Issues in Pakistan Economy

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Munazza Ahmed
Department of Management Sciences
Virtual University of Pakistan MODULE 3
 Issues in Pakistan Economy

INDUSTRIAL SECTOR

OF

PAKISTAN

Munazza Ahmed
Department of Management Sciences
Virtual University of Pakistan MODULE 3
INDUSTRIAL SECTOR OF PAKISTAN

Generally Industrialization
implies “Growth and
Development”

At the time of independence,

Pakistan had no industries to
speak of, no industrial raw
material, no significant industrial
or commercial groups.

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

By the mid 1960’s, Pakistan was

considered model developing
country with phenomenal
industrial growth.

During 1951 to 1955, the

manufacturing sector grew
annually at 34%. (one of the
highest growth rate witnessed in
the world)

Introduction
 INDUSTRIAL SECTOR OF PAKISTAN
INDUSTRY

Process of Process of Key Issues in

Industrializati Industrializati Pakistan’s
on (1947- on (1977 till Industrial
1977) present) Sector

Outline
INDUSTRIAL SECTOR OF PAKISTAN

PROCESS OF
INDUSTRIALIZATION

(1947-1977)

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

THREE PHASES

 First phase is period 1947-58

 Second phase is 1958-1968

 Third phase is 1969-1977

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

Industrial Policy of April 1948

Features;
 Extreme industrial backwardness
 No jute mill (with 75% of worlds
jute production)
 Few textile mills (Huge cotton
production)
 Pakistan blessed with
considerable economic resources

First phase is period 1947-58

INDUSTRIAL SECTOR OF PAKISTAN

1949-1958 Growth rate of

industry in Pakistan was most rapid
in the world.
(Large scale manufacturing growth
23.6% between 1949-1954)

1950’s Establishment and

expansion of large scale
manufacturing sector.

First phase is period 1947-58

INDUSTRIAL SECTOR OF PAKISTAN

Economic development and Investment

Tools in the first decade

• The impact of Exchange Rate

• The Trade Policy Regime
• Import Substitution Industrialization

First phase is period 1947-58

AGRICULTURE SECTOR OF PAKISTAN

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Issues in Pakistan Economy

INDUSTRIAL SECTOR

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MODULE 3
AGRICULTURE SECTOR OF PAKISTAN

The impact of Exchange Rate

 September 1949, Pound sterling ,
currencies of numerous countries as well
as India were devalued. But Pakistan did
not follow.
To,
 Announce the world Pakistan’s
independent economic policy
 Sell raw material (jute) at higher price
and import machinery at lower price

First phase is period 1947-58

AGRICULTURE SECTOR OF PAKISTAN

The impact of Exchange Rate

 Pakistan government imposed some
controls on imports and exports to
manage trade.
 India suspended trade with Pakistan in
September 1949.
As a consequence Pakistan;
 Either devalue the currency
 Find alternative market

First phase is period 1947-58

AGRICULTURE SECTOR OF PAKISTAN

The impact of Exchange Rate

 Due to Korean war Pakistan make
spectacular profits on its exports.
 1952, The price of cotton and Jute fell but
government decided not to devalue.
Instead government put physical controls
on imports and exports.

First phase is period 1947-58

AGRICULTURE SECTOR OF PAKISTAN

The impact of Exchange Rate

The decision NOT to Devalue currency

started Pakistan on the road to industrial
and economic development.

First phase is period 1947-58

AGRICULTURE SECTOR OF PAKISTAN

The Trade Policy Regime

Analysis;
• Collapse of Korean Boom (1952)
• Fall in export prices
• Balance of payment deteriorated
• Controls and restrictions were imposed
on trade

First phase is period 1947-58

AGRICULTURE SECTOR OF PAKISTAN

Pakistan’s Trade Policy aspects;

 Overvaluation of rupee
 Use of quantitative controls on imports
 Highly differentiated structure of tariffs
on imports and export taxes

First phase is period 1947-58

AGRICULTURE SECTOR OF PAKISTAN

Import Substitution Industrialization

The exchange rate and trade policies
adopted by Pakistan leads to Import
Substitution Industrialization.
Protective Policy;
 Produce anything that reasonably can be
produced
 Ban on import of domestically produced
goods

First phase is period 1947-58

AGRICULTURE SECTOR OF PAKISTAN

Import Substitution Industrialization

Due to Highest protection (consumer goods)

Import substitution progressed easily

and rapidly.

Imports of capital goods & non-agricultural

industrial goods only, government played
major role in determining the nature and
structure of industry.

First phase is period 1947-58

AGRICULTURE SECTOR OF PAKISTAN

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 Issues in Pakistan Economy

INDUSTRIAL SECTOR

OF

PAKISTAN

Munazza Ahmed
Department of Management Sciences
Virtual University of Pakistan MODULE 3
INDUSTRIAL SECTOR OF PAKISTAN

Economic policies of the first

decade initiated an era of
industrial growth and
development.

This laid the foundation for the

decade of development between
1958-1968.

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

Growth rates in
Large scale manufacturing,
Agriculture and
GDP
showed astonishing trends over
the ten years between 1958-1968.

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

Examine the nature of

development through;

• Growth rates
• Policies pursued
• Consequences of policies

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

Growth Rates
High growth rates in large scale
manufacturing continued in the
first few years of this decade
(growth rate around 17% annual).

Even after 1965, manufacturing

sector growth remained above
10%.

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

Trade Policies
1. Many controls on trade were
disbanded.
2. New trade policy 1959 shifted
away from direct controls to
indirect controls
3. Export Bonus scheme (EBS)
launched in 1959.

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

Trade Policies
4. Import Licensing scheme
replaced with Open General
License (OGL) in 1961.
5. Introduction of “Free List”
scheme.
6. Focus on Import liberalization.
7. New Import controls introduced

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

Analysis
 Import liberalization would not
have been possible without
increase in foreign aid.
 Export Bonus scheme
compensated overvalued
exchange rate and boosted export.
 Due to overvalued exchange rate
it became cheaper to import
machinery.

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

Consequences
 Impact of EBS, Import licensing
and liberalization strategy was
considered “Dramatic” on
Industrial Development.

 Large Scale manufacturing growth

increased from 8% (1955-60) to
17% (1960-65).

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

Consequences
 In 1965, Pakistan’s manufactured
exports were greater than the
combined manufactured exports
of south Korea, Turkey, Thailand
and Indonesia.

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

Conclusion
Foreign Aid Imports
Both industrial production and
investment responded well to
liberalization of imports.

Export Bonus Scheme (EBS)

encouraged the export of
manufactured goods.

Introduction
AGRICULTURE SECTOR OF PAKISTAN

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 Issues in Pakistan Economy

INDUSTRIAL SECTOR

OF

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Munazza Ahmed
Department of Management Sciences
Virtual University of Pakistan MODULE 3
INDUSTRIAL SECTOR OF PAKISTAN

Last phase ends with rise in inter

regional disparities and income
inequalities particularly between
East and West Pakistan.

New democratic government

inherited new Pakistan defeated in
war by India in December 1971.

Introduction
 INDUSTRIAL SECTOR OF PAKISTAN

Analysis
 Socialism concept was responsible for dismal growth rates and
highest rates of Inflation.
 Bad Economics and poor policies were responsible for poor economic
performance
 Many ‘bad luck factors’ also causes played a critical role in causing
economy to grow at below trend rates.

Third phase period 1969-77

 INDUSTRIAL SECTOR OF PAKISTAN

Major steps / Economic Policies

 Nationalization of all basic industries and financial institutions.
Nationalization policy has three aspects;
1. All those means of production that are generators of industrial
advancement must be taken in public hands
2. All enterprises of national economy infrastructure must be in public
ownership.
3. Institutions dealing with medium of exchange (banking and
insurance) must be nationalized.

Third phase period 1969-77

 INDUSTRIAL SECTOR OF PAKISTAN

Major steps / Economic Policies

 The party’s promises to urban organized labour were fulfilled with in
six months of coming to power through the labour reforms (1972).
 Devaluation of Pakistani rupee by 131 percent.
 Banking reforms May 1972, State Bank of Pakistan extends controls
over scheduled banks.
 Export Bonus Scheme (EBS) was abandoned.

Third phase period 1969-77

 INDUSTRIAL SECTOR OF PAKISTAN

Bad Luck Factors

 August 1973 Massive floods hit Pakistan
 October 1973 Increase in international petroleum prices
 World recession as a result of OPEC price rise
 Huge failure of cotton crop (25%)
 1976-77 Worst floods in Pakistan's History

Third phase period 1969-77

 INDUSTRIAL SECTOR OF PAKISTAN

Consequences of factors
 Nationalization measures results out to complete reversal of public and
private investment. (In 1974/75 Private sector investment was only 15 %
of its level in 1970 while public sector investment rose to 75% from only
5% in the same time period).
 Private sector had lost all trust in government.
 Inflation reaches to peak level due to oil price rise.
 Oil price rise wiped out positive balance of trade (gains from devaluation).
 Floods and pest attacks damaged crops severely.
 Failure of cotton crop 1974/75.

Third phase period 1969-77

 INDUSTRIAL SECTOR OF PAKISTAN

Critical Review
 Generally economic performance remains poor /economic stagnation
 Lack of fiscal and monetary discipline;
High budget deficit
Monetary growth and inflation
 Period of domestic and international turmoil

Third phase period 1969-77

 INDUSTRIAL SECTOR OF PAKISTAN

It was more external (Bad luck) factors than Bad management

which resulted the

poor economic growth rates.

Third phase period 1969-77

AGRICULTURE SECTOR OF PAKISTAN

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 Issues in Pakistan Economy

INDUSTRIAL SECTOR

OF

PAKISTAN

Munazza Ahmed
Department of Management Sciences
Virtual University of Pakistan MODULE 3
INDUSTRIAL SECTOR OF PAKISTAN

PROCESS OF
INDUSTRIALIZATION

(1977 till present)

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

Last Era was characterized by poor

policies, bad management and
various
bad luck factors which results into
overall poor performance of the
economy.
This Era started in 1977 with the
military rule in the country.

Introduction
 INDUSTRIAL SECTOR OF PAKISTAN

Features
 Pakistan’s manufacturing sector became more capital intensive
between 1975-1986.
 There is little employment growth in almost all industries between
1975-1986.
 1980’s has been a period of relatively high growth in manufacturing.
 This time period has the first ever industrial policy, formulated and
executed.
 Overall performance of the economy in this period was phenomenal.

Fourth phase period 1977-

 INDUSTRIAL SECTOR OF PAKISTAN

Analysis
 Change in government in 1977 brings a change in industrial strategy.
 Most important concern of the government was to restore private
sector confidence and motivation in order to revive investment in
industry.
 Government made the decision that the private sector was to play the
leading role in the industrial sector.

Fourth phase period 1977-

 INDUSTRIAL SECTOR OF PAKISTAN

Steps taken
 Sep 1977, Denationalization of number of agro based industries.
 Dec 1977, number of basic and heavy chemical and cement
industries were opened to private sector.
 March 1978, Tax holidays and incentives to encourage industrial
activity in the less developed regions of country.
 June 1978, Export rebates were given.
 Fifth five year plan 1978/79 was launched (third & fourth plan were
lost)

Fourth phase period 1977-

 INDUSTRIAL SECTOR OF PAKISTAN

Steps taken
 Return of assets seized and nationalized in the last regime.
 Sixth five year plan 1983-88 marks the process of deregulation and
liberalization.
 A ‘negative list’ was introduced to encourage foreign trade.
 Manufactured exports were given rebates, import facilities, income
tax concessions to encourage exports.
 Distinguishing measure of this government was Islamization (islamic
laws were enacted, commissions formed and economy was brought
under islamic laws and principles).

Fourth phase period 1977-

 INDUSTRIAL SECTOR OF PAKISTAN

On the whole
the manufacturing sector in Pakistan
has recorded
impressive growth rates
during the 1977-88 period.

Fourth phase period 1977-

AGRICULTURE SECTOR OF PAKISTAN

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 Issues in Pakistan Economy

INDUSTRIAL SECTOR

OF

PAKISTAN

Munazza Ahmed
Department of Management Sciences
Virtual University of Pakistan MODULE 3
INDUSTRIAL SECTOR OF PAKISTAN

The Age of Structural

Adjustment:
1988 onwards

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

The political and economic background

of the role that the IMF and world
bank began to play in Pakistan’s
economy after 1988 through Structural
Adjustment program.

Seventh five year plan (1988-93) under

the instructions of IMF and World bank
set ambitious targets for overall
reforms in industrial sector.

Introduction
 INDUSTRIAL SECTOR OF PAKISTAN

Industrial sector Reforms

 Further Deregulation
 Liberalizing the economy
 Privatization
 Tariff Reforms
 Regulation of foreign Investment

Structural Adjustment:1988
 INDUSTRIAL SECTOR OF PAKISTAN

Industrial sector Reforms

Under the three year agreement (1988-1991) with the IMF, the industrial
policy outlined. Some points are as follows;
 Deregulating business decisions
 Enhancing export incentives
 Reducing level of protection
 Reducing the list of restricted imports
 Divesting the shares of public sector companies to private sector

Structural Adjustment:1988
 INDUSTRIAL SECTOR OF PAKISTAN

Industrial sector Reforms Review

 The world bank in its review program (1991) felt that economy
responded well to policy reforms.
 Progress in implementing structural reforms to promote private sector
activity has been exceptional.
 Manufacturing sector managed impressive 7.4% growth (1991).
 World bank and IMF have concluded that three year structural
adjustment program (1993) went well especially in industrial sector.

Structural Adjustment:1988
 INDUSTRIAL SECTOR OF PAKISTAN

Industrial sector in 1990’s

 Manufacturing sector growth rate fell from 8.21% average annual to
4.8% average in 1990’s.
 In 1996-97 industrial sector growth was minus 0.1 %.
 1999-2000 industrial sector growth was only 1.5%.
 Industrial sector in 1990’s only reconfirmed the deteriorating
condition of the industry in the country.

Structural Adjustment:1988
 INDUSTRIAL SECTOR OF PAKISTAN

Analysis of Industrial sector in 1990’s

 All the governments relying on private sector to lead Pakistan on
higher levels of industrial development.
 Its not surprising the public investment reduced.
 Disturbing fact is that the private investment (as a percentage of
GDP) also fell.
 But public investment was higher 9.2% (as a percentage of GDP) than
private investment 7.8%(as a percentage of GDP).

Structural Adjustment:1988
 INDUSTRIAL SECTOR OF PAKISTAN

Industrial sector in 2000’s

 Most of the investment and manufacturing indicators improved
substantially after 1990’s.
 Both total investment and fixed investment grew at higher rates.
 Main motor of investment was private sector with almost three times
higher as much as public investment (12.6% as compared to only
4.8%)
 This trend marks a very clear shift in the dynamics of investment in
Pakistan.

Structural Adjustment:1988
 INDUSTRIAL SECTOR OF PAKISTAN

Summary
• Industrial sector has suffered since neo-liberal structural adjustment
program was initiated in 1988.
• It was only after 9/11 that growth rates in the industrial sector, in
investment, and of the economy picked up.
• Growth and investment in Pakistan depends on incentives to the
private sector and on supportive conditions in which private sector is
willing to invest.

Structural Adjustment:1988
INDUSTRIAL SECTOR OF PAKISTAN

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 Issues in Pakistan Economy

INDUSTRIAL SECTOR

OF

PAKISTAN

Munazza Ahmed
Department of Management Sciences
Virtual University of Pakistan MODULE 3
INDUSTRIAL SECTOR OF PAKISTAN

Key Issues in
Industry in Pakistan

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

 Trends in Industrial sector

 The Small Scale Manufacturing
Sector
 The Textile Industry
 Public Sector Industry
 The Privatization Process
 Efficiency in Industrial Structure
 The Energy Crisis

Introduction
 INDUSTRIAL SECTOR OF PAKISTAN

Trends in Industrial sector

 No industrial base in the beginning
 1950’s Extraordinary industrial growth rate
 1960’s Large Scale Manufacturing shows exceptional growth
 1970’s Substantial reduction in Industrial growth
 1980’s Impressive annual average growth in manufacturing
 1990’s growth in industry again fell down
 2000’s revival in industrial growth after 9/11

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN

Trends in Industrial sector

 The industrial and manufacturing growth of Pakistan witnessed roller
coaster
 boom / bust trend throughout the time.
 Population increases in this time but employment in formal
manufacturing sector did not increase.
 Small scale sector grew in 1980’s, captured the increase in labor
force.

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN

The Small Scale Manufacturing Sector

 Small scale sector plays an increasingly important role in Pakistan's
economy.
 In urban manufacturing sector 98% of the manufacturing units were
small scale unregistered firms.
 Employment elasticity in the small scale sector is amongst the
highest in all the sectors.

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN

Issues affecting Small Scale Sector

 State policy has been very biased in favor of the large scale
manufacturing sector, whereas small scale sector was treated with
contempt.
 State played no real role in explicitly promoting the small scale sector.
 Banking sector was also unhelpful and discouraging to small scale
informal units.
 With regard to utilities provided to large scale manufacturing, the
small scale sector was treated with “hands off” policy.

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN

The Textile Industry

 The textile sector holds a very important position in Pakistan’s
economy in terms of;
o Employment
o Value-added
o Contribution of this sector towards exports
 Highest manufacturing value added (26%) 2005/06.
 One third (1/3rd) of the entire manufactured employment in textile.

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN

Issues in the Textile Industry

 Textile was highly concentrated amongst few industrial houses.
 Number of installed spindles has been growing, whereas the
percentage of working spindles has been lower than 1950’s and
1960’s.
 Only 66% of installed capacity is being utilized in the loom sector
(number of working looms is one fifth of that in the 1950’s and
1960’s).
 Negative productivity in the textile and garment sector is the result of
fragmentation of the industry from large scale to small scale units.

Key Issues in Industry in

INDUSTRIAL SECTOR OF PAKISTAN

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 Issues in Pakistan Economy

INDUSTRIAL SECTOR

OF

PAKISTAN

Munazza Ahmed
Department of Management Sciences
Virtual University of Pakistan MODULE 3
INDUSTRIAL SECTOR OF PAKISTAN

Key Issues in
Industry in Pakistan

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

 Trends in Industrial sector

 The Small Scale Manufacturing
Sector
 The Textile Industry
 Public Sector Industry
 The Privatization Process
 The Energy Crisis

Introduction
 INDUSTRIAL SECTOR OF PAKISTAN

The Textile Industry

 The textile sector holds a very important position in Pakistan’s
economy in terms of;
o Employment
o Value-added
o Contribution of this sector towards exports
 Highest manufacturing value added (26%) 2005/06.
 One third (1/3rd) of the entire manufactured employment in textile.

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN

Issues in the Textile Industry

 Textile was highly concentrated amongst few industrial houses.
 Number of installed spindles has been growing, whereas the
percentage of working spindles has been lower than 1950’s and
1960’s.
 Only 66% of installed capacity is being utilized in the loom sector
(number of working looms is one fifth of that in the 1950’s and
1960’s).
 Negative productivity in the textile and garment sector is the result of
fragmentation of the industry from large scale to small scale units.

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN

Public Sector Industry

 Role of the government has been reduced
 Public sector enterprises are;
Inefficient
Costly to run
Poor performers
Drain on exchequer

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN

Public Sector Industry

 Pakistan Industrial Development Corporation (PIDC) established in 1952
played very important role in fulfilling its objectives. Its role was leading the
private sector in industrialization.
 In 1972-77 the role of the public sector was considerably expanded. By 1977
government was involved in finance, manufacture, transport &
communication, construction, energy etc.
 After 1977 the role of the public sector began to diminish.

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN

Public Sector Industry

 Public sector enterprises besides responding to pure market criteria have social
and political responsibilities and motives.
 Public sector industries performed far better than the overall manufacturing
sector during 1972-77.
 The efficiency levels across industries are independent of the locus of ownership.
 By 1990 much has been changed in public policy after Structural Adjustment
Program.

Key Issues in Industry in

INDUSTRIAL SECTOR OF PAKISTAN

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INDUSTRIAL SECTOR OF PAKISTAN

Key Issues in
Industry in Pakistan

Introduction
INDUSTRIAL SECTOR OF PAKISTAN

 Trends in Industrial sector

 The Small Scale Manufacturing
Sector
 The Textile Industry
 Public Sector Industry
 The Privatization Process
 The Energy Crisis

Introduction
 INDUSTRIAL SECTOR OF PAKISTAN

The Privatization Process

 The disinvestment and deregulation committee was established in 1990 to
identify the units for privatization.
 This committee identified 109 industrial units & four out of five nationalized
banks to be privatized at earliest opportunity.
 The privatization commission replaced this committee in 1991, with the
following functions;
• Valuation of public enterprises
• Implementation of the bidding process
• Supervision of the transfer of the units to private sector.

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN
The Privatization Process
 Since privatization program was corner stone of government’s economic
policy, so it improved its legal and administrative procedures.
 But this privatization process was severely criticized;
 Lack of transparency / Corruption
 Incorrect bid evaluation process
 Inadequate attention to new management
 Favoritism, as the units transferred to the management with no previous
experience
 Inconsistency in process

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN

The Privatization Process

Public and private investments are essentially complementary in
nature; and that while private investment holds the greatest
promise in areas of productive efficiency, its success depends on
public investment which provides an efficient infrastructure.

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN
The Energy Crises
 An important factor having its impact on industrial sector as well as on
economy as a whole is energy crisis in Pakistan.
 The on going energy crises has crippled Pakistan’s industry and economy. It is
hitting the industry at multiple levels;
 Energy tariff increases
 Un announced load shedding
 Voltage fluctuations
 Unavailability harms productivity of workers

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN
The Energy Crises Reasons
 Growing gap between the rising demand and supply of energy
 Rising burden of circular debt
 Lack of maintenance
 Line losses (power theft)
 Billions of rupees of unpaid bills
 Inappropriate energy generation mix

Key Issues in Industry in

 INDUSTRIAL SECTOR OF PAKISTAN

The Energy Crises consequences

 In industrial cities such as Karachi, Lahore, Gujranwala and
Faisalabad, thousands of units have shut down or are operating at the
bare minimum level.
 Energy crises resulted in huge capital flight (investments have shifted
elsewhere).
 Loss of thousands of jobs due to reduced industrial and commercial
activities.

Key Issues in Industry in

INDUSTRIAL SECTOR OF PAKISTAN

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