Qazi M. Alimullah1

Qazi M. Alimullah1

Trade and exchange rate policies together determine the relative prices of imports vis-a-vis exports and of tradables vis-a-vis nontradables. The relationship between import liberalization and exchange rate management is thus analytically inextricable. The intimacy of trade and exchange rate policies is indicated by the way in which international trade economists use the term “real or effective exchange rate.” In the literature on trade and development, which has been dominated by the distinction between outward-looking and inwardlooking strategies, this orientation of development strategies has been defined in terms of the effective exchange rate of exports (EERx) relative to that of imports (EERm).

The effective exchange rate, in turn, pertains to the combined effect of exchange and trade policies on relative prices. EERx, then, is the domestic currency acquired per unit of foreign exchange earned as a result both of the nominal exchange rate (say, rupees per U.S. dollar) and of all subsidies (whether direct or indirect) minus import duties and the like. Similarly, EERm is the combined effect of the nominal exchange rate and all duties on the domestic currency paid to acquire a unit of foreign currency.

If EERx > EERm, then selling goods in the export markets on average provides greater revenues than selling them in the home market, and the price incentives can be said to create a bias favoring exports. In the literature, however, this sort of bias is almost invariably referred to as an ultra outward-oriented strategy; simple outward orientation is identified as a neutrality of incentives between home and export sales, or EERx = EERm. The apparatus above is not the only possible usage of the term real effective exchange rate. Macroeconomists also use it to mean the relative price of tradables and nontradables and derive it by simply deflating the nominal exchange rate by the domestic price level. According to Jagdish Bhagwati, “[this] usage is basically inadequate since, in many developing countries, duties, subsidies and other subventions and charges are important, and concentrating on the parity is not enough. For this purpose the Bhagwati-Kreuger National Bureau of Economic Research (NBER) Project defined the added concept PLDEER, that is, price-level-deflated EER, to get at the appropriate concept that macroeconomists should use.”2

While the exchange rate and trade policy are analytically bound together, capital flows enter the picture through the effect of import liberalization on the balance of payments and through the possible effect of capital flows on the nominal exchange rate. Moreover, notwithstanding their analytical inextricability, the nominal exchange rate and trade policy are two quite different sets of policy instruments, and the precise combination used to yield any given EER is significant, particularly during a period of transition from an inward-oriented to an outward-oriented regime, or vice versa.

Thus, the sort of policy issue typically facing policymakers is how rapidly and in what sequence to liberalize trade and what sort of policies to adopt regarding the exchange rate and foreign borrowing. These certainly have been and remain the policy issues in Pakistan, and they form the main focus of this paper.

Liberalization, Adjustment, and Outward Orientation

Import Liberalization

Import liberalization involving the reduction of tariffs and quantitative restrictions leads to a rise in imports, other things being equal. Concern over the effect on the balance of payments has inhibited import liberalization just as defending the balance of payments has so often been the rationale for imposing and intensifying import restrictions. Import liberalization, though, also has a positive effect on the balance of payments since it shifts incentives away from production for the home market and toward production for the export market. How much and how quickly imports and exports respond is the crucial issue from the point of view of the effect of import liberalization on the balance of payments.

The question is one of the demand elasticity for imports vis-a-vis the supply elasticity of exports, and for any given set of such price elasticities, the net effect on the balance of payments depends on the exchange rate policies adopted, or the real exchange rate as macroeconomists use the term. A depreciation of the exchange rate would shift domestic demand from tradables to nontradables and foreign demand from other countries’ products to those of the economy that has depreciated its currency. For such expenditure “switching” to bear the sole brunt of balance of payments equilibrium may require excessive depreciation, especially when there are no restraints on domestic demand. Whatever the relevant price elasticities, restoring or maintaining equilibrium in the current account of the balance of payments is best done when both the exchange rate and expenditure switching are combined with restraints on aggregate domestic demand or with the “absorption” of tradables. The lower is aggregate demand, the lower will be the increase in imports upon import liberalization and the greater will be the surplus available for exports.

In theory, import liberalization does not have to worsen the current account because any rise in imports will be offset by an increase in exports. A modest depreciation of the exchange rate may be enough to correct any balance of payments disequilibria, or mild restraint on aggregate demand may do the trick. In practice, though, a substantial liberalization of imports is likely to involve some combination of all three adjustment mechanisms, and the required correction in the exchange rate and aggregate demand may be quite considerable. This is partly because the short-run demand elasticity of imports tends to be fairly high while exports are likely to respond with a longer lag. Invariably, the supply elasticity of exports tends to be significantly higher in the long run than in the short run.

Foreign capital inflows can greatly reduce the potential short-term costs of import liberalization. To the extent that such capital is available, it facilitates the macroeconomic management that must accompany import liberalization. Foreign capital lessens the need for or risk of such an excessive depreciation of the exchange rate that it becomes substantially undervalued in the short run compared with its longerrun equilibrium, with the possible danger of setting off an inflationary spiral. Similarly, the stabilization measures do not need to restrain demand quite as much when additional foreign capital inflows are available during the adjustment period.

Moreover, the availability of additional foreign resources is likely to induce the government authorities to undertake more import liberalization than they otherwise would. The uncertainty about the shortrun balance of payments effects and about the possible social and economic costs often inhibits liberalization of imports. To the extent that foreign capital inflows lessen the need for growth-restricting policies, adjustment involving import liberalization will likely cause fewer short-term costs in terms of economic growth.

Two caveats to the positive role that foreign capital can play in supporting import liberalization should be mentioned. One is to guard against the danger that capital inflows will lead to an excessive appreciation of the exchange rate; a mistake that has not always been avoided. The other is the importance of avoiding external debt that is in excessive amounts or on inappropriate terms and of making sure to use the foreign capital to adjust adequately, not to squander it.

The lessons of experience suggest the following ingredients of successful and sustained import liberalization: an exchange rate policy that encourages exports and efficient import substitution; avoidance of macroeconomic imbalances, since both high inflation and expansionary demand-management policies hinder the needed structural shifts in production and the viability of the balance of payments; and additional inflows of foreign capital on appropriate terms, which can facilitate import liberalization by reducing its possible short-term costs and giving governments the confidence to undertake more rapid or more substantial liberalization than they might otherwise have considered. This is not to say that faster, greater import liberalization is always better. But timid reforms that fall short of a critical minimum are likely to lead nowhere and fail to provide clear, strong signals to economic agents.

Development Experiences

Since the publication of the seminal critique of import-substituting, or inward-oriented, industrialization in developing countries (Little, Scitovsky, and Scott, 1970), the subject and related issues have probably received more attention than any other set of issues involving the economies of developing countries.3 More recently, however, awareness of and a consensus on the benefits of export promotion, or outward orientation, has grown, as has acknowledgement of the costs of an excessive emphasis on import substitution. The limitations of government intervention are also much better appreciated, and it is recognized that market failure, in itself, is not a sufficient justification for government action. As such, the probability and costs of inappropriate or ineffective intervention must be taken into account. Thus, a broad consensus has emerged that the following measures should be avoided: extreme levels of protection and an overvaluation of exchange rates, at least for prolonged periods; liberalization of the capital account of the balance of payments before liberalization of the current account; and macroeconomic instability.

However, many important areas of controversy remain. A vigorous debate continues on various matters: the pace and sequencing of trade and payments reforms, including the relative merits of across-the-board liberalization versus selective liberalization; the validity of the infant-industry argument; and more generally, the ingredients of growth-oriented adjustment. In the light of developing country experiences and the economic literature, the following “lessons” can be discerned (also see Noman, 1991a).

  • —While extremely high levels of protection should be avoided in the long run, they can help in the early stages of industrialization, at least in medium to large countries. The crucial features of good economic management are not to prolong this early phase but to initiate policies aimed at efficient resource allocation and resource use, thus leading to the fairly quick removal of the anti-export bias so that EERx ≥ EERm.

  • —Adjustment need not be sudden and across the board. Although large variations in effective trade protection are not recommended, considerable variance within EERx and EERm (while on average EERx ≥ EERm) has been a feature of such East Asian miracles as Taiwan, Korea, Japan, and more recently, Thailand. The contrast between import substitution and export promotion has often been overdrawn—not just in the sense that importsubstituting industries can become export industries with rising levels of efficiency but also that it is possible to pursue both simultaneously.

  • —Rapid export growth can precede import liberalization. In most cases, export growth should ideally precede an across-the-board liberalization of imports, especially when foreign capital flows cannot ease the balance of payments constraint that the consequent surge in imports can quickly face.

  • —Undervalued exchange rates can be a powerful way of promoting exports and providing protection, as demonstrated by the experiences of Korea, Taiwan, Japan (in the 1950s and 1960s), and Chile (in the early 1980s). However, moving to an undervalued exchange rate can be a tricky business because of the inflationary implications of exchange rate depreciation. But a realistic exchange rate, in the sense of a nominal exchange rate that does not require enormous subsidies to exporters, is necessary for sustained export expansion.

  • —Macroeconomic stability is essential to sustain liberalization and growth. But more controversial questions are what constitutes the right blend of demand- and supply-side measures for growth-oriented adjustment and whether stabilization should precede or accompany structural adjustment in cases of severe imbalances. Certainly, a poor supply response and an inadequate growth orientation have been major concerns.

  • —Credibility, consistency, and coherence are important for the success of liberalization policies. This requirement is closely related to the question of governmental commitment to its reform program. Without strong commitment, indeed without “ownership” by the government, reform efforts are most unlikely to succeed.

  • —The ability of governments to intervene successfully varies enormously. The differences are partly a matter of the quality and experience of the civil servants responsible for the design and implementation of policy and partly one of political economy. This factor along with the level of development and size of the country are among the most crucial contextual issues determining the appropriate set of reform policies.

Economic Development and Macroeconomic Policy: The Case of Pakistan

Pakistan’s experience during the 1950s and the 1960s has been widely hailed both as a model of successful development, especially of industrialization, and as one of the worst examples of import-substituting industrialization.4 An assessment of these contrasting views and the subsequent industrialization of Pakistan can be found in Noman (1991b). Interestingly, both views of Pakistan’s industrialization have considerable merit, though there is almost certainly more merit in the view that Pakistani industrialization was more a success than a disaster.

As for Pakistan’s industrialization after this initial stage, an economic setback in the 1970s, partly caused by the “shock” of nationalization and the break-up of the customs union of East and West Pakistan, was followed by a decade of fairly rapid growth. But it has been argued that this reflected developments which permitted fairly rapid, easy industrial growth without the need to undertake the policy reform needed to create a more competitive, technologically advanced, and dynamic industrial sector. Thus, in the late 1980s, when the favorable external shocks ended, the need for a major reform of trade and industrialization policies, particularly to boost exports, became fully apparent. To examine Pakistan’s experience in greater detail, these various periods of industrialization will be discussed individually.

The 1950s

The decision not to devalue along with the pound sterling and the Indian rupee in 1949 was immediately followed by a run-up in the prices of Pakistan’s exports (at that time, mainly raw jute and cotton). An overvalued exchange rate, quantitative restrictions on imports, and acute scarcities created by the disruption of trade with India meant high return on imports. Importers made quick fortunes.

In the face of a balance of payments crisis at the end of the commodity boom in 1952, which had been related to the Korean War, the government intensified import restrictions. In addition to heavy protection, the manufacturing sector was provided with generous fiscal incentives and cheap credit. Profits were high and guaranteed, and inflation was modest. The traders who had earlier made overnight fortunes were now in a position to respond to these powerful incentives, and they did. As Little, Scitovsky, and Scott noted about their sample, only Pakistan, and to a lesser extent Taiwan and the Philippines, needed to create an entrepreneurial class. Within a decade, Pakistan had done so.

It should be noted that a large domestic market and the presence of raw materials that could be easily processed and marketed (jute and cotton) made the early stage of inward-oriented industrialization easier and longer. Nevertheless, the most extreme period of protection lasted only seven years, 1952-59.

The 1960s

In 1959, Pakistan began to reverse the anti-export bias of its trade regime. The second plan period, 1959/60-1964/65, witnessed a number of important departures, including:

  • —the introduction of an export bonus scheme—in effect, a multiple exchange rate system favoring manufactured exports—and a host of other incentives for exports, including preferential access to foreign exchange;

  • —a substantial increase in foreign capital inflows (on concessional terms);

  • —a significant liberalization of imports that was accompanied by increases in import capacity, via rising exports and aid, and carefully managed to avoid a balance of payments crisis; and

  • —the beginning of the “green revolution” in agriculture.

Economic growth accelerated sharply. Ahmad (1980) has observed that the rise in agricultural productivity and incomes occurred at a time when the limits placed on the domestic market for manufacturing by import substitution were being increasingly felt.


This was a period of severe exogenous and endogenous shocks: war and civil strife, the break-up of the country, the nationalization of large parts of industry and finance, and the first oil shock. At the same time, the familiar complexities and distortions created by the multiple exchange rate system ended with unification and the devaluation of the exchange rate.5

Pakistan’s manufacturing industries that had learned to export in the 1960s were quite successful in diverting sales from the protected market of the former East Pakistan to the world market in the early 1970s. But the effects of the devaluation are impossible to distinguish from those of the “shocks” noted above.

After 1977

Following the upheaval of the early to mid-1970s, industrial growth recovered with the support of earlier “heavy” investment by the public sector and a rapid expansion in domestic demand. The latter reflected a rapid growth in workers’ remittances, a rise in foreign resource inflows and illicit exports related to the war in Afghanistan, and a growing fiscal deficit. This period can be characterized as one of relatively easy, soft-option growth fueled by booming domestic demand. Improvements in international competitiveness and exports were at best inadequate. By 1988, however, all these trends had been reversed. Remittances had stabilized at a level well below their peak; foreign resource inflows related to the Afghan war began to decline; and fiscal deficits began to be reduced.

Between about 1980 and 1990, there was gradual liberalization, and the exchange rate system was moved to a managed float in 1982; since that time, the rupee has gradually depreciated. In 1990, a major package of economic reforms was introduced. It focused on exchange and payments reform (including liberalization of the capital account), privatization, deregulation, attraction of foreign direct investment, fiscal reforms, and export promotion. While some generalized import liberalization was also planned, its pace has been slower than that of the other reforms noted above.

The new reforms include the following measures:

  • —Restrictions have been removed on foreign currency bank accounts, on foreign exchange for travel, and on other payments for advertising abroad, education, publications, trade fairs, and so on. Certain other restrictions, such as the rules governing private sector foreign borrowing, have been greatly liberalized.

  • —A number of restrictions on foreign direct investment have been abolished or greatly liberalized. Among the former category are rules pertaining to the approval of investments, limits on equity shares, and remittances of dividends and profits.

  • —All commercial banks nationalized in 1974 are to be privatized; two of them already have been transferred to the private sector. A number of areas previously subject to public sector monopoly have been opened to the private sector (power generation, telecommunications, airlines, and shipping), with 115 industrial units to be privatized.

  • —Measures to encourage exports have included improvements in the scheme for duty drawback, bonded duty-free imports, and export credit. Also, the scheme for export-processing units, the allocation of textile export quotas, and income tax rebates are among the export-promotion policies that have been revamped.

  • —Import licensing has been largely eliminated, and the small list of exceptions is being reduced further. The maximum tariff has been reduced from 125 percent to 90 percent (except for motor vehicles).

  • —Industrial investment has been largely deregulated and offered strong incentives.

Perhaps the most potent manifestation of these reforms has been the 23 percent increase in exports during 1990-91; GDP growth has also accelerated, to 6.5 percent a year. These improvements occurred despite the severe adverse impact of the Middle East crisis on Pakistan and the nonavailability of any official assistance to deal with it. There were also larger capital inflows in the form of a 25 percent increase in foreign currency deposits.

Concluding Remarks

Over the four decades 1950-90, Pakistan’s GDP increased at an average annual rate of 5.2 percent; excluding the first decade, the growth rate was 6 percent. During 1980-89, Pakistan was one of the few countries in which GDP growth accelerated compared with growth over the previous decade. At 6.4 percent a year, GDP growth in this period exceeded that of all countries except China, South Korea, Hong Kong, and Thailand (barring the curious cases of Botswana, Oman, and war-torn Chad). “Large-scale” manufacturing has been the fastest growing sector in Pakistan, achieving an annual rate of more than 10 percent over the past forty years.

It has been widely noted that during the 1950s and 1960s, the extensive system of controls was administered by a competent civil service with relatively modest corruption. Since then, there has probably been a deterioration on both these counts. Macroeconomic stability, in the sense of modest inflation and avoidance of severe contractions of demand, has existed throughout the period.

As to the inefficiencies of Pakistan’s early industrialization, recent research has shown them to be much exaggerated (Noman, 1991b). While there is considerable evidence of total factor productivity growth and technological innovations in the 1960s, what has happened since seems more disturbing. A recent study finds evidence of much technological backwardness and industrial inefficiency, though also some cases of success (IMG Consultants, 1989). Liberalization until 1990 was much too slow. Protection still remains high by international standards with a number of anomalies in protection.

With the end of the favorable shocks of the 1980s and the accumulated shortcomings of past policies, the need to reform trade and related policies has increased, particularly in order to boost exports. The government’s recently launched economic reform program is a major response to this need. Its success in raising exports has made the task of import liberalization smoother by easing the balance of payments constraint. However, both tariff and financial sector reform conflict with the need to reduce the fiscal deficit. How to phase in and sequence these reforms and reconcile them with macroeconomic stabilization are the major challenges for economic policy today. At the policy level, there is a strong commitment to complete the agenda on tariff reforms by the middle of the 1990s and to create an environment that encourages secular capital flows and investment and that ensures allocative and productive efficiency.


Malcolm D. Knight

The two distinct parts of Qazi Alimullah’s paper are a fitting reflection of his wealth of experience as both a professional economist and a senior civil servant actively engaged in policy making. The first part of the paper enunciates several general propositions, or “lessons from experience,” drawn from the academic literature and Pakistan’s recent economic history. The second provides a concise survey of some major economic trends in Pakistan since the early 1950s. In my comments, I would like to discuss these lessons from experience and relate them, from a slightly different perspective, to economic developments in Pakistan over the very recent past.

Three of the general themes that run through Alimullah’s paper are unexceptionable: (i) that macroeconomic stability is essential to sustain liberalization and economic growth; (ii) that credibility, consistency, and coherence of policy are very important for the success of a government’s efforts at trade liberalization; and (iii) that the ability of governments to intervene successfully in the economy varies according to the economic management skills of those who must implement the policies, namely senior civil servants.

These are sound and sensible propositions that need no further elaboration. Indeed, the macroeconomic adjustment and structural reform program that the Pakistani authorities initiated in mid-1988 was based on their conviction that these principles must be enacted to achieve a sustainable external position while maintaining satisfactory growth performance. Essentially, the broad intention has been to adhere credibly and consistently to a comprehensive medium-term program. Key elements of the program have been fiscal deficit reduction through structural revenue reforms and expenditure restraint; correction of domestic cost and price distortions through adjustments in administered prices and other steps to deregulate markets; trade liberalization and tariff reform; firm domestic credit restraint and financial sector reform; management of the exchange rate to maintain international competitiveness; and steps to strengthen the performance of public sector enterprises.

Despite a number of adverse external developments and, at least until recently, a weaker than expected pace of structural reforms, the implementation of this program has allowed Pakistan to avoid severe balance of payments problems while posting solid economic growth performance. These results are a tribute to the practical relevance of Alimullah’s three propositions. But Alimullah also enunciates three other “lessons” the applicability of which is, at least to my mind, less general and more controversial. Let me express some of those doubts both at the general level and in light of Pakistan’s experience.

First, concerning restrictions on international trade, Alimullah acknowledges that extremely high levels of protection are to be avoided in the long run, but he nevertheless asserts that “they can help in the early stages of industrialization, at least in medium to large countries.” Although the paper does not say so explicitly, this view is based on the infant-industry argument—the idea that if a fledgling industry is given sufficient trade protection to achieve economies of scale, then unit costs can gradually be reduced to a point where the industry can produce without the need for continued protection.

At first sight, Pakistan does seem to provide a reasonably good example of the extensive use of protection to achieve rapid industrial growth. As Alimullah notes, the period 1952-59 saw an intensified emphasis on nontariff barriers as well as heavy use of other fiscal incentives, and the period was also characterized by rapid growth of industrial production. But I cannot help wondering whether this policy of protection was really a paramount factor in contributing to the strong growth.

At least until 1988, Pakistan’s trade regime remained both pervasive and highly restrictive. It comprised extensive negative lists of banned and restricted imports, very high nominal rates of tariff protection across a broad range of commodities, and a complex system of tariff concessions and exemptions. To the extent that this trade system operated to raise the prices and reduce the availability of imported inputs, it acted as a tax on export activity. Nor was its scope focused on protecting only those industries that were likely to enjoy a comparative advantage in the long run.

These features of Pakistan’s system of trade protection have left its economy with two adverse legacies. First, despite important structural fiscal reforms implemented in the past few years—including the introduction of the general sales tax and a marked expansion of the sales tax base—Pakistan’s fiscal system still relies heavily, perhaps excessively, on revenues from taxes and charges on international trade. Taxing any activity reduces the incentive to undertake it; international trading activities are no exception to this economic truism. The second problem is that partly because pervasive tariff and nontariff barriers raise the cost of imported inputs, they limit the incentive to diversify the export base. As a result, while Pakistan achieved solid growth performance during much of the 1980s, external sector performance has often been inhibited by the concentration of exports in a small number of industries. This lack of diversification has made Pakistan’s external sector performance vulnerable to the vagaries of foreign demand and supply and to protectionist trends in a small number of markets, including those for textiles and rice. These consequences of Pakistan’s extensive trade protection have left structural weaknesses that the recent period of more vigorous trade liberalization has not yet overcome.

With regard to the second of Alimullah’s lessons, I have similar reservations about his argument that rapid export growth can precede liberalization. Alimullah argues, “In most cases, export growth should ideally precede an across-the-board liberalization of imports, especially where foreign capital flows cannot ease the balance of payments constraint.” This proposition implicitly assumes that most imports are final consumer goods rather than inputs since—as I have already noted—import protection acts as a tax on export activities. It is my impression that both the quality and diversity of Pakistan’s export expansion may have suffered from the adverse effects of high tariff and nontariff barriers on imported inputs, and the various exemptions and concessions that have been granted to exporters (and potential exporters) over the years suggest that the authorities have shared these concerns.

In summarizing the relation between protectionism and economic growth in Pakistan, I would submit the following alternative view. On paper, the system of tariff and nontariff barriers that existed in Pakistan from the 1950s to at least the late 1980s was comprehensive. But in Pakistan it proved virtually impossible for the authorities to hermetically seal the domestic economy because the restrictive trade system could easily be circumvented. Many banned or prohibitively taxed goods entered the country through other channels and were widely available at prices only moderately above world market levels.

The implications of this practice have been several. First, owing to the limited effectiveness of the system of protection in achieving policymakers’ aims, the system had a much less distortionary effect on resource allocation than the authorities themselves intended. Thus, in practice, it did not act strongly to inhibit growth and diversification of exports and output. Second, even a major liberalization of nontariff barriers such as the one that began in 1988 would be unlikely to cause an import surge and pressure on international reserves, since many banned and highly taxed goods were entering the country anyway. Given Pakistan’s porous borders, the main role of import liberalization has probably been to produce an efficiency gain by allowing a broader range of foreign goods to enter the country at prices nearer world market levels.

Finally, I will say only a few words on Alimullah’s third general proposition that an undervalued exchange rate can be a powerful tool for promoting exports. Without addressing directly the merits of such a policy, let me say that it is very tricky to implement it effectively for any length of time. This is because undervaluing the real exchange rate requires not just a single policy but rather a combination of several analytically separate instruments. These include measures to influence the nominal exchange rate and sterilize the resulting effects on the money supply as well as policies for restraining domestic unit labor costs. Both of these policies are hard to operate effectively over the longer term.

But even if such a policy package could succeed, what would be the result? A deliberate policy of undervaluing the real exchange rate would tend to make production more labor intensive than it would have been in the absence of such a distortion. While Pakistan has a high rate of population growth, an undervalued exchange rate does not seem like a very effective means of increasing employment. And capital market distortions are hardly likely to make production excessively capital intensive in Pakistan. On balance, I would conclude that it is important to get the exchange rate “right” in real effective terms. But this does not justify the risky strategy of intentionally undervaluing the rate, since this can destabilize domestic prices.

In relating the exchange rate issue to the debate between free trade and protection, I would return to Alimullah’s three basic propositions. Macroeconomic stability is essential to allowing the authorities to sustain reforms and liberalization efforts. This is particularly so in the trade sector, where rent-seeking pressures are often intense. But it is also important for reform elsewhere, such as in the financial sector or the state-enterprise sector. Given firm demand management, good expenditure control, and monetary policies that can achieve moderate inflation, competitiveness can be maintained while the economy is liberalized to exploit the longer-run gains from international trade. That is why the Government of Pakistan has recently renewed its emphasis on supply-side reforms. That is also why, despite setbacks, a major liberalization of the trade and exchange system has occurred in Pakistan without adverse output and employment effects or an uncontrollable surge in imports.


The author wishes to acknowledge the assistance of Akbar Noman in the preparation of this paper. As Secretary, Ministry of Finance, the author would also like to stress that the views expressed in this paper are personal and do not necessarily reflect those of the Government of Pakistan.


Bhagwati (1987, p. 258).


For a survey of the leading issues and approaches in this area, see Noman (1991a) and Corbo, Goldstein, and Khan (1987), particularly the contributions of Jagdish Bhagwati, Stanley Fischer, Gerald Helleiner, Constantine Michalopoulos, Y.C. Park, Jeffrey Sachs, and John Williamson.


Little, Scitovsky, and Scott (1970).


The nominal devaluation was from 4.76 rupees to 9.9 rupees per U.S. dollar, but the effective devaluation was an average 25 percent for exports and 40 percent for imports. See Guisinger and Scully (1988).

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