Detailed Elaboration of Key Points from MIP Chapter 7 Notes
The Process of Industrialization in Pakistan Part 2
• Overview:
• • This chapter focuses on the industrialization process during General Zia ul-Haq's
rule (1977-1988) and the subsequent post-1988 era of structural adjustment,
examining the policies, growth trends, and economic outcomes in these periods.
The Zia Years: 1977-1988
• Nature and Extent of Growth:
• • GDP growth averaged 7% per annum from 1978 to 1986, indicating a strong
economic performance.
• • Growth in capital stock accounted for 82.3% of this growth, while total factor
productivity (TFP) growth was much lower at 3.17%, reflecting reliance on capital
investment over efficiency gains.
• • Despite overall economic growth, there was little employment growth across
most industries, and labor productivity declined in many sectors. The apparel
industry saw an increase in employment but a 19% fall in output.
• • The manufacturing sector became more capital intensive, and the share of wages
in industrial output fell, highlighting a shift towards capital-heavy production
methods.
• Industrial Policy:
• • Three periods of policy:
• - 1977-1981: Initial cautious attempts to restore private sector confidence while
seeking political legitimacy.
• - 1982-1985: A more forceful drive towards Islamization after consolidating
power.
• - 1985-1988: Efforts to disengage the government from direct control of the
economy, promoting privatization.
• • Denationalization of agro-based industries such as rice husking, flour milling, and
cotton ginning began in September 1977, followed by basic and heavy chemical and
cement industries in December 1977.
• • Various incentives were provided to stimulate private sector investment in
agriculture and industry, including tax holidays, export rebates, and reduced
interest rates.
• • The fifth Five-Year Plan (1978-1983) aimed for ambitious growth in large-scale
manufacturing at 12% per annum, a target that was achieved.
• Public/Private Sector Divide:
• • Despite the push towards privatization, the public industrial sector remained
large, employing over 50,000 people with significant ongoing investment projects.
• • Initially, public sector output increased more rapidly than private sector output
in large-scale manufacturing, but this trend reversed in the latter half of Zia's tenure.
• • The financial sector remained under government control, with no significant
denationalization or privatization of banks during Zia's rule.
• Deregulation and Liberalization:
• • The Sixth Five-Year Plan (1983-1988) marked the beginning of deregulation and
liberalization, moving towards export-led industrialization and incorporating
incentives and institutional reforms to enhance industrial efficiency.
• • Key initiatives included increasing investment sanction limits, reducing tariffs on
raw materials, intermediate and capital goods, implementing a liberal trade policy,
and establishing a Tariff Commission in 1989 to address fiscal anomalies and
effective protection.
• • Import policy shifted to a 'negative list' approach, where everything not on the
free or tied list could be imported.
• • The World Bank supported the deregulation and liberalization policies, citing the
increase in private sector share as a positive outcome.
• Causes of High Growth:
• • Significant inflows of foreign aid, particularly due to the US-Afghan war, and
remittances from the Gulf region boosted investment and consumption demand.
• • Zia's regime benefited from international community support, leading to
increased foreign aid and investment.
The Age of Structural Adjustment: 1988 Onwards
• Principles of the Programme:
• • The Seventh Five-Year Plan (1988-1993) aligned with IMF/World Bank
Structural Adjustment Programme (SAP), focusing on further deregulation,
privatization, tariff reform, and encouraging foreign investment.
• • Policy reforms included ambitious targets for industrial sector reforms, with a
'forceful' programme to liberalize the economy from government control.
• • Mixed results were observed, with significant variation between targets and
achievements, often leading to revised and more realistic targets.
• Impact on Industrial Sector:
• • Manufacturing growth fell from an impressive 8.21% average annual increase in
the 1980s to only 4.8% in the 1990s, with a further decline to 3.22% in the latter
half of the 1990s.
• • Growth rebounded to an average of 7% in the 2000s, primarily due to 9/11
windfall gains and debt rescheduling.
• • Post-2008, manufacturing growth fell again due to the transition from military to
democratic government, global recession, and poor performance of the PPP.
• • Private investment declined as a percentage of GDP from around 10% in 1992/3
to 8% after 1998/9, with a temporary rise above 15% in 2005-08.
• Challenges:
• • High interest rates for long-term industrial investment rose significantly,
impacting borrowing costs. Utility prices also increased, driven by market forces,
affecting production costs.
• • Tariff rates fell drastically from a maximum of 225% in 1986 to 25%, making
imported goods cheaper and contributing to the 'sick' status of over 4000 industrial
units.
Critical Analysis of MIP Chapter 7 in the Context of Pakistan’s Current
Political and Economic Climate
Chapter 7 of MIP provides an in-depth analysis of the industrialization process during Zia
ul-Haq's regime and the subsequent era of structural adjustment, highlighting the
complexities and challenges faced by Pakistan's economy. The Zia years saw robust GDP
growth driven by capital stock increases and significant public sector investment, but the
benefits were unevenly distributed, with limited employment growth and increased income
inequality. The policy focus on deregulation and liberalization in the 1980s and beyond
aimed to reduce government control and promote private sector-led growth. However, the
structural adjustment programmes of the post-1988 era brought mixed results, with initial
industrial growth followed by stagnation and decline due to high interest rates, rising utility
costs, and reduced tariff protections. These historical trends underscore the importance of
balanced economic policies that promote sustainable industrial growth while addressing
socio-economic disparities. Current economic challenges in Pakistan, including reliance on
foreign aid, political instability, and economic inequality, reflect the need for comprehensive
reforms that enhance productivity, support small and medium enterprises, and foster
resilience against external shocks.
