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4. TITLE AND SUBTITLE The Role of Infrastructure in Pakistan’s Economic Development, 1972-1991

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Pakistan Economics and Social ReviewVolume XXX NO.1 (Summer 1992) pp. 69-93

THE ROLE OF INFRASTRUCTURE INPAKISTAN'S ECONOMIC DEVELOPMENT, 1972-1991.

ROBERT E. LOONEYand

DAVID WINTERFORD*

Introduction

For most of the 1980s, the Pakistan economy performed well,with Gross Domestic Product (GOP) increasing by over 6 per cent perannum. However, the latter part of the decade was characterized byincreasing fiscal and external deficits, infrastructure deficiencies anddisruptions in production. In 1989 the Government initiated a three-yearstructural adjustment program with the assistance of the InternationalMonetary Fund (IMF). The prqgram sought to redress the growing macro-imbalances. resulting from large fiscal deficits. and to increaseproductivity through major structural reforms in the real as well as thefinancial sectors. 1

By the late 1980s fiscal imbalances resulted in the public sector'sgross fixed investment declin.ing in real terms in both 1988 and 1990. Infact a relative decline in the growth in public sector investment occurredthroughout the 1980s. so that by the end of the 1980s the growth incapital formation was the lowest in the country's history.2 The limitedexpansion of pUblic sector investment is particularly disturbing in lieu ofsbasethe fact that the country's stock of infrastructure is modest even bythird w9r1d standards. Clearly, if a stable relationship exists betweenincreases in social overhead capital and private sector capital formation

•

Dr. Robert E. Looney and Dr. David Winterford are professors at the NavalPostgraduate School, Monterey, California, U.S.A.

70 Robert E. Looney & David Winterlord

then .the likely declines in public investment stemming from currentausterity programs may have severe consequences for the nation'sdevelopment process.

The purpose of this paper is to examine the consequences ofdeclining public sector investment in Pakistan. Specifically, we areinterested in examining the impact on the economy of these trends ininfrastructural investment. Has investment in this area acted primarily toincrease output or has it stimulated private sector investment?Alternativefy, has pUblic infrastructure been passive, largely responding toobvious needs created by growth of private sector capital formation?

Patterns of Investment and Infrastructural Development

The Pakistan Government does not publish data on the stock ofand increments to the country's infrastructure. However, Blejer and Khansuggest two approaches to approximate increments to the nation'sinfrastructural base.3 The basic assumption underlying these proxies isthat infrastructure investment is an ongoing process that moves slowlyover time and cannot be changed very rapidly.

The first approach takes the trend level of real public sectorinvestment as representing the long-term or infrastructural component. Inthe discussion that follows this measure is referred to as "estimatedinfrastructure." In computing this measure of infrastructure we have useda linear trend (see note to Table 1). Deviations of real public sectorinvestment from the trend are assumed to correspond to non-infrastructural investment.·

A second approach is to make the distinction between types ofpublic investment on the basis of whether the investment is expected ornot. Again, it is assumed that expected, or anticipated, public investmentis' closer to the long-term or infrastructural component. If deterioration isoccurring in the country's stock of infrastructure, this measure may be amore accurate proxy than that obtained using the trend method.

The data reveal several trends in' the pattern of public sectorinvestment (See Table 1). First, there has been a gradual deceleration inthe rate of increase in the government's gross capital formation. For theperiod as a whole. real public capital formation increased at a rate of 8.3per cent per annum. However, the data reveal two distinct periods: during