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Pakistan operates a mixed economy in which the state-owned enterprises (including industrial corporations, trading houses, banks, insurance companies, institutions of higher learning, medical schools and hospitals, and transport companies) account for nearly half of the gross national product (GNP). In addition, the state, with the help of an intricate system of industrial licensing and trade regulations, controls new private investments. The state also has at its disposal labour, health, and tax laws to oversee the functioning of the private sector. The balance between the public and private sectors of the economy was altered in favour of the former in 1972–74 as a result of a series of nationalization measures. Until then, and unlike most other developing countries, Pakistan had regarded the private sector as the leading sector of the economy.
The economy, which was primarily agricultural at the time of independence, is now considerably diversified. Agriculture, although still the largest sector, now contributes less than one-fourth of the GNP, while manufacturing provides almost one-fifth. In terms of the structure of its economy, Pakistan resembles the middle-income countries of East and Southeast Asia more than the poor nations of the Indian subcontinent. Economic performance compares favourably with that of many other developing countries; the GNP has increased at an average rate of more than 5 percent a year since independence. At the same time, there has been a relentless increase in population, so that, despite a real growth in the economy, output per capita has risen slowly. By 1990 Pakistan's economy was four times as large as it was at the time of independence in 1947, its population was three and a half times as large, and its per capita income was twice as large. In general, although the GNP per capita is relatively low, Pakistan does not have a high incidence of absolute poverty (the level below which a minimally adequate diet and other essential requirements are not affordable); the proportion of the population living in absolute poverty is considerably smaller than in other South Asian countries. The relative prosperity of the industrialized regions around Karachi and Lahore contrasts sharply with the poverty of the Punjab's barani areas, the semiarid Balochistan, and the North-West Frontier Province.
One of the paradoxes of Pakistan's economic situation is that, in spite of a healthy increase in its GNP and in spite of its success in alleviating the worst forms of poverty, it has continued to experience a very low level of social development. The social status of Pakistani women is particularly low. The country has a high rate of infant mortality, losing before they reach one year of age more than 100 children out of every 1,000 born; its maternal mortality rate, at 6 per 1,000 live births, is among the highest in the world; the rate of literacy, with only one of every seven women able to read and write, is very low compared to that of other developing countries.
A system of medium-term planning was introduced in 1958 with the belated publication of the first five-year plan (1955–60). In the following decades a series of five-year plans were formulated, but these met with varying degrees of success.
During the 1980s a movement toward an “Islamic economy” was announced by the Pakistani government. This movement involved the purging of economic practices outlawed by Muslim theology, such as riba (interest), and the mandatory reinstatement of the zakat (an annual tax on several types of personal financial assets that is used to provide aid for the poor) and the ushr (the zakat on land), which had not been universally adhered to but remained central tenets of Islamic law. General Zia had promised further Islamization of the economy, but he died before these steps could be taken. Under Benazir Bhutto, his successor, the Islamization movement slowed, although the government was obliged to keep on the books most of the legislation enacted during the Zia period.
Taxation accounts for more than three-quarters of government revenue, and government expenditures exceed revenues by a large amount. Income tax rates have been comparatively high, but the tax base has been so small that individual and corporate income tax revenues have remained substantially less than excise, sales, and other indirect taxes. The government has been able to maintain heavy expenditure on development and defense because of the inflow of foreign aid and the remittances sent by Pakistanis working abroad. In the 1970s and '80s external capital inflows were equivalent to as much as one-tenth of the GNP and financed well over half of the total domestic investment. In allowing this dependence on foreign capital to persist, however, the country has accumulated an enormous foreign debt, the financing of which has been a major problem.
The trade union movement dates to the late 19th century, but, because Pakistan's industrial sector (inherited at independence) was so small, organized labour as a proportion of total employment is still in a minority. This has not prevented it from becoming an important political force. Before the 1971 civil war, there were well over 1,000 registered unions, most of them organized within individual establishments. Countrywide unions based on a common craft or industry were very few. Most of the unions were situated in the urban centres and were affiliated to one of three national labour confederations. After the civil war and the emergence of Bangladesh, the number of unions declined to a few hundred, affiliated to one umbrella organization, the Pakistan National Federation of Trade Unions. Because of the high rates of unemployment, employers remained in a strong position, and many of them were able to bypass working agreements and laws. Only the unions in the bigger industries (e.g., cotton textiles) had the necessary coherence to fight back. Labour laws introduced in 1972 met some of the demands (job security, social welfare, pensions) of organized labour but also sought to control political activity by industrial workers. Labour union activity was severely constrained by the military government of 1977–88 but was revived by the administration of Benazir Bhutto.
The exploration of Pakistan's mineral wealth is far from complete, but more than 20 different types of minerals have been located. Coal mining is one of the country's oldest industries. The quality of the coal is poor, and the mines work below capacity because of the lack of demand. Iron ore deposits are also mostly of poor quality. The most extensive known reserves are situated in the Kalabagh region in western Punjab. Other low-grade ore reserves have been found in Hazara in the North-West Frontier Province. Small reserves of high-grade iron ore have been identified in Chitral and in the Chilghazi area (located in northwestern Balochistan), also in the North-West Frontier Province. Deposits of copper ore, equaling or surpassing the reserves of iron ore, have been located, but most sites remain unexploited. There are enormous reserves of easily exploited limestone that form the basis of a growing cement industry, the largest component of the manufacturing sector. Other minerals that are exploited include chromite (mostly for export), barite (a white, yellow, or colourless mineral resembling marble), celestite (strontium sulfate), antimony, aragonite (a mineral resembling calcite [calcium carbonate]), gypsum, rock salt, and marble. Radioactive minerals have been found in southwestern Punjab.
Pakistan also has small quantities of oil and some very large natural gas fields. The first oil discovery was made in 1915. Pakistan intensified the search for oil and natural gas in the 1980s and was rewarded with the discovery of a number of new oil fields in the Potwar Plateau region and in Sindh. The oil fields near Badin, in Sindh, are particularly promising. Oil fulfills a substantial portion of Pakistan's energy requirements, and the search for new and richer fields has continued. The largest natural gas deposits are at Sui (on the border between Balochistan and the Punjab), discovered in 1953. A smaller field, at Mari, in the northeast of Sindh province, was found in 1957. A number of smaller natural gas fields were discovered in the 1980s. A network of gas pipelines links the fields with the main consumption areas: Karachi, Lahore, Multan, Faisalabad (Lyallpur), and Islamabad.
