The process of industrilization in pakistan ii: 1977-2004

Industrialization periods

• Fall of Bhutto led the country into the hands of military dictatorship once again which lasted till 1988.

• Zia ul Haq introduced certain reforms and held local bodies elections in 1979 and then elections in 1985 on non party basis.

• He tried to strengthen his rule by devolution plan and process of Islamization.

• Dismissed Junejo’s elected government in May,1988.• High growth rate and increase in private sector role are

prominent features of Zia’s era.

The democratic Era (1988-1999)

• This era consists of three democratic governments .• Economic programmes were more or less the same.• Structural adjustment programmes under supervision of IMF

and World Bank.• Both Washington based organizations directed the Pakistani

economy.

The Zia Years (1977-88)

The Nature and Extent of Growth:• Akbar Noman quotes the World development Report of

1990:During 1980-88 Pakistan’s GDP growth rate of 6.5% was only exceeded by that of Korea, China and Hong Kong.

• Growth of real wages in manufacturing was just about the fastest in the world at 6.2% surpassed only by Thailand (7.0%) and equaled only by Singapore.

Figures:

• SNH Naqvi and Khawaja Sarmad show that the GDP growth averaged 7% per annum consistently between 1978-86.

• According to World Bank manufacturing GDP average growth rate was 9.5% between 1977-86.

• Investment in medium and large scale industry grew by an average of 18.2% annually.

• Total private investment expanded at 15.6% per annum.• The total average growth in this period was 9.6% with first

half of Zia era showing 12.8% growth.• In both Fifth five year plan and sixth five year plan ,actual

growth rates exceeded the targets of 12% and 9% respectively.

The Other Picture:

Asad Sayeed gives a different picture of it: The productivity growth figures gives much less rosy picture of Zia regime.

• The aggregate of 0.3% is low as compared 5% growth in 1960’s.

• Consumer goods have negative TFP growth rate.• Low contribution of TFP growth to overall growth during the

decade.• 82.3% of overall growth was due to growth in capital

stock ,14.5% due to labour and only 3.17% to TFP growth.

Asad Syed writes that in case of Pakistan not only the contribution of TFP is significantly lower than that of developing country average ,but the contribution of capital is also inordinately high.

The other Picture (contd)

• Very little growth in employment in almost all industries between 1975 and 1986.

• Negative growth in labor productivity in many industries.• Wearing apparel industry showed greater increase in

employment but the output fall by 19%.

UNIDO Report on Manufacturing sector:

• An underlying feature of the Industrialization in Pakistan is the deteriorating performance of manufacturing sector in generating employment oppurtunities.Although the decade of the 1980’s has been a period of relatively high growth in manufacturing value added,the growth in manufacturing employment has remained insignificant.This partly represents more an increase in capital industry than labour absorption during the period of accelerated expansion.

• Manufacturing sector became more capital intensive between 1975 and 1986.

• Share of wages and salaries in value added fell from 26.9% in 1976 to 20.3% in 1986.

• According to a report of Institute of developing economies ,Japan the Public sector dominated industries such as electrical machinery and chemicals showed high rate of growth in labour productivity.

Contradiction

• Labour productivity needs to be higher in capital intensive projects where labour-output ratio is high.

• Second ,as large firms attain high level of capacity utilization ,labour productivity will increase but that was not the case with Zia regime.

Industrial Policy in Zia Regime

• SNH Naqvi and Khawaja Sarmad divide Zia ear into two sub periods ,1978-81 and 1982-86.

• For Institute of Developing economies there were three sub periods : 1978-81 in which the policy was directed toward dismantling existing Govt. policies and restoring confidence in private sector and gaining political legitimacy.

• 1982-85:Islamization and consolidation of power.• 1985-88:Attempts to disengage Govt. from direct control of

economy.• Mid 1977 concern of Zia regime was restoring business

confidence and motivation to revive investment in industry and agriculture.

Industrial Policy

• Denationalization of number of agro based industries which included Rice Husking, Flour mills and Cotton ginning which were run inefficiently.

• December 1977, basic and heavy chemical and cement industries were opened to private sector with tax holidays and other incentives.

• June 1978,interest rate on fixed investment in agriculture and industry was reduced.

• Fifth Five year plan was launched in 1978/89.

Investment programme of Fifth Five Year Plan

• Priority to producer and investment goods industries.• Stress on use of indigenous raw materials in industry to revive

the poor performance of agriculture sector.• Growth rate in LSM was set at 12% which was high but

achieved.• The process of Islamization emphasizes on social justice

which from economic point of view is distribution of wealth and income in favour of poor and elimination of interest.

• Islamization was not aimed at departure from capitalist industrial culture but substitute for certain aspects of it.

The Public/Private Sector Divide:

• Less denationalization then expected because the current public sector industry was large and held 50’000 employees and a massive investment programe of Rs 40 billion was in progress.

• It was not possible for Govt. to abandon the Industrial sector investment programme because funds were either spent or committed in form of International contracts.

• Govt. opted the gradual process of reorientation toward private sector led industrial growth.

• For public sector industries,a programme to improve efficiency and profitability was initiated and investment was restricted to only ongoing projects and BMR of existing public sector units.

Public/Private Sector Divide

According to Institute of Developing Economies Japan:• The reason behind not to go for large scale denationalization

was based on getting rewards from Bhutto regime programmes.

• Secondly,the Govt. didn’t wanted to confront the Urban lower middle class which benfited fron Nationalization and was potent agitator in Pakistan’s history.

Public/Private Sector Divide

• Public sector’s share in total industrial investment fell from 72% in 1978-79 to less than 18% ten years later.

• In Fifth Five Year plan (1978-83) only 23% of total public industrial outlay was on new projects.

• In first half of Zia regime public sector output increased rapidly then private sector but in second half private sector growth was faster.

• The Govt. gave incentives to private sector but never went for large scale denationalization as it was politically favorable .

• All powerful and important financial sector was retained by Govt. and no privatization and denationalization of Banks took place in Zia era.

Deregulation and Liberalization

• Sixth Five Year plan (1983-88) marks the beginning of deregulation and liberalization.

• Policy moved from one sectoral investment planning to one which also emphasized incentives and institutional reforms to enhance the efficiency of industry.

• Export led industrialization was mentioned as policy goal for first time.

• Reduction of tariffs on raw materials, intermediate and capital goods.

• 3 year liberal trade policy was introduced.• Industrial Incentive Reform Cell was upgraded to form Tarrif

commission in 1989.

Deregulation and Liberalization

• Measures to deregulate operations in cement, oil-seeds and fertilizer production were taken.

• Private investment was allowed in cement production and state owned enterprises and were allowed to vary prices.

• Subsidies were substantially reduced and cement imports were permitted.

• Steps were taken to liberalize and encourage foreign trade.• Negative list was introduced. Goods not on that list were not

importable.• Replacement of quantitative restrictions(non tariff barriers) by

tariffs.

Deregulation and Liberalization

• To encourage exports, exporters were given import facilities and income tax concessions and finance at concessionary rates.

• Introduction of managed float currency system against old fixed peg system.

• Rupee was devalued by 38.5% from 1982 to 1987/88.

Deregulation and Liberalization

• Asad Sayeed ,Asian Development Bank, Institute of Developing Economies, S.N.H Naqvi and Khawaja Sarmad agree that the most important step of Zia regime was devaluation of Rupee.

• The macro economic reason behind were the impact of old peg system on industrial decisions to invest and produce.

• Impact expected on increase in exports to capture larger world market shares.

• Devaluation was done to enhance imported goods prices and hence induce backward linkages for producer goods industries.

World Bank on 6th Five year Plan

• World Bank was happy with process of deregulation and liberalization of economy.

• Private sector share in Total fixed investment increased from 38% in FY 83 to 42% in FY88.TFI in manufacturing sector rose from 51% to 83% .

• It argues that the :

“The industrial growth has been encouraged by an improvement in the industrial policy environment for private sector initiative, in accord with the 6th Five year plan. Private industrial investment expanded by almost 23% p.a.In total 72% of total industrial investment during FY 84-87 was contributed by private sector.

Causes of High growth and Success of Zia regime:

• Manufacturing sector recorded impressive growth.• Stream of public sector provided diversity in the

manufacturing sector. The public sector investment brought gains and created linkages effects.

• Revival of confidence in private sector .The spheres for private industrial investment which were charted by Bhutto regime , i.e. consumer goods sector and picking up of linkages effects which public sector would create, reached fruitation in Zia regime.

• High rate of growth and investment for growth in ouptut was due to buoyant demand.

Causes of High Growth and Success of Zia regime

• Consumption demand increased because of remittances from Gulf and growing agriculture sector and services sector.

• Investment demand was enhanced by high resource inflow from international community especially US because of Pakistan’s role in Afghan war.

S.N.H Naqvi and Khawaja Sarmad’s views

• The high growth rate of GDP of 7% p.a between 1978-86 was due to expansion in manufacturing and booming domestic market due to remittances and US financial support.

• The good luck factor was Afghan war for Zia.

• Asad Sayeed argues that the contribution of foreign resource inflows was an importan assistance to Zia regime and helped finance industrial investment but its share in total investment declined to almost half of its share in 1965-70.

• The rise of remittances in 1978-81 helped raise national saving rate.The average share of investment in GDP rose to 20% in 1977 which was high by historical figures.

• Growth in investment was due to increase in public investment in social and economic infrastructure.

• Private investment remained low as investment in public enterprise.

• Public sector remained as the biggest recipient of foreign capital and public investment increased to an average of 11.6% of GDP despite decline in external capital.

The Age of Structural Adjustment:1988 Onwards

• Seventh Five year plan(1988-93) was based on the IMF/World Bank conditions which were accepted by Govt. in form of Structural adjustment programe.

• The plan was set on reforms in Industrial sector, further deregulation, privatization ,tariff reform and regulation of foreign investment.

The Industrial Policy according to agreement with IMF

• Limiting the list of specified industries.• De-regulating business decisions.• Raising the investment sanctioning limit annually .• Phasing out industrial location policies over a three year

period and provision of infrastructural services at prices the reflect economic costs.

• Divesting the shares of public sector companies to private sector.

• Instituting a corporate rationalization programme to enhance efficiency in the remaining , i.e. non –divested and public enterprises.

Results of SAP

• The World Bank in review of 1988-91 programme felt economy responded well and private sector performed exceptionally well.LSM managed an impressive 7.4% in 1991/92 due to rapid expansion of cotton manufacturing.

• Economy was liberalized and public sector investment areas were opened for private sector including power sector, air line and sea transport.

• To promote investment in rural areas ,an incentive package of 5 year income tax holiday, exemptions from custom duty ,sales tax and import surcharges ,be provided for all industries established between 1990 and June 30,1995.

Results of SAP

• Significant increase in all major energy sources i.e. crude oil,gas and electricity.

• Industrial value added grew by 6.3% p.a.• In manufacturing cotton industries dominated.• Construction was realtively subdued because of stagnation in

public investment.• Small scale manufacturing industry and non traditional large

scale industries performance was exceptional.

Assessing the impact on Industrial sector

• Lower growth rates of manufacturing in 1990s as compared to 1980s.

• Lowering growth rate trend in Industrial sector in 1990s.• Fixed investment as a percentage of GDP in 2002/03 was only

13.1% as opposed to 19% in 1992/93.• Lower public investment because of privatization going on

from 1988.• Gross Fixed capital formation in private sector in large scale

manufacturing sector fell continuously in 1990s at much at 60% between 1991/2 and 1998/9.

Assessing the impact on Industrial sector

• The reasons behind deteriorating industrial sector are higher interest rates upto 20-23% by 1997.

• Freeing up of utility prices – forced prices of gas ,electricity and petroleum inputs which had impact on all final goods.

• Tariff rates on imported goods reduced from 225% in 1986/87 to 25% making imported goods cheaper.

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