Pakistani defense expenditures and the macroeconomy: Alternative strategies to the year 2000

Abstract

Abstract : Toward the end of 1988, Pakistan's deteriorating resource situation caused a financial crisis, many remnants of which still exist today. In 1988, the Government's budget deficit reached 8.5% of Gross Domestic Product (GDP), inflation accelerated, the current account deficit doubled to 4.3% of Gross National Product (GNP), the external debt service ratio reached 28% of export earnings, and foreign exchange reserves fell by half to $438 million, equal to less than three weeks of imports. These developments have eroded the ability of the government to affect the country's development process. In fact, the encouragement of private sector activity, particularly investment, is the only viable option open to the authorities. It follows that for policy purposes the most important issue involves restructuring government expenditures and their financing in a manner that would provide the maximum inducement to private sector capital formation, especially in manufacturing. Operationally, this means finding an optimal balance between the Government's three most important budgetary items: defense, public consumption and infrastructural development. What is more important, because there is abundant evidence that the government's deficits have crowded out a certain amount of private investment, the authorities must achieve this balance within the context of a reduced level of expenditures and/or tax increases. Defense expenditures are an obvious candidate for expenditure reductions. As noted in the next section, the country's defense burden is one of the heaviest in the world. At round 7% (1992) of GNP, it is more than twice that of India. Moreover, while during most of the 1980s worldwide defense expenditures contracted, Pakistan's expanded. This trend occurred even after the hostilities in Afghanistan had subsided.