The Great Invention: The Story of GDP and the Making and Unmaking of the Modern World - Ehsan Masood (2016)

Chapter 4. The Karachi Economic Miracle

Pakistan has had the highest rate of industrial growth in the world. The only country that comes close is Japan. Pakistan started out as the hopeless case. We could not have been more wrong.

—Gustav Papanek, “The Development 
Miracle” (1965)

Elite universities are usually spoiled for choice when it comes to selecting whom to feature in their alumni magazines. But there’s one University of Cambridge class in particular that would have left any editor of its alumni magazine CAM spoilt for choice.

The economics class of 1953 had Meghnad Desai, now Labour member of the UK House of Lords. It had Nobel Prize–winning economist Amartya Sen, and last but not least, there was Pakistan’s Mahbub ul Haq, who would become his country’s chief economist and later its finance minister.

I know a tiny bit of this generation, as it is the generation of my own parents: children of the partition of India and participants in what is still the world’s largest mass migration. In the late 1940s, members of my own family were debating what to do: whether to stay put in India or to leave for Pakistan. After centuries of coexistence, Hindus, Muslims, and Sikhs found themselves having to choose a new nation and in effect a new identity. India’s Muslims and Pakistan’s Hindus struggled with the idea of diminished influence. But to migrate meant losing friends, relatives, ending relationships, abandoning homes. And for those who chose to make their new homes in Pakistan, this would be a nation whose very survival was not even certain.1 This is partly because the new nation was split into two landmasses. West Pakistan housed the capital city, Karachi, and comprised four constituent provinces with their own languages, cultures, and histories. One thousand miles away was East Pakistan, which had a larger population and its own languages. In between lay India. What supposedly united Pakistan’s two wings was a shared religion. But we know it wasn’t enough, as in 1971 the east broke away to become independent Bangladesh.

In the early 1950s, those who left aboard steam-powered locomotive trains had little more than a few days’ food and a change of clothing. On arrival in Pakistan’s first capital, Karachi, the refugees would live, sometimes for years, in tented cities. The experience would leave scars, certainly, but also a deep sense of responsibility, not only to themselves and their families, but also to their nations’ futures and to the wider cause of prosperity after independence.

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That economics class of 1953 would have selected Cambridge, because in the early 1950s the university was at the center of the macroeconomics universe. The connection to Keynes and other leading lights such as Joan Robinson, Richard Kahn, and Richard Stone meant it would attract talented minds keen to absorb the latest ideas and then apply these to a spectrum of economies in the thick of being built (or rebuilt) after the end of World War II. They would become close friends, and yet each of the three would later turn their backs on at least some of what they had learned. Amartya Sen and Mahbub ul Haq would openly revolt against the idea of organizing economies according to GDP. And Haq, an unlikely revolutionary, would lead the design of the United Nations’ Human Development Index, which has so far come closest to “dethroning GDP,” as one of his longtime associates, Sir Richard Jolly, told me.2

Haq died tragically young in 1998. He acknowledged that in his earliest years as an economist he had little time or inclination for economic growth based on anything other than maximizing GDP. “I emerged from the campuses of Cambridge and Yale [with] few doubts about the right path to economic development. Those were happy days. My sights were set. My horizon was clear and there was no hesitancy in my views. I expressed them with a youthful exuberance and conviction which is one of the few privileges of the inexperienced,” he wrote in the opening pages of his second book, The Poverty Curtain.3

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But for the early part of his professional life Mahbub ul Haq was a thoroughly mainstream economist. After completing his first degree at Cambridge he headed for the United States, where he took a doctorate at Yale. Returning to Pakistan, he relocated to Karachi, and joined a government body called the Planning Commission, which was tasked with providing a framework through which to run the economy of the newly independent state. Still in his twenties, Haq would be its chief economist.

The Planning Commission’s first chairman was Zahid Hussain, a respected intellectual and statesman. In India he had organized the finances of the princely state of Hyderabad. The British writer and historian of India William Dalrymple describes Hyderabad in the 1940s as having an economy the size of Belgium and its ruler’s personal fortune running into hundreds of millions of dollars.4 In February 1937, Hyderabad’s ruler was featured on the cover of Time magazine as the world’s richest man.

In contrast to his life in India, the tasks facing Hussain and his young Pakistani team could not have been more different. For its population of 76 million the new government had to create a currency and banking system; there were taxes to collect, pensions to transfer; electricity, telephone, and postal services had to be organized; road and rail transport had to be established; not to mention finding jobs for the 7 million refugees who had crossed over from the other side. In its first “National Plan,” published in 1950, the government planned to build 120 hospitals, 1,200 dispensaries, and 4,460 primary schools. It also set aside $36 million to build institutes for technical training and research labs and to send Pakistanis abroad for higher education.5

Pakistan in the early 1950s had few trained economists and few institutions in which to train its up-and-coming talent. Moreover, few of its government officials had experience running the economy of a country, says Gustav Papanek, a development economist based in Boston with extensive experience working in Pakistan at the time.6

As relations with Britain were still tense, the Pakistan government chose to approach US-based institutions, including the government, as well as philanthropies such as the Ford Foundation for financial support so that experts from developed countries could be paid to help develop and implement Pakistan’s economic plans. The Ford Foundation turned to Harvard University, which sent a team to work alongside government officials in Karachi. Gustav Papanek, who at the age of eighty-eight remains busy advising the governments of developing nations, was one of them. Six decades later, his memory of that period remains vivid.

For Papanek the Harvard assignment had come at just the right time. Then age twenty-five and a socialist, he had lost his job as an economist with the US aid program during Senator Joseph McCarthy’s purge of left-wingers from government jobs. “I was the only one who knew about Pakistan in the group,” he told me. “When we started there was no economist in the Planning Commission. No one with an economics degree.”

With his wife, Hanna Papanek, a sociologist, he moved to Karachi to live from 1954 to 1958. “We were in a newly developed area on Drigh Road among mostly Pakistani families. There were still many refugee colonies. Small huts with tin roofs,” he says, as if explaining something that had happened last week.

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Together, Zahid Hussain, Mahbub ul Haq, and the Harvard team took the reins of national planning. And as they did so, those initial priorities to get kids into schools and build 1,200 hospitals gave way to a different style of development model. Instead of building the new nation’s health and skills, the planning team decided to go down a development path that emphasized industrial growth.

The National Plan would be modified, with a new focus on developing industry, especially private industry. The promise was self-sufficiency in food, 2 million more jobs, and a 60 percent increase in industrial output. To achieve these goals, 28 percent of spending would go to industrial projects, as opposed to the 11 percent earmarked for farming. In contrast, what the government pejoratively called “social services,” including health, education, and housing, would be allocated far less. The government’s new advisers were basically saying that developing countries had to get rich first through industrialization before they could spend. Schools would get 4 percent of public spending and health care even less: just 2 percent.7

What Haq called “growth philosophy” meant resisting demands to invest in health and housing. “During the industrial revolution, no one gave much thought to the emergence of slums, the prevalence of bad sanitary conditions and the need for social security benefits for the aged, the needy and the sick,” Haq would write.8 Instead, the bedrock of growth philosophy was to develop private industry (maximizing the I in the GDP formula).

Except that the planners had a problem. “There was no industry to speak of,” says Papanek. At the time of partition in 1947, 1.4 million owners of businesses left to join India, including the bulk of large businesses. Fewer than 300,000 traders moved the other way.9 Even in agriculture, although Pakistani farmers were among the world’s largest exporters of cotton and jute, practically all of the cotton and jute textile mills were now over the new border with India.

As Papanek recalls, the focus in those initial years was to find and build big businesses. New industries such as cement manufacturing, or new industrial facilities such as cotton mills, needed new industrialists. And as most had left for India, the Karachi government and its Harvard advisers had to find ways to make some of the city’s small-scale trading families into owners of much larger businesses. Had this been a question for today, the answer might have been to deregulate, so that many more people could try out their business ideas. But instead the government sought to do the opposite: by restricting competition, it effectively handpicked the companies that would be allowed to grow. That meant a handful of chosen families were effectively given a license to print money. The result was that industrial production increased at a greater rate than had been forecast. It also made a relatively small number of people into the new superrich.

Meanwhile, although the Planning Commission chairman, Zahid Hussain, had promised that spending on health, education, and housing could not happen at the same time as spending on GDP-style economic development,10 in practice a government that had to be reelected couldn’t entirely ignore the scale of poverty literally on its doorstep. Public spending on housing and education did increase slightly between 1955 and 1960, though this was concentrated on universities and on housing for the middle classes. On the other hand, health and welfare spending fell to even lower levels than had been forecast.11

GDP had grown at a modest 2.5 percent.12 At the end of their first five-year experiment at pulling Pakistan’s people out of poverty by ramping up one of the components of GDP, Pakistan’s planners were none too satisfied.

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GDP growth of 2.5 percent was pretty poor, and so by the time Mahbub ul Haq had arrived in the Planning Commission, thinking had begun on the next five-year plan, which would take the country from 1960 to 1965.13 The planners stuck to their formula, again focusing most of the spending on farming and industry; with education, health, and welfare altogether occupying only 7 percent of the budget.14

The medicine worked, in that GDP duly increased by around 6 percent for the period of the second plan, from 1960 to 1965, with manufacturing growing by more than twice that rate.15 The young economists basked in the glow of fame and were tasked with preparing a third plan, largely along the same lines as the first two, although this time with a larger share given to social services.

Pakistan was seen around the world as a model economy which merited a visit from no less than President Dwight D. Eisenhower. America had helped to pay to house many refugees, but Papanek recalls that when Eisenhower flew into Karachi for a state visit in 1959, he was advised not to get too close to the refugee settlements.16 “Instead the president was taken in a low flying plane. I always wondered how much he realized the misery of the people below.”

“Growth had created jobs, which helped the poor, and it showed that economic incentives work,” Papanek said in a speech in New York in May 1965, which he called “The Development Miracle.” He added, “Pakistan has had the highest rate of industrial growth in the world. The only country that comes close is Japan. Output of industry is increasing 14 percent or so per year, which is really quite remarkable. Pakistan started out as the hopeless case. We could not have been more wrong.”17

As to the lowly sums spent on health and education, Haq was clear. “The road to eventual equalities may inevitably lie through initial inequalities,” he would later reflect.18 “Economic growth is a brutal, sordid process. There are no short cuts to it. The essence of it lies in making the labourer produce more than he is allowed to consume for his immediate needs.” He added, “The first priority was growth; the other issues had to take a secondary place. The commitment to a growth philosophy was so wholehearted that all other policies were subordinated to it.”

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And yet Haq and his advisers could also see that the raw numbers were masking a more complex picture.

Several problems stood out: First, GDP growth rates in the east were lower than in the west, especially in manufacturing, which was concentrated in the west. Second, as we’ve seen, the original National Plan’s priorities to build hospitals and schools had been torn up.

Third, the lack of a minimum wage and controls on trade unions meant there was no external incentive to enable wages to keep pace with inflation, which was leading to strikes. The main beneficiaries of the industrial boom seemed to be the middle and upper classes, as they were the only ones who could afford to live in the new houses being built and buy the new consumer goods that were being produced by Pakistan’s newly minted industrial families.

Fourth, and tucked away in the data tables, was one quite troubling statistic. Foreign aid and loans had trebled to about $3 billion during the five years of the second plan. This amounted to around half the government’s bill for spending on agriculture and industry and suggested that the industrial boom was more precarious than it looked.19 What would happen, for example, if international assistance were to fluctuate, which it had done for much of Pakistan’s history?

Perhaps most worrying of all for Haq was the policy that allowed only a small number of families to become superrich by preventing other businesses from competing with them, in contrast to the original National Plan, which had recognized that new businesses needed access to capital in order to grow.20 After nearly a decade of a policy that Haq called “Functional Inequality,” he had begun to seriously question it.

Mahbub ul Haq could now see that his dogged focus on growth had done little to help the mass of citizens become healthier or better educated. He knew that there was little state protection for someone who became ill or unemployed. He could see that unemployment remained stubbornly high, and its effects he witnessed firsthand when trade unions started agitating for strike action. Moreover, he could see that concentrating wealth in a small number of families was acting as a brake on competition and stopping others from establishing their own firms.

And so on a spring morning in April 1968, a chastened Mahbub ul Haq took to the lectern at a management convention in Karachi. His audience of policy makers and members of the newly created West Pakistan Management Association might have been anticipating a speech that would celebrate continuous economic growth and Pakistan’s new status as a third world exemplar. But Haq, who did not have a prepared text, began by apologizing to his hosts if he sounded rambling. In a sign of what was to come, he asked that his remarks be taken not as those of the Planning Commission’s chief economist, but as those of “an ordinary economist to fellow professionals on the critical issues of our time.”21

The speech began in a familiar vein. Haq started off by recounting the successes, including economic growth of more than 6 percent and more than 5 million new jobs. But then the narrative changed. Haq’s wife, Khadija, a fellow economist, had been looking at data from the Karachi Stock Exchange and had discovered that just twenty families owned 66 percent of industrial companies, 79 percent of insurance funds, and 80 percent of banks listed on the exchange.22 Those families, Haq noted in his speech, had a responsibility to invest their largesse on behalf of a growing nation. And then came what sounded like a call to civil disobedience. If the newly wealthy weren’t able to act more responsibly, he said, then “society has every right, in fact it has the duty, to resist the emergence of a privileged class of entrepreneurs which is pampered by fiscal concessions, which is sheltered by prohibitive tariffs, which is nurtured by artificial incentives and which makes its living on the basis of imperfect and inefficient competition.”23

Here was the government’s own chief economist drilling holes in a whole decade’s worth of his own policies. He was saying that Pakistan’s twenty newly industrial families had gotten rich on the back of public money and they were now hoarding wealth when they should be investing it or redistributing it. The speech, not surprisingly, became an overnight sensation.

Haq’s speech stunned both ordinary citizens and opinion formers, including the political and landowning classes, as well as those living in the handsome military colonies. Arguments ensued about the size of the list and who should—and shouldn’t—be on it. Nearly a decade earlier Gustav Papanek had calculated that some twenty-four families controlled half of all industrial assets.24 Some years later the economist Lawrence White expanded the list to forty-three family groups.25 But few argued with Haq’s basic point: that countries do not become more prosperous if government policies focus on stopping all but a small number of wealth creators from becoming ever richer.

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Mahbub ul Haq was not alone in discovering firsthand the damage that could be done by managing an economy through a narrow focus on GDP. Five thousand miles west of Karachi, another Cambridge alumnus had come to the same conclusion. This was Dudley Seers, inspirational statistician, founder of the Institute of Development Studies based at the University of Sussex, and an adviser to the then British Labour government of Harold Wilson and especially Wilson’s minister for overseas development, the formidable Barbara Castle.

Seers, who died at age sixty-three in 1983, has now been largely written out of economic histories, but according to those who knew him, he seems to have been no less exciting to work for than Keynes. Seers had a “quality of rock-like independence, which was inspiring,” recalled his colleague Paul Streeten. “When Dudley entered a room, without saying or doing anything, just quietly slipping into his place, somehow the temperature, the alertness, and the level of excitement rose.”26

During the 1960s Seers had been traveling the length and breadth of Britain’s newly independent former colonies, advising their governments on strategies to reduce poverty. He watched as countries such as Kenya and Zambia established national statistical offices, sometimes paid for by the aid programs of richer governments. And he despaired when discovering they had to implement a GDP-focused system that measured things that didn’t matter much to their people’s prosperity. Seers heard accounts from the directors of these offices, who complained that their governments would often pressure them to show GDP always on the rise, and he heard about the often questionable data on which GDP figures were being compiled in some places. Decimal points in a developing country’s GDP are a “fantasy,” Seers famously said in a 1969 lecture entitled “What Are We Trying to Measure?”27 Seers reflected many of Haq’s experiences. He said: “What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality? If one or two of these central problems have been growing worse, especially if all three have, it would be strange to call the result ‘development,’ even if per capita income has soared.”

The GDP index, he reminded his audience, had been created to suit the needs of countries that had already developed. Few OECD member states, for example, had become prosperous by sticking to the GDP formula. Few had become rich by increasing consumption and giving the private sector a free hand. Countries such as America and Britain, Seers said, had chosen to implement GDP only after absolute poverty had been eliminated; only after unemployment was at historically low levels; and only after these countries had felt that inequality was in retreat. Developing countries, Seers observed in his lecture, should be encouraged to do so too.

For all the force of his argument, it seems that Seers understood that his speech had made little headway with policy makers. There was no change to the GDP-focused policies of international development funders that Seers knew well, nor any change to the GDP requirements of statistics offices in developing countries.

And so Seers chose a different approach. He organized an international meeting in which the aim was to gather together the heads of the statistics offices in developing countries with the representatives of the donor agencies, all in the same room. The meeting lasted a week and took place in Sussex (rather than London), which minimized the chances of people leaving early.

The government statisticians explained how they were caught in a tug-of-war. On the one side there was pressure from heads of government to make the figures look good, even if that meant falsifying data. On the other side was pressure from international agencies, including the UN, to measure things that had little relevance to national or local needs, and which often had the effect of distorting reality. For example, many newly independent but poor countries appeared wealthier because of high military budgets. If that wasn’t enough, they repeated, international technical experts weren’t really helping, as they were paid to carry out, rather than question, the orders they were given by donor governments. “The more a statistical office relies on technical assistance,” Seers remarked, “the more it has to accept the priorities of donors.”

The meeting, as its report makes clear, was not a particularly happy affair. Representatives from the international agencies, who included Richard Stone, tried to defend themselves by saying that the GDP template should not be treated as if it was some immutable law. But Seers, though hosting the event, was unequivocal. “What statistics we use mould our perception of reality,” he said, bringing the meeting to a close. “This is why such a dull subject is crucially important.”28

Seers was a creative thinker with a sense of fun. And as a statistician he wasn’t so much against GDP as in favor of amending it to measure the things that matter. Richard Jolly, one of his former students and later director at the Institute of Development Studies at Sussex, recalls that Seers once said that a “shoe index” would be more useful than GDP as a measure of prosperity for the poorest countries.29 Such an index would count four things: the numbers of people who walked barefoot; the number who wore shoes with soles made from recycled car tires; the number who wore locally manufactured leather shoes; and finally, the number who wore imported shoes from companies such as Bata. The point he was trying to make was that data is of use to policy makers only if it is (a) relevant and (b) useful in the sense that making a change will actually improve people’s lives in a discernible way.

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Dudley Seers and Mahbub ul Haq were early critics of a blunt, data-driven approach to creating and measuring prosperity. Haq’s 1968 speech changed the language of politics and economics and introduced the phrase “the twenty-two families,” which many in South Asia still use today, nearly a half century later, as a proxy for wealth concentration and abuse of privilege.30 It changed his life, too, in that it planted a seed for his efforts to challenge economic policy making that is fixated on rising GDP. And it paved the way for the Human Development Index, although that would happen two decades later.

Shortly after the “twenty-two families” speech, Pakistan became engulfed in yet another political crisis that would end a decade-long military rule, paving the way for the country’s next experiment with democracy. Haq, however, chose not to stay, crossing the Atlantic for a new and in many ways more influential job as head of policy and planning at the World Bank in Washington, DC. He would work under Robert McNamara, President John F. Kennedy’s controversial secretary for defense during the Vietnam War.

While at the World Bank, Haq would retain a strong interest in what he called the “sins of development planners,” and it would be in Washington that he would write The Poverty Curtain, a reflection on his decade as Pakistan’s chief economic adviser. “Brazil has recently achieved a growth rate of close to 7 percent but persisting mal-distribution of income continues to threaten the very fabric of its society. What has gone wrong?” he would ask. “We were confidently told that if you take care of your [GDP], poverty will take care of itself. We were often reminded to keep our eyes focused on a high growth target, as it was the best guarantee of eliminating unemployment and of redistributing incomes. Then what really happened?”31

In Washington, Haq would continue to play an important role in the emergent discussions about GDP alternatives. However, as we shall see in Chapter 6, this role would not quite be the one he was expecting.