KEY ISSUES IN INDUSTRY IN PAKISTAN

Group Members:

•Rabia Farooqui•Rehman Siddique•Roshanna Durrani•Saad Imtiaz•Saad Zahid•Sadiq Samin

•Umm E Rabab Rizvi•Usama Batavia•Usman Farooq•Versha Qazi•Yawar Masood•Zulfiqar sajwaniOmar Mahmood

•Aunuddin Qadri•Sehrish Irfan•Saroosh Zahid•Shahrukh Samad•Syed Danial Mustafa•Tayyaba Sami

Numbers and Trends in Industry

•Growth in industrial sector rose dramatically in 1950’s and 1960’s

o Reason: Initial Investment•The growth rates of small scale sector rose.

•Small scale sector was more productive in Pakistan.•The shift of textiles from large to small scale.•The growth of informal sector underestimated.•Growth in mining & construction industry

remained volatile until 1970’s-economy began to expand.

•1970’s nationalization-increase in growth rates.•Domination of public sector.

•1990’s privatization-role of private sector increased.•Share of textile was the highest in the Manufacturing

Sector.•Population rose but employment in formal

manufacturing industry reduced-employment rose in informal sectors.

•Large scale industries became capital intensive.

Numbers and Trends in Industry

The Small-Scale Manufacturing SectorCharacteristics

•Growth rates were higher than formal sector.•Employment in informal sector rose dramatically•The share of informal sector slightly increased.•Textiles, fabricated metals and food and tobacco

were the largest sectors.•Formal sector was highly capital intensive.

Emergence and Growth

•The green revolution in 1960’ssmall scale industry began to grow.

•Demand for agricultural machinery rose.•The devaluation of 1972 favored SSISSI products

were export oriented.•Import liberalization industrial capital diverted to

exports paving way for SSI products.•Cottage industries act of 1972 shift from LSM to SSI.•1970’s and 1980’sremittances rose and home

demand increased.• Middle class prospered.

Issues Affecting Small Scale Sector

•Unwaged family workers in small sector.•Labor displacement in formal sector.

•Formal sector had high labor productivity•Informal sector had higher capital efficiency.•Government policy only favored LSM.•This gave hands off policy to SSI.

•Linkages of LSM with SSI gave another boost to SSI.•Unavailability of credit to SSI was the major issue.

•Other ways to obtain credit were used.•SSI generated 25% of Pakistan’s export earnings.

•The government needed to provide SSI appropriate credit packages.

Issues Affecting Small Scale Sector

Textile Industry and its crisis.

• Textile sector holds a significant position in Pakistan

> employment > value added• Pakistan’s textile industry was quite prominent and emerging in world cotton textile market in 1960’s and 70’s.

Comparison of Pakistan’s Textile Market with Hong Kong and Korea

• 1972 – Korea and Hong Kong had less share in the world textile market than Pakistan

• 1988 – Pakistan’s poor performance. -- Pakistan had lesser share than Korea and Hong Kong

Reasons for decline

• Pakistan’s textile industry concentrated amongst few industrial houses

• Performance of looms and spindles• Shift from large scale to small scale

manufacturing and its impact• Interest of state towards public sector

intermediate and capital goods industry• Impact of Cottage industry Act (fragmentation

of firm size)

• Pakistan failed to diversify• Relied only on growth in world market

• Pakistani entrepreneurs ignored up gradation• Pakistan was unable to meet quotas of

advanced capitalist countries• UNIDO pointed out factors that led to decline

Some facts

•Pakistan is world’s fourth largest cotton producer.

•Pakistan is one of world’s largest cotton exporter but its exports have low value added

•Low level of technology•Pakistan occupies dominant position in low cost

low quality cotton fabrics market

Recommendations

• Pakistan must enter high quality textile market• Improve quality standards • Move into production of synthetic fibres• Invest in R&D of different types of cotton, especially long staple superior variety

Has Public Sector Industry Been a Failure?

• Diminished role of the state• Public sector• Inefficient• Costly• Poor performance• Drain on exchequer

• Nationalization program of ZA Bhutto in 1972• Role of PIDC and success in jute, fertilizer, cement

industries • Zia’s regime followed by Privatization• Socio-political goals of the Government• Studies of Asad Sayed criticized by the World Bank

• Studies of Nawab Haider Naqvi and AR Kemal include-

Rates of protectionEfficiency levelAllocative EfficiencyCapacity level

The Privatization Process

• Structural Adjustment Program begun in 1988• 65% of targeted industries privatized

• Disinvestment and Deregulation Committee 109 units to be privatized at earliest

opportunity• New Privatization commission

formed in 1991

• Initially unsuccessful- Government had to revise its policy• More transparent and effective procedures• Transfer of 49 units to private sector by 1992• Reason of failure Companies were already bankrupt• Energy, Telecom and Commercial banks converted most.

• Lack of sufficient information for investors

• Process criticized for:Lack of transparency InconsistencyFavoritism and corruptionLack of planningFailure to float equity in market

• Naqwi and Kemals findings

Debate over Efficiency in Industrial Structure

• By the end of 1960s, it was realized that elevating growth required substantial costs.

• Industrial structure was highly inefficient.• Reasons:

State intrusionToo much emphasis on manufacturing sectorIgnorance to agricultural sectorMultiple exchange rates

– Taxes– discouragement to technical change– Unintelligent use of capacities.– Wastage of resources

• However, growth still occurred. Most of the sectors still showed growth prospects.

• Industrial sector did show vigor to develop and advance.

• Many critics believe that the inefficiencies have been overstated

• They believe that allocated inefficiencies were remunerated by gains that followed.

• Many believe that this efficiency led to Industrial Crisis in 1970s

• Overall, small scale industries were the nutrients to Pakistani economy in the era.

• Public sectors efficiency cannot be denied, but was much more widespread.

• Privatization was a political stunt, as per opinion.

• Flaws were mostly structural. • Consensus: Inefficiency was due to

overprotection and distorted incentives.