DEVELOPMENT ECONOMICS EC-315

Industrial Development of Pakistan

Instructor: Mamona Sadaf

Industrialization and Development

Creating capacities to process raw materials in order to manufacture

different products
GROWTH OF INDUSTRIAL SECTOR FROM 1947 TO 1950
• Pakistan got only 34 industries i.e. 4% of the total industries established
in the Subcontinent.
comparatively small size and were based on raw material.
small sugar mills, cotton ginning factories, flour mills, rice husking mills and canning etc.

• Industrial Finance Corporation and an Industrial Investment and Credit Corporation

were established in 1948.

• Private entrepreneurs invested in those industries which showed the highest profit.

• The contribution of industrial sector was 6.9% to GDP in 1950.

GROWTH OF INDUSTRIAL SECTOR IN 1950'S
Policies: Import substitution for industrialization; Govt. decided not to
devalue currency
Loss of exports of raw material
3 major aspect of trade policy
• Over-valuation of Pakistani Rupee
• Use of quantitative controls on imports
• A highly differentiated structure of tariff on imports and export
cascaded tariff structure;
• With lower tariff on investment goods,
• Tight control over the import of luxuries and control of other consumer goods
• Easier access to capital goods and industrial raw materials
 Results of Policies
Rapid industrialization
Rapid growth of manufacturing
• Decline in the imports of consumer goods
• Rise in import substitution investments
• The emergence of manufactured exports
• Large scale manufacturing grew at 24% per annum during 1949-54 and more than 9%
per annum up to 1960.
• The annual return on investments ranged from 50 to 100% in the early 1950s.

Concentration of industrial assets and income on personal and regional basis was resulted
0.8% firms own the 50% of all private industrial assets
 Industrial Expansion (1958-68)
Continuity of policies;
From direct control to Biased Economic policies
Result
indirect controls
• Open Import Licensing • Large scale manufacturing • Growth in West
growth increased
• Free List of Imports • From 8%/ year in 1955-60 to Pakistan only
• EBS was launched for 17% per annum in 1960-65 • Transfer of
• Domestic demand based
import liberalization industrial production resources from east
• Differential in tariff • Import substitution to west Pakistan
industrialization shifted
rate widened consumer goods to
• Foreign aid increased intermediate and capital
goods industries.
from 2.7% to 7% of in • Aid dependent success
mid 1960s. • Concentration
• Income inequality fuelled in
1960s
Facts Income inequality
 Nationalization of Industries 1970-78
Radical Changes in policies;
Nationalization Removal of biased Results
against agriculture
• To access additional • Complete reversal of public private
resources for continuation •Devaluation of Pak investment
of industrial growth • Public sector invest rose up to 80%
• To deal with concentration
Rupees up to 131%
in 1977-78 from 5% in 1970 t0 71
• To broaden and
• 100% increase in • Mixed results in term of output and
strengthen industrial procurement prices of trade
structure and production agriculture • Average growth rate decreased from
• Firstly, large scale •The Export Bonus 7.2% (1965-70) to 4.4% (1971-77).
manufacturing sector, • Agriculture and manufacturing
especially in the capital Scheme was also slowed down
and intermediate industry abandoned. • Services sector improved
• Secondly, vegetable oil • Large scale manufacturing largely
sector declined
• cotton ginning and rice
milling
Further reasons for economic slowdown

• Massive floods in Pakistan (1973)

• multiple increase in international mineral oil prices (1973)
• world recession due to energy crisis (1974-77)
• failure of cotton crops (1974-75)
• repetition of massive flood in Pakistan (1976-77)
• large increase in import prices, which resulted in inflation at close to
30% in 1973-74
 Liberalization of Industries (1978-88)
• Gradual deregulation and liberalization of public sector in favour of public-private partnership was
adopted
50,000 employees
Rs.40 billion
to restore business confidence and motivation

To revive investment in agriculture

- Denationalization of agro-based industries and small engineering units
Privatization and tax holidays for number of basic and heavy chemical and cement industries
• Interest rate on fixed investments in agriculture and industry was reduced
• Export rebates
• Ease of economic controls and regulations
• Replacement of quantitative restrictions by tariff
• Managed float of the currency was introduced
• Increased Private industrial Investment
• the private sector share in total fixed investment increased from 38% in 1982-83 to 42% in 1987-88
• In manufacturing sector its share in investment rose from 51% to 83%
• GDP growth averaged 7% per annum. Average per annum growth in manufacturing sector reached at
9.6% during 1978-88
Structural Adjustment and Privatization of Industries (1988-2008)

To finance its development expenditure and debt service liabilities through

conditional financing of the World Bank and IMF
Stabilization policy was adopted as per instructions of IMF and WB
• The reduction in budget deficit was achieved through raising indirect taxes
• freezing of real wages
• Reduction in subsidies and investments
• Private sector led growth was the main emphasis
• Sanctioning of private investment, import licensing and regulatory restrictions (registration of domestic and foreign
loan an agreements, procedure for employment of foreign workers, etc.) were removed
• Areas of investment previously reserved for the public sector were opened to the private sector, including power
generation, banking and transport
 SAP and consequences
• 105 manufacturing units and began to take steps to expand the privatization
program to the energy and telecommunication sectors
• The process of privatization was accompanied with financial liberalization
• The cost of borrowing increased continuously during the 1990s. From average of
12% in 1990 to 20-23% in 1997.
• Capital formation reduced
• Contraction in investment caused lowering of GDP growth rate from 5.6% in
1990-91 to 3.1% in 2001-02
• Growth rates of commodity producing sector and manufacturing sector reduced
from 5.9% and 6.3% to 1.4% and 4.5%, respectively.
• Reduction in output was accompanied with stagflation
• Electricity prices rose by 14.7% per annum between 1991-2001, while gas prices
rose by 10%.
 Contd.
• The per unit price of petroleum increased from 13 Rupee in August 1993 to 35
Rupee in March 2003
• Tariff rate had fallen drastically making imported goods cheaper. More than 4000
industrial units were declared “sick’’.
• Stagflation radically raised the level of absolute poverty
• Through increased indirect taxation and price inflation the burden of stabilization
was transferred to the masses of taxpayers and consumers
Industrial Development and Issues
Sectoral Share of GDP
60%

50%

40%

30%

20%

10%

0%
1949-50 2002-03 2012-13
Agriculture Industry Services
Textile industry
• Highest manufacturing value-added for any industry in the manufacturing sector
• One-third of the total manufacturing employment from the sector
• 30% of Pakistan’s exports came from textile sector
• According to UNIDO, textile constituted 56% of Pakistan’s export in 1985
• Industry has lost its relatively more prominent position of 1960s and today holds
a little over 2% of the world market which was 12% in 1960s
• Share of Hong Kong and Korea has risen
• Only 83% of installed spindles are working
• Percentage of working looms is currently only 45% of the installed looms
• yarn production may have increased fifteen-fold since 1955
Cloth production has not reached to its previous maximum level
 Reasons

Fragmentation
• Emphasis of the state shifted towards the creation of public sector intermediate and capital goods
industry
• Export manufacturing led growth was ignored
• Both output and employment in the small scale sector grew significantly after Cottage Industry Act
• Nationalization program broke the power of large scale textile groups and their link with banking
and insurance sector
Less competitive exports
Ignored up-gradation into higher value-added products
narrow production base
Outdated technology and limited product range
About 70% of Pakistan’s yarn production is coarse cotton yarn and only 3% accounts for
fine and super fine counts
4th largest exporter of less value-added woven cloth
 Status
• Biggest growth of textile sector is taking place in the share of
clothing and apparel.
• Clothing trade since 1990s has grown at a rate of 82%
compared to textile, 4%, with both accounting for around 160
billion US$ world trade.
• Pakistan has at best 1% of global apparel market.
• WTO and textile sector of Pakistan
Small scale industries
• Growth in SSI is more impressive
o The Cottage Industries Act 1972 provided new stimulus for small scale
industries
o Remittances increased demand for consumer goods by Cottage
industries
Comparison of Growth rates
Privatization of Public sector Industries: A
case
It has been argued that public sector enterprises are usually inefficiently, costly to run, poor
performers, and a drain on the exchequer. Therefore, the state should no longer subsidize them,
rather they should be privatized or closed down. However, it must be remembered that public sector
enterprises not merely have to respond to pure market criteria, but also have social and political
responsibilities. There is little doubt that public sector enterprises performed far better than overall
manufacturing sector in Pakistan. According to a study carried out by Nawab Haider Naqvi and
[Link] five out of eight public sector corporation, accounting for 71% of total public sector output,
have been reasonable profitable, and the effective rates of protection were relatively lower in
industries where public enterprises dominated. 39 of the 60 public sector enterprises had capacity
utilization rates exceeding 75%. Thus, changing the focus of ownership of industries is by itself neither
a necessary nor a sufficient condition for an efficient operation of an industrial enterprise.
 Privatization
Policy of denationalization of industries started in the mid of 1970s and
during 1980s to encourage industrialization
 Industrial Efficiency
• Industrialization policy consisted of protecting domestic industry
• Building up trade barriers in the tariff and non-tariff restrictions,
• Multiple exchange rates and import licensing.
• Industrial development of 1960s emerged at high cost with higher infrastructural inefficiency
• In 1964 about 75% of actual value added was due to distortion in the industrial structure.
• High effective protection rate; under invoicing of imports
• inadequacy of demand
• infrastructural bottlenecks including power and transport,
• scarcity of skilled labour
• problem of assimilation of foreign technologies
• Inefficiency: three industrial sub-sectors of chemicals, engineering and textiles faced
domestic resource costs that were close to international standard and thus not
operating particularly inefficiently
 Policy Options

• Privatization of Public enterprises or

• Public enterprises can be given independent status and subjecting
them to the same legal requirement as private firms
• Including deficit reduction,
• Trade liberalization,
• and public sector reform,
• policies to allow private and foreign investors to participate in the
development of infrastructure with capital and expertise.
• Labour-intensive activities, small scale industries, agro-based
industries and comparative-advantage-based value added
manufacturing
• The regulation of financial intermediation, non performing banking
loans
• Fiscal policy should strongly consider progressive taxation
• Human capital needs to be developed on priority basis.
• Institutional reforms are required for effective planning and
implementation of government policies.