PAKISTAN

Islamic Republic of Pakistan

Islami Jamhooria Pakistan

COUNTRY OVERVIEW

LOCATION AND SIZE.

Pakistan is a country located in South Asia that covers an area of 796,095 square kilometers (310,410 square miles), almost twice the size of California. In the south, it borders the Arabian Sea, with a coastline of 1,046 kilometers (650 miles) and stretches north to the great Hindukush and Karakoram mountain ranges, with peaks as high as the Nanga Parbat (8,126 meters, 26,660 feet) and the K2 (8,611 meters, 28,251 feet). Pakistan is edged between India, with whom it shares a 2,192-kilometer (1,362-mile) borderline to the east, and Afghanistan and Iran, with whom it has 2,430 kilometers (1,510 miles) and 909 kilometers (565 miles), respectively, of common border. It also shares a 523-kilometer (325-mile) border with China in the north.

The country's temperatures are amongst the most extreme on earth, ranging from 50 degrees Celsius (122 degrees Fahrenheit) or more at the height of summer in the deserts of Sindh to-50 degrees Celsius (-58 degrees Fahrenheit) and below in the depths of winter on the northern mountain ranges. Until 1947, Pakistan was part of British India, which was then divided into the largely Hindu India and the Muslim state of Pakistan. Until 1971, this state consisted of a large territory to the west of the newly established Republic of India and a smaller territory in the northeastern part of historic British India, separated from each other by 1,600 kilometers (995 miles). East Pakistan succeeded in that year to become independent Bangladesh.

POPULATION.

The government of Pakistan estimated that Pakistan's population was 137.5 million in June 2000, excluding about 1.5 million refugees from Afghanistan. Pakistan's Afghani refugee population increased significantly in the fall of 2001 after a U.S. bombing campaign against Afghanistan's ruling Taliban regime caused thousands to flee to Pakistan. A large majority of Pakistanis are very young, owing to the high rate of population growth in recent decades. About 41 percent of the population is under the age of 14 years, and 55 percent is between the ages of 15 and 64 years. Population growth is still quite high at around 2.2 percent in 2000. Pakistan has a very high infant mortality rate, with 88 deaths per 1,000 live births, but, on average, every woman in the country gives birth to more than 4 children. According to government figures, only about a third of the population lives in towns (33 percent in 2000), while two-thirds (67 percent) are rural. The population density was 175 people per square kilometer in 1999, according to World Bank figures, which makes Pakistan a heavily populated country despite its size. The largest towns are Karachi with 9.3 million inhabitants, Lahore (5.1 million), and Faisalabad (2 million).

Pakistan has 4 major provinces: the Punjab, Sindh, Baluchistan, and the North-West Frontier Province (NWFP), as well as some federally administered tribal areas. In 1998, 55.6 percent of the population lived in Punjab, 23.0 percent in Sindh, 13.4 percent in the NWFP, 5 percent in Baluchistan, 2.4 percent in the Federally Administered Tribal Areas (FATA), and 0.6 percent in the northern areas and the federal capital of Islamabad. The provinces are, by and large, based on the 5 major ethnic groups prevalent in Pakistan. Punjabis live mainly in the fertile and most populous region, Punjab, in the center and east of the country. Sindhis live in the south; the Pashtuns share a common ethnic heritage with most Afghanis and live in the west. Baluchis live in the mountainous areas in the southwestern part of the country. Finally, the immigrants from India at the time of the partition and their descendants are called Muhajir (Muhajireen), after the Arabic term for immigrant.

Urdu is the national language of the state, and English is the official language, most widely used among the elite and in government ministries, since only 10 percent of the population speak Urdu as their native tongue. Punjabi is spoken by 48 percent of the population, while Sindhi is used by 12 percent; Siraiki, a Punjabi variant, is spoken by 10 percent, and Pashtu by 8 percent of the population. Only 40 percent of Pakistanis are able to read and write, compared to an average of 49 percent in South Asia and 53 percent in low-income countries worldwide. The literacy rate for women is even lower than for men, showing gender disparities in education.

Islam is the state religion of Pakistan, which was designed to be the homeland for Muslims living in British India. At the time of the census in 1998, 96.7 percent of Pakistanis were Muslims. The remaining 3.3 percent consist of non-Muslim minorities, such as Christians (1.6 percent of total population), Hindus (1.5 percent), and others. The majority of Muslims are adherents to the Sunni branch of Islam, but a minority, variously estimated at 15 to 25 percent, are Shia Muslims. An offshoot Shia sect, the Ismailis, led by Prince Karim Aga Khan, are prominent in some northern areas. Shia-Sunni tensions have increased in recent years and there have been occasional clashes.

OVERVIEW OF ECONOMY

Pakistan is a poor, heavily populated country on which internal political instability, phases of military dictatorship, and inefficient, corrupt governmental rule have taken a toll as much as the costly confrontation with neighboring India ever since partition in 1947. The economy is dominated by services, but agriculture still plays an important role. Pakistan's most important industry is textiles, which alone represents about 60 percent of the country's exports. After growing at an average rate of over 6 percent per year from 1980 to 1991, real gross domestic product (GDP) growth slowed during the 1990s and dropped to 1.3 percent in 1996-97 due to a poor cotton crop and related setbacks in the textile industry. In 1997-98, growth hit 4.3 percent against a governmental target of 6 percent. Real GDP grew only by 3.1 percent in 1998-99 but went up to 4.5 percent during 1999-2000. Pakistan's GDP per capita was US$450 in 1999, which puts it slightly above the South-Asian average of US$440 per capita.

Since the late 1980s, Pakistan has pursued a program of market-oriented economic adjustment, reform, and development. With the support of international financial institutions—mainly the International Monetary Fund (IMF) and bilateral donors—this program has aimed at enhancing macroeconomic stability, promoting the private sector and export-led industrial development, and reversing past neglect of key social sectors such as health, education, and population planning. Specifically, the government has sought to reduce monetary and external imbalances, reduce trade barriers, modernize the financial sector, privatize state-owned industries, and offer specific incentives to attract foreign investment. Unfortunately, the implementation of this program has mostly lagged behind expectations.

Despite the availability of cheap labor, a large domestic market, and access to regional markets, foreign investors have shied away from investing their money in Pakistan because of its widespread corruption, lack of skilled labor, law and order problems (especially in Karachi, the industrial hub), and an outdated infrastructure . Domestic investment has also slowed in recent years. According to official figures, total investment has declined from an average of 17.1 percent of GDP a year between 1984 and 1994 to 7.9 percent between 1994 and 2000. One reason is that manufacturers, who are traditionally served by the domestic banking system (particularly yarn spinners and sugar refiners), have often failed to honor their debts, contributing to a banking crisis.

Underlying most of the economic problems faced by Pakistan is the "crisis of governance," as the World Bank calls it. This phrase refers to the poor performance of the public institutions in terms of accountability, efficient management, corruption, and tax collection. Among these, corruption is one of the most pressing problems. Transparency International, an international non-governmental organization monitoring governments, ranked Pakistan 2nd, 5th, and 11th, in its annual reports on the most corrupt countries in the world between 1996 and 1998. Corruption hurts the economy by raising transaction costs. Even if these payoffs are considered part of the cost of doing business, there is an economic loss as these payments are neither available for expansion and improvement in the quality of public services, nor for private sector investment. A 1994 survey conducted by the World Bank among 200 business firms in Pakistan revealed that a significant amount of time and money was wasted in numerous unpredictable interactions with petty and higher-level bureaucrats seeking bribes. Entrepreneurs reported spending about 12 percent of their time dealing with tax and regulatory requirements. Also, corruption depresses economic growth by lowering public investment. Only a part of the amount appearing in budget documents as expenditure on public projects may actually get spent on these projects; the rest is siphoned off by government functionaries and contractors. One study estimated that the value for money obtained in government construction of school buildings may be only 50 to 60 percent.

Another major problem is Pakistan's huge external debt and its continued dependence on financial aid. Foreign loans and grants provide approximately 25 percent of government revenue, and debt service obligations total nearly 50 percent of government expenditure, which means that as much as half of all government expenditures are used to repay loans. Defense and debt service together absorb more than two-thirds of total federal expenditure, or almost all revenues from federal taxes. Improving tax collection in the medium-to long-term is crucial if Pakistan is to maintain repayments on its combined foreign and domestic debt of about US$62 billion, almost equivalent to Pakistan's annual GDP. It is estimated that the country needs at least US$21 billion of aid up to 2004 just for debt repayment, a large figure for a nation with annual exports of less than US$9 billion and very little foreign exchange reserves . In the case of the provinces, the bulk of expenditure is taken up by establishment costs (civil servants' salaries, benefits, and pensions), interest payments, and subsidies . The government under General Pervez Musharraf, which overthrew the government under Nawaz Sharif in 1999, faced US$32 billion in external debt. General Musharraf's ambitious economic agenda includes measures to widen the tax net, privatize public sector assets, and improve its balance of trade position. Commitment to these reforms, however, has to withstand strong opposition from interest groups such as employees of state-owned corporations, private traders, landlords, and government bureaucrats. It is unclear how the U.S. war against the Taliban regime in neighboring Afghanistan, begun in 2001, will impact Pakistan's economy.

POLITICS, GOVERNMENT, AND TAXATION

Democracy has not yet taken root in Pakistan. The military has intervened several times in Pakistan's history and has always remained an important political player even when not in power. A military intervention occurred as recently as 12 October 1999, when elected institutions were suspended. Under the suspended constitution, the parliament consists of 2 houses: a National Assembly elected directly through universal suffrage (voter eligibility begins at 21 years of age), and a Senate elected by the provincial legislatures. The prime minister is the head of government and is elected by and from the National Assembly. The president is the head of state and is chosen by an electoral college consisting of the National Assembly, the Senate, and the provincial assemblies. The constitution requires that the president be a Muslim and provides for a 5-year term. For all practical purposes, the prime minister has to be a Muslim as well.

Each of Pakistan's 4 provinces had its own directly elected provincial assembly, a government headed by a chief minister, and a governor appointed by the president upon recommendation by the prime minister. After 12 October 1999, however, provinces had only governors, with no assemblies or chief ministers. The 217-member National Assembly is elected for a 5-year term and the 87-member Senate for a 6-year term. The National Assembly seats are currently divided, with 8 going to the Federally-Administered Tribal Areas (FATA), 1 to the federal capital of Islamabad, and 10 additional seats reserved for religious minorities. Each of the 4 provinces has 19 senators; there are 8 senators from the FATA and 3 from the federal capital area. Indirect elections for half the members of the Senate are held at 3-year intervals.

The constitution guarantees an independent judiciary. The supreme court is the highest court in the country; high courts in the provincial capitals of Lahore, Karachi, Peshawar, and Quetta stand at the head of the provincial judicial systems. In principle, Pakistan's press publishes freely. However, self-censorship is widely practiced by journalists, and advertising and other tactics are used by the government to influence media content. About 90 percent of Pakistan's paper-reading public reads papers and magazines in the Urdu language which are not noted for their objectivity, fairness, or accuracy. The electronic media are strictly controlled by the state and are notorious for their propaganda against domestic political opposition and India.

Pakistan came into existence in August 1947 with the partition of British India and has had a turbulent political history ever since. The country was designed to be the homeland for Muslims living in British India. The creation of a separate Muslim nation was accomplished largely through the efforts of Mohammed Ali Jinnah, Pakistan's first governor general, who is also remembered as "Quaid-e-Azam" (The Great Leader). Between 1947 and 1948, Pakistan and India fought the first of 3 wars over the Muslim-majority territory of Kashmir, claimed by both states. The conflict ended in a stalemate. Kashmir continues to be a disputed territory and the principal subject of discussion within the Pakistani establishment and media.

Initially, Pakistan consisted of 2 parts: East Pakistan and West Pakistan, separated by 1,610 kilometers (nearly 1,000 miles) of Indian territory. In 1970 general elections resulted in the Awami League sweeping the East Pakistan seats to gain a majority in Pakistan as a whole. The Pakistan People's Party (PPP), founded by Zulfikar Ali Bhutto, won a majority of the seats in West Pakistan. The outcome was a country completely divided, with neither major party having support in the other area. Negotiations to form a coalition government broke down, and a civil war ensued. In 1971, the eastern section declared itself the independent nation of Bangladesh. Leadership of the western part of Pakistan was handed over to Bhutto, who became prime minister and the first civilian chief martial law administrator.

In July 1977, Bhutto was deposed by the chief of army staff, General Zia-ul-Haq, who became president in 1978. (Bhutto was executed in 1979.) Under Zia, the government of Pakistan became increasingly Islamized and benefited from supporting mujahideen (holy warriors) efforts to counter the Soviet invasion of Afghanistan. General elections were held in November 1988 after General Zia died in a plane crash, and the PPP, headed by Benazir Bhutto, daughter of the late prime minister, won a majority of seats in parliament and formed a coalition government. In August 1990, President Ghulam Ishaq Khan exercised his right under the constitution to dissolve the National Assembly, dismiss the prime minister, and call for new elections. In the general election held in October 1990, the Islamic Democratic Alliance won the largest number of seats, and Mian Nawaz Sharif, leader of its largest component party, the Pakistan Muslim League (PML), became prime minister. Nawaz Sharif, the first industrialist to lead Pakistan, continued a trend toward liberalization of the economy and promotion of private sector growth, though largely unsuccessfully.

In 1997, Nawaz Sharif was re-elected prime minister with a substantial majority, but on 12 October 1999 his government was removed in a bloodless military coup. The chief of army staff, General Pervez Musharraf, took over as "chief executive," suspended the constitution, established a military-dominated National Security Council as the country's supreme decision-making body, and named a mostly civilian cabinet. Many western countries, led by the United States—Pakistan's Cold War ally and partner in the jihad (holy war) of the 1980s that expelled the Soviets from neighboring Afghanistan—tolerated the coup, even though it seemed a throwback to a pre-Cold War era. After the nuclear standoff with India over the Kashmir dispute, it seemed favorable to have the army in command rather than have Islamists take over the country from a run-down civilian government.

Upon assuming power, General Musharraf set an ambitious reform agenda, which included fighting corruption, devolving power to the local level, and fighting sectarianism. In May 2000, the supreme court validated the coup, but gave General Musharraf 3 years from 12 October to return to a civilian government. Musharraf agreed to this time frame. Tensions with India, religious sectarianism, corruption, and political uncertainty are among the many challenges his government faces.

Plans have been put forward to implement well-designed and comprehensive civil service reforms. These reforms, as favored by the World Bank, could foster economic growth and sustained poverty reduction by reducing the obstacles to private sector development that the poorly performing public sector now creates. They are also designed to expand access of the poor to good-quality basic social services, and address serious problems of governance, such as corruption. The country's civil service is largely unchanged since the days of British colonial rule and is characterized by rigid, often irrelevant, and unevenly enforced rules and mismanagement. The erosion of real wages even of high-level officials (which is the consequence of high rates of inflation without attendant pay raises in the civil service) add to the factors that have eroded accountability and transparency, and led to widespread corruption. At the same time, the government is burdened by wage costs and rising pension costs, which are making important non-wage expenditures impossible.

An economic team, headed by the finance minister, has identified tax reform as the single most urgent measure needed to hold Pakistan together. Without a rise in tax revenues the state will simply not have the money to tackle any of the major problems facing the country. Economists warn that Pakistan must eventually raise its annual tax collection to 20 percent of GDP, up from a range of 10.7 to 15.5 percent in the past decade, to begin balancing its budget. At the moment, annual tax revenues just about pay for debt servicing and national defense, leaving other crucial areas to be financed through more loans. Only about 1 percent of the country's population of nearly 140 million pay income tax .

INFRASTRUCTURE, POWER, AND COMMUNICATIONS

Pakistan's infrastructure is poor and suffers from decades of neglect. Roads and railways are insufficient and in poor condition. Both the telephone system and the provision of electricity are hampered by corrupt and inefficient governmental service providers, which increasingly face competition from private entrepreneurs.

TRANSPORTATION.

Pakistan has a total of 247,811 kilometers (153,990 miles) of roads, of which 141,252

kilometers (87,774 miles) are paved. There are only 339 kilometers (211 miles) of expressway. Almost 90 percent of Pakistan's freight and passenger traffic travels by road. The major north-south and east-west link is Lahore and Rawalpindi to Peshawar and carries over half of Pakistan's goods and passenger traffic. The World Bank reports that Pakistan's road network is notable for its poor condition. Over two-thirds of paved arterial roads are not wide enough for 2 lanes. At both federal and provincial levels, Pakistan provides insufficient funding for road maintenance. According to the World Bank, these poorly maintained roads can result in 30 to 40 percent higher transportation costs.

Trains, the classic means of public transportation in British India, diminished in importance during the last decade of the 20th century. There are 8,163 kilometers (5,072 miles) of railway tracks. Pakistan Railways, an autonomous agency under the Ministry of Railways, operates the railroad system. Over the past 15 years, there has been a marked shift in freight traffic from rail to highways, a trend that the government hopes to stabilize and reverse. Railways carry about 15 percent of freight traffic and road vehicles 85 percent. The rail system comprises 781 stations. Rolling stock includes about 550 locomotives, 4,250 passenger coaches, and 32,000 freight cars. Pakistan Railways plans to improve railroad's share of long-haul freight traffic, upgrade track to permit trains to operate at higher speeds, and rehabilitate infrastructure to make better use of capacity.

Pakistan's major ports are Karachi and Port Muhammad bin Qasim, where Pakistan's merchant fleet of 20 ships is based; the country also has 2 proposed sites for future facilities at Gwadar and Pasni, both on Baluchistan's Makran Coast. Karachi is the main port, handling the majority of all dry and liquid cargo. During 1999 and 2000, Karachi Port handled 18 million tons of cargo, an increase of 2.4 percent from the preceding year. Port Qasim during the same period handled 9.5 million tons of cargo, showing an impressive increase of 19 percent over the corresponding period. To facilitate this expansion, the Pakistani government has allowed 2 shipping companies to construct and operate specialized integrated container terminals at Port Qasim and on Karachi's West and East Wharves.

The government-owned national air carrier, Pakistan International Airlines (PIA), has a fleet of 48 planes and serves 35 domestic and 37 international destinations. Karachi's Quaid-i-Azam International Airport, whose Jinnah Terminal opened in August 1992, is the principal international gateway to Pakistan, although Islamabad, Lahore, Peshawar, Faisalabad, and Quetta also have a number of international flights. In line with plans to continue modernizing and upgrading its civil aviation facilities, a new international airport is being constructed at Lahore. New airports and improvements in runways are also planned for Islamabad and other cities. The government recently opened the domestic aviation market to private sector competition. As of July 2000, 3 private airlines—Aero Asia, Shaheen Air, and Bhoja Air—are operating on local and international routes, while a fourth private sector airline, Safe Air, is operating on domestic routes only.

POWER.

The combined generating capacity of the 2 public energy producers and distributors—the Water and Power Development Authority (WAPDA) and the Karachi Electricity Supply Corporation (KESC)—reached 11,701 megawatts (MW) in 1999-2000. Private producers contributed an extra 4,674 MW, bringing the total installed capacity to 16,375 MW. Pakistan's energy supply comes from a combination of oil (42.8 percent), natural gas (38.6 percent), water (12.8 percent), coal (5.2 percent), liquid petroleum gas (0.4 percent), and nuclear production (0.2 percent). Pakistan has faced chronic energy shortages, and domestic energy demand has outstripped supply. The development of the energy sector remains a high priority. From July 1998 to June 1999, the largest electricity consumption was by the industrial and transport sectors (34.4 percent each), followed by domestic (22.1 percent), commercial (3.2 percent), agriculture (3.0 percent), and other government sectors (2.9 percent). Pakistan's commercial energy demand is estimated to double over the next 10 years and, despite recent gas discoveries, the energy shortfall is expected to increase.

Even after recent rationalization of power tariffs , industrial and commercial tariffs are quite high in Pakistan. Nevertheless, the state-run WAPDA remains close to bankruptcy due to numerous unpaid bills. Unpaid bills (many in dispute) mounted from R15 billion at the end of June 1998 to R28 billion by the end of February 1999. KESC, which is supposed to be privatized, owes WAPDA R8 billion. The government reacted by using armed forces personnel to collect overdue electricity bills from private consumers and to check for theft of electricity. The successful drive against illegal connections led to a fall in sales demand as illegal connections were removed by WAPDA as well as by the consumers themselves. Although bill collection from private consumers is greatly improved, collection from government agencies is still a serious problem.

TELECOMMUNICATIONS.

Pakistan has a mediocre but improving domestic telephone system. Service is adequate for government and business use, in part because major businesses have established their own private systems. Since 1988, the government has promoted investment in the national telecommunications system on a priority basis, significantly increasing network capacity. However, despite improvements in urban systems, telecommunication services are still not readily available to the majority of the rural population. There were 2.861 million fixed lines in 1999 and another 400,000 applications are being processed, yet Pakistan's Telecommunication Corporation (PTC) is meeting less than half of this demand each year. One reason is that much of the demand is from customers in rural areas where two-thirds of the population lives and where the payback takes much longer and is less lucrative.

In December 1990, the Pakistan Telephone and Telegraph (PTT) Department, which was directly controlled by the Ministry of Communications, was converted into the Pakistan Telecommunications Corporation (PTC), which still is the only provider of basic telephone services. PTC today employs 60,000 civil servants and is the country's most lucrative state-owned franchise. PTC earned net profits of about R18 billion on sales of R60 billion in the first half of 2001. Nevertheless, the government is eager to privatize PTC by first selling 26 percent ownership to a "strategic investor," and then selling further parts after the firm is on a solid footing. This new urgency to sell parts of PTC stems from a desire to lay a telecom infrastructure that supports a wider ambition. Pakistan, with an eye on India's IT success, wants to develop a software sector, but IT companies will invest only if they have access to affordable bandwidth capacity. Since private-sector inflows are necessary to achieve this goal, the sector is being deregulated in rapid fashion.

At present there are 3 cellular mobile phone operators. Cellular phones are a small market, with a penetration of only 0.24 percent, but it is growing quickly as deregulation lowers tariffs and as the cost of handsets falls. In 1998, there was only 1 operator, which had 158,000 subscribers. The current 350,000 cellular phone subscribers is forecast to swell to 1 million by 2003. There were 49 radio stations in 1998, broadcasting to about 13.5 million radios. In 1997, the country had 22 television broadcast stations, and Pakistanis owned 3.1 million televisions. In 1999, there were 26 different Internet service providers (ISPs); by 2000, this number had increased above 30 ISPs. Internet bandwidth usage grew heavily as access expanded from 29 cities in August 2000 to 350 population centers in a 4-month crash program. The number of Internet accounts is about 150,000, sharpening a market struggle between several Internet service providers.

Pakistan's IT policy focuses on education, and the budget reflects the emphasis: the allocation to science and technology went from R120 million in 2000 to R5 billion in 2001. The aim is to equip and upgrade universities; train teachers and public servants; improve economic rewards for PhDs; draw women into the IT net by training them for, say, medical transcription services; and teach the computer language Java on a mass scale, especially to the large number of jobless young people. At the same time, 15-year tax breaks are being offered to create the right business environment for foreign investment.

ECONOMIC SECTORS

Services dominate the Pakistani economy. In 1998, they contributed 48.2 percent to GDP, while agriculture and industry each accounted for about a quarter of gross domestic production (25.2 percent and 26.6 percent, respectively). After the crisis following the nuclear standoff with India and the subsequent international sanctions against Pakistan in May 1998, value-added large-scale manufacturing was projected to grow by only 2.4 percent in 1998-99, sharply down from 6.2 percent in 1997-98. Growth of the agricultural sector, too, was expected to be only about half the level of the previous year. The manufacturing sector has seen dramatic fluctuations, averaging 9 percent per year during the first 2 decades of independence, but dropping to less than 3 percent in the 1970s, when large-scale nationalization significantly reduced investment levels. The rate recovered in the 1980s, averaging 7.6 percent, but fell back to 3.9 percent in the 5 years prior to 1999-2000.

A common feature in developing countries is the informal sector , often making up a good deal of the services sector. The popular view of informal sector activities is that they are primarily those of petty traders, smugglers, drug traffickers, street hawkers , shoeshine boys, and other groups underemployed on the streets of the big towns. Evidence suggests that the bulk of employment in the informal sector, far from being only marginally productive, is economically efficient and profit-making, though mostly small in scale and limited by simple technologies and little capital. The informal sector employs a variety of tradesmen offering virtually the full range of basic skills needed to provide goods and services for a large though often poor section of the population. Persons employed in this sector are not documented, meaning they do not have access to public services and do not pay income tax. The informal sector also includes the heroin manufacturers flourishing in the North-West Frontier Province and Baluchistan, who compensate for the bareness of their soil and the neglect of successive central governments by resorting to the " black market " economy, notably the processing of opium, grown in neighboring Afghanistan, into heroin. Smuggling across the porous border with Afghanistan is also a large constituent of the economy. However, the opium smuggling trade with Afghanistan will no doubt be undercut by the U.S. bombing campaign in Afghanistan, which targeted Afghani poppy fields as well as Taliban military operations. Acting in cooperation with the United States, Pakistan officially closed its border with Afghanistan, which could also stem the flow of drugs into Pakistan.

AGRICULTURE

Agriculture is a vital sector of Pakistan's economy and accounted for 25.9 percent of GDP in 1999-2000, according to government estimates. The sector directly supports three-quarters of the country's population, employs half the labor force , and contributes a large share of foreign exchange earnings. The main agricultural products are cotton, wheat, rice, sugarcane, fruits, and vegetables, in addition to milk, beef, mutton, and eggs. Pakistan depends on one of the world's largest irrigation systems to support production. There are 2 principal seasons. Cotton, rice, and sugarcane are produced during the kharif season, which lasts from May to November. Wheat is the major rabi crop, which extends from November to April. The key to a much-needed improvement of productivity lies in a more efficient use of resources, principally land and water. However, change is dependent on the large landowners who own 40 percent of the arable land and control most of the irrigation system, which makes widespread reform difficult. Assessments by independent agencies, including the World Bank, show these large landholdings to be very unproductive. Pakistan is a net importer of agricultural commodities. Annual imports total about US$2 billion and include wheat, edible oils, pulses, and consumer foods.

Pakistan is one of the world's largest producers of raw cotton. The size of the annual cotton crop—the bulk of it grown in Punjab province—is a crucial barometer of the health of the overall economy, as it determines the availability and cost of the main raw material for the yarn-spinning industry, much of which is concentrated around the southern port city of Karachi. Official estimates put the 1999-2000 harvest at some 11.2 million 170-kilogram bales, compared with the 1998-99 outturn of 8.8 million bales and the record 12.8 million bales achieved in 1991-92. The government recently actively intervened in the market to boost prices and to encourage production. A major problem is that the cotton crop is highly susceptible to adverse weather and pest damage, which is reflected in crop figures. After peaking at 2.18 million tons in 1991-92, the lint harvest has since fluctuated considerably, ranging from a low of 1.37 million tons in 1993-94 to a high of 1.9 million tons in 1999-2000.

The 2000-01 wheat crop was forecast at a record 19.3 million tons, compared to 17.8 million tons produced during the previous year. This increase is due largely to favorable weather and a 25-percent increase in the procurement price to about US$135 per ton. About 85 percent of the crop is irrigated. Despite the record production, Pakistan will continue to be a major wheat importer. The government has imported an average of US$2.4 million annually over the past 5 years. The United States and Australia are the major suppliers. Demand for wheat is increasing from Pakistan's rapidly growing population as well as from cross-border trade with Afghanistan.

Pakistan is a major rice exporter and annually exports about 2 million tons, or about 10 percent of world trade. About 25 percent of exports is Pakistan's famous fragrant Basmati rice. Rice is Pakistan's second leading source of export earnings. Private traders handle all exports. Pakistan's main competitors in rice trade are Thailand, Vietnam, and India.

Tobacco is grown mainly in the North-West Frontier Province and Punjab and is an important cash crop . Yields in Pakistan are about twice those for neighboring countries largely due to the extension services provided by the industry. Quality, however, is improving only slowly due to problems related to climate and soil. Farmers have started inter-cropping tobacco with vegetables and sugarcane to increase returns. About half of the total production is used for cigarette manufacturing and the remainder used in traditional ways of smoking (in hand-rolled cigarettes called birris, in water pipes, and as snuff). The share of imported tobacco is increasing gradually in response to an increased demand for high-quality cigarettes.

Minor crops account for only 5 percent of total cultivated area; these include oilseeds (sunflower, soybean), chilies, potatoes, and onions. Domestic oilseed production accounts only for about 25 percent of Pakistan total edible oil needs. As a result, Pakistan spends more than US$1 billion annually in scarce foreign exchange to import edible oils, while its oilseed processing industry operates at less than 25 percent of capacity due to an inadequate supply of oilseeds. For 2000-01 total oilseed production was forecast to decrease 10 percent to 3.6 million tons. The government has highlighted development of the oilseed sector as a priority.

Pakistan's fishing industry is relatively modest, but has shown strong growth in recent years. The domestic market is quite small, with per capita annual consumption of approximately 2 kilograms. About 80 percent of production comes from marine fisheries from 2 main areas, the Sindh coast east from Karachi to the Indian border, and the Makran coast of Baluchistan. Ninety percent of the total marine catch is fish; the shrimp which constitute the remainder are prized because of their greater relative value and demand in foreign markets. During 1999-00, total fish production was 620,000 tons, of which 440,000 tons consisted of sea fish and the remainder were fresh-water species. About one-third of the catch is consumed fresh, 9 percent is frozen, 8 percent canned, and about 43 percent used as fish meal for animal food.

Livestock accounts for 40 percent of the agricultural sector and 9 percent of the total GDP. Principal products are milk, beef, mutton, poultry, and wool. During 1999, the livestock population increased to 120 million head. That same year Pakistan generated 970,000 tons of beef, 640,000 tons of mutton, and 190,000 tons of poultry. In an effort to enhance milk and meat production, the government recently launched a comprehensive livestock development project with Asian Development Bank assistance. Poultry production provides an increasingly popular low-cost source of protein. Modern poultry production is constrained by high mortality, high incidence of disease, poor quality chicks, and poor quality feed, combined with an inadequate marketing system. Frozen poultry have only recently been introduced.

Forests cover an area of 4.2 million hectares or about 5 percent of the total area of Pakistan. The principal forest products are timber, principally for house construction, furniture, and firewood. Many of the country's wooded areas are severely depleted as a result of over-exploitation. The government has restricted cutting to protect remaining resources—though corruption often jeopardizes environmental efforts—and has lowered duties to encourage imports. Forestry production has since declined from 1.07 million cubic meters in 1990-91 to 475,000 cubic meters in 1998-99. Pakistan imports an estimated US$150 million of wood products annually to meet the requirements of a growing population and rising demand by a wealthy elite.

INDUSTRY

Pakistan, which had almost no large industrial units at the time of partition in 1947, now has a fairly broad industrial base, and manufacturing accounts for about 17 percent of GDP. Cotton textile production is the single most important industry, accounting for about 19 percent of large-scale industrial employment. Cotton yarn, cotton cloth, made-up textiles, ready-made garments, and knitwear collectively accounted for nearly 60 percent of Pakistan's exports in 1999-2000. Other important industries are cement, vegetable oil, fertilizer, sugar, steel, machinery, tobacco, paper and paperboard, chemicals, and food processing. The government is attempting to diversify the country's industrial base and to increase the emphasis on export industries. Small-scale and cottage industries are numerically significant but account for a relatively small proportion of the GDP at about 6 percent. Small-scale industry includes facilities, which employ fewer than 50 workers, and cottage industries (industrial units in which the owner works and is aided by family members but employs no hired labor). In 1999, industrial production grew by 3.8 percent.

Privatization of many state-owned enterprises is a key element of Pakistan's reform program. In 1991, the government identified a group of 118 state-owned industrial units for privatization. Of these, 97 units have been sold off. Industrial units—including factories producing cement, chemicals, automobiles, food products, etc.—have mainly attracted domestic private investors. The government plans to spend 90 percent of privatization proceeds for debt repayment and 10 percent for poverty alleviation. The government has laid out a time frame for privatization of various organizations in the financial, oil and gas, power, industrial, and telecommunication sectors, and the privatization process is to be completed by 30 June 2002. In most cases, the government aims to find "strategic investors" to buy up a certain stake of these firms and gain management control. The privatization process is a very complex undertaking, since new regulations of private sector entities in these sectors are still being established.

MINING/HYDROCARBONS.

Unless there are major new discoveries, crude oil production—which satisfies under 18 percent of the country's requirements, compared with 35 percent in 1991-92—will ultimately run out. Recoverable reserves were estimated at 225 million barrels. Crude oil and related product imports cost R100.4 billion (US$1.7 billion) during the first 9 months of 1999-2000, accounting for 25.9 percent of all imports.

There have been promising gas discoveries in recent years. Natural gas production averaged 2.22 billion cubic feet per day in 1999-2000, about 10 percent above the previous year, while known recoverable reserves were estimated at over 19.5 trillion cubic feet at the end of March 2000. The government faced the prospect of buying this gas at international oil prices, since it had earlier promised to do so. However, it can hardly afford the price, which caused problems with the gas exploration companies.

There is an extensive range of non-fuel minerals. Deposits of limestone, marble, china clay, dolomite, gypsum, silica, ochre, sulfur, barytes, bauxite, iron ore, and emeralds are being exploited, but all on a very low scale. International exploration and development companies would, if they could, flock to Baluchistan, which is believed to possess massive reserves, particularly of natural gas. The problem is that the province's tribal chiefs, over whom the central government exerts little control, have been demanding too high a price for permission to drill. Most of the foreign companies initially awarded concessions were not able to make use of them when faced with obstruction from Baluchi tribesmen. An exception is the country's biggest development project in the remote Chagai district of Baluchistan, where the Metallurgical Construction Corporation of China is mining blister copper. It is also hoping to exploit some of the area's gold and silver reserves.

MANUFACTURING.

Before 1947 there was little manufacturing in the area that makes up present-day Pakistan. Its primary role was as a supplier of raw materials, including cotton, to industrial hubs across British India, such as Bombay. In general, manufacturing still works with relatively basic technologies, generates few value-added products, and has a narrow production base, i.e., it does not diversify into many different product groups. Textiles are Pakistan's primary industry, and in 1999 accounted for 8.5 percent of the gross domestic product, 31 percent of total investment, 38 percent of industrial employment, and almost 60 percent of total exports. Pakistan is Asia's eighth-biggest textiles exporter, with export revenues of US$5.7 billion in the first half of 2000. Export growth has been declining since a recent peak of 6.1 percent in 1996. The trend is reversing, encouraged by large cotton crops in the past 2 years which have lifted output to about 11 million bales (each bale weighing 170 kilograms), the bulk of which is consumed at home, and large-scale capital investment to modernize plants. However, progress is still expected to fall short of targets, notably to be among Asia's top 5 exporters with sales of US$14 billion by 2005.

As a rule, large textile firms concentrate on spinning and weaving, leaving garment manufacturing to highly fragmented small to medium-scale producers. The industry, particularly its spinning and weaving sectors, has been under pressure since the mid-1990s, owing to increased competition in the international market, financial mismanagement within the industry, and rising global demand for value-added textiles, as well as the increase in production capacity in other developing countries. Pakistan's textile sector must move to higher value-added production to meet challenges and opportunities beyond 2005, when quotas are removed and tariff barriers lowered, as mandated by the World Trade Organization (WTO). This will expose Pakistan's mills to intense competition from China, Asia's largest textile exporter.

Food processing is a large industry, generating an estimated 27 percent of value-added production and making up 16 percent of the total employment in the manufacturing sector. Major sub-sectors of Pakistan's food industry are cooking oils and hydrogenated vegetable oils, sugar, flour, tea, dairy products, beverages, and canned foods. The fish, meat, and fruit and vegetable sectors remain underdeveloped, partly for lack of adequate infrastructure, including storage and transportation facilities. A small quantity of processed foods is imported to feed a few supermarkets catering to the country's elite. The vast agricultural resources and the country's geographic location make Pakistan an ideal country for investment in the food sector. Several foreign firms have entered the market and established their own presence as manufacturers, or established joint ventures with local partners. The fastest growing sectors are beverages—including carbonated soft drinks and juice and juice-flavored drinks—poultry, and edible oils.

Pakistan Steel, with an annual capacity of 1.1 million tons, is Pakistan's only integrated steel plant. It is located near Port Bin Qasim, 25 kilometers (15.5 miles) east of Karachi. The steel mill was constructed with technical assistance from the former Soviet Union, and currently employs about 20,000 workers. Iron ore, manganese, and cocking coal for the plant are all imported.

Leather is one of the major foreign exchange earners for Pakistan. The leather and leather products industry is labor-intensive (directly employing more than 200,000 workers), and there are over 500 tanneries in Pakistan. The recent growth of the industry is due in large part to its successful progression from the export of raw hides and skins and semi-processed leather towards high value-added finished leathers and leather products (including leather jackets, gloves, footwear, and sporting goods). The tanning sector is concentrated in Punjab, where manufacturing units process primarily buffalo and cow hides; tanneries in Sindh process primarily goat and sheep skins. The local market for leather is limited, and about 80 percent of production is exported. More sophisticated machinery and productivity increases can be expected to further boost exports. Pollution, especially through tannic acid and dyes, is a serious problem for this industry.

SERVICES

In 2000, services contributed about 49 percent to GDP. Wholesale and retail trade alone accounted for 14.9 percent of GDP, while transport, storage, and communications contributed 10.1 percent, public administration and defense 6.3 percent, ownership of dwellings another 6 percent, and finance and insurance 2.5 percent. Other services contributed 9.3 percent to GDP.

FINANCIAL SERVICES.

A ruling by the Pakistani supreme court in December 1999 obliged the government under General Pervez Musharraf to finalize arrangements for an Islamic banking system by the end of the 2001 financial year. The issue of converting to an Islamic banking system, under which fixed interest is abolished in favor of a regime where profits and losses are shared between depositors and borrowers, has never been as central in the country's history as it is now. Some of the existing instruments, such as leasing, are considered compatible with Islam and could be offered on a wider variety of products to respond to demand. Bankers assert that once the issue of Islamic banking is resolved Pakistan will launch the privatization of 1 or 2 of its 3 large public sector banks: Habib Bank, United Bank, and National Bank.

Financial reforms introduced in 1990 have liberalized Pakistan's banking sector, which had long been dominated by state-owned banks, and private banks are gradually playing a more significant role. In December 1990, the government announced plans to privatize state-owned banks and to allow the establishment of private domestic banks. As of 2001 the government had privatized 2 formerly nationalized banks: Allied Bank Limited (ABL) and Muslim Commercial Bank. There are 44 banks operating in the country, of which 25 are domestic, while 19 are foreign banks. The 25 Pakistani commercial banks have over 8,000 branches nationwide. Commercial banks are engaged predominantly in corporate lending. Consumer banking in Pakistan is largely undeveloped. There is no tradition of lending to small individual consumers, and purchases of automobiles, housing, and consumer goods are generally made on a cash basis. High interest rates combine with high start-up costs to discourage initiatives in the consumer sector.

In 1996, the banking system was on the verge of collapse due to the breakdown of governance and loss of financial discipline. Over the years there had been widespread political interference in both lending and loan recovery by banks, and borrowers had come to expect not to repay loans they took, especially from the state-owned banks. As a result, the stock of non-performing loans (NPLs) grew by almost 600 percent between the end of June 1989 and the end of June 1998, when the total amount of NPLs stood at R146 billion. Since December 1997 a reform program has been implemented, with support from the World Bank. Corporate governance has been improved through changes in management of the state-owned banks and protection given to the new management from political interference. The legal and judicial processes for recovery of loans have been strengthened. Operating losses have been reduced through staff separations and closures of non-viable bank branches. Much remains to be done to further strengthen banking regulation and supervision, and develop a well-functioning legal and judicial system. At the same time, privatization needs to be accelerated while ensuring that banks are sold to sponsors that bring in internationally recognized good corporate governance.

COMMERCE.

Commercial activities such as wholesale and retail trade have the largest share of business in the service sector at around 30 percent.

In 2000, General Pervez Musharraf, the military ruler, ordered his troops to accompany teams of tax inspectors to visit neighborhoods to collect information on the expenditures of individual Pakistanis. The move sparked resistance from traders in parts of the country, eventually forcing the government to make some concessions. Many of the tax board's employees are poorly paid and have wide-ranging powers, a combination that breeds corruption. Businessmen complain of being harassed by tax officials and subjected to complicated bureaucratic procedures as penalties for not paying bribes. Concessions made to traders included the abolition of a newly introduced general sales tax at retail level. This measure did not meet International Monetary Fund (IMF) conditionality, and the organization subsequently stalled the payment of a sizeable adjustment loan.

TOURISM.

The number of foreign tourist arrivals in the South Asia region was 5 million in 1998; Pakistan's share of tourist arrivals in this region was 7.6 percent. More than half of foreign tourists in 1999 traveled to Pakistan to visit friends and relatives, followed by business travelers (18.3 percent), holidays and recreational travelers (13.4 percent), and religious tourists (2.5 percent). Most of the total tourists from overseas visited main cities like Karachi, Rawalpindi/Islamabad, and Lahore. Of the 420,000 tourists visiting in 1999, the largest share of around 125,000 came from the United Kingdom, mostly native Pakistanis working and living in Great Britain.

INTERNATIONAL TRADE

The external sector was seriously affected by the economic sanctions imposed on Pakistan after it conducted nuclear tests in May 1998. The lack of foreign investor confidence following the freeze on foreign currency deposits led to a decline in foreign private capital inflows and a sharp decline in money sent home from citizens working abroad, or so called "workers' remittances ." The level of foreign direct investment declined by 32.1 percent per year to a low of US$296 million in 1998-99, according to official data. Remittances from Pakistanis abroad, most of them in the Gulf, the United Kingdom, and North America, peaked at US$2.89 billion in 1982-83, but fell to under US$1.5 billion in 1998-99. These adverse developments, along with suspension of new economic assistance by major donors, pushed Pakistan's foreign exchange reserves down from US$1,533 million at the end of April 1998 to US$415 million (the lowest level reached during the crisis) by 12 November 1998, hardly sufficient to finance 2-3 weeks worth of imports.

Disappointing foreign sales performances have given Pakistan a trade deficit every year since 1972-73. This is partly due to the narrow range of export products. Five categories of goods—cotton yarn, garments, cotton cloth, raw cotton, and rice—still account for over 60 percent of export earnings. A second major reason is the vulnerability of key products, notably cotton, to droughts, floods, and pestilence. However, there are other reasons for the poor performance, including the small proportion of high value-added goods in the sales mix, low product quality, and poor marketing.

The United States has long been Pakistan's largest export market, absorbing over 21 percent of total sales in 1999-2000. The United Kingdom, Hong Kong, and Germany have also been major outlets. In recent years, Japan and the United States have alternated as Pakistan's top supplier, although Gulf countries took a bigger share in 1999-2000, reflecting the sharp increase in the cost of oil imports. In 1999, Pakistan exported goods worth US$8.4 billion; it imported goods in the value of US$9.8 billion, creating a trade deficit of US$1.4 billion. Pakistan's main exports are cotton, fabrics, yarn, rice, and other agricultural products, most of which go to the United States (21 percent), Hong Kong (7 percent), the United Kingdom (7 percent), Germany (7 percent), and the United Arab Emirates (5 percent). Imports are mainly machinery, oil and oil-related products, chemicals, transportation equipment, grains, pulses, and flour. They come mainly from the United States (8 percent), Japan (8 percent), Malaysia (7 percent), Saudi Arabia (7 percent), and the United Arab Emirates (7 percent). Exports of goods and services represent roughly 15 to 16 percent of GDP, and imports equal around 18 percent of GDP.

Pakistan is a member of the World Trade Organization (WTO). Though not a member of any regional free trade arrangement, the country is party to 2 arrangements which are progressing toward regional trade liberalization. The Economic Cooperation Organization (ECO), whose founding members are Pakistan, Turkey, and Iran, grants a 10 percent tariff preference on several goods. ECO membership was expanded to 10 in 1993, when Afghanistan, Azerbaijan, and the 5 former Soviet Muslim republics of central Asia were admitted. The second arrangement, the South Asian Association for Regional Cooperation (SAARC), is comprised of India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives. Because of competition in key export sectors such as textiles among the larger member states, this association is not expected to stimulate regional trade flows. Pakistan's leading regional trading partners are Bangladesh (its former eastern part), India, and Sri Lanka. Pakistan is also a member (along with India and Nepal) of the Asian Clearing Union, which was founded in 1976 and aims to facilitate multilateral payments through the use of currencies of participating countries in regional transactions in order to expand intra-regional trade and save convertible foreign exchange.

MONEY

In June 2001, 1 U.S. dollar equaled 63 Pakistani rupees. The rupee's average value against the dollar had been R12.7 for US$1 in 1982-83. This shows that inflation has been running high since that time. For the decade from 1980 to 1990, the inflation rate averaged 7 percent per year, and from 1990 to 1995, it reached an average

of more than 11 percent annually. After the economic crisis that came as a consequence of the nuclear standoff with India and international sanctions against Pakistan in 1998, it went down to about 7 percent again. There are 3 stock exchanges in Pakistan: Karachi, Lahore, and Islamabad. In 2001 the Karachi stock exchange had about 780 listed companies with trading volume increasing from 1.1 million shares a day in 1990 to about 95 million in 2001. Lahore and Islamabad stock exchanges are substantially smaller than Karachi.

The State Bank of Pakistan (SBP), the central bank, controls the money supply and credit, supervises the operations of banks, administers the country's international reserves, and acts as banker to the federal and provincial governments. The government of Pakistan has followed a liberal monetary policy from 1999 to 2000 in order to provide cheap credit to the industrial sector. The demand for credit, however, has not come forth from the private sector. Although domestic credit expansion was higher this year due to large borrowing by the government sector, conversion of non-resident foreign currency accounts into rupees, and an increase in liquid reserves, actual growth in money supply has remained stagnant due to low credit demand from the private sector. The government and the SBP are attempting structural reforms in an effort to move toward more indirect, market-based methods of monetary control along with greater autonomy for the SBP. The central bank's autonomy was considerably strengthened with the passage of new banking laws in the State Bank Act in May 1997.

Pakistan's external debt increased significantly during the 1990s, mainly due to growth of private debt. Total external debt, including private sector debt, increased from US$27.5 billion in 1993-94 to US$32.6 billion in 1997-98, equivalent to 50.6 percent of GNP.

POVERTY AND WEALTH

A third of the population of Pakistan lives below the poverty line (34 percent in 1991). While the lowest 10 percent of the population has a share of only 4.1 percent

in the overall household income and consumption, the richest 10 percent of the population has a share of 27.6 percent. The slowdown of economic growth in recent years has resulted in an increase in the incidence of poverty in the 1990s. Thus, there is a compelling need for a clear strategy focusing on reviving and sustaining high economic growth in a stable macroeconomic environment (i.e. low fiscal and external deficits with single digit inflation). It includes the provision of quality basic social services—particularly education, health, and drinking water—and an efficient and responsive social safety net program for the very poor. Low inflation in the prices of food and other mass consumption goods are also very important for the welfare of the poor.

Pakistan's human development indicators, especially those for women, fall significantly below those of countries with comparable levels of per-capita income. Only 40 percent of the population is literate (28 percent of women), compared with 49 percent in South Asia and 53 percent in low-income countries. About two-fifths of the population has no access to safe drinking water, and more than half has no access to sanitation. The infant mortality rate of 88 per 1,000 live births is higher than the average of 73 in South Asian countries and 83 for low-income countries. Pakistan's population growth rate of 2.6 percent remains among the highest in the world and frustrates efforts to increase the coverage of social services.

To address these problems, the government initiated a Social Action Plan (SAP) in 1993. Increasingly, the design and implementation of social service programs involve active participation from communities and nongovernmental organizations (NGOs). To make further progress in the social sectors, the second phase of the SAP was initiated in 1997-98. A key part of the poverty reduction strategy is the provision of adequate basic social services—particularly elementary education and basic health services—to a much higher proportion of the poor. Only through better education and improved health can the life-long earning capacity of the poor be enhanced.

Pakistan is a major transit and consumer country for opiates (opium, heroin, morphine) from neighboring Afghanistan, the world's largest producer of opium. In 2000, Afghanistan cultivated 82,000 hectares of opium poppies, yielding 3,275 metric tons of fresh opium. As a result of the high levels of opium production in the region over the past 2 decades, Pakistan now has one the highest addiction rates in the world. Drug addiction is a common reason for the incidence of poverty for individuals and families. A recent shift to injecting heroin instead of smoking or sniffing it has heightened fears of an HIV/AIDS epidemic.

WORKING CONDITIONS

The workforce comprises of 38.6 million people, growing at an annual average rate of 2.7 percent in 1992-99. There is an extensive export of labor, mostly to the rich Middle Eastern states in the Gulf region, where Pakistanis, alongside Sri Lankis, Indians, and Filipinos find work as cleaners and domestic servants, but also in industry, commerce, and governmental services. The convenience of affordable travel to the oil-rich Arabian Gulf states and the expectation of work opportunities makes those countries attractive destinations for Pakistanis seeking jobs.

Officially, about 7 percent of the workforce is currently unemployed, a crude measure in most countries, but even more so in a country with a massive undocumented labor force. Pakistan's employment statistics are incomplete, omitting a range of wage earners and self-employed persons, male as well as female, in what is termed "the informal sector." According to unofficial estimates, unemployment may reach about 15 percent, and represents a growing problem for the government. With a majority of the population poised to enter a job market with few employment prospects, the provision of jobs, especially in rural areas, is of increasing importance. Due to the low quality or absence of educational services, again particularly in rural areas, there is a lack of skilled labor.

Several attempts have been made to eradicate bonded labor over the past decade in Pakistan, but the system remains partially in place. The bonded labor system is a lending structure in which the debtor/worker is bound to the creditor/employer as long as all or part of the debt remains outstanding. In case of sickness or death, the family of the individual is responsible for the debt, which often passes down from generation to generation. The problem of child bonded labor is especially serious: bonded money is paid to a parent or guardian, who then provides the child to work off the debt. The most severe conditions have been detected among the haris (landless tenant farmers) in the Sindh region, as documented by the Human Rights Commission of Pakistan. Some 1,000 laborers surveyed revealed that three-quarters had been subject to physical restraint, such as private jails, and that some 90 percent of the children had been compelled to work. To alleviate this problem the Human Rights Commission of Pakistan has purchased land and set up temporary camps in order for families to take refuge, and the government has allowed haris to settle on government land.

A related but distinct problem is that of child labor. Although most Pakistani children work in the agricultural sector, a large number of children work in urban centers weaving carpets, manufacturing surgical instruments, and producing sporting goods for export. A 1992 UNICEF/Government of Pakistan study reported that 90 percent of the 1 million workers in the carpet industry are children, many of whom began working in the industry before 10 years of age. Just as the data on Pakistan's labor force is unreliable, figures on child labor remain somewhat unclear. Nevertheless, there is little doubt that child labor has assumed massive proportions in Pakistan. The actual total number of working children in Pakistan is probably somewhere between 8 and 10 million.

COUNTRY HISTORY AND ECONOMIC DEVELOPMENT

1930. The idea of establishing a separate state for all Muslims of South Asia is conceived by the poet-philosopher Allama Muhammad Iqbal.

1947. On 14 August, the British divide the crown colony of India into 2 territories: the Republic of India and the future Islamic Republic of Pakistan, essentially establishing separate Hindu and Muslim states. Several millions of Muslims and Hindus are killed in sporadic fighting between the 2 groups as people migrate across the border into the country aligned with their religious affiliation.

1948. On 30 July, Pakistan signs the General Agreement on Tariffs and Trade (GATT), an agreement aimed at regulating international trade.

1950s-60s. Pakistan uses military and economic aid from its Cold-War alliances to create an artificial prosperity.

1970-71. Zulfikar Bhutto's Pakistan People's Party (PPP) wins elections in West Pakistan, while the Awami League wins the overall majority due to its clear victory in East Pakistan. After the ensuing civil war, East Pakistan declares its independence as the People's Republic of Bangladesh. Bhutto becomes prime minister of the remaining Pakistan.

1970s. The 1970s oil boom in the nearby manpower-starved Persian Gulf enables Pakistan to export manpower in large numbers. Money from Gulf workers transferred home to Pakistan in large amounts helps to sustain the economy in the 1970s.

1977-79. The chief of army staff, General Zia-ul-Haq, overthrows Bhutto in a military coup on 5 July 1977 and becomes president in 1978. Bhutto is executed in April 1979.

1980s. Pakistan's opposition to the Soviet invasion of neighboring Afghanistan in late 1979 helps it procure heavy doses of financial aid from Western nations also opposed to the Soviet action. However, when the aid dries up with the end of the Cold War towards the close of the decade, Pakistan's economy becomes saddled with huge amounts of foreign debt .

1988. Pakistan returns to democratic rule after Zia-ul Haq dies in an airplane crash. The country once again comes under the rule of the Pakistan People's Party, now led by Bhutto's daughter, Benazir. The constitution is restored with some amendments on 30 December.

1996-97. The Bhutto government is dismissed by the president due to charges of corruption, mismanagement, and involvement in extra-judicial killings. Elections in February 1997 result in an overwhelming victory for the Pakistan Muslim League and Nawaz Sharif, who becomes prime minister.

1998. In May, India and Pakistan both conduct nuclear tests, demonstrating their strength and bringing the region to the verge of nuclear war over the disputed Kashmir province. The ensuing international economic sanctions and the related drying up of most capital inflows lead to severe financial difficulties.

1999. The government of Sharif is overthrown by the chief of army staff, General Pervez Musharraf, who jails Sharif and declares himself chief executive of the state. The supreme court validates the military coup against Sharif but restricts the rule of the chief executive to a period of 3 years.

FUTURE TRENDS

Pakistan's prospects for the immediate future are bleak. There is uncertainty as to the political future of the country; the supreme court legitimized General Musharraf's military coup of 12 October 1999 in the course of 2000, but also restricted the rule of the chief executive to 3 years. Nobody knows whether the country will return to democratic rule or whether this new phase of democracy will be equally dominated by the large landowners and characterized by widespread corruption as it was in the past. Observers warn that Pakistan's economic outlook and the extent to which its communities outside Punjab feel that they live in an unjust system could be the key determinant of the country's political future rather than the system of government it follows. The pending return of Benazir Bhutto, the former prime minister convicted of bribery and corruption, to Pakistan and possibly into politics further complicates the picture. The ongoing dispute with India over the province of Kashmir, where frequent ambushes have led to casualties and brought the 2 countries to the verge of nuclear confrontation, is unlikely to be resolved in the near future.

While Pakistan's military regime earns credit from Western economists for having a deeper commitment to reforms than previous rulers, many add that the pace of change is not fast enough. With a short-term mechanism in place to service the debt, the long-term challenge is to seek a significant increase in annual export income and large inputs of foreign inward investment. Another challenge to face is the public sector's poor performance. Public sector companies alone run a combined annual deficit equivalent to about 2 percent of GDP. The government promised to begin privatizing some large companies in 2001 and eventually sell some loss-making ones in an attempt to improve the risky state of public finances. It is vital for the country that it keeps the support of the IMF and other donors as it struggles to maintain payments. Improving tax collection in the medium-to long-term is crucial if Pakistan is to maintain repayments on its combined foreign and domestic debt of about US$62 billion, almost equivalent to Pakistan's annual GDP. It is estimated that the country needs at least US$21 billion of aid up to 2004 just for debt repayment, a large figure for a nation with annual exports of less than US$9 billion and reserves of below US$1 billion—sufficient to pay for about 5 weeks of imports.

Pakistan, it seems, has plans for reforms, but the success of its program will ultimately depend on how quickly and comprehensively it can deal with low social indicators, attract investors, and convince lenders that the future management of the economy will be different from the past.

DEPENDENCIES

Pakistan has no territories or colonies.

BIBLIOGRAPHY

Government of Pakistan, Ministry of Finance. <http://www.finance.gov.pk>. Accessed August 2001.

Harrison, Selig S. India and Pakistan: The First Fifty Years. Cambridge: Woodrow Wilson Center Press, 1999.

Naipaul, V. S. Among the Believers. Harmondsworth: Penguin,1982.

Noman, Omar. Pakistan: Political and Economic History Since 1947. London: Kegan Paul, 1990.

U.S. Department of State. FY 2001 Country Commercial Guide: Pakistan. <http://www.state.gov/www/about_state/business/com_guides/2001/sa/pakistan_ccg2001.pdf>. Accessed August 2001.

Zaidi, S. Akbar. Issues in Pakistan's Economy. Oxford: Oxford University Press, 1999.

—Markus R. Bouillon

Ralph Stobwasser

CAPITAL:

Islamabad.

MONETARY UNIT:

Pakistani rupee (R). 1 Pakistani rupee equals 100 paisa. Currency notes of 1, 2, 5, 10, 50, 100, 500, and 1,000 rupees are in use.

CHIEF EXPORTS:

Cotton, fabrics and yarn, rice, other agricultural products.

CHIEF IMPORTS:

Machinery, petroleum, petroleum products, chemicals, transportation equipment, edible oils, grains, pulses, flour.

GROSS DOMESTIC PRODUCT:

US$282 billion (purchasing power parity, 1999 est.).

BALANCE OF TRADE:

Exports: US$8.4 billion (f.o.b., 1999). Imports: US$9.8 billion (f.o.b., 1999).