Economy

NUST College of
Electrical and
of Pakistan
Mechanical
1947-2013
Engineering

ECONOMY
Etymology:
The English words "economy" and "economics" can be traced back to the Greek words
(oikonomos) (i.e. "one who manages a household"), a composite word derived from
(oikos) ("house") and (nemo) ("manage; distribute")
The first recorded sense of the word "economy" is in the phrase "the management of conomic affairs",
found in a work possibly composed in a monastery in 1440.

Definition
An economy or economic system consists of the production, distribution or trade, and consumption of limited goods
and services by different agents in a given geographical location. The economic agents can be individuals,
businesses, organizations, or governments. Transactions occur when two parties agree to the value or price of the
transacted good or service, commonly expressed in a certain currency
Explanation
In the past, economic activity was theorized to be bounded by natural resources, labor, and capital. This view
ignores the value of technology (automation, accelerator of process, reduction of cost functions), and creativity (new
products, services, processes, new markets, expands markets, diversification of markets, niche markets, increases
revenue functions), especially that which produces intellectual property.
A given economy is the result of a set of processes that involves its culture, values, education, technological
evolution, history, social organization, political structure and legal systems, as well as its geography, natural resource
endowment, and ecology, as main factors. These factors give context, content, and set the conditions and parameters
in which an economy functions. Some cultures create more productive economies and function better than others,
creating higher value, or GDP.
A market-based economy is where goods and services are produced without obstruction or interference, and
exchanged according to demand and supply between participants (economic agents) by barter or a medium of
exchange with a credit or debitvalue accepted within the network, such as a unit of currency and at some free market
or market clearing price. Capital and labor can move freely to any area of emerging shortage, signaled by rising
price, and thus dynamically and automatically relieve any such threat. Market based economies require transparency
on information, such as true prices, to work, and may include various kinds of immaterial production, such as
affective labor that describes work carried out that is intended to produce or modify emotional experiences in
people, but does not have a tangible, physical product as a result.

History of Economy
Ancient times
As long as someone has been making, supplying and distributing goods or services, there has been
some sort of economy; economies grew larger as societies grew and became more complex.

the Babylonians and their neighboring city states developed the earliest system of economics as we think
of, in terms of rules/laws on debt, legal contracts and law codes relating to business practices, and private
property.
The ancient economy was mainly based on subsistence farming. The Shekel referred to an ancient unit of
weight and currency. The first usage of the term came from Mesopotamia circa 3000 BC. and referred to
a specific mass of barley which related other values in a metric such as silver, bronze, copper etc. A
barley/shekel was originally both a unit of currency and a unit of weight... just as the British Pound was
originally a unit denominating a one pound mass of silver.

Middle ages[edit]
In Medieval times, what we now call economy was not far from the subsistence level. Most exchange
occurred within social groups. On top of this, the great conquerors raised venture capital(from ventura,
ital.; risk) to finance their captures. The capital should be refunded by the goods they would bring up in
the New World. Merchants such as Jakob Fugger (14591525) and Giovanni di Bicci de' Medici (1360
1428) founded the first banks.[citation needed] The discoveries of Marco Polo (12541324),
[dubious discuss]
Christopher Columbus (14511506) and Vasco da Gama(14691524) led to a
first global economy. The first enterprises were trading establishments. In 1513 the first stock
exchange was founded in Antwerpen. Economy at the time meant primarilytrade.

Early Modern Times

The firstSecretaries of State for economy started their work. Bankers like Amschel Mayer
Rothschild (17731855) started to finance national projects such as wars and infrastructure. Economy
from then on meant national economy as a topic for the economic activities of the citizens of a state.

The industrial revolution[edit]

The first economist in the true meaning of the word was the Scotsman Adam Smith (17231790). He
defined the elements of a national economy: products are offered at a natural price generated by the use
of competition - supply and demand - and the division of labour. He maintained that the basic motive
for free trade is human self-interest. The so-called self-interest hypothesis became
the anthropological basis for economics. Thomas Malthus (17661834) transferred the idea of supply and
demand to the problem of overpopulation. The United States of America became the place where millions
of expatriates from all European countries were searching for free economic evolvement.
The Industrial Revolution was a period from the 18th to the 19th century where major changes
in agriculture, manufacturing, mining, and transport had a profound effect on the socioeconomic and
cultural conditions starting in the United Kingdom, then subsequently spreading throughout Europe, North
America, and eventually the world. The onset of the Industrial Revolution marked a major turning point in
human history; almost every aspect of daily life was eventually influenced in some way. In Europe
wild capitalism started to replace the system of mercantilism (today:protectionism) and led to economic
growth. The period today is called industrial revolution because the system
of Production, production and division of labour enabled the mass production ofgoods.

After World War II[edit]

After the chaos of two World Wars and the devastating Great Depression, policymakers searched for new
ways of controlling the course of the economy. This was explored and discussed byFriedrich August von
Hayek (18991992) and Milton Friedman (19122006) who pleaded for a global free trade and are
supposed to be the fathers of the so-called neoliberalism. However, the prevailing view was that held
by John Maynard Keynes (18831946), who argued for a stronger control of the markets by the state.
The theory that the state can alleviate economic problems and instigate economic growth through state
manipulation of aggregate demand is called Keynesianism in his honor. In the late 1950s the economic
growth in America and Europeoften calledWirtschaftswunder (ger: economic miracle) brought up a
new form of economy: mass consumption economy. In 1958 John Kenneth Galbraith (19082006) was
the first to speak of an affluent society. In most of the countries the economic system is called a social
market economy

Late 20th - beginning of 21st century[edit]

With the fall of the Iron Curtain and the transition of the countries of the Eastern Block towards democratic
government and market economies the idea of the post-industrial society is brought into importance as its
role is to mark together the significance that the service sector receives at the place of the
industrialization, as well the first usage of this term, some relate it to Daniel Bell's 1973 book The Coming
of Post-Industrial Society, while other - to social philosopher Ivan Illich's book Tools for Conviviality. The
term is also applied in philosophy to designate the fading ofpostmodernism in the late 90s and especially
in the beginning of the 21st century.</ref> but the term came to common usage to describe the growth of
economies like the Chinese at the period (the term is specifically used by Bill Clinton in a speech about
Republic of China in 1998).
With the spread of Internet as a mass media and communication medium especially after 2000-2001 the
idea for the Internet and information economy is given place because of the growing importance of
ecommerce and electronic businesses, also the term for a global information society as understanding of
a new type of "all-connected" society is created. In the late 00s the new type of economies and economic
expansions of countries like China, Brazil and India bring attention and interest to different from the
usually dominating Western type economies and economic models.

Economic phases of precedence[edit]

The economy may be considered as having developed through the following Phases or Degrees of
Precedence.

The ancient economy was mainly based on subsistence farming.

The industrial revolution phase lessened the role of subsistence farming, converting it to
more extensive and mono-cultural forms of agriculture in the last three centuries. The economic
growth took place mostly in mining, construction and manufacturing industries. Commerce became
more significant due to the need for improved exchange and distribution of produce throughout the
community.

In the economies of modern consumer societies phase there is a growing part played
by services, finance, and technologythe (knowledge economy).

In modern economies, these phase precedences are somewhat differently expressed by degrees of
activity
Primary stage/degree of the economy: Involves the extraction and production of raw materials, such
as corn, coal, wood and iron. (A coal miner and a fisherman would be workers in the primary degree.)

Secondary stage/degree of the economy: Involves the transformation of raw or intermediate

materials into goods e.g. manufacturing steel into cars, or textiles into clothing. (A builder and a
dressmaker would be workers in the secondary degree.) At this stage the associated industrial
economy is also sub-divided into several economic sectors (also called industries). Their separate
evolution during the Industrial Revolution phase is dealt with elsewhere.

Tertiary stage/degree of the economy: Involves the provision of services to consumers and
businesses, such as baby-sitting, cinema and banking. (A shopkeeper and an accountant would be
workers in the tertiary degree.)

Quaternary stage/degree of the economy: Involves the research and development needed to
produce products from natural resources and their subsequent by-products. (A logging company
might research ways to use partially burnt wood to be processed so that the undamaged portions of it
can be made into pulp for paper.) Note that education is sometimes included in this sector.

Economic measures

Consumer spending
Exchange Rate
GDP and GNP
Stock Market
Interest Rate
National Debt
Rate of Inflation

GDP
The GDP - Gross domestic product of a country is a measure of the size of its economy. The most
conventional economic analysis of a country relies heavily on economic indicators like the GDP and GDP
per capita. While often useful, it should be noted that GDP only includes economic activity for which
money is exchanged.

economic planning
economic planning is essential for the development of economy in any state.

Definition:
Accordind to prof. Lewis lorwin

economic planning is a scheme of an economic organization for the purpose of utilizing all available
resources to achieve maximium satisfaction of peoples need within a given period of time
The definition of economic planning can be divided into three parts
To fulfill the dreams, desires and needs
With available resources
Within a given period of time

ECONOMY OF PAKISTAN
Background:
Pakistan came in to being on 14th august 1947.There was a massive population exchange
between India and Pakistan. Based on 1951 Census of displaced persons, 7,226,000 Muslims
went to Pakistan from India while 7,250,000 Sikhs and Hindus moved to India from Pakistan
immediately after partition.About 11.2 million or 78% of the population transfer took place in
the west, with Punjab accounting for most of it; 5.3 million Muslims moved from India to
West Punjab in Pakistan, potentially 3.8 million Hindus and Sikhs could have moved from
West Pakistan to East Punjab in India but 500,000 had already migrated before the Radcliffe
award was announced; elsewhere in the west 1.2 million moved in each direction to and
from Sind. The newly formed governments were completely unequipped to deal with
migrations of such staggering magnitude, and massive violence and slaughter occurred on
both sides of the border. Estimates of the number of deaths range around roughly 500,000,
with low estimates at 200,000 and high estimates at 1,000,000.At the time of partition the
total currency reserves of the united india were estimated at Rs. 4 billion. According to the
partition formula, Pakistan was entitled to receive Rs. 1 billion as her share, but the indian
government agreed to pay only 75 crore out of it. After the payment of 20 crore the balance
was withheld on one pretext or the other. On Gandhis insistence another 50 crore were
payed but the balance amount of 5 crore were never payed. On the other hand, 20% of the
total debt, which the government of united india owed, was made pakistans liability. Some of
the functionaries spoiled the official records and mutilated the factories and the military
equipment before leaving for India; they even did not spare the hospital equipments which
were to be used for the treatment of the patients.

Division of military ASSESTS :

Division of military assests began when the process of partition started; laiquatali khan
demanded that a transparent formula for division of the armed forces and there assests
should be divised. Defenceminister SardarBaldevsingh and the commander in chief ignored
this demand. However , in july 1947 it was decided that the armed forces will be divided into
two parts. A committee under the chairmanship of field marshal auchinleck was formed to
implement the scheme. The indian government did everything to flout the auchinleck
committees efforts for the just division of assets. Disappointed at the indian government

uncompromising attitude, the field marshal decided to wind up his task four months ahead
of time. Sending a report thebritish government on September 28,1947 auchinleck wrote :
I have no hesitation, whatever, in affirming that the present indian cabinet are implacably
determined to do all in their power to prevent the establishment of the dominion of Pakistan
on firm basses.
\departure of committee gave india a free hand to fulfill its designs. The indian government
gave Pakistan only a small pat=rt of her share in the military assets, even that was not in a
working condition and was badly mutilated. The aircrafts and ships sent to Pakistan were not
in working condition. At the time of partition there were 16 ordnance factories in the subcontinent. All of them went to indian share. Thus , Pakistan started its new life with a small
military force having absolutely meager resources.

Industrial assets:
Pakistan started with an extremely weak industrial base after independence. The british had
concerntrated all the industrial establishment in a few big cities like Calcutta, Bombay and
madras. Under partition plan, all these cities were made a part of india. At the time of
partition, major industries established in india were textile, jute, sugar, steel, iron, cement,
paper and glass. At the time of partition, there were 921 big industrial units, out of these
only 34 came to the share of Pakistan which is less than four percent of the total. This was
not fair because 20 % of the total indian population lived in Pakistan. Employment capacities
of the insdustries which came to share of Pakistan was even poorer. Indian industrial units
had a total capacity of employing 11,37,150 persons daily. Pakistans 34 units had a capacity
of employing only 26,400 persons daily which is only 2.32 percent of the total.

Post partition Era (1947-1954):

The overwhelming importance and utility of planning in Pakistan cannot be ignored because
Pakistan has always been facing problems in its economic development. All government,
from time to time, have been well aware of this problem and has always given their utmost
attentions towards its solutions for this purpose economic planning was always done in
shape of development plans and other development projects. The government of Pakistan,
immediately after independence, set up the institution of planning in the country. A
development board was set up in 1948 with a view to carry out economic planning in the
newly born nation in order to promote economic growth. A planning advisory board was also
established which was to extend assistance to the development board in its work of planning
for the economic development

A survey of Development plans (1955-1998)

The development board began its work with a six year development plan on the
recommendation of the Colombo Plan. The plan, however, could not succeed because of the
internal political unrest. In 1953 the development board was dissolved and a planning board
was assigned the job of preparing the first five year plan which was designedand released ijn
1955. With the first five year plan, the systematic economic planing in pakistan st in.

The planing machinery in pakistan was once again reshaped in 1958 when the planing board
was raised to the status of The Planing Commision. The head of the state was to be its
chairman and a deputy chairman with the status of a cabinent minister was to be appointed
as its operational head who was either a senior member of the civil service or a professional
economist. The commission had several other staff members such as secetary planing, chief
economist and joint chief economist. Also a separate ministry of planing and development
was created in early eighties. Dr. Mahbub-ul-Haq, a reowned economist was appointed as
the first minister of planing and development
The planing Commission, since coming into existance, has given eight five year plans to the
country. These plans, to a great extent, have given sufficient boost to the national economy.

Five Year
Plans

fifth five year

plan (197883)

First five year

plan (195560)

second five
year plan
(1960-65)

Third five
year plan
(1965-70)

forth five
year plan
(1970-75)

sixth five
year plan
(1983-88)

seventh five
year plan
(1988-93)

eighth five
year plan
(1993-98)

First Five Year Plan (1955-60):

The development of the rural and agriculture sectors was placed on top priority, a balanced
approach between the agricultural and industrial sector was stressed. Twenty nine percent of
the total expenditure during the plan was earmarked for the development of water and
power resources major part of the expenditure required for development schemes was to be
generated from indigenous resources

Targets :
Following development targets were set for the first five year plan

To
To
To
To

improve the general living standards of the people.

improve balance of payment by increasing exports.
create more job opportunities and reduce unemployment.
improve health, education, and other social services.

Achievements and drawbacks:

National income was increased by 11% although The target was set at 15%
Increase in annual per capita income was recorded at 1.6% as against anticipated
target of 7%.
1 million acres of barren land were reclaimed for cultivation 1.5 million acres.
New industries were established.
Commendable improvement was made in railway and transport sector.
No mentionable success was achieved in the field of mineral development except in
the field of natural gas

ECONOMIC PERFORMANCE 1999 - 2003:

It was at this stage that the military government under General Pervez
Musharraf assumed power in October 1999. The initial period was devoted by
the economic team of the new government in managing the crisis and making
sure that the country avoided default. A comprehensive programme of reform
was designed and implemented with vigour and pursued in earnest, so as to put
the economy on the path of recovery and revival. The military government did not
face the same constraints and compulsions as the politically elected
governments. It was therefore better suited to take unpopular decisions such as
imposing general sales tax, raising prices of petroleum, utilities and removing
subsidies so badly needed to bring about fiscal discipline and reduce the debt
burden. The IMF and the World Bank were invited to enter into negotiations on
new stand-by and structural adjustment programmes.
Although the canvas of reform in Pakistan was vast and corrective action
required on a number of fronts, there was a conscious effort to focus on
achieving macroeconomic stability, on certain key priority structural reforms and
improving economic governance. The structural reforms included privatization,
financial sector restructuring, trade liberalization, picking up pace towards
deregulation of the economy and generally moving towards a market-led
economic regime. A stand-by IMF programme was put in place in November
2000, which was successfully implemented followed by a three-year Poverty
Reduction and Growth Facility (PRGP), which will expire in November 2004.
9
What have been the outcomes of the economic reforms undertaken during the
past four years?
Macroeconomic Stability:
There has been considerable progress in achieving macroeconomic
stability. Strong fiscal adjustment has led to primary budgetary surplus and
significant reduction of the fiscal deficits. Current account has turned around
from chronic deficit to a surplus of more than 5 percent of GDP, mainly due to

renewed export growth and resurgence of workers remittances. Monetary

aggregates have been contained and inflation rate is below 4 percent. External
debt burden has been reduced in absolute terms from $38 to $35 billion and as a
proportion of GDP from 62.5% to 46%. The risk of default on external debt,
which loomed large on the horizon in 1999 and 2000, was mitigated and the
country's capacity to service its restructured debt has considerably improved.
Exchange rate has not only stabilized but appreciated during the last two years.
Table II shows the changes in the key economic indicators between October
1999 and September 2003.
Structural Reforms - Privatization, Deregulation, Liberalization:
The Musharraf Government actively pursued an aggressive and
transparent privatization plan whose thrust was sale of assets in the oil and gas
industry as well as in the banking, telecommunications and energy sectors, to
strategic investors, with foreign investors encouraged to participate in the
10
privatization process. This plan is being followed by the newly elected
government under Prime Minister Jamali.
To demonstrate the seriousness of the government in encouraging foreign
investment flows in Pakistan; there has been a major, and perceptible
liberalization of the foreign exchange regime. Foreign investors can now bring in
and take back their capital, remit profits, dividends and fees etc., without any
restrictions. Foreign Portfolio Investors (FPI) can also enter and exit the market
without any restrictions or prior approvals. In the Karachi Stock Exchange with a
market capitalization of $15 billion, over 700 listed companies showed average
returns of 15 per cent that were higher than those in most emerging countries.
This makes Pakistan an attractive place to invest for foreign portfolio investors.
As part of this liberalization, non-residents and residents are allowed to maintain
and operate foreign currency deposit accounts, and a market-based exchange
rate in the inter-bank market is at work.
Allied to this effort, the trade regime has been opened up and the
maximum tariff rate has been cut down to 25 per cent with only four slabs and
the average tariff rate is down to 14 percent.
The financial sector too, has been restructured and opened up to
competition. Foreign and domestic private banks currently operating in Pakistan
have been able to increase their market share to more than 60 percent of assets
and deposits. The interest rate structure has been deregulated and monetary
11
policy uses indirect tools such as open market operations, discount rates etc.
Domestic interest rates on lending have dropped to as low as 5 percent from 20
percent substantially reducing financial costs of businesses.
Central to the economic reforms process has been a clear progression
towards deregulation of the economy. Prices of petroleum products, gas,
energy, agricultural commodities and other key inputs are determined by market.
Imports and domestic marketing of petroleum products have been deregulated
and opened up to the private sector. The markets do not always function
effectively. Independent regulatory agencies have been set up to protect the

interests of consumers and end-users of utilities and public services. Despite this
movement towards a liberalized and deregulated regime, old habits die-hard.
Bureaucratic hassles at lower levels continue to be irritants for the business
community.
Tax Reforms:
Taxation reform has figured prominently on the government's agenda, as
this is another area where the business community has innumerable grievances
and dissatisfaction with the arbitrary nature of tax administration. Tax reforms are
aimed at broadening the tax base, bringing in tax evaders under the tax net,
minimizing personal interaction between tax payer and tax collector, eliminating
the multiplicity of taxes and ultimately reducing the tax rate over time. A massive
survey and documentation drive was undertaken to widen the tax base, extend
incidence to all sectors of the economy and develop the data for purposes of
12
assessment. Despite these reforms, the business community remains
dissatisfied with the performance and attitude of tax officials particularly at the
lower level. Complaints of delays in refunds of sales tax persisted throughout the
three-year period. The Central Board of Revenue (CBR) is being restructured to
improve tax administration including taxpayer facilitation.
Economic Governance:
The most dramatic shift introduced by the military government is in
promoting good economic governance. Transparency, consistency, predictability
and rule-based decision-making have begun to take roots. Discretionary powers
have been significantly curtailed. Freedom of press and access to information
has had a salutary effect on the behaviour of decision makers. The other pillars
of good governance are, (a) devolution of power to the local governments who
will have the administrative and financial authority to deliver public services to all
citizens, and (b) an accountability process which will take to task those indulging
in corruption through a rigorous process of detection, investigation and
prosecution.
Despite these positive outcomes and their impact on the business
community and other stakeholders, within the country as well as abroad, the
incidence of poverty is still quite high and unemployment rates are worrisome.
The challenge therefore for the next phase of the reform process is to accelerate
growth rate and reduce poverty and unemployment.