A. Malaysia

Malaysia was formed in 1961 as a federation of Malaya, North Borneo (now Sabah), Sarawak, Brunei, and Singapore. However, Brunei and Singapore opted out of the federation in 1963 and 1965, respectively.³ The Federation of Malaya was established in 1914 under the British colonial rule by the Malay sultanates (states), although the process of economic and political integration of these states into the British Empire had started in the mid-1870s. Malaya gained its independence in 1957. Singapore was part of the British Empire until 1960. The British mercantile interests ruled the states of Brunei, Sabah, and Sarawak on the island of Borneo until the early 1960s.

As a British colony, Malaya (Peninsular Malaysia) was an enclave economy with a distinctly dualistic structure for almost one hundred years. A large part of this economy was controlled by the British capital invested in rubber plantations, tin mining, and timber extraction, and their products were almost entirely exported. Most of the labor for these activities consisted of migrants from China and India. The waves of migrants in the 19th and 20th centuries, supported by the British, had transformed Malaya into a multiethnic society by the time of its independence in 1957.⁴ The other part of the economy consisted of agricultural production and fishing, mostly for consumption, in the rural and urban areas. The Malay tenants, small landholders, and orang asli, or the indigenous non-Malay community, were engaged mainly in these activities. There were almost no large-scale industries and the Chinese largely controlled the small-scale processing industries, trade, and services. The British administration followed a laissez faire policy for trade with emphasis on law and order and maintained macroeconomic stability. The rental and export incomes from tin, rubber, and timber provided ample foreign exchange for the import of consumer goods and repatriation of profits. They also generated substantial revenue for the colonial government to maintain law and order and to build the physical infrastructure necessary for keeping the enclave economy profitable.

At the time of independence, Malaya’s population was about 6.2 million, of which almost one-half were Malay, 37 percent Chinese, 12 percent Indian, and the rest (mainly orang asli) made up 2 percent. A vast majority (80 percent) of the Malay population lived in rural areas and most of the Chinese (73 percent) lived in urban areas. Although the average income in Malaya was higher relative to its neighbors, large income disparities existed between the ethnic groups and within the Malay population.⁵ Malays were the poorest of the three major groups. A large part of the export and import trade, rubber plantations, and tin mining were owned and controlled by the British interests. Malaya was one of the most profitable colonies of Britain until its independence (Gomez and Jomo, 1999). The dualistic economy of Malaya was dependent largely on natural resources with little manufacturing industry. Agriculture provided 45-50 percent of the GDP and engaged about 65 percent of the labor force. International trade was a major engine of incomes based on the export of tin and rubber and import of a large number of consumer goods. Exports and imports accounted for nearly 90 percent of the GDP. Changes in the demand for tin and rubber and their prices in world markets greatly affected the level of national income and government revenue.

Malaya’s independence was achieved by an alliance of the main Malay, Chinese, and Indian political parties, and it has remained in government within a parliamentary system ever since.⁶ The Alliance has continued to reflect the fine social and economic balance between the three groups, but particularly between the Malay and Chinese, and provided continuity of a “social contract” through economic plans for rapid and equitable growth. Malaysia also inherited a strong central government and a small and efficient administration. The firmly entrenched legal code would give the government a strong base for implementing and administering its policies in the decades ahead. However, these institutions also served to codify certain social disparities, particularly in health and education, which have affected Malaysia since the beginning.

B. Pakistan

Pakistan was carved out of British India as an independent state in 1947 with two separate parts—East and West Pakistan—where a vast majority of the people, though linguistically and ethnically diverse, were Muslims. Although Pakistan was established as a federation of provinces, it functioned as a highly centralized state dominated by the elite from West Pakistan. The inability of successive governments to address the issue of interregional economic disparities between East and West Pakistan, which simmered throughout the 1950s and 1960s, led to a costly civil war after the general election in 1970 and eventually to the dismemberment of Pakistan at the end of 1971.

Pakistan—which was called West Pakistan, including the present provinces of Punjab, Sindh, North-West Frontier, and Balochistan, until the end of 1971—was an agrarian economy based on an irrigation system that the British developed in the Indus basin over a 50 year-period beginning in the 1880s. A large part of the output of grains, hides, and cotton was exchanged for manufactured consumer goods from other parts of British India and foreign countries. Most of the agricultural land was owned and controlled by landlords—zamindars and jagirdars—and cultivated by sharecropping tenants. However, some of the newly-irrigated areas in Punjab were allotted to small landowners. Muslim landlords and peasants provided a large part of the government revenue for infrastructure through land taxation. The non-Muslim population, Hindus and Sikhs, dominated the commercial and financial transactions and small-scale industries. Almost all of the large-scale manufacturing was located in other parts of British India. The colonial government’s investment was limited to the building of physical infrastructure, particularly the network of canal irrigation, railways and roads linking the main markets and the administrative (urban) centers. There were large interregional disparities between the irrigated and nonirrigated areas.

Pakistan emerged as an independent state with the partition of British India in 1947. Pakistan received over 6 million Muslim refugees between 1947 and 1951, which necessitated major adjustments in the economy and society. The emigration of Hindus and Sikhs to India greatly disrupted Pakistan’s commercial and industrial activities until Muslim entrepreneurs replaced the emigrants in the early 1950s. The population of Pakistan was estimated at 34 million in 1951, with nearly 80 percent living in rural areas.⁷ Agriculture was the mainstay of the economy, contributing nearly 55 percent of the GDP, using nearly 70 percent of the labor force and earning 90 percent of the foreign exchange. In 1950, the average income per capita was about $360 (1985 international dollars) or one-fifth of the income per capita in Peninsular Malaysia. Given the high concentration of agricultural land, which was still the most important income-earning asset, the distribution of income was highly unequal.

The transfer of power from the British to Pakistan included a constitutional but highly- centralized administration dependent on a narrowly based elite civil service. It was also a one- party state led by the Muslim League that depended on the political leadership of a handful of dedicated individuals, although a majority of the regional leaders were zamindars and jagirdars.

In the first four years, Pakistan was overwhelmed by several events, including the conflict with India on Kashmir, settlement of Muslim refugees, scarcity of financial resources and trained personnel, and the death of its founder followed soon by the death of its first prime minister. The failure of political leaders to develop a consensus on a new constitution and the increased political power of the civil and military bureaucracy, reflecting clearly the failure of politicians, created political instability in the early 1950s, which eventually led to the military takeover in 1958. The politicization of the civil and military bureaucracy contributed a great deal to the increased centralization of authority and exacerbated the regional grievances in both East and West Pakistan.⁸

A. Economic Growth and Structural Transformation

In the 1950s, Malaysia (Peninsular Malaysia) enjoyed far more favorable conditions than did Pakistan in several respects. Malaysia had a significantly higher income per head, far higher rates of adult literacy and school enrollment of male and female children, far lower infant mortality rates, higher life expectancy, greater macroeconomic stability, and a somewhat better endowment of natural resources in relation to the population.

Malaysia’s real GDP grew annually at an average rate of 6.6 percent compared with 5.3 percent in Pakistan during 1955-2000. However, Pakistan’s economic growth rate was significantly higher in the 1960s and modestly higher in the 1980s (Tables 3 and 4). It should be added that Malaysia’s growth rate was higher than 6.0 percent per year throughout the period, except in the second half of the 1950s and 1990s and the first half of the 1980s. Given the lower level of average income in Pakistan in the 1950s, private consumption accounted for 82 percent of GDP as against 63 percent in Malaysia; the ratio fell to 73 percent in Pakistan and to 49 percent in Malaysia by the end of the 1990s. It should be noted that the ratio of private investment to GDP was similar in the two countries in the 1950s. But in Malaysia private investment rose to nearly 20 percent in the 1990s, and stayed unchanged at 9 percent in Pakistan.

Similarly the share of public investment in GDP doubled from 7 percent in Malaysia but fell slightly in Pakistan from 8 to 7 percent during the same period.

Agricultural growth was the major contributor to the growth of GDP in Pakistan, and the growth of manufacturing and exports made the major contribution to the overall growth rate in Malaysia. The two economies have experienced significant structural changes due to the growth process. In both economies agriculture was almost equally important in the 1950s in terms of its contribution to GDP and use of labor. However, today it has become far less important in the economy of Malaysia than in Pakistan; agriculture contributes only 9 percent to GDP (25 percent in Pakistan) and uses 17 percent of the labor force (45 percent in Pakistan). The role of industry, particularly manufacturing, has become far more dominant in Malaysia, with services being almost equally important in the two economies. The trade composition in both countries has changed significantly from dependence on the export of primary goods to manufactured goods. It should be added that Malaysia has developed a much broader base of manufactured goods for exports than Pakistan has. The same shift has occurred in the composition of imports in Malaysia, but in Pakistan the share of primary goods has increased and that of manufactured goods decreased.

The differences in the growth rates and changes in the economic structures between Malaysia and Pakistan should be placed in the context of other important macroeconomic differences. For one thing, foreign trade has been far more important in the Malaysian economy than in Pakistan, although its importance in Pakistan increased as well from 10 percent of GDP in the 1950s to about 40 percent in the late 1990s. It is significant that the growth rates for both exports and imports were significantly higher in Malaysia than in Pakistan throughout the period, except in the 1960s. Malaysia managed to keep a low annual inflation rate, ranging between 1 and 5 percent, except in the 1970s when the rate was about 6 percent. In Pakistan, except for the 1960s, inflation was much higher, ranging from 7 percent to 21 percent. A similar difference can be observed in the government budget and balance of payments. In Malaysia there was a budget surplus in the second half of the 1950s and a negligible deficit in the 1990s; its budget deficit was reasonably low in the 1960s (4 percent of GDP) but high in the 1970s and 1980s (7 and 8 percent). In Pakistan, the budget deficit was reasonably small (4 to 5 percent of GDP) in the first 15 years (1955 to 1970), but rose to between 7 and 8 percent of GDP from the early 1970s to the end of 1990s. Similarly, Malaysia experienced modest surpluses and deficits in the current account, except in the first half of the 1980s and 1990s, when the deficits were 8 and 7 percent of GDP, respectively. The current account deficits in Malaysia were always on account of services and not goods. Pakistan has never had a surplus on its current account, and the deficits were quite high in the 1960s and 1970s. The deficits in Pakistan have been on account of trade in both goods and services.

In terms of resources for economic growth, domestic savings and foreign capital, particularly foreign direct investment, have played a significant role in Malaysia, whereas Pakistan has depended on borrowed foreign capital (largely from international donors and agencies) with a low level of domestic savings and little foreign private capital. Domestic savings in Malaysia have always been significantly higher than in Pakistan and increased from about one-quarter of GDP in the 1960s to 40 percent in the 1990s; the level in Pakistan has stayed between 8 and 12 percent of GDP.⁹ It is important to note that the ratio of domestic investment to GDP was similar in the two countries in the 1950s and 1960s, but increased in Malaysia to 36 percent and stayed at about 17 percent in Pakistan at the end of the 1990s. In both countries, the government revenue in proportion to GDP increased through time but was always higher in Malaysia. The ratio of government spending to GDP rose in both countries, but much more significantly in Malaysia, rising from 13 percent in the 1950s to 34 percent in the 1980s, before falling to 23 percent at the end of the 1990s. The share of government spending to GDP in Pakistan rose almost constantly, from 14 percent to 23 percent until the 1980s and stayed at that level in the 1990s.¹⁰

Foreign private capital has played an important role in the economy of Malaysia, including the preindependence period. After independence, foreign direct investment rose from just over 3 percent of GDP in the early 1970s to 6 percent in the 1990s. In Pakistan, foreign direct investment stayed under 0.5 percent of GDP until the 1980s and rose to only 0.9 percent of GDP in the 1990s. In contrast, foreign aid constituted nearly 5 percent of GDP in Pakistan in the 1960s, falling to 2 percent in the 1990s.¹¹ In Malaysia, however, foreign aid was less than 2 percent in the 1960s and fell to 0.2 percent at the end of 1990s. The foreign debt of Malaysia, largely on account of the private sector borrowing, rose significantly, from $6 billion in 1980 to $20 billion by 1985 and was $41 billion in 2000. Pakistan’s foreign debt, largely on account of the public sector borrowing, rose from $3 billion in 1970 to $15 billion in 1985 and to $36 billion in 2000. Compared with Malaysia, Pakistan has had a significantly higher debt burden from the mid-1960s (28 percent versus 11 percent of GDP) to the end of 1970s (41 percent versus 19 percent). However, Malaysia carried a higher debt burden in the 1980s, rising to 54 percent of GDP in the 1980s (against 42 percent in Pakistan), before it fell to 43 percent in the 1990s (against 56 percent in Pakistan). It should be added that the debt-service ratio in Malaysia ranged between 5 and 8 percent, except during the 1980s when it was about 17 percent. For Pakistan, the debt service ratio was never below 20 percent and has ranged between 20 and 29 percent; it rose from 20 percent in the 1970s to 27 percent in the 1990s.

B. Changes in Standard of Living

The data on changes in the standard of living, reflected by a number of economic and social indicators, show that the quality of life in Malaysia has improved far more impressively than in Pakistan. Using the United Nations Human Development Index (HDI) as a measure of standard of living, in 1999 Malaysia occupied 56th position and Pakistan 127th in a list of 162 countries. The values of HDI for Malaysia and Pakistan were 0.330 and 0.183 in 1960 and 0.832 and 0.445 in 1995, respectively. The gap in per capita income between Malaysia and Pakistan increased from about 5:1 in 1960 ($975 versus $181) to 9:1 ($4,600 versus $515) in 2000. Similar differences are seen in the changes in income per capita measured in purchasing power parity dollars; the gap was 2:1 in 1955, 3:1 ($1,278 versus $421) in 1975, and rose to 4.5:1 ($8,209 versus $1,834) in 2000. In addition to these differences it is important to examine the changes in other indicators of the quality of life.

Looking at the demographic transition, population grew more rapidly in Pakistan—from 30 to 137 million—than in Malaysia—from 6 to 23 million, increasing the gap between their populations from 5:1 in 1947 to 6:1 in 2000. However, in both countries, the growth rate has slowed particularly since the late 1980s. In 1960, the total fertility rate was 7 in Malaysia and 7.5 in Pakistan, but fell to 3 in the former and 5.3 in the latter by 2000. In 1960, the crude birth and death rates were higher in Pakistan than in Malaysia, but the difference between the two countries had increased significantly by 2000, since the fall in the two rates was far larger in Malaysia than in Pakistan. It should be added that Malaysia is now far more urbanized than Pakistan (56 percent of the population of Malaysia and 37 percent of the population of Pakistan live in urban areas) although about one-quarter of their populations lived in urban areas in 1960.

The differences in the infant mortality rate and life expectancy between Malaysia and Pakistan were quite large in 1960, but they have increased even more. Nearly all adults in Malaysia are literate, compared with only 45 percent in Pakistan, rising from 53 and 15 percent respectively in 1960. Almost all of the primary school-age children in Malaysia, but only 65 percent in Pakistan, are in school; in Malaysia primary school enrollment was almost as high in 1960. With regard to the secondary school, enrollment has increased from 19 percent to 67 percent in Malaysia but only from 11 to 30 percent in Pakistan. Public expenditure on health and education has always been higher in Malaysia, although the difference has been significantly higher in education than in health.¹²

Finally, the data on income distribution and poverty are important. Income distribution in Malaysia has been far more concentrated than in Pakistan, although the income concentration has fallen consistently in Malaysia since 1970 after rising significantly in the 1960s. In Pakistan, income inequality fell in the 1960s, increased in the 1970s, fell in the 1980s, and rose in the 1990s.¹³ Since the data on poverty are based on the nationally defined poverty lines, the important point is to examine the trend in poverty reduction and not compare the poverty levels in the two countries.¹⁴ In Malaysia, almost one-half of the population lived in poverty in 1970, but the proportion of the poor was only 8 percent in 2000. Poverty fell consistently over time in both rural and urban areas, although 12 percent of the rural and only 4 percent of the urban population was regarded as poor in 2000.¹⁵ In Pakistan, the data show that poverty increased in the 1960s, from 40 to 47 percent of the population, although the economy grew at a robust rate. There was a significant fall in poverty during the 1970s and 1980s, from 47 to 22 percent of the population. It should be noted that there was little economic growth in the 1970s but quite significant growth in the 1980s. There was a substantial increase in poverty in the 1990s, rising from just over one-fifth (22 percent) of the population in 1990 to nearly one-third in 1999. It is fair to suggest that in Malaysia economic growth had a significant impact on reducing poverty, whereas in Pakistan economic growth seems not to have had a strong relationship to changes in poverty.¹⁶ The following section further explores the differences in the institutions and policies that may have affected both economic growth and poverty in the two countries.

A. Economic Growth in Malaysia

Since independence, Malaysia has enjoyed a high degree of political stability, except in 1969 when there were ethnic riots. This threat to the fragile political alliance came at the end of a decade in which the Malay-Chinese disparities grew largely because of their initial differences and the laissez faire policies adopted by the government in the 1960s. The government responded to the riots of 1969 with its New Economic Policy (NEP) in 1971. NEP can be seen as a response to the failure of the trickle-down effects expected from the market-led development to achieve a socially acceptable pace of growth in income and reduction in disparities of income and wealth between the economically disadvantaged Bumiputeras and other ethnic (Chinese and Indian) groups. In essence NEP reflected a new social contract between the major ethnic groups in Malaysia and a more active and direct role of the state in resource allocation, production, and trade, primarily through public enterprises. Successive governments, represented by the Alliance and the National Front (Barisan Nasional), have followed a consistently activist role through the five-year plans to maintain high levels of economic growth and to reduce economic disparities and poverty.¹⁷ The economic growth experience of Malaysia can be divided into three distinct phases.

B. Economic Growth in Pakistan

The process of economic growth in Pakistan since its birth in 1947 has been greatly affected by public policy and management. However, unlike Malaysia, Pakistan has experienced considerable political instability and social tensions almost throughout the survey period.²³ The process of economic growth in Pakistan can be divided into five phases, reflecting the political regime and its approach to economic development. However, in each of these phases the governments played a key role, often with distortionary effects on the economy.²⁴

A. Poverty Reduction Policies in Malaysia

In the 1950s, poverty in Malaysia was concentrated among the rural Malay and orang asli or the indigenous populations. These groups were at the bottom of the distribution of income and wealth because they had few capital assets (which were in the hands of foreigners and non- Malay groups) and low levels of education and skills, and were employed mainly in low- productivity rural activities (agriculture and fisheries). After independence in 1957, the Alliance government started making significant investment in building the rural physical and social infrastructure, including education for women. It undertook a large-scale program of land development and settlement to give land to smallholders and to improve land productivity. In addition, incentives and loans were given to encourage the establishment of private small-scale rural industries, and price subsidies were given to small farmers to reduce the cost of production and to induce the transfer and diffusion of new farm technology. All of these investments and policies were undertaken to protect the rural Malay population.

However, the urban riots of 1969 forced the government to review its laissez-faire policy to promote economic growth in Malaysia. In the 1960s the growth process was modest in its effect on the structure of the economy, had little if any impact on poverty, and certainly widened rather than reduced income and wealth inequalities within and between the ethnic groups (Jomo, 1990; Drabble, 2000). This review resulted in the formulation of New Economic Policy (NEP), incorporated in five-year plans starting with the Third Plan (1971–75), for the next two decades to restructure the economy and society. The crux of this policy was to promote rapid economic growth with reliance on private markets and with an activist state working on behalf of the Malay population to reduce poverty and interethnic disparities. In 1991, after two decades of NEP, the government started the New Development Policy (NDC) to reduce the state ownership and control of enterprises, continue to provide an enabling environment for rapid economic growth, and to maintain support for the Malay population through promotion of education and development of new skills.

The impressive record of poverty reduction in Malaysia—from 50 percent of the population in 1970 to 8 percent in 2000—can be attributed to basically two factors. The first factor was rapid economic growth with macroeconomic stability, promotion of labor-absorbing industries, open economy to trade and investment, high level of public sector investment in building the country’s physical and social infrastructure, and proactive policy to provide increasing opportunities for education, employment, and enterprise for the Malay population. The second factor was that the government’s poverty reduction programs were targeted at specific groups in both rural and urban areas, including redistribution of assets, access to credit, subsidies for education and health, and safety nets for the very poor. It is noteworthy that the government generally followed policies that promoted stable and high growth rates, helped reduce interethnic and intra-ethnic inequalities and reduce poverty across ethnic groups in both urban and rural areas (Drabble, 2000; Barlow, 2001).

Improved distribution of income because of the rising share of wages in family income and a more even distribution of wages, resulting from the broad expansion of education and improvement in literacy, have accompanied growth in Malaysia. Strong demand for labor contributed to rising wages—low inflation helped the real wage to rise significantly—supported by the growing productivity of a more skilled workforce. The expansion of government employment at lower levels also helped increase the demand for wage labor. At the same time, Malay women entered the formal labor market in significant numbers, finding employment in the garment and electronics industries. The increased ability of the Malay to adapt to changing occupations and easy migration on the Peninsula maintained flexible and nonfragmented labor markets without large wage disparity between the rural and urban areas and across sectors (World Bank, 1995b). Perhaps the most important overall factor was the shift of large numbers of workers out of the traditionally low-paid rural occupations into better paid modern sector employment.⁴⁰ Finally, the government’s support for the Malay population was no less important in promoting economic growth with reduced income inequality and poverty. The policy included public sector employment, increased share in the ownership and management of private businesses, greater access to education and training at all levels, investment in building the rural infrastructure, and incentives for agriculture and fisheries.⁴¹

The government used several targeted programs to alleviate poverty. In the rural areas, programs included land distribution and settlement, replantation of low-yielding rubber trees on small plantations, and integrated agricultural development projects in each state focusing on a package of modern inputs, technologies, infrastructure, and support services to assist traditional peasants (small farmers) to increase productivity and income. In addition, it provided incentives for the expansion of small-scale rural industries and invested in the provision of basic services and utilities, such as education, health care, potable water, and electricity. In the urban areas, the programs targeted squatter resettlements and low-cost housing.

The government’s targeted policies differentiated between the poor and the very poor, the latter defined as those with less than one-half of the poverty-line income (World Bank, 1991).⁴² In 1973, nearly 16 percent of the population—and 15 percent of households—was categorized as very poor, with a vast majority in rural areas (World Bank, 1991). The proportion of the very poor had fallen to 1.5 percent by the end of 1999 (Eighth Plan, 2001–05). The important difference between the programs for the very poor—started in the late 1980s—and the government’s general poverty alleviation programs is that only those households belonging to the very poor category can participate in the Development Program for the Hardcore Poor (PPRT). PPRT includes several components aimed at children, mothers, elders, and heads of household. Most of them emphasize income-generating activities, training, and basic amenities (nutrition and health). The Malaysian government has also contributed substantial funds to the Amanah Ikhtiar Malaysia (AIM) project, operated by a private trust, to give small interest-free loans to very poor households for production activities. In the Seventh Plan period (1996–2000), AIM provided loans to about 23,000 poor families.⁴³

B. Poverty Reduction Policies in Pakistan

The highly unstable economic growth and its structure are the primary factors explaining changes in poverty in Pakistan. The growth-poverty links were weak because of the structural factors and policies pursued for economic growth and poverty reduction.⁴⁴ As indicated in the previous section, the growth process in Pakistan has been characterized by dependence on foreign resources, particularly aid and remittances, low investment in infrastructure and human resources development, capital-intensive and highly protected industries, narrow base of manufactured exports, severe macroeconomic imbalances, and political instability. The periods of strong overall growth were associated with robust agricultural growth and good performance of the large-scale manufacturing industries. Agricultural growth is still a strong indicator of overall growth in Pakistan, but it has been affected by the moods of nature as much as by government policies. The performance of large-scale manufacturing industries has been constrained by inadequate private investment and high levels of protection. In a country with serious structural and institutional problems, particularly affecting the rural economy, the links between economic growth and poverty reduction cannot be strengthened without redressing those problems effectively.

The governments, at least in the 1950s and 1960s, thought that economic growth would have strong trickle-down effects and reduce poverty. In the 1950s, the growth process was weak and the successive governments made almost no attempt to restructure the highly concentrated land system on which the growth of agriculture—when it was still the mainstay of the economy—largely depended. Also, they pursued policies that encouraged the development of capital-intensive industries with high levels of protection at the expense of agriculture. In the 1960s, the military government concentrated its efforts—with the help of foreign donors—on industrial and agricultural growth based largely on incentives for the large-scale industries and large landowning farmers. The strong support given to capital-intensive industries and a bimodal strategy for agriculture adversely affected labor absorption and wages.

In the five years following the dismemberment of Pakistan in 1971, the populist agenda of the elected government and its policies focused on redistribution and poverty alleviation while weakening the growth process by excessive public control of the economy. In the 1980s, the military government reversed the policies of the previous government on economic growth and made marginal attempts at poverty reduction through targeted programs. The fortuitous inflow of foreign resources—remittances and aid—during this period probably did more for growth and poverty reduction than did government policies since these policies left the country with a financial crisis by 1988. The elected governments in the 1990s were more or less forced to direct their attention to improve human resources and social services, particularly in rural areas, as part of the structural adjustment program. In addition, they used public resources in a variety of targeted programs for poverty reduction, but their design and implementation were politically determined resulting in considerable rent seeking and waste.

Since the beginning of Pakistan, poverty has been a largely rural phenomenon, and successive governments have attempted programs for rural development, a catchphrase for poverty alleviation without radical reforms of the highly differentiated agrarian structure. In the formative phase (1947–58), the successive governments not only discriminated against the agriculture sector but missed their chance to introduce structural reforms in the ownership of land and tenancy rights in spite of their pronouncements in a number of committee reports and the First Five-Year Plan document. In the early 1950s, the tenancy reforms in the provinces for the first time gave some legal rights to tenants. In 1959, the first military government undertook a program of land redistribution, breaking up jagirs, to reduce the influence of the large zamindars and jagirdars and create a new (progressive) class of farmers in the country. But this program did not significantly alter the concentration of landownership; its major beneficiaries were not the small landowners (the near landless) and landless peasants, including tenants and wage workers. It was followed by another land reform program undertaken by the elected government as part of its populist agenda in 1972. While the impact of this program on land redistribution was marginal, its tenancy legislation had a favorable impact on the legal position of the (sharecropping) tenants. The third land reform program, to lower the ceiling on landholdings, was introduced by the same government six months before its removal in 1977. Little progress was made in implementing this program; the military government that followed made several amendments to facilitate the development of large-scale private farms.⁴⁵

The impact of these reforms has been minimal in terms of land redistribution since only 300,000 persons, mainly small landowners and some tenants, received 1.5 million hectares of land and not all of it in good condition for cultivation. These numbers are very small in proportion to the number of landless peasants and small landowners and the farm area of the country. An important aspect of the land reforms was the absence of a follow-up or support system for the new landowners. As for the landless wage workers, they did not benefit directly from any of these reforms. The agrarian structure in Pakistan remains differentiated, with high concentration of land, decline in the sharecropping tenancy, fragmentation of small landholdings, and conversion of small cultivators—tenants and landowners—into wage labor looking for work in both rural and urban areas.

Successive governments have undertaken rural development programs ostensibly aimed at building the physical infrastructure, providing part-time employment to the landless and near- landless peasants, and transferring new agricultural technologies. A common feature of all of these programs was the domination of the government bureaucracy, with almost no involvement of the intended rural beneficiaries. The rural elite and the government officials were the major participants, activists, and beneficiaries in these programs. Genuine community participation in the state-sponsored programs was constrained by the lack of empowerment of the landless and small (landholding) cultivators and wage workers. The evaluations of these programs—including the Village AID program, Rural Works Program (or People’s Works Program), and Integrated Rural Development Program—have revealed that they made some contribution to the physical infrastructure and temporary job creation at a high cost, but they had little lasting impact on the rural poor.⁴⁶ However, in the 1970s, the populist government gave material support to the urban wage workers in the form of subsidies and small plots for homes, including investment in urban squatter settlements (katchi abadis), and provided similar support to the landless peasants and rural wage workers.⁴⁷

By the late 1980s it was widely recognized that in Pakistan a serious imbalance existed between economic growth and human development and that state-sponsored programs did not work well without the active participation of the intended beneficiaries.⁴⁸ Consequently, in 1992/93 with the support of the World Bank, the federal government launched the Social Action Program (SAP) to focus on expanding basic education, health care and water supply, particularly in the rural areas, with emphasis on female participation, to be implemented through participatory community organizations.⁴⁹ In addition, the government provided financial support to nongovernmental organizations (NGOs) to help the rural poor to form community organizations to become active agents to improve and build the local productive infrastructure, graft new technology, and access small loans for farm and nonfarm enterprises. A number of rural support programs based on the partnership between NGOs and community organizations have been expanding their activities throughout the country. It seems that community organizations can be an important institution for the implementation of state-sponsored programs intended to improve the quality of life in the rural areas and urban katchi abadis. The role of these organizations has become particularly important for enabling the rural and urban poor to receive small loans through the government-organized Pakistan Poverty Alleviation Fund (PPAF) and the Khushali Bank (KB). These two institutions were established in 1999 and 2000, respectively, with the financial support of the World Bank and the Asian Development Bank, and they have started channeling their resources through NGOs and community organizations in both rural and urban areas.⁵⁰

The first nationwide safety net was established in 1983 after the promulgation of the Zakat and Ushr Ordinance in 1980 and its amendment in 1981.⁵¹ The purpose was to collect a fixed proportion of the personal wealth and agricultural output of Sunni Muslims at the end of each year and transfer the proceeds to the needy or indigent Muslims. A decentralized organizational structure was established for the assessment, collection, and distribution of the zakat and ushr levy in both rural and urban areas. The recipients of assistance from the zakat fund included eligible individuals considered needy and institutions involved in the social sector services identified by the local zakat committees. The assistance was given in different forms, including monthly allowance for subsistence, educational stipends, rehabilitation and marriage (dowry) grants to needy individuals, and grants to charitable social and educational institutions. The zakat fund had accumulated about Rs. 20 billion by the end of 2000, with annual collections of Rs. 4 billion since 1998, and reaches about 2.4 million eligible widows, orphans, destitute, and sick individuals (Pakistan, 2001). In addition to the zakat fund for the needy Muslims, in 1992 the government established the Pakistan Bait-ul-Maal (PBM) as a safety net for those not covered by the zakat system. Its funding is based on grants from the federal government and the Central Zakat Fund. PBM provides assistance to individuals in the form of cash and food (wheat floor) subsidy. The funds for this program fell sharply between 1996 and 1999, but the government revitalized the program in 2000 with additional funds set aside from the General Sales Tax. It is estimated that 250,000 individuals benefited from this program in 1999. The government claims that the number rose to 1.2 million at the end of 2000 (Pakistan, 2001).⁵²