SOME ECONOMIC CONSEQUENCES OF TWO PAKISTANS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010032-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: February 1, 2010
• Sequence Number: 32
• Publication Date: May 1, 1971
• Content Type: IM

Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
Confidentia!
R/ .Zee/ 7,- 8'/
OCUM,NT SFfVfS
D0 NOT
DESTROY
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Some Economic Consequences Of Two Pakistans
Confidential
ER IM 71-81
May 1971
Copy No..
61
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
WARNING
'T'his document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
G"I, P
Crdudrd 6om aWomolit
downp.ndlnti and
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
May 1971
INTELLIGENCE MEMORANDUM
SOME ECONOMIC CONSEQUENCES OF TWO PAKISTANS
Introduction
1. The civil war in East Pakistan, with the accompanying disruptions
in trade between the two wings, demonstrated dramatically the extensive
interdependence that has developed between them since the union was
formed. For example, the virtual halt in jute exports from East Pakistan
divested the West of the foreign exchange earnings that normally flow to
it in payment for inter-wing trade. At the same time, the West wing's textile
industry could not ship its products to the East - its major outside market.
2. Islamabad's military successes in the civil war have probably only
postponed the establishment of two separate Pakistans. This memorandum
evaluates the economic links between the two Pakistans and some of the
short-term implications of a halt in trade to the economies of both wings.
Discussion
Background
3. Economic relations between the two wings of Pakistan expanded
rapidly following independence in 1947, and by 1970 each was the other's
major trading partner. Both were protected by the same tariff walls against
the outside world, and capital was able to flow freely between the two
wings. This free movement of goods and capital in an expanded domestic
market benefited both wings to the extent that each provided a market
Noe: This memorandum was prepared by the Office of Economic
Research and coordinated within CIA.
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
CONFIDENTIAL
for many products that the other could not sell profitably elsewhere, given
the limitations on trade with India. 1
4. While economic relations were expanding, however, so too was
the disparity in living standards between the two wings. Whereas there was
little difference in per capita incomes when the union was formed, they
are now about 50% higher in the West than in the East. In the West,
economic progress was favored by a better inheritance in the form of a
developed infrastructure, a population that was already 20% urban, and
an inflow of entrepreneurial talent from India. Economic development in
the East - largely a backward, greatly overpopulated agricultural economy
which lost much of its entrepreneurial class to India - depended almost
entirely on funding received from the West-dominated central government.
Such funding did not become substantial until the 1960s, however, and
private investment remained small. Consequently, economic growth in the
East was very slow.
5. The "Green Revolution" in Pakistan in the late 1960s occurred
almost exclusively in the West, 1 and constituted a highly visible
manifestation of its greater economic success. Subsequently, the floods and
cyclone of 1970, which devasted large areas of East Pakistan, further
underscored that region's vulnerability and helplessness. J Moreover, the
slow response by the central government - located in West Pakistan -- to
the disaster that followed the November cyclone may have been decisive
in the overwhelming scope of the victory of the separatist-oriented Awami
league in the East's December 1970 elections.
6. In any event, practically all Easterners are convinced that they
have been exploited by the West, and most believe that they would be
better off, or at least no worse off, as an independent nation. In the event
of a split, each wing would have to develop new trading patterns. The
difficulty of the adjustment and the prospects for economic growth would
depend also on the distribution of foreign indebtedness and foreign exchange
assets.
- 2 -
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
CONFIDENTIAL
An Independent West Pakistan
7. As a separate economy, West Pakistan would lose access to East
Pakistan's market and would need to find alternative sources of supply for
the goods that it has been importing from that region. A review of West
Pakistan's trading patterns in 1970 provides some insight into its likely
foreign trade situation as an independent nation. West Pakistan registered
a deficit of $352 million in its foreign trade, as exports totaled $338 million
and imports $690 million. In its trade with East Pakistan, West Pakistan
had a surplus of $78 million (exports of $174 million and imports of $96
million). Thus the inclusion of inter-wing trade cuts the deficit to $275
million (see Table 1). 4/
8. The West, however, could not find alternative markets for goods
now sold in the East. Its exports to the East -- $174 million in 1970 -
are about one-half of those to the rest of the world. The principal
commodities are food, textiles, and raw cotton (see Table 2), all of which
are items currently being sold in foreign markets. But the textile and food
products sold to the East are of low quality and, therefore, not readily
disposable in foreign markets. Other manufactured items are consumer
goods - shoes, drugs, and medicines, etc. - plus cement, and a little
machinery, many of which would not be competitive in world markets.
We estimate that an independent West Pakistan would be able to redirect
less than half of its sales to East Pakistan to other markets in the first
year or two following the split.
9. Prospects for increasing the West's ongoing foreign exports are
uncertain. While West Pakistan has succeeded in doubling its textile exports
since 1955, further growth may be constrained by quotas in some of its
largest markets, the United States and Western Europe. On the other hand,
exports of raw cotton have fallen as domestic consumption has increased.
A reduction in textile production - as a result of an inability to export
abroad some of the output currently sold to the East wing - would open
up the possibility of increased exports of raw cotton. Some surplus
foodgrains, now shipped to the East, might also be exported. On'the whole,
however, West Pakistan in the shortrun cannot expect to increase its export
receipts enough to offset the loss of sales to the East.
10. Thus, unless it reduces its imports, West Pakistan's trade deficit
is likely to increase from what it otherwise would have been to around
4. Recent studies indicate that the official rate of the rupee - 4.76 to
the US dollar - overvalues the rupee by about 100%. The Pakistani rupee
in inter-wing trade was thus converted to dollars at the rate of 9.5 to 1,
rather than at the official exchange rate of 4.76 to 1.
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
CONFIDENTIAL
$400 million, assuming no change in imports. A severance of trade with
East Pakistan would affect only about one.eighth of West Pakistan's
imports - primarily consumer goods such as?tea, jute, and paper (see Tables
3 and 4). There would be no difficulty finding foreign sources for these
or substitute imports - the problem would be availability of foreign
exchange. Much more than one-third of West Pakistan's imports other than
those from East Pakistan are capital goods, and a curtailment would
adversely affect economic development in the long run. However, West
Pakistan has considerable amounts of unused industrial capacity. Thus,
near-term industrial growth can be achieved even if imports of capital goods
are reduced so long as imports of raw materials and intermediate goods
are sustained.
11. In addition to a larger trade deficit, an independent West Pakistan
would experience a serious economic recession brought on by the loss of
its major market. Manufacturers of cotton textiles would lose more than
two-fifths of what is currently their production for the domestic market
and about one-fourth of their total market (see Table 5). The value of
the lost production would be even more significant because of the premium
prices paid in the East. On the basis of the textile industry's share of
industrial employment, this would put as much as 10% of the industrial
labor force out of work. Trade and commercial establishments also would
be hit hard by the contraction of sales. The returning West Pakistanis and
their capital, on the other hand, would augment the relatively large
entrepreneurial class in the West, although the capital might remain
unemployed for some time.
12. Agriculture in the West probably would be restructured after a
split. Land utilization would shift to accommodate the altered demand
patterns. The nature and extent of the shift would depend heavily on the
West's success in marketing cotton and foodgrains abroad. Production of
higher grade rice for the export market might well be increased, and
production of the lower grades of rice probably would be reduced. This
might slow the spread of the new "miracle seeds" which generally yield
a low-quality rice. Oil seed production probably would increase to satisfy
internal requirements and reduce imports of edible oils.
13. On balance, an independent West Pakistan would face severe
economic dislocations, an economic recession, and a deteriorating
balance-of-payments situation. A devaluation of the rupee, which is
currently overvalued by an estimated 100%, would be essential to make
foreign exports more attractive. Substantial amounts of foreign aid would
be needed both to maintain economic: growth and to avoid a de facto default
on the nation's foreign debts.
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
CONFIDENTIAL
An Independent East Pakistan
14. An independent East Pakistan also would face balance-
of-payments problems, but these would not be as serious in the short-term
as West Pakistan's. In 1970 the East Wing recorded a $31 million foreign
trade deficit. Taking into account its deficit on inter-wing trade, the East's
total deficit was about $110 million. A considerable part of the trade with
West Pakistan probably could be shifted, however; the terms of trade might
improve; and new trade patterns could be developed relatively fast.
15. Unlike West Pakistan, the East as a separate nation most likely
would resume trade with neighboring India. Historically, East Pakistan and
the adjacent Indian state of West Bengal - which includes Calcutta -
formed a natural trading area. Prior to the union, East Pakistan provided
food for Calcutta's population and raw materials for its industry in exchange
for manufactured goods, fuels, and construction materials. Each area became
progressively less dependent on the other after the partition of India, until
1965, when trade was halted, but the potential for substantial trade still
exists.
16. Much of the trade with India would be in commodities now traded
with West Pakistan. India could supply the East with cotton textiles and
tobacco, and paper and paper products could be sold by the East to India.
The East currently sells 65% of its paper production in inter-wing trade.
Trade with India would be less expensive than inter-wing trade, if only
because of lower transportation costs. India would not replace the West
wing as a market for the East's tea, and prospects for other foreign sales
are poor because of low quality.
17. Furthermore, India and East Pakistan have a large potential trade
in commodities not now included in Pakistan's inter-wing trade. Although
India has been forced to grow its own jute to supply the Calcutta mills,
it has not attained self-sufficiency and would probably import raw jute
from East Pakistan. This would probably more than offset the loss of jute
textiles sales to the West wing. East Pakistan could also revive fish sales
to India. India has large coal deposits in close proximity to the East, which
has had to-import coal from Communist China. Indian Bengal also produces
cement and other construction materials that East Pakistan needs to rebuild
areas destroyed by the army, to reconstruct embankments destroyed during
last November's cyclone, and to build dikes to control the annual flooding
during the monsoon; and India can offer a variety of machinery and
transportation equipment for sale to the East.
18. East Pakistan's exports will be heavily affected not only by
expanded trade with India but also by developments in the world jute
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
CONFIDENTIAL
market because jute and jute products make up some 90% of total foreign
exports. In an effort to increase export earnings, the East has been shifting
from the export of raw jute to that of jute manufactures; nevertheless,
about half of its foreign exchange earnings still come from raw jute exports.
In recent years, exports of burlap have declined drastically in the face of
competition from packaging made from synthetics and paper, and a further
decline appears in prospect. The East's mills have been adjusting for several
years to this shift in world demand by converting to the manufacture of
carpet backing, for which demand is likely to continue rising, at least for
the next several years.
19. The main economic problems of an independent. East Pakistan
would be population pressure on the food supply and a severe shortage
of entrepreneurial talent and technical skill. The nation would have a
substantial food deficit. If, as seems likely, there was a wholesale expulsion
of West Pakistanis, the urban economy -- both industry and commerce -
would be set back. West Pakistanis also have played a major role in the
development of East Pakistan's jute industry. The highly limited domestic
investment resources and a shortage of entrepreneurial talent would limit
East Pakistan's ability to finance and manage the economy on its own.
Implications for Foreign Aid
20. At least for the first two or three years after a split, both wings.
would probably need increased foreign assistance to maintain current per
capita incomes. However, the aid requirements of the two wings would
differ greatly in both magnitude and type.
21. The West's economy would depend on general commodity aid
to cover a gap of some $400 million between its imports and its exports.
Although more than self-sufficient in food, the West relies heavily on
imports to support industrial development. The West could, with appropriate
economic policies, develop new exports, but it would take many years to
achieve self-sustaining growth.
22. For the East, foreign aid requirements in the first two or three
years after the split would probably be in the range of $100-$150 million
annually and would be of a type that is far easier to satisfy than the West's
requirements, as it would consist solely of food aid, project aid, and
technical assistance. Immediate requirements for foreign assistance would
include not only food but also re!icf for reconstruction and re!rabilitation
of areas devastated by the civil war. In the longer term, la,ge-scale aid would
be needed for the massive flood control and water development projects
the country must undertake to improve growth potential. Of the
approximately $600 million in foreign aid disbursed throughout Pakistan
in fiscal year 1970, roughly one-fourth was spent in the East.
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
CONFIDENTIAL
23. Disposition of Pakistan's foreign debt between the two nations
will have a significant effect on their overall balance-of-payments positions.
Negotiations between the wings could result in some debt-sharing, perhaps
in the same proportions as recent foreign aid disbursements. It is more
likely, however, that an independent East Pakistan - emerging from a civil
war imposed on its territory by the West wing - would disclaim all debts
contracted by Islamabad. In any event, with a foreign debt currently at
about $4 billion and annual repayments at $ 160 million, some debt relief
would be the first order of business for whoever inl"rits the foreign
obligations.
Conclusions
24. An independent West Pakistan is likely to experience a severe
economic recession and a deteriorating balance-of-payments situation. The
loss of markets in the East wing for its textiles and other consumer goods
would reduce industrial production and employment. Although the West
probably would be able to increase its foreign exports, the increase would
not offset the loss of trade with the East, even if the rupee was substantial;:
devalued. Dependence on foreign commodity aid to finance economic -
especially industrial - development would increase. Moreover, West Pakistan
would inherit most if not all of Pakistan's foreign obligations, and some
debt relief would be essential to avoid default.
25. An independent East Pakistan would have a much smaller
balance-of-payments problem, with aid requirements limited to food aid,
project aid, and technical assistance. Trade with India would probably be
resumed; it would replace much of the loss inter-wing trade, improve the
terms of trade, and provide the potential for further trade expansion.
Nevertheless, East Pakistan would remain a poor and Lackward economy
with a severe shortage of managerial talent and skills, which would be
worsened by an exodus of West Pakistanis. Because of this shortage, the
comparative lack of infrastructure, and the high population pressure on the
land, long-term growth prospects are much less favorable in the East than
in the West.
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
CONFIDENTIAL
East and West Pakistan:
Inter-wing and Foreign Trade, 1970
Million US
~
Imports
Exports
.
Trade-Balance
East Pakistan
554.6
445.6
--109.0
Inter-wing
173,.9
96.4
- 77..5
Foreign
380.7
349.2.
3.1.5
West Pakistan
786.3
511 . 7
-274.6
Inter-wing,
96.,4
173.9
77-.5-
Foreign
689.9
337.8
-352.1
West Pakistan:
Major Inter-wing. and Foreign Exports, 1970
Million US $
Inter-wing
Foreign
Total
173.9
337.8.
511.7
Of which:
Food
60.7
48.9.
109.6
Cotton, raw
17.5
47.0
64.5
Cotton textiles
34.6
123.2
157.8
Leather
0.3
23.0
23.3
Tobacco
15.2
3.5,
18.7
Machinery
6.7
2.4
9.1
Other manufactures
22.4
5%.4
81.8
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
CONFIDENTIAL
East Pakistan:
Major Inter-wing and Foreign Exports, 1970
Million US $
Inter-wing
Foreign
Total
Total
96.4
349.2
445.6
Of which :
Jute, raw --
160.1
160.1
Jute manufactures 16.9
158.6
175.5
Leather 3.0
12.6
15.6
Paper and paperboard 11.5
0.4
11.9
Tea 25.6
--
25.6
East and West Pakistan:
Foreign imports, 1970
Million US $
East West
Pakistan Pakistan
Total
Total
380.7
689.9
1,070.6
Of which :
Foodgrains
82.7
11.0
93.7
Other foods
7.3
19.5
26.8
Animal and vegetable
oils
21.8
22.9
44.7
Chemicals
52.9
125.9
178.8
Fuels
16.3
46.2
62.5
Machinery
103.5
194.9
298.4
Transport equipment
19.6
71.4
91.0
Other manufactured
goods
66.9
155.6
222.5
CONFIDENTIAL
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
 Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4
East and West Pakistan: Selected Inter-wing and
Foreign Exports as Shares of Provincial Production. 1970
Inter-wing Exports as a
Percent of Production
Inter-wing Exports as a
Percent of Production
for Pakistani Markets
International Exports Tctal Exports
as a Percent of Production as a-Percent of Production
West Pakistan
Cotton, raw
13.5
16.0
15.7
2?.2
Cotton textiles
22.5
44.1
49.1
71.6
r
Cotton twist and yarn
5.4
7.3
26.8
32.2
0
Cesient
12.3
12.3
--
12.3
1
Rice
17.2
17.9
3.3
21.0
East `Pakistan
Jute, raw
--
--
48.9
48.9
Jute textiles
11.0
67.1
84.6
95.6
Paper
64.5
65.1
1.0
65.!
Matches -
50.2
50.2
--
50.2
Tea
9-3.4
q3.4
--
93.4
Sanitized Copy Approved for Release 2010/02/02 : CIA-RDP85T00875R001700010032-4