Industrialization in Pakistan

INDUSTRIALIZATION IN PAKISTAN

Fahad QureshiMuhammad Shariq

Ramish SafaAli Hamza

Introduction In the statement of Industrial policy 1948 it was

stated: “The most striking feature of Pakistan’s present economy is the marked contrast between its vast natural resources and its extreme industrial backwardness”

Industrialization:1947-1958 Objectives:

• To manufacture its own products of its raw materials.

• To meet requirements of the home market for consumer goods for which Pakistan was dependent on outside sources.

Process of industrialization:• Exchange rate.• Trade policies.

Exchange Rate In 1949 numerous countries devalued their

currencies but Pakistan did not devalue its currency.

After Korean war the prices of raw material fell. with over valued exchange rate the conditions changed in favor of industry because it became cheaper to import industrial machinery to produce manufactured goods.

Trade policy Major aspects of trade policy to Favor

Industrialization:• Quantitative controls on Imports.• Tariffs on Imports to promote industrialization. The objectives of these trade policies were to

produce anything that can be reasonably produced domestically.

These control on the imports made industrial sector look attractive and led to investment in industrial sector which led to growth of industrial sector.

Average Rate of duty on Imported goods (%)Source: Economic policy and industrial growth in Pakistan, George allen & Unwin Ltd,London,1969

Description 1955/6

1956/7

1957/8

1958/9

1959/60

1960/1

1961/2

1962/3

1963/4

Consumer goods

• essentials 35 35 35 35 35 55 55 55 56

• Semi luxuries

54 99 99 99 99 111 111 111 116

• luxuries 99 99 99 99 99 140 140 140 142

Raw material for consumer goods

Unprocessed 26 26 26 26 26 27 27 27 30

Processed 43 43 43 43 43 50 50 48 51

Outcome of Exchange rate and Trade policy

The decision not to devalue its currency put Pakistan on the road to industrial development.

There was significant growth in manufactured goods produced from newly established industries e.g. cotton and jute.

Between 1949 and 1958 the growth rate of industry in Pakistan was amongst the most rapid for any country in the world.

The establishment of Large scale manufacturing sector with a Maximum annual growth rate of 28.7% in 1953/54 and minimum annual growth rate of 4.9 % in 1957/58.

The investment rate doubled during 1950s.

Source: government of Pakistan, Pakistan Economic survey,1984-85

Year Annual growth rate in Large scale manufacturing sector (%)

1950/1 23.5

1951/2 18.7

1952/3 23.6

1953/4 28.7

1954/5 24.1

1955/6 17.5

1956/7 8.1

1957/8 4.9

1950-1954 (average) 23.6

1954-1958(average) 13.6

1958-68;The Decade of Development

Trade policy directing Industrialization:• The new regime of Ayub Khan disbanded many of

the controls that had been imposed in 1950s and it shifted form direct controls towards indirect controls on imports.

• New trade policy in 1959: Open General Licence. Free list. Exports bonus scheme (EBS) or bonus voucher

scheme. Incresed tariffs on imports.

Outcome of trade policy Both industrial production and investment

responded well to these trade policies. EBS boosted exports especially of

manufactured goods instead of raw materials. EBS also had a positive impact on imports,

making machinery imports easier and cheaper.

High average growth rate in large scale manufacturing sector of 13.3% for period of 1960-65 and even after 1965-70,when there was marked slowdown because foreign aid curtailed average growth rate was still impressive of Above 10%.

The share of exports in total consumer goods output rose from 15% in 1959/60 to 45% in 1969/70.

Source: Government of Pakistan, Pakistan economic survey,1984-85

Year Annual growth rate in Large scale manufacturing sector (%)

1958/9 5.6

1959/60 2.7

1960/1 20.3

1961/2 19.9

1962/3 15.7

1963/4 15.5

1964/5 13.0

1965/6 10.8

1966/7 6.7

1967/8 7.6

1968/9 10.6

1969/70 13.9

1958-1964 (average) 13.3

1965-1970(average) 10.4

INDUSTRIAL POLICY OF BHUTTO 1972-77

Fahad Qureshi

Industrial reforms twofold; nationalization, and the improvement of workers' rights

nationalization In the first phase, basic industries like

steel, chemical and cement were nationalized 1972

The next major step in nationalization took place on January 1, 1974, when Bhutto nationalized all banks.

The last step in the series was the most shocking; it was the nationalization of all flour, rice and cotton mills throughout the country.

Nationalization caused reversal of public private investment

Private sector investment was only 15% Public sector investment rose from 5% to

75%. Businessmen had little confidence

Source naqvi snh and khwaja sarmad , Pakistan in the seventies ,PIDE ,Islamabad 1993 .

Year Public investment in (%)

70 12.8

71 5.3

72 8.4

73 12.6

74 33

75 60

76 70

Currency devaluation The rupee was devalued by 131% in

may 1972 1$ = 4.6rs to 1$ = 11rs Increasing the exports But the imports became much more

expensive Pakistan's imports were much more than

its export ( negative balance of payments)

loss of east pakistan 50% of west Pakistan's products found a

way to east Pakistan . 18% of the imports of west pakistan

came from east pakistan . urgent need to find new markets

Two and a half years of industrial growth 1972/3 Exports increased by 153% in over

the previous year (due to world demand conditions of cotton textile )

1973/4 manufactured exports grew by 19 % The growth in export was key factor in growth

of industrial output Also due to availability of credit to export

sector Export refinance scheme lending rate lower

than normal lending rate

1974 World wide commodity boom caused the economic

boom of 1972-73 The boom was short lived and the world was hit by

recession , which slowed the economic boom and industrial growth .1974

The prices of petroleum had a fourfold increase(oct 1973) , prices of inputs increased , prices of fertilizers increased

Positive balance of trade was wiped in one go as the oil imports rose from $60m to $225m in one year 1973 to 1974 .

Fertilizer imports increased from $40m to $150m

There was a huge failure of cotton crop in 1974-75 when the international cotton prices had risen , affected industrial output .

1976-77 floods destroyed agriculture crops, excessive expenditure on public goods , affecting industrial output.

Zia Ul Haq’s Era1977-1988

Ramish Safa

Industrial Challenges Result of Bhutto’s regime Nationalization Restoration of confidence of of private

investors. Restoration of private sector

involvement Motivating of investment in private

sector

Highlights of the Zia eraAccording to the World Bank

manufacturing GDP in Pakistan grew at an annual average rate of 9.6 percent between 1977 and 1986.

Investment in medium and large scale industries grew by an average rate of 18.2 percent per year.

While total private industrial investment rose by 15.6 percent per year.

According to World development report 1990, the growth in real wages during the 80s in Pakistan manufacturing sector was the fastest in the world at 6.2% a year.

Pakistan’s manufacturing sector became more capital intensive due to boom in industrial activity between 1975 and 1986.

Growth rates of some Industrial sectors

Industry Sector Output Labor Capital StockWearing Apparel 21 10.7 10.4

Wood and Cork products

13.7 14.5 13.7

Furniture 13.3 11.8 23.6

Electric Machinery

13.3 5.7 11.7

Non Electric machinery

17.6 7.5 5.6

Total Of Whole Industry

9.6 5.8 10.3

Actions Taken Industrial Policy Earliest steps included a policy to

denationalize agro based industries that were heavily ‘in the red’ during the time of Bhutto. Rice husking, flour milling and cotton ginning.

Some small engineering units were also denationalized.

Basic and heavy chemical and cement industries were opened to the private sector.

Actions Taken Some incentives given to promote

industrialization by atrracting private investment and the promotion of the private sector.

Tax holidays Export rebates Reduction in interest rates in both agriculture

and industry. Growth in large scale manufacturing was

projected at a highly ambitious rate of 12 % which was achieved.

Actions Taken The Public/Private sector divide. It was highly anticipated that large scale

denationalization would take place. However this did not happen with the exception of the few afore mentioned industries.

The private sector given a clear signal to participate.

Denationalization not done for political and administrative reasons.

The demand of original owners of nationalized industries.

1988-Onwards

Ali Hamza

INTRODUCTION

•After an economically stagnant decade of the 1990s, the year 1999 brought a coup led by General parvez,

with an era of accelerated economic growth that led to more than doubling of the national GDP, and expansion

in Pakistan's urban middle class.•Pakistan's GDP more than doubled to $170 billion

(nominal) since 1999. It has reached $440 billion in terms of purchasing power parity (PPP)

High-Lights Aziz was a consumer-finance man, he began

the deregulation of the banking sector, by sharply cutting loan interest rates, and allowing banks to engage more liberally in giving consumer finance loans, and lifting restrictions on the number of branches that foreign banks could open in Pakistan.

Easy access to low-cost consumer finance led to a sharp rise in the sale of consumer goods such as cars, motor cycles, cell phones and home appliances.

As a result the banking sector boomed and many foreign banks from the Middle East and other parts of the world came flocking to Pakistan and Pakistan attracted over $5 billion foreign direct investment in the 2006-07 fiscal year, ten times the figure of 2000-01.

The strong consumer demand in Pakistan drove large investments in real estate, construction, communications, automobile manufacturing, banking and various consumer goods. Millions of new jobs were created. The ranks of the middle class swelled in Pakistan.

Pakistan's information technology sector revenue grew from almost nothing to about $2.8 billion in 2008.

The telecom boom increased mobile phone penetration from near zero in 1999 to over 50% now, along with the expansion of Internet access to double digits. The CNG sector attracted over $70 billion in investment in the past five years and created 45,000 jobs.

The literacy rate improved by 11 per cent and the Poverty rate decreased by 10 per cent.

A revolution took place in the field of media. Many new TV channels were introduced, giving freedom to media and creating thousands of new jobs.

Urbanization is an integral part of the process. With the robust economic growth averaging 7% and availability of millions of new jobs created there was an increased rural to urban migration in Pakistan to fill the jobs in growing manufacturing and service sectors.

Pakistan's economy witnessed a major economic transformation in the last decade. The country's real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during 2000-07.

Criticism In the 51 weeks of 2009, Pakistan had suffered at

least 44 attacks. The death toll from this steady stream of violence stood at more than 800.

The absence of cell phone manufacturing plants in the country meant that all the phones had to be imported, adding to the country’s import bill and widening the growing trade gap.

Billions of rupees in revenue earned by the foreign-owned cell phone companies and banks were being remitted abroad because the government had imposed no limit on such transfers.

The increasing revenues earned by the cell phone companies and other foreign investments were automatically included in the annual GDP. The government claimed that its economic policies had boosted the GDP growth rate to over 6% in contrast to the average growth rate of below 4%

The share of agriculture in GDP has declined to about 27%

The government had artificially propped up the value of the dollar against the rupee by directing the SBP to regularly buy dollars from the open market. The SBP bought several billion dollars from the open market over a four-year period. The government claimed it had propped up the rupee’s value to help exporters resulting a higher rupee-dollar exchange rate meaning that exporters would have earned fewer dollars for their exports, putting pressure on the country’s balance of payments.

State Bank’s operations in the currency market made imports more expensive in rupee terms, fuelling inflation and driving up the prices of many goods, including capital goods. Higher-priced capital goods, in turn, increased the cost of expanding manufacturing plants or setting up new factories, resulting in a slowing down industrialization process.

Even after significant reduction in poverty, the number of poor people earning less than $1.25 a day remains high.

Rising inequalities – income and non-income – have led to a weaker link between economic growth and poverty reduction in the country widening of the rich-poor gap, worsening law and order situation.

Recurring and daily power outages are severely impacting all business, economic and social activities in Pakistan. Adding further to the public pain are the multiple crises of sugar and wheat shortage, food price rises, and water scarcity, and deteriorating security situation making life extremely difficult for ordinary people.