups and Regional Disparities ..................................................... 278
7.5.2: Database of Model..................................................................................................................... 278
7.5.3: Theoretical Structure of Model.................................................................................................. 279
7.6: CONCLUDING REMARKS ............................................................................................................. 279
APPENDICES .............................................................................................................................................. 281
APPENDIX 2.1: TRADE POLICIES 1947-2005: SELECTED TOPICS................................................. 281
APPENDIX 2.2: FOREIGN INVESTMENT POLICY AND PRIVATISATION PROCESS 1988-2005 282
APPENDIX 2.3: MAIN REGIONAL CONFLICTS OF PAKISTAN....................................................... 284
APPENDIX 3.1: CGE STUDIES ON PAKISTAN ................................................................................... 287
APPENDIX 4.1: VARIABLES AND COEFFICIENTS OF PAKREG .................................................... 301
APPENDIX 4.2: UPDATE STATEMENTS AND FORMULAS OF PAKREG ...................................... 313
APPENDIX 4.3: MISCELLANEOUS EQUATIONS IN CORE MODEL ............................................... 315
APPENDIX 5.1: CONVERSION OF I-O TABLE 1990-91 FROM PURCHASERS’ TO PRODUCERS’
PRICES...................................................................................................................................................... 317
APPENDIX 5.2: INPUT DATA FOR TABLO PROGRAM PAK.TAB (I-O TABLE 1990-91 AT
PRODUCERS’ PRICES AND IMPORT MATRIX 1990-91) ................................................................... 322
APPENDIX 5.3: SPLITTING ‘GOVERNMENT SERVICES’ SECTOR OF IMPORT MATRIX 1983-84
INTO THREE SECTORS.......................................................................................................................... 344
APPENDIX 5.4: CLASSIFICATIONS AND ABBREVIATIONS .......................................................... 346
APPENDIX 5.5: EXPLANATION OF TABLO CODE OF PAK.TAB.................................................... 354
APPENDIX 5.6: REFINEMENT OF CAPITAL FORMATION AND ASSOCIATED INDIRECT TAX
AND MARGIN MATRICES..................................................................................................................... 365
APPENDIX 5.7: REGIONAL INDUSTRY OUTPUT SHARES ............................................................. 368

APPENDIX 5.8: REGIONAL INDUSTRY INVESTMENT SHARES ................................................... 372
APPENDIX 5.9: REGIONAL COMMODITY CONSUMPTION SHARES ........................................... 375
APPENDIX 5.10: REGIONAL COMMODITY EXPORT SHARES....................................................... 379
APPENDIX 5.11: REGIONAL GOVERNMENT EXPENDITURE SHARES ........................................ 380
APPENDIX 5.12: REGIONAL INVENTORY SHARES......................................................................... 387
APPENDIX 6.1: DATA UNDERLYING TABLES AND CHARTS IN CHAPTER 6............................. 390
APPENDIX 6.2: PRIMARY FACTOR DEMAND AND EMPLOYMENT IN SHORT-RUN ................ 402
APPENDIX 6.3: ROLE OF NATIONAL INDUSTRIES IN SHAPING REGIONAL ADVANTAGES.. 403
REFERENCES ............................................................................................................................................. 407

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LIST OF BOXES
BOX 4.1: MAIN BLOCKS OF EQUATIONS IN CORE MODEL ............................................................................................................................. 85
BOX A2.1A: EXPORT BONUS SCHEME .......................................................................................................................................................... 281
BOX A2.1B: ECONOMIC GROWTH AND POVERTY DURING AYUB REGIME .................................................................................................. 281
BOX A2.2A: FOREIGN INVESTMENT POLICY OF PAKISTAN 1988-2005........................................................................................................ 282
BOX A2.2B: PRIVATISATION POLICY OF PAKISTAN 1988-2005 ................................................................................................................... 283
BOX A4.1A: COEFFICIENTS CALCULATED USING ‘FORMULA’ STATEMENTS IN CORE MODEL (IN ORDER OF APPEARANCE)................... 307
BOX A4.1B: COEFFICIENTS CALCULATED USING ‘FORMULA’ STATEMENTS IN REGIONAL EXTENSION (IN ORDER OF APPEARANCE) .... 312
BOX A4.2A: UPDATE STATEMENTS AND FORMULAS IN CORE MODEL (IN ORDER OF APPEARANCE) ........................................................ 313
BOX A4.2B: UPDATE STATEMENTS IN REGIONAL EXTENSION (IN ORDER OF APPEARANCE)..................................................................... 314
BOX A5.6A: DAGG INPUT FILE TO SPLIT IMPROVED CAPITAL FORMATION MATRICES INTO BASIC, MARGIN AND TAX MATRICES ...... 367
BOX A6.3A: IMPACT OF NATIONAL INDUSTRIES ON REGIONAL ADVANTAGES IN SHORT-RUN—BASED ON TABLE 6.12 IN MAIN BODY OF
STUDY ................................................................................................................................................................................................ 403
BOX A6.3B: IMPACT OF NATIONAL INDUSTRIES ON REGIONAL ADVANTAGES IN LONG-RUN—BASED ON TABLE 6.14 IN MAIN BODY OF
STUDY ................................................................................................................................................................................................ 405

ix

LIST OF CHARTS
CHART 2.1: SHARE OF PAKISTAN’S MAJOR EXPORTS IN TOTAL EXPORTS—1970-2002 .............................................................................. 33
CHART 2.2: AVERAGE ANNUAL REAL OUTPUT GROWTH RATES (1981-98) ................................................................................................. 45
CHART 2.3: LITERACY RATES OF POPULATION AGED 10 AND OVER ............................................................................................................ 45
CHART 2.4: SCHOOLS WITH NO CLASSES BEING HELD AS % OF TOTAL SCHOOLS IN 1998-99 ..................................................................... 45
CHART 2.5: ACCESS TO PUBLIC OR PRIVATE HEALTH FACILITIES IN RURAL AREAS—1998-99 .................................................................. 45
CHART 2.6: PER CAPITA DISBURSEMENTS FROM SOCIAL SECURITY PROGRAMS IN 2000-01 (RS)............................................................... 49
CHART 6.1A: IMPACT OF TARIFF CUTS (T0IMP = P0IMP) ON IMPORTS (X0IMP) IN SHORT-RUN—THREE SECTORS OF ECONOMY ............. 191
CHART 6.1B: IMPACT OF TARIFF CUTS (T0IMP = P0IMP) ON IMPORTS (X0IMP) IN SHORT-RUN—SORTED BY % INCREASE IN IMPORTS ... 191
CHART 6.2A: IMPACT OF TARIFF CUTS (T0IMP = P0IMP) ON IMPORTS (X0IMP) IN LONG-RUN—THREE SECTORS OF ECONOMY .............. 195
CHART 6.2B: IMPACT OF TARIFF CUTS (T0IMP = P0IMP) ON IMPORTS (X0IMP) IN LONG-RUN—SORTED BY % INCREASE IN IMPORTS..... 195
CHART 6.3A: IMPACT OF TARIFF CUTS ON SHORT-RUN VARIABLE COSTS (P1VAR) OF DOMESTIC INDUSTRIES—THREE SECTORS OF
ECONOMY .......................................................................................................................................................................................... 200
CHART 6.3B: IMPACT OF TARIFF CUTS ON SHORT-RUN VARIABLE COSTS (P1VAR)—ABOVE-AVERAGE AND BELOW-AVERAGE
REDUCTION IN COSTS ........................................................................................................................................................................ 200
CHART 6.4A: IMPACT OF TARIFF CUTS ON INDEX OF PRODUCTION COSTS IN LONG-RUN—THREE SECTORS OF ECONOMY .................... 205
CHART 6.4B: IMPACT OF TARIFF CUTS ON INDEX OF PRODUCTION COSTS IN LONG-RUN—SORTED BY DECREASE IN INDEX OF
PRODUCTION COSTS .......................................................................................................................................................................... 205
CHART 6.5A: IMPACT OF TARIFF CUTS ON INDUSTRY/COMMODITY OUTPUT (X1TOT/X0COM) IN SHORT-RUN—THREE SECTORS OF
ECONOMY .......................................................................................................................................................................................... 213
CHART 6.5B: IMPACT OF TARIFF CUTS ON INDUSTRY/COMMODITY OUTPUT (X1TOT/X0COM) IN SHORT-RUN—SORTED BY % INCREASE IN
OUTPUT .............................................................................................................................................................................................. 213
CHART 6.6A: IMPACT OF TARIFF CUTS ON INDUSTRY/COMMODITY OUTPUT (X1TOT/X0COM) IN LONG-RUN—THREE SECTORS OF
ECONOMY .......................................................................................................................................................................................... 223
CHART 6.6B: IMPACT OF TARIFF CUTS ON INDUSTRY/COMMODITY OUTPUT (X1TOT/X0COM) IN LONG-RUN—SORTED BY % INCREASE IN
OUTPUT .............................................................................................................................................................................................. 223
CHART 6.7A: IMPACT OF TARIFF CUTS ON INDUSTRY EMPLOYMENT (EMPLOY) IN SHORT-RUN—THREE SECTORS OF ECONOMY .......... 227
CHART 6.7B: IMPACT OF TARIFF CUTS ON INDUSTRY EMPLOYMENT (EMPLOY) IN SHORT-RUN—SORTED BY % INCREASE IN

EMPLOYMENT .................................................................................................................................................................................... 227
CHART 6.8A: IMPACT OF TARIFF CUTS ON INDUSTRY EMPLOYMENT (EMPLOY) IN LONG-RUN—THREE SECTORS OF ECONOMY............ 232
CHART 6.8B: IMPACT OF TARIFF CUTS ON INDUSTRY EMPLOYMENT (EMPLOY) IN LONG-RUN—SORTED BY % INCREASE IN EMPLOYMENT
........................................................................................................................................................................................................... 232
CHART 6.9A: REGIONAL OUTPUT (REGX1TOT) OF LOCAL INDUSTRIES IN SHORT-RUN—SORTED BY INCREASE IN NATIONAL INDUSTRY
OUTPUT (X1TOT)................................................................................................................................................................................ 240
CHART 6.9B: CHANGE IN REGIONAL OUTPUT (REGX1TOT) OF LOCAL INDUSTRIES RELATIVE TO OUTPUT CHANGE AT NATIONAL LEVEL IN
SHORT-RUN ....................................................................................................................................................................................... 240
CHART 6.10A: REGIONAL OUTPUT (REGX1TOT) OF LOCAL INDUSTRIES IN LONG-RUN—SORTED BY INCREASE IN NATIONAL INDUSTRY
OUTPUT (X1TOT)................................................................................................................................................................................ 247
CHART 6.10B: CHANGE IN REGIONAL OUTPUT (REGX1TOT) OF LOCAL INDUSTRIES RELATIVE TO OUTPUT CHANGE AT NATIONAL LEVEL
IN LONG-RUN ..................................................................................................................................................................................... 247
CHART 6.11: CONTRIBUTIONS TO TOTAL REGIONAL EMPLOYMENT OF EACH INDUSTRY (REGEMPLOYCON) IN SHORT-RUN .................. 256
CHART 6.12: CONTRIBUTIONS TO TOTAL REGIONAL EMPLOYMENT OF EACH INDUSTRY (REGEMPLOYCON) IN LONG-RUN .................... 256

x


LIST OF FIGURES
FIGURE 4.1A: STRUCTURE OF MAIN DATABASE OF PAKREG—ABSORPTION MATRIX ................................................................................. 76
FIGURE 4.1B: STRUCTURE OF MAIN DATABASE OF PAKREG—PRODUCTION AND IMPORT DUTY MATRICES.............................................. 76
FIGURE 4.2: STRUCTURE OF PRODUCTION ..................................................................................................................................................... 87
FIGURE 4.3: STRUCTURE OF INVESTMENT DEMAND ...................................................................................................................................... 92
FIGURE 4.4: STRUCTURE OF HOUSEHOLD DEMAND ....................................................................................................................................... 94
FIGURE 5.1A: SUMMARY OF MODEL’S DATABASE ....................................................................................................................................... 127
FIGURE 5.1B: EXPLANATION OF SUBSCRIPTS AND SYMBOLS USED IN FIGURE 5.1A ................................................................................... 127
FIGURE 5.2: CONVERTING I-O TABLE 1990-91 INTO STANDARD DATABASE OF CORE MODEL ................................................................. 133
FIGURE 5.3: MAPPING OF 10 SECTORS IN TABLE 5.8B TO 59 COMMODITIES IN I-O DATABASE ................................................................. 170
FIGURE 6.1: MACROECONOMIC IMPACT OF TARIFF CUTS IN SHORT-RUN................................................................................................... 180
FIGURE 6.2: MACROECONOMIC IMPACT OF TARIFF CUTS IN LONG-RUN .................................................................................................... 180

xi


LIST OF TABLES
TABLE 2.1: KEY ECONOMIC AND SOCIOECONOMIC INDICATORS OF PAKISTAN—1949 TO 2005 ................................................................. 10
TABLE 2.2: TARIFF RATES DURING 1956-60 AND 1960-64............................................................................................................................ 12
TABLE 2.3: TARIFF RATES FROM EARLY 1980S TO 2003-04.......................................................................................................................... 23
TABLE 2.4: TARIFF BINDING COVERAGE AND AVERAGE BOUND AND APPLIED TARIFFS IN 2004 ............................................................... 31
TABLE 2.5: AREAS OF TRADE POLICY REQUIRING FURTHER REFORM .......................................................................................................... 35
TABLE 2.6: POPULATION, AREA AND POPULATION DENSITY (1998 CENSUS)............................................................................................... 40
TABLE 2.7: INEQUALITY AND POVERTY IN FOUR REGIONS OF PAKISTAN ..................................................................................................... 47
TABLE 2.8: ECONOMIC GROWTH AND CHANGE IN INCIDENCE OF POVERTY—HEAD COUNTS .................................................................... 52
TABLE 3.1: CGE MODELS VERSUS ECONOMETRIC MODELS ......................................................................................................................... 58
TABLE 3.2: CGE MODELS VERSUS I-O MODELS ............................................................................................................................................ 60
TABLE 3.3: MAJOR SURVEYS OF CGE MODELS ............................................................................................................................................. 61
TABLE 3.4: CGE MODELS OF AUSTRALIAN (ORANI) TRADITION AND US TRADITION ............................................................................... 70
TABLE 4.1: COMPONENTS OF SETS LISTED IN EXCERPT 1 OF MAIN PART OF PAKREG .............................................................................. 82
TABLE 4.2: SYNOPSIS OF REMAINING EQUATIONS IN THE CORE MODEL .................................................................................................... 102
TABLE 4.3: ELEMENTS OF SETS IN EXCERPT 1 OF REGIONAL EXTENSION OF PAKREG ............................................................................ 111
TABLE 4.4: SHORT-RUN CLOSURE FOR PAKREG ....................................................................................................................................... 119
TABLE 4.5: LONG-RUN CLOSURE FOR PAKREG......................................................................................................................................... 121
TABLE 5.1: AGGREGATED I-O TABLE OF PAKISTAN 1990-91 AT PURCHASERS’ PRICES WITH INDIRECT ALLOCATION OF IMPORTS
(RS MILLION) ..................................................................................................................................................................................... 130
TABLE 5.2A: LAYOUT OF INPUT DATA FOR PAK.TAB—I-O TABLE 1990-91 AT PRODUCERS’ PRICES WITH DIRECT ALLOCATION OF
DUTY-PAID IMPORTS INCLUSIVE OF INDIRECT TAXES ON THEIR SALES .......................................................................................... 139
TABLE 5.2B: LAYOUT OF INPUT DATA FOR PAK.TAB—IMPORT MATRIX 1990-91 (DUTY-PAID IMPORTS INCLUSIVE OF INDIRECT TAXES
ON THEIR SALES)................................................................................................................................................................................ 139
TABLE 5.3: OUTPUT SHARES OF MAJOR ECONOMIC SECTORS IN PAKISTAN (%)........................................................................................ 145
TABLE 5.4: RATIO OF EXPORTS TO OUTPUT (1990-91) IN DESCENDING ORDER ......................................................................................... 154

TABLE 5.5: ESTIMATES OF REQUIRED ELASTICITIES ................................................................................................................................... 157
TABLE 5.6: NATIONAL AND LOCAL COMMODITIES/INDUSTRIES ................................................................................................................. 160
TABLE 5.7: CONSTRUCTION OF REGIONAL INDUSTRY OUTPUT SHARES ..................................................................................................... 162
TABLE 5.8A: GOVERNMENT REGIONAL EXPENDITURE IN 1990-91 (RS MILLION)....................................................................................... 168
TABLE 5.8B: GOVERNMENT NATIONAL DEVELOPMENT EXPENDITURE BY SECTOR ................................................................................... 168
TABLE 6.1: MACROECONOMIC IMPACT OF TARIFF CUTS—SHORT-RUN AND LONG-RUN .......................................................................... 181
TABLE 6.2: SUMMARISED IMPACT OF TARIFF CUTS ON IMPORTS IN SHORT-RUN ....................................................................................... 188
TABLE 6.3: SUMMARISED IMPACT OF TARIFF CUTS ON IMPORTS IN LONG-RUN ........................................................................................ 193
TABLE 6.4: SUMMARISED IMPACT OF TARIFF CUTS ON SHORT-RUN VARIABLE COSTS OF DOMESTIC INDUSTRIES ................................. 198
TABLE 6.5: SUMMARISED IMPACT OF TARIFF CUTS ON INDEX OF PRODUCTION COSTS IN LONG-RUN ..................................................... 203
TABLE 6.6: SUMMARY OF FAN DECOMPOSITION AND SALES DECOMPOSITION OF INDUSTRY/COMMODITY OUTPUT (X1TOT/X0COM) IN
SHORT-RUN ....................................................................................................................................................................................... 208
TABLE 6.7: SUMMARY OF FAN DECOMPOSITION AND SALES DECOMPOSITION OF INDUSTRY/COMMODITY OUTPUT (X1TOT/X0COM) IN
LONG-RUN ......................................................................................................................................................................................... 216
TABLE 6.8: SUMMARISED IMPACT OF TARIFF CUTS ON DOMESTIC INDUSTRY EMPLOYMENT IN SHORT-RUN .......................................... 226
TABLE 6.9: SUMMARISED IMPACT OF TARIFF CUTS ON DOMESTIC INDUSTRY EMPLOYMENT IN LONG-RUN ............................................ 229
TABLE 6.10: REGIONAL MACRO RESULTS—SHORT-RUN AND LONG-RUN ................................................................................................ 235
TABLE 6.11: REGIONAL OUTPUT OF LOCAL INDUSTRIES IN SHORT-RUN—SORTED BY INCREASE IN OUTPUT OF CORRESPONDING
NATIONAL INDUSTRIES ...................................................................................................................................................................... 238
TABLE 6.12: REGIONAL ADVANTAGE MATRIX IN SHORT-RUN ................................................................................................................... 242
TABLE 6.13: REGIONAL OUTPUT OF LOCAL INDUSTRIES IN LONG-RUN—SORTED BY INCREASE IN OUTPUT OF CORRESPONDING
NATIONAL INDUSTRIES ...................................................................................................................................................................... 246
TABLE 6.14: REGIONAL ADVANTAGE MATRIX IN LONG-RUN ..................................................................................................................... 249
TABLE 6.15: INDUSTRY CONTRIBUTIONS TO REGIONAL EMPLOYMENT IN SHORT-RUN ............................................................................. 253
TABLE 6.16: INDUSTRY CONTRIBUTIONS TO REGIONAL EMPLOYMENT IN LONG-RUN .............................................................................. 258
TABLE 6.17: SYSTEMATIC SENSITIVITY ANALYSIS OF KEY ELASTICITY PARAMETERS.............................................................................. 263
TABLE A3.1A: SUMMARY OF CGE STUDIES ON PAKISTAN.......................................................................................................................... 287
TABLE A4.1A: VARIABLES IN CORE MODEL (IN ALPHABETICAL ORDER) .................................................................................................. 301
TABLE A4.1B: COEFFICIENTS IN CORE MODEL (IN ALPHABETICAL ORDER) .............................................................................................. 304
TABLE A4.1C: VARIABLES IN REGIONAL EXTENSION (IN ALPHABETICAL ORDER).................................................................................... 306

TABLE A4.1D: COEFFICIENTS IN REGIONAL EXTENSION (IN ALPHABETICAL ORDER) ............................................................................... 307
TABLE A4.3A: REMAINING EQUATIONS IN CORE MODEL............................................................................................................................ 315
TABLE A5.1A: AGGREGATED 4-SECTOR I-O TABLE 1990-91 AT PURCHASERS’ PRICES WITH DIRECT ALLOCATION OF IMPORTS PLUS
IMPORT DUTIES IN THE FORM OF A ROW AS PER FIGURE 5.2: BOX 8 (RS MILLION) ........................................................................ 319
TABLE A5.1B: AGGREGATED MARGIN ON SALES OF COMMODITIES TO ALL USERS (RS MILLION) ........................................................... 320
TABLE A5.1C: MARGIN ON PURCHASES MATRIX (RS MILLION).................................................................................................................. 320
TABLE A5.1D: AGGREGATED 4-SECTOR I-O TABLE 1990-91 AT PRODUCERS’ PRICES WITH DIRECT ALLOCATION OF IMPORTS PLUS
IMPORT DUTIES IN THE FORM OF A ROW AS PER FIGURE 5.2: BOX 10 (RS MILLION) ...................................................................... 321
TABLE A5.2A: INPUT DATA FOR PAK.TAB—60-SECTOR I-O TABLE 1990-91 AT PRODUCERS’ PRICES WITH DIRECT ALLOCATION OF
DUTY-PAID IMPORTS INCLUSIVE OF ASSOCIATED INDIRECT TAX AS A SINGLE ROW, AS PER TABLE 5.2A IN CHAPTER 5
(RS MILLION) ..................................................................................................................................................................................... 322

xii


TABLE A5.2B: INPUT DATA FOR PAK.TAB—IMPORT MATRIX 1990-91 INCLUDING IMPORT DUTY AND INDIRECT TAXES ON SALES, AS
PER TABLE 5.2B IN CHAPTER 5 (RS MILLION)................................................................................................................................... 333
TABLE A5.3A: RELEVANT ENTRIES FROM INTERMEDIATE USAGE AND FINAL DEMAND COLUMNS OF 118-SECTOR IMPORT MATRIX
1983-84 (RS‘000’) ............................................................................................................................................................................. 344
TABLE A5.3B: RELEVANT ENTRIES FROM INTERMEDIATE USAGE AND FINAL DEMAND COLUMNS OF 82-SECTOR I-O TABLE 1990-91
(RS MILLION) ..................................................................................................................................................................................... 345
TABLE A5.3C: SHARES OF COMMODITY USAGE BY 3 PUBLIC SECTORS IN TABLE A5.3B (%).................................................................... 345
TABLE A5.3D: IMPORT MATRIX 1983-84—DISAGGREGATION OF ‘GOVERNMENT SERVICES’ INTO THREE SECTORS (RS‘000’).............. 345
TABLE A5.4A: CLASSIFICATION OF COMMODITY/INDUSTRY NAMES IN 82-SECTOR I-O TABLE 1990-91 ................................................. 346
TABLE A5.4B: CLASSIFICATION OF COMMODITY/INDUSTRY NAMES IN 120-SECTOR IMPORT MATRIX 1983-84 ...................................... 347
TABLE A5.4C: CONDENSING 82-SECTOR I-O TABLE 1990-91 AND 120-SECTOR IMPORT MATRIX 1983-84 INTO 60 SECTORS—USING PSIC
AND PSTC.......................................................................................................................................................................................... 348
TABLE A5.4D: EXPLANATION OF CODE NAMES OF COMMODITIES/INDUSTRIES IN CONDENSED 60-SECTOR I-O TABLE 1990-91 AND
IMPORT MATRIX 1990-91—DATABASE OF PAKREG ...................................................................................................................... 350
TABLE A5.4E: CLASSIFICATION OF CONSUMER GOODS AND CAPITAL GOODS IN 60-SECTOR I-O TABLE 1990-91 AND IMPORT

MATRIX 1990-91 ............................................................................................................................................................................... 351
TABLE A5.4F: SYNCHRONISING THE CLASSIFICATIONS OF CMI 1990-91 WITH 35 MANUFACTURING INDUSTRIES IN 60-SECTOR I-O TABLE
1990-91.............................................................................................................................................................................................. 352
TABLE A5.7A: COMPUTATION OF REGIONAL INDUSTRY OUTPUT SHARES OF 6 CRPOTR .......................................................................... 368
TABLE A5.7B: COMPUTATION OF REGIONAL INDUSTRY OUTPUT SHARES OF 7 CRPPULSAGRAM ............................................................ 369
TABLE A5.7C: COMPUTATION OF REGIONAL INDUSTRY OUTPUT SHARES OF 8 CRPOILSEEDS ................................................................. 370
TABLE A5.7D: COMPUTATION OF REGIONAL INDUSTRY OUTPUT SHARES OF 9 LIVESTOCK ..................................................................... 370
TABLE A5.7E: REGIONAL INDUSTRY OUTPUT SHARES ................................................................................................................................ 371
TABLE A5.8A: CONSTRUCTION OF REGIONAL INDUSTRY INVESTMENT SHARES ........................................................................................ 372
TABLE A5.8B: REGIONAL INDUSTRY INVESTMENT SHARES ........................................................................................................................ 374
TABLE A5.9A: CONSTRUCTION OF REGIONAL COMMODITY CONSUMPTION SHARES ................................................................................. 375
TABLE A5.9B: REGIONAL CONSUMPTION SHARES OF FOUR COMMODITIES WITH READILY AVAILABLE DATA ....................................... 376
TABLE A5.9C: PER CAPITA MONTHLY CONSUMPTION OF 26 COMMODITIES IN EACH REGION IN 1990-91 (RUPEES)—AVAILABLE IN HIES
1990-91.............................................................................................................................................................................................. 377
TABLE A5.9D: REGIONAL POPULATION ‘000’.............................................................................................................................................. 377
TABLE A5.9E: PER CAPITA REGIONAL MONTHLY CONSUMPTION IN AGGREGATED FORM—AVAILABLE IN HIES 1990-91 (RUPEES).... 377
TABLE A5.9F: REGIONAL COMMODITY CONSUMPTION SHARES ................................................................................................................. 378
TABLE A5.10A: REGIONAL COMMODITY EXPORT SHARES ......................................................................................................................... 379
TABLE A5.11A: CONSTRUCTION OF REGIONAL GOVERNMENT SHARES ..................................................................................................... 380
TABLE A5.11B: GOVERNMENT EXPENDITURE SHARES IN LIVESTOCK (9 LIVESTOCK) .............................................................................. 382
TABLE A5.11C: ALLOCATION OF DEVELOPMENT EXPENDITURE TO 59 COMMODITIES IN EACH REGION (RS MILLION)........................... 383
TABLE A5.11D: ALLOCATION OF NON-DEVELOPMENT EXPENDITURE TO 59 COMMODITIES IN EACH REGION (RS MILLION).................. 384
TABLE A5.11E: ALLOCATION OF DEVELOPMENT PLUS NON-DEVELOPMENT EXPENDITURE TO 59 COMMODITIES IN EACH REGION (RS
MILLION) ............................................................................................................................................................................................ 385
TABLE A5.11F: REGIONAL GOVERNMENT EXPENDITURE SHARES.............................................................................................................. 386
TABLE A5.12A: CONSTRUCTION OF REGIONAL COMMODITY INVENTORY SHARES ................................................................................... 387
TABLE A5.12B: REGIONAL INVENTORY SHARES ......................................................................................................................................... 389
TABLE A6.1A: IMPACT OF TARIFF CUTS ON IMPORTS IN SHORT-RUN ........................................................................................................ 390
TABLE A6.1B: IMPACT OF TARIFF CUTS ON IMPORTS IN LONG-RUN .......................................................................................................... 391
TABLE A6.1C: IMPACT OF TARIFF CUTS ON SHORT-RUN VARIABLE COSTS OF DOMESTIC INDUSTRIES ................................................... 392

TABLE A6.1D: IMPACT OF TARIFF CUTS ON INDEX OF PRODUCTION COSTS IN LONG-RUN ....................................................................... 393
TABLE A6.1E: SUMMARY OF FAN DECOMPOSITION AND SALES DECOMPOSITION OF INDUSTRY/COMMODITY OUTPUT (X1TOT/X0COM) IN
SHORT-RUN ....................................................................................................................................................................................... 394
TABLE A6.1F: SUMMARY OF FAN DECOMPOSITION AND SALES DECOMPOSITION OF INDUSTRY/COMMODITY OUTPUT (X1TOT/X0COM) IN
LONG-RUN ......................................................................................................................................................................................... 395
TABLE A6.1G: IMPACT OF TARIFF CUTS ON DOMESTIC INDUSTRY EMPLOYMENT IN SHORT-RUN ............................................................ 396
TABLE A6.1H: IMPACT OF TARIFF CUTS ON DOMESTIC INDUSTRY EMPLOYMENT IN LONG-RUN.............................................................. 397
TABLE A6.1I: REGIONAL OUTPUT BY INDUSTRY IN SHORT-RUN ................................................................................................................ 398
TABLE A6.1J: REGIONAL OUTPUT BY INDUSTRY IN LONG-RUN.................................................................................................................. 399
TABLE A6.1K: EMPLOYMENT GROWTH BY INDUSTRY AND REGION IN SHORT-RUN .................................................................................. 400
TABLE A6.1L: EMPLOYMENT GROWTH BY INDUSTRY AND REGION IN LONG-RUN .................................................................................... 401

xiii


CHAPTER 1: INTRODUCTION
1.1: BACKGROUND
The history of Pakistan’s political and trade regimes, and the associated regional
disparities and conflicts, makes it an interesting case-study. During the first 40 years
after independence (1947-87) the country pursued a generally protectionist approach to
international trade policy, despite trade liberalisation measures sporadically introduced
by different governments at different points in time. More recently, in common with
other major South Asian economies—particularly India, Bangladesh and Nepal—
Pakistan has undertaken concrete and consistent steps toward trade liberalisation and
global economic integration since the late 1980s. 1
Successive governments in Pakistan have pursued this strategy under a series of
structural adjustment programs (SAPs) arranged with the International Monetary Fund
(IMF) and the World Bank since 1988. While these SAPs have encompassed many
other areas of trade (and, more generally, of economic) policy, across-the-board tariff
reductions have been a key ingredient. As a result, the maximum tariff rate has dropped

from 225 per cent in 1986-87 to 16.5 per cent in 2003-04 (see Chapter 2). The pace of
trade liberalisation has accelerated considerably under the current military government,
which ousted the last democratic government in October 1999.
Pakistan has also actively participated in the Uruguay Round (UR) of trade negotiations,
during which the textile and clothing sector, Pakistan’s main exporting sector, has
featured prominently. While the phasing out of textiles and clothing quotas under the
Multi-Fibre Arrangement (MFA) 2 on 1 January 2005 has provided Pakistan with a
golden opportunity to increase market access for its major exports, heightened
competition from the other main exporters of textile and clothing products (in particular,
China and India) has posed serious challenges to the country’s main export industries.

1
The World Bank (2004) argues that the primary motive for the trade liberalisation that has occurred in the South Asian countries
was the belated recognition that they had missed out on the spectacular export-oriented economic growth that had benefited East
Asian and South East Asian developing countries since the 1960s.
2
The MFA was a framework for bilateral agreements or unilateral actions that established quotas limiting imports of textiles and
clothing into countries whose domestic industries were facing serious damage from rapidly increasing imports. Since 1995, the
World Trade Organisation’s (WTO’s) Agreement on Textiles and Clothing (ATC) took over from the MFA. By 1 January 2005, the
sector was fully integrated into normal General Agreement on Tariffs and Trade (GATT) rules and the ACT ceased to exist (WTO,
2005). As a result, textiles and clothing quotas have come to an end, and importing countries are no longer able to discriminate
between exporters.

1


These developments in trade and economic policy have occurred against a background
of conflicts and disparities between the country’s various regions. In turn, they have at
times served to deepen such disparities and tension. Pakistan’s military, which has
directly controlled the country’s affairs for more than one-half of its post-independence

history and which often retained real political power even during periods of democratic
rule, has played a major role in all this. 3 Military governments have tended to follow
more liberal approaches to trade than democratic governments. They have probably
also contributed more to the regional conflicts, because regions and groups of people
who were affected adversely by their policies were more likely to be denied the
opportunity to voice their protests.
Pakistan’s history may be unique in that the country’s majority wing—formerly East
Pakistan, now Bangladesh—seceded from the nation in 1971 after a bloody war, leaving
the minority wing—West Pakistan—as the sole constituent part of the new Pakistan.
This conflict arose because of serious interregional economic disparities (caused by
biased economic and trade policies) and a denial of basic democratic rights under the
West Pakistan-based military regime. Even after this traumatic event, the relationships
among the four regions that remain in (West) Pakistan have not been harmonious.
Reasons for regional friction have ranged from the distribution of economic resources—
such as revenue and water—to the location of proposed dams and the expansion of
garrisons.
These conflicts and the associated regional disparities have been compounded by
ongoing interventions on the part of the military in the democratic governing process.
The first democratically elected prime minister—Zulfiqar Ali Bhutto—was hanged by
the military in 1978 and the two remaining democratic prime ministers—Benazir Bhutto
and Nawaz Sharif—are both in exile. The dominant role played by the military has
hampered the development of key institutions—the legislature and judiciary—capable
of keeping the role of the executive in check.

3

For the purpose of this study, the entire period—from the seizure of power by a military leader to his exit from the political
scene—will be considered to constitute a military regime, even though military administration may have been transformed into
some kind of civilian rule. This is in line with many studies on military rule in developing countries. For example, see Zafarullah
and Akhter (2001).

2


Military expenditure has always been disproportionately high in Pakistan. For instance,
defence expenditure is currently around 23 per cent of the federal government
expenditure, or 4.5 per cent of GDP. 4 (This estimate of military expenditure does not
include pensions paid to retired army personnel, free allotments of valuable land, and
generous subsidies provided to army staff with respect to main items of consumption.)
As a result, public expenditure on health and education has been squeezed to around
1 per cent and 1.8 per cent of GDP, respectively. The conspicuous spending on the
military and the government has generated resentment among the poorer sections of
society against the privileged class, and has raised anger in the smaller regions against
the largest region—Punjab—which has the highest representation in the armed forces.
At present, Pakistan is again under military rule. There is unrest in all the four regions
of the country, accompanied by a significant rise in poverty (to 40 per cent), high crime
rates, and the virtual non-existence of justice. As Zaidi (2000, p.437) argues:
There is a growing concern in Pakistan that the state and its institutions are on the
brink of a collapse. The general feeling is that the state has failed to deliver on
basic issues, that it can no longer govern, administer justice, provide essential and
basic social services, or collect taxes, and its only function seems to be coercive,
with institutions of law and order increasingly turned not towards protecting the
life and property of citizens, but against the people of Pakistan. Corruption is
noticeably rampant, and affects all institutions of the state. The decline of state
authority is so obvious that one wonders if there is any real state or government in
Pakistan. The general prognosis seems to be that, unless some action is taken in
the immediate future, this country and society will collapse.
1.2: MOTIVATION
Interest in the research underlying this study stems from a number of reasons. Firstly, it
is well established in the literature that trade liberalisation can interact with economic

growth, national welfare, income inequalities, poverty and regional disparities in
complex ways. For Pakistan, there exist a number of studies that have described key
features of the country’s trade policies, and/or examined the impacts of trade
liberalisation on important economic or socioeconomic variables, such as economic
growth, national welfare, income inequalities and poverty. 5

However, to our

4

The figures cited in this paragraph are based on the World Bank (2005), and the MoF (2005).
Some of the important studies are: Lewis (1969); Little et al. (1970); Balassa (1971); Ahmed and Amjad, (1984); Asian
Development Bank (ADB, 1985); World Bank (1988); Guisinger and Scully, (1991); Naqvi and Khwaja (1993); Institute of
Developing Economies (1994); Sayeed (1995); WTO (1995); Khan and Mahmood (1996); DRI-McGraw Hill (1997); Khan (1997);
5

3


knowledge, no previous study has focused on modelling/quantifying the impacts on
Pakistan’s industry at a highly disaggregated level. The present study will make a
contribution toward filling this gap in the literature.
Secondly, Pakistan’s export sector is facing major challenges. The phasing out of the
MFA can potentially have serious implications for the country as, unlike other major
suppliers of textiles and clothing such as India and China, Pakistan has a narrow export
base dominated by cotton and textile related products 6 (World Trade Organisation
(WTO), 2002). Government efforts directed toward diversifying the export base have
remained infertile to date (Ministry of Finance (MoF), 1999 and 2005).
Understandably, the existing literature in this area has concentrated on the possible
impact of the quota abolition on this sector.7 To our knowledge, however, no study has

attempted to model/quantify the impact of wide-ranging tariff cuts on Pakistan’s textile
and clothing exports. This is another limitation of the existing literature that the present
study can help rectify.
Thirdly, relations between Punjab and the three smaller regions are poor. There is a
sentiment in the smaller regions—Sindh, NWFP and Balochistan—as there was
previously in East Pakistan, that Punjab and the Punjab-based military are exploiting the
other regions’ resources and giving very little in return. Despite the sensitivity and
potential significance of such regional disharmonies, no existing study has to our
knowledge examined possible links between trade liberalisation and regional
disparities in Pakistan. 8 This study will attempt to make a contribution in this regard.
The study should be of interest, not only to Pakistanis but also to advocates and
opponents of trade liberalisation, analysts and observers of inter-regional issues, and all
those who are interested in human and economic development generally.

Ahmad (1998); Bandara and McGillivray (1998); Khan (1998); Siddiqui et al. (1999); Khan and Mahmood (2000); Zaidi (2000);
Anwar (2001); Kemal et al. (2001); Ministry of Finance and Planning (2001); Siddiqui and Iqbal (2001); Khan (2002); Mahbub ul
Haq Human Development Centre (MHDC, 2002); Siddiqui and Kemal (2002); Siddiqui and Kemal (2002a); World Bank (2002);
World Bank (2002a); Kemal et al. (2003); Martin et al. (2004); and World Bank (2004).
6
The clothing sector is part of the cotton and textile sector.
7
These are, just to name a few, Naqvi et al. (1995); WTO (1995 and 2002); Nabi (1999); Zaidi (2000); Khan and Mahmood (2000);
MHDC (2002); Martin et al. (2004); and World Bank (2004).
8
Some studies (such as Lewis, 1969; Ahmed and Amjad, 1984; and Zaidi, 2000) have discussed the impact of Pakistan’s economic
and political policies on the regional disparities but their analysis is confined to the political and economic disparities between West
Pakistan and East Pakistan caused by the West Pakistan based government policies prior to the secession of East Pakistan.
Moreover, these studies do not quantify systematically the impact of the trade policies on the regional disparities.

4

1.3: PURPOSE
Given

the

above

motivations,

the

main

purpose

of

the

study

is

the

estimation/quantification of the impact of trade liberalisation (in particular,
comprehensive tariff reductions) on Pakistan’s industries at a highly disaggregated
level, with a view to identifying the losers and winners not only at the national level but

also at the regional level. At the national level, particular attention will be paid to the
country’s major export industries, including the cotton and textile related industries. At
the regional level, emphasis will be placed on ascertaining whether trade liberalisation
has contributed to the existing regional disparities in Pakistan.
In addition, it is desirable to undertake a critical review of the country’s political
economy, with a view to gaining insights into the interactions between political setups,
trade policies, national socioeconomic outcomes, and regional disparities. The review
will also serve as a basis for the modelling and estimation work mentioned above.

1.4: SPECIFIC RESEARCH OBJECTIVES
In light of the above purposes, the specific research objectives of the study are:
a) to review critically Pakistan’s trade policies and their socioeconomic outcomes
under different political setups, and to identify possible relations among
political setups, trade regimes and regional disparities in Pakistan;
b) to develop a CGE model of Pakistan and construct an accurate and highly
disaggregated database capable of supporting the model;
c) to examine the short-run and long-run effects of across-the-board tariff
reductions at the national and regional levels using the CGE model, with
emphasis on the major export industries at the national level and on the relative
output and employment growth at the regional level; and
d) to present the results in a way that does not require extensive prior knowledge of
CGE modelling, so that they can be of use to various groups of interested
people, including exporters, importers, investors, industrialists, economic
analysts and policy makers.
5


1.5: OUTLINE OF STUDY
The plan of the study is as follows. Chapter 2 undertakes an analytical review of
Pakistan’s political and trade regimes, socioeconomic indicators, and regional conflicts

and disparities, and identifies apparent patterns of association among them. In doing so,
it also provides a rationale for undertaking a study which can model/quantify the
impacts of tariff cuts on (a) Pakistan’s industry at a highly disaggregated level and on
(b) regional disparities, as measured by differential growth in regional output and
employment.
Chapter 3 provides a rationale for using a CGE approach to pursuing the objectives
identified in the previous chapter.

To that end, it reviews the CGE literature on

Pakistan, and also sets the context for the development of a CGE model and its database
which would avoid some key shortcomings of previous CGE models of Pakistan’s
economy. Chapter 4 highlights the main features of the CGE model developed in this
study, and its database. Chapter 5 documents the process of constructing this database.
Chapter 6 presents simulation results indicating short-run and long-run impacts of tariff
reductions on Pakistan’s economy at the national and regional levels.

Chapter 7

summarises the major findings of the study, recommends appropriate policy responses,
acknowledges important limitations of the study, and suggests avenues for future
research.

6


CHAPTER 2: POLITICAL SETUPS, TRADE REGIMES
AND REGIONAL DISPARITIES
2.1: INTRODUCTION
This chapter undertakes a critical review of Pakistan’s political economy, with a view to

gaining insights into the relations between political setups, trade policies, national
socioeconomic outcomes, and regional disparities. In doing so, it sets the context 9 for
modelling/quantifying the impacts of trade liberalisation on (a) the domestic industry at
a highly disaggregated level with a special reference to the main exports and on (b)
regional disparities.
The chapter is organised as follows. Section 2.2 investigates the trade policies pursued
by various political regimes and the socioeconomic outcomes of such policies.
Particular attention will be paid to examining the trade liberalisation process (especially,
comprehensive tariff cuts) since the late 1980s. The export structure will also be
explored, as the performance of the key exports (related to cotton and textiles) is of
critical importance in the wake of the abolition of textiles and clothing quotas on
1 January 2005. Section 2.3 briefly reviews the foremost studies on the impact of the
abolition of textiles and clothing quotas on the main exports of Pakistan.

The

information and analysis presented in this section and the previous section lays the
foundation for modelling/quantifying the impacts of tariff cuts on the domestic industry
at a highly disaggregated level, with explicit focus on the key export industries.
Section 2.4 highlights the main regional conflicts, and evaluates the extent of regional
disparities, especially between Punjab and the three smaller regions.

Section 2.5

identifies apparent patterns of association among Pakistan’s political and trade regimes,
socioeconomic indicators, and regional conflicts and disparities. It also makes a case
for adding a regional dimension to the proposed study on the impact of tariff cuts on the
domestic industries. The chapter ends with some concluding remarks in Section 2.6.

9

It should be noted that this chapter does not review general literature on trade liberalisation in Pakistan for two reasons. Firstly,
since the intended study will focus on quantifying/modelling the impacts of trade liberalisation, a comprehensive review of the
relevant modelling studies will be undertaken in the next chapter. Secondly, conducting a universal literature review of the studies
on trade liberalisation in Pakistan would be beyond the scope of this study. This chapter also does not compare Pakistan’s trade
liberalisation policies with other countries in South Asia because this information is already available in some recent studies,
particularly in MHDC (2002) and the World Bank (2004).

7


2.2: ANALYTICAL REVIEW OF TRADE POLICIES UNDER DIFFERENT
POLITICAL REGIMES
2.2.1: Bureaucracy-Led Ad-hoc Trade Policies—1947-52
There were no fully developed institutions at the time of Pakistan’s independence other
than the imperial bureaucracy and military. The standing of politicians eroded after the
death of Pakistan’s founder, Mohammad Ali Jinnah, in 1948, and the assassination of
his successor, Liaquat Ali Khan, shortly afterwards in an abortive coup. Consequently,
in the early years of independence, the country was run by a small group of bureaucrats
who were essentially responsible for formulating the policies to ensure the survival of
the country (Zaidi, 2000). In the first few years of independence, the bureaucracy made
trade policies mainly on an ad-hoc basis in response to international conditions.
The bureaucracy pursued a liberal import policy from independence until
September 1949 when the pound sterling was devalued by 31 per cent, and most
currencies linked to the sterling were also devalued, including that of India (Zaidi,
2000). Pakistan, however, decided to maintain its old exchange rate and imposed some
loose quantitative controls on certain imports and exports in order to manage trade with
countries that had devalued. At that time, Pakistan’s main exports were cotton and jute,
with Pakistan being a monopoly exporter of jute. Ahmed and Amjad (1984) argue that
the main motivation behind the non-devaluation decision was to be able to sell raw jute
(since Pakistan had no jute mills) at a higher price and to be able to import machinery

and capital goods at a cheaper price.
The loose quantitative controls on imports and exports were abolished within one year
after the Korean War broke out in June 1950. During the Korean boom demand for
Pakistan’s exports—mainly jute and cotton—increased by 109 per cent (Zaidi, 2000).
Not only was there increased demand for jute and cotton, but their prices also increased
appreciably, enabling Pakistan to make spectacular profits on its exports. Zaidi (2000)
argues that the government liberalised trade to the extent that by June 1951 around
85 per cent of the imports were virtually without licence, importable on the Open
General Licence (OGL) System. Under the OGL System, licences were issued for the
import of a majority of commodities without formality and with no restrictions on
quantity or source. However, export taxes on jute and cotton were raised. In addition,
Pakistan maintained strict controls on foreign direct investment (FDI). For example, the
8


services sector was reserved for local investors and foreign investment was not allowed
in the fields of banking, insurance and commerce.
As is evident from Table 2.1, the balance of trade improved substantially, averaging
around 1.48 per cent of GDP per annum during 1949-52. (Henceforth, the statistics of
Pakistan’s economy in Section 2.2 will refer to the annual averages during the period
under discussion unless mentioned otherwise.) The ratio of exports to GDP grew to
16.77 per cent—the highest value so far (the words ‘highest’ or ‘lowest’ in Section 2.2
denote the highest or lowest values among the average annual values calculated for the
seven trade regimes examined in this chapter). The ratios of imports and trade to GDP
also increased enormously to 15.29 per cent and 32.06 per cent, respectively, with the
latter being the second-highest during 1949-2005.
The growth of large-scale manufacturing also became the highest (21.10 per cent),
arguably because of Pakistan’s overvalued exchange rate, which allowed the import of
machinery and capital goods at cheaper prices.

However, the real GDP growth

remained modest (1.05 per cent) because the agriculture sector, which had the highest
sectoral share in GDP in 1949-52 (53.19 per cent) contracted by 3.25 per cent. In short,
the decision not to devalue the currency turned out to be fruitful but primarily because
of the fortuitous international circumstances.
2.2.2: Bureaucracy-Led Highly Protected Trade Regime—1952-59
The trade policies of Pakistan during 1952-59 were formulated mainly by the
bureaucracy and partly by a collection of land-owing politicians. During this period the
policy of import substitution of consumer goods was pursued with a view to creating a
highly protected environment for industrialisation. Naoman (1992) considers the trade
policy in 1952-59 the most extreme form of protection.

Throughout this period,

revenue depended heavily on export taxes on agricultural products (cotton and jute) and
import duties on imported manufactured goods. In addition, the strict controls on FDI
since the creation of Pakistan were maintained.

9


Table 2.1: Key Economic and Socioeconomic Indicators of Pakistan—1949 to 2005
ANNUAL AVERAGES FOR
EACH PERIOD
a) TRADABLE SECTOR
Nominal exchange rate (Rs per $US)
Real effective exchange rate
(Base Year = 1999-2000 )
Exports/GDP (%)

Imports/GDP (%)
Trade balance/GDP (%)
Trade/GDP (%)
Manufactured exports
(% of merchandise exports)
High-technology exports
(% of manufactured exports)
FDI, net inflows (% of GDP)
b) WHOLE ECONOMY
Real Growth (%)
GDP
Agriculture
Large-scale manufacturing
Small-scale manufacturing
Banking and Insurance
Public Admin and Defence
Services
Sectoral Shares in GDP (%)
Agriculture sector
Growth in agriculture sector share
Manufacturing sector
Growth in manufacturing sector share
Remaining sectors
Growth in remaining sectors share
External Assistance
Workers’ remittances (% of GDP)
Foreign aid per capita (current $US)
Ratio of foreign aid to GDP, current
$US (%)
Indicators of Macroeconomic Stability

Overall budget balance (% of GDP)
Current account balance (% of GDP)
Inflation (%)
Average external debt/GDP (%)
Public and publicly guaranteed debt
service (% of exports)
Socioeconomic Indicators
GDP per capita (constant 1994-95 $US)
Growth in GDP per capita
(constant 1994-95 $US)
Unemployment rate (%)

194952

195259

195965

196571

195971

197177

197788

198899

19992005

3.33

4.37

4.79

4.80

4.79

10.09

13.69

33.70

58.75

n/a

n/a

n/a

n/a

n/a

n/a

176.71

110.03

94.73

16.77
15.29
1.48
32.06

9.63
10.02
-0.39
19.64

7.59
14.44
-6.85
22.03

5.24
8.69
-3.44
13.93

6.42
11.57
-5.15
17.98

10.61
16.19
-5.58
26.80

10.30
19.35
-9.05
29.65

14.40
18.82
-4.41
33.22

13.71
16.11
-2.40
29.81

n/a

n/a

32.47

51.89

43.70

56.92

61.69

83.04

85.17

n/a

n/a

n/a

n/a

n/a

n/a

n/a

0.08

0.46

n/a

n/a

n/a

0.12

n/a

0.08

0.28

0.85

0.84

1.05
-3.25
21.10
2.35
9.55
3.25
4.00

4.04
3.33
14.40
2.27
10.61
0.63
4.00

7.43
3.20
16.88
2.80
16.48
5.47
4.62

5.96
6.34
9.92
2.92
12.66
9.64
4.02

6.63
4.63
12.43
2.85
14.75
7.36
4.35

4.12
2.38
1.70
7.28
10.37

12.20
5.05

6.86
3.88
9.00
8.40
8.15
5.35
6.53

4.06
4.47
3.87
5.31
5.17
3.04
6.53

4.98
2.91
9.23
5.31
6.05
9.06
6.87

53.19

46.93

-11.78
11.42
47.35
41.66
6.64

39.68
-15.44
15.04
31.70
45.28
8.70

38.88
-2.02
16.04
6.65
45.08
-0.44

39.28
-17.14
15.54
40.46
45.18
8.22

33.19
-15.50
15.58

0.26
51.23
13.39

28.19
-15.06
16.86
8.20
54.95
7.26

25.56
-9.32
17.26
2.41
57.17
4.04

24.89
-2.64
17.29
0.13
57.82
1.14

n/a
n/a

n/a
n/a

n/a
7.92

n/a
6.90

n/a
7.41

2.37
7.73

7.95
9.67

3.40
9.04

2.89
11.22

n/a

2.50

8.46

4.81

6.63

5.03

3.12

2.11

2.70

n/a
n/a
n/a
n/a

n/a
n/a
n/a
n/a

n/a
n/a
2.47
n/a

n/a
-6.70
4.58
34.89

n/a
n/a
3.62
n/a

-8.12
-5.03
15.52
54.34

-7.07
-2.99
7.04
43.13

-7.29
-3.96
9.55
50.37

-4.08
2.72
4.49
50.90

n/a

n/a

n/a

n/a

n/a

20.79

22.48

22.03

17.72

n/a

n*a

199.34

253.48

226.41

274.30

359.52

484.08

568.26

n/a

n/a

4.53

2.94

3.66

0.37

3.94

1.52

6.73

n/a

n/a

n/a

1.70

n/a

2.03

3.57

4.89

7.55

7.75
39.06

Memorandum: Poverty trends in Pakistan (Head Counts) for selected years
Year
1963-64
1965-66
1966-67
1969-70
1970-71
1979-80
1980-81
1984-85
Proportion of poor
40.24
40.20
44.50
46.50
46.50
30.68
30.70
24.47
in Pakistan (%)

Year
1990-91
1992-93
1993-94
1996-97
1998-99
1999-00
2001-02
2004-05
Proportion of poor
22.11
22.40
23.60
31.00
32.60
33.50
37.00
40.00
in Pakistan (%)
Note: ‘n/a’ denotes ‘not available’.
Source: ADB (1985); Zaidi (2000); Anwar (2001); Kemal et al. (2001); Khan (2002); Arif (2003); IMF (2005); World Bank
(2005); and MoF (1970 to 2005).

1987-88
17.32

The tightening of the trade regime originated from the steps taken to ameliorate the
balance of payments, which had started deteriorating due to a fall in the prices of jute
and cotton after the Korean boom. Following the Korean boom, Pakistan’s exchange
10