India and Pakistan are completing five decades of their independence.

Since the
partition, the relationship between the two countries has been uneasy and
characterized by a set of paradoxes. There is a mixture of love and hate, a tinge of
envy and admiration, bouts of paranoia and longing for cooperation, and a fierce
rivalry but a sense of proximity, too. The heavy emotional overtones have made it
difficult to sift the facts from the myths and make an objective assessment. There are
in fact only two extreme types of reactions on each side. Either there are those who
always find that the grass is greener on the other side of the pasture or those who are
totally dismissive of the accomplishments of the other side.

This article attempts to present an objective, empirically-based and balanced view of

the economic achievements and failures of both the countries during the span of the
last five decades. The strict comparison becomes somewhat problematic because of
the separation of East from West Pakistan in 1971 but, the analysis and conclusions
drawn by and large remain valid.

First, the common successes shared by both the countries:

o Despite the prophets of gloom and doom on both sides of the fence,
both India and Pakistan have succeeded in more than doubling their
per capita incomes. This is a remarkable feat considering that the
population has increased fourfold in case of Pakistan and threefold in
India. Leaving aside the countries in East Asia and China, very few
large countries have been able to reach this milestone.
o The incidence of poverty (defined as $1 per day) has also been reduced
significantly although the number of absolute poor remains
astoundingly high. However, the level of poverty is lower in Pakistan.
o Food production has not only kept pace with the rise in population but
has surpassed it. Both countries, leaving aside annual fluctuations due
to weather conditions, are self-sufficient in food. (Pakistan exports its
surplus rice but imports small volumes of wheat).
o Food self-sufficiency has been accompanied by improved nutritional
status. Daily caloric and protein intake per capita has risen by almost
one-third but malnourishment among children is still high.
o The cracks in the dualistic nature of the economy -- a well-developed
modern sector and a backward traditional sector -- are appearing fast in
both the countries. A buoyant middle class is emerging. The use of
modern inputs and mechanization of agriculture has been a leveling
influence in this direction. But public policies have not always been
consistent or supportive.

Second, the common failures of the two countries. The relatively inward-looking
economic policies and high protection to domestic industry did not allow them to reap
the benefits of integration with the fast-expanding and much larger world economy.
This has changed particularly since 1991 but the control mind-set of the politicians
and the bureaucrats has not changed. The centrally planned allocation of resources
and "license raj" has given rise to an inefficient private sector that thrive more on
contacts, bribes, loans from public financial institutions, lobbying, tax evasion and
rent-seeking rather than on competitive behavior. Unless both the control mind-set of
the government and the parasitic behavior of the private industrial entrepreneurs do
not change drastically, the potential of an efficient economy would be hard to achieve.
This can be accomplished by promoting domestic and international competition,
reducing tariff and non-tariff barriers and removing constraints to entry for
newcomers.

The weaknesses in governance in the legal and judicial system, poor enforcement of
private property rights and contracts, preponderance of discretionary government
rules and regulations and lack of transparency in decision making act as brakes on
broad-based participation and sharing of benefits by the majority of the population.

In terms of fiscal management, the record of both the countries is less than stellar.
Higher fiscal deficits averaging 7-8 percent of GDP have persisted for fairly long
periods of time and crowded out private capital formation through large domestic
borrowing. Defense expenditures and internal debt servicing continue to pre-empt
large proportion of tax revenues with adverse consequences for maintenance and
expansion of physical infrastructure, basic social services and other essential services
that only the government can provide. The congested urban services such as water,
electricity, transport in both countries are a potential source of social upheaval.

The state of financial sector in both countries is plagued with serious ills. The
nationalization of commercial banking services, the neglect of credit quality in
allocation decisions, lack of competition and inadequate prudential regulations and
supervision have put the system under severe pressure and increased the share of non-
performing assets in the banks’ portfolio. The financial intermediation role in
mobilizing and efficiently allocating domestic savings has been seriously
compromised and the banking system is fragile. Both countries are now taking steps
to liberalize the financial sector and open it up to competition from foreign banks as
well as private banks.

Third, the areas where India has surpassed Pakistan. There is little doubt that the
scientific and technological manpower and research and development institutions in
India are far superior and can match those of the western institutions. The real
breakthrough in the Indian export of software after the opening up of the economy in
1991 attests to the validity of the proposition that human capital formation
accompanied by market-friendly economic policies can lift the developing countries
out of low-level equilibrium trap.

Indian scientists working in India excel in the areas of defense technology, space
research, electronics and avionics, genetics, telecommunications, etc. The number of
Ph.Ds produced by India in science and engineering every year -- about 5,000 -- is
higher than the entire stock of Ph.Ds in Pakistan. The premier research institutions in
Pakistan started about the same time as India have become hotbed of internal
bickerings and rivalries rather than generator of ideas, processes and products.

Related to this superior performance in the field of scientific research and

technological development is the better record of investment in education by India.
The adult literacy rate, female literacy rate, gross enrollment ratios at all levels, and
education index of India have moved way ahead of Pakistan. Rapid decline in total
fertility rates in India has reduced population growth rate to 1.8 percent compared to
3.0 percent for Pakistan.
Health access to the population and infant mortality rates are also better in India and
thus the overall picture of social indicators, although not very impressive by
international standards, emerges more favorable. The two most important
determinants of Pakistan’s dismal performance in social development are its inability
to control population growth and the lack of willingness to educate girls in the rural
areas.

Fourth, the areas where Pakistan has performed better than India. The economic
growth rate of Pakistan has been consistently higher than India. Starting from almost
the same level or slightly lower level in 1947, Pakistan’s per capita income today in
US nominal dollar terms is one-third higher (430 versus 320) and in purchasing parity
dollar terms is two-third higher (2,310 versus 1,280). The latter suggests that the
average Pakistani has enjoyed better living standards and consumption levels in the
past but the gap may be narrowing since early 1990s. Had the population growth rate
in Pakistan been slower and equaled that of India, this gap would have been much
wider and the per capita income in Pakistan today would have been twice as high and
the incidence of poverty further down.

Although both India and Pakistan have pursued inward-looking strategies, the anti-
export bias in case of Pakistan has been comparably lower and the integration with the
world market faster. The trade-GDP ratio in PPP terms is twice that of all South Asian
countries. Pakistan’s export growth has been stronger and the composition of exports
has shifted from primary to manufactured goods; albeit the dominance of cotton-
based products has enhanced its vulnerability.

Domestic investment rates in Pakistan have remained much below those of India over
the entire span primarily due to the relatively higher domestic savings rates in the
latter. But the efficiency of investment as measured by the aggregate incremental
capital-output ratio or total factor productivity has been higher in case of Pakistan
and, to some extent, compensated the lower quantity of investment.

CONCLUSION

What is the bottom line then? The overall record looks mixed. Pakistan scores high on
income and consumption growth, poverty reduction and integration with the world
economy. India has done very well in developing its human resource base and
excelled in the field of science and technology. Both countries face a set of common
problems -- the inherited legacy of a control mind-set among the government and
rent-seeking private sector, widespread corruption, poor fiscal management, weak
financial system and congested and overcrowded urban services. But there is an
important and perceptible positive shift in most of the indicators of India since 1991.
Export growth rates have almost doubled, GDP growth is averaging 6 to 7 percent in
recent years, current account deficit is down and foreign capital flows for investment
have risen several fold. The edge that Pakistan has gained over India in most of these
indicators until 1990 is fast eroding. Pakistan, on the other hand, has made greater
progress in privatization of state owned enterprises and in attracting foreign investors
to expand power generating capacity in the country.

How does the future look like? Since 1991, both India and Pakistan have embarked on
a policy of liberalization, outward orientation and faster integration with the global
 economy. The initial responses have been very positive. As outlined earlier, portfolio
and foreign direct investment flows in the last few years have surpassed those
accumulated over the last 20-25 years. Indian exports recorded an increase of 50
percent since 1991 while Pakistan, despite a setback due to failure of successive
cotton crops, have expanded by two-thirds since 1990. The political uncertainty in
India has been minimized after the elections and adoption by the coalition government
of the Congress’ agenda on economic reforms. This combination of political stability,
economic policy credibility and well developed human resource base places India at
an advantage today. But there is no earthly reason as to why we in Pakistan cannot put
our house in order, strike a consensus among the two major political parties on the
contours of our economic policy direction, stop brickbating each other for the larger
sake of the country’s interests and avoid promoting contrived and perceived sense of
economic instability.

The imperatives of globalization and integration with the world economy dictate that
the countries that are not agile and do not seize the opportunities at the right time are
likely to be losers. What is encouraging is that the economic policy stance of both
major parties in Pakistan is identical, i.e., liberalization of the economy. We have
made a headstart and let us not lose this momentum by narrow-minded and purely
self-serving interests. The destiny of a nation depends upon the hard work, discipline
and internal cohesion of its people and the vision of its leaders. Let our future
generations not blame our leaders for failing to leave a legacy of prosperity and hope
for them.

ECONOMIC PERFORMANCE INDICATORS

India Pakistan

Per Capita Income, in US$ 320.0 430.0

in PPP$ 1,280.0 2,130.0

GDP Growth Rates, 1950-80 3.6 5.0

1980-94 5.0 5.9

Trade/GDP (PPP) Ratio 10.0 20.0

Per Capita Trade, in US$ 44.0 121.0

Average Annual Rate of Inflation, 1980-93 8.7 7.4

Overall Budget Deficit/GDP, 1980-94 -6.5 -7.3

1995 -5.0 -5.6

Current Account/GDP, 1980-94 -1.7 -4.4

1995 -0.9 -3.9

Export Growth Rate, 1980-90 5.9 8.1

1990-94 13.6 11.3

COMPARATIVE SOCIAL INDICATORS

(Most Recent Estimates)

India Pakistan

Life Expectancy (in years) 60.7 61.8

Adult Literacy (in percent) 50.6 36.4

Female Literacy (in percent) 36.0 23.0

Gross Enrollment Ratio (combined - in percent) 55.0 37.0

Access to Health Services (in percent) 85.0 55.0

Daily Caloric Supply Per Capita 2,395 2,316

Underweight Children Under Five (in percent) 53.0 40.0

Infant Mortality (per ’000 births) 81.0 89.0

Total Fertility Rate 3.8 6.2