Excessive Defense Expenditures and Economic Stabilization: The Case of Pakistan
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 percent of Gross Domestic Product (GDP), inflation accelerated, the current account deficit doubled to 4.3 percent of Gross National Product (GNP), the external debt service ratio reached 28 percent of export earnings, and foreign exchange reserves fell in half, to $438 million, equal to less than 3 weeks of imports (World Bank, 1991). 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, tax increases, or both. 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 around 7 percent (1992) of Gross (GNP), it is more than twice that of India. Moreover, while over recent years global defense expenditures have been declining, Pakistan's has expanded: From 5.4 percent of GNP in 1980, it reached 6.8 percent in 1985.
Document Details
- Document Type
- Technical Report
- Publication Date
- Aug 01, 1997
- Accession Number
- ADA528058
Entities
People
- Robert E. Looney
Organizations
- Naval Postgraduate School