Domestic Resources and Fiscal Policy in Pakistan’s Second and Third Plans

Pakistan is now widely regarded as a successful case of movement toward self-sustaining economic growth. If one lets it become known that he has spent some time in Pakistan, other economists immediately want to know: What happened? What were the “real” causes? Is the success a mirage? How long will it last? An attitude of enthusiasm is a sharp contrast to the air of pessimism that prevailed as recently as two years ago. The notes here are not an attempt to establish what has happened to Pakistan’s economy, or why it happened now and not five years ago. The aim is much more modest, but may have some bearing on the larger question. My primary interest is in examining certain aspects of government policy in general and fiscal policy in particular, excluding policy on government expenditures. I shall not be concerned with Plan allocations and government outlays. In the macroeconomic framework of Pakistan’s plans, present investment is the only determinant of future output. The problem of “mobilizing” resources is one of finding offsets to investment expenditure from either domestic or foreign sources. The Third Plan states [16, p. 20] that “the main task in the Perspective Plan will be to institutionalise the growth process and to finance it increasingly from domestic resources.” The “domestic resources” with which the Plan is primarily concerned are domestic saving (to offset investment) and exports (to pay for imports). A related variable not treated in the discussion of the Perspective Plan is taxation, which is necessary to offset government expenditure on current and capital account. In order to reduce and eventually eliminate foreign assistance, while maintaining or increasing the proportion of income invested, domestic saving must increase more rapidly than investment, taxation must increase more rapidly th?a government current and capital expenditures, and exports must increase mote rapidly than imports, since foreign assistance now offsets a large proportion of investment, government expenditure, and imports.