ISSUE IN THE ECONOMY OF PAKISTAN-[ECO610]

SHORT NOTES BY LEO-ARTIST

MODULE # 01 – STRUCTURAL TRANSFORMATION:

INTRODUCTION:
 The reallocating of economic activity among three broader sectors of a developing
economy.
 And those sectors are: Agriculture, manufacturing and services.
 It is also a developmental theory, which is explains that how subsistence economy or
agricultures economy has been transformed a diversified towards more diversified
structure, which is based on manufacturing and servicing setup.

AGENDA:
 To evaluate the performance of our country over a period of about seven decades.
 A brief overview to understand Pakistan economy's structural transformation.
 Own development narrative.

STRUCTURAL TRANSFORMATION AT A GLANCE:

 Sectoral contributions to GDP at the time of independence;
i) Agriculture 53% (65% labor force involved)
ii) Manufacturing 7.8%
iii) Trade 11.9%
 Sectoral contributions to GDP today;
i) Agriculture 19.5% (42.3% labor force involved)
ii) Industrial Sector 20.88%
iii) Services sector 59.59%
 The huge transformation in economic, social and hence political power from the
agriculturist towards an urban and rural middle class.
 One of the key indicators highlighting the extra ordinary structural transformation of
Pakistan over the time period.

70 years of Development Or 7 Decades of Pakistan's Economy:

 Pakistan today is less than half of the country it was in 1947 with reference to its
population. (Since 55% of the population lived in East Pakistan)
 Geographically West Pakistan was 6 times more than East Pakistan
  Huge contributions to society and economy by East Pakistan.

1. LAYING THE FOUNDATION (1947-1958):

FEATURES:
 Laying the Foundations (1947-1958) -Predominantly agrarian 4 -Undeveloped and newly
independent nation
 Little industry, few services -Absence of economic infrastructure
 Adverse international conditions -Precarious domestic situation (with millions of
refugees) -Attempts of bureaucracy to keep Pakistan on its feet
 Lack of Capital
 Colombo Plan launch 1951 (Rs.2600 million) -Provision of very basic necessities -
Building an economic base by state sector

POLICY SUCCESS:
 Ban on Imports of cotton textiles and Luxury goods
 Emphasis on Industrial Growth
 Manufacturing Sector Growth 34% (1952-54)
 Korean war(1950-1953)

POLICY FAILURE:
 Decline in agricultural growth rate (1951-1958)
 Severe floods in the Sindh and Punjab (1948)
 Deficit financing throughout 1950's

2. THE DECADE OF DEVELOPMENT (1958-1968):

Military takeover by General Ayub Khan in October 1958;

FEATURES:
 Considerable Economic growth
 Economic policy-making Focus
 Model Capitalist Economy
 High growth rate in manufacturing
 Progress in Agriculture sector (5% p.a)
 Increase in Exports -Inflow of American Aid
 Indus Water Treaty
  Water & Power Investments
 1965 War
 Economic & political tensions grew between the two wings

POLICY SUCCESS:
 Economic and social reforms
 Increase in Investment (three fold )
 Technological breakthrough in Agriculture (5% p.a)
 Coordinated economic policies
 Price stability

POLICY FAILURE:
 Regional Disparities (Industry and Agriculture in Central Punjab, Industry in Karachi)
 Feeling of East Pakistan of Utter neglect Demand for full economic autonomy
 Income Inequality (concentration of economic power, Few families acquired most of the
national wealth)
 Perpetuation of Industrial & Trade policies
 Functional Inequality (as social sector was neglected)
o Education sector
o Health Sector
o Little increase in real wages

AN ASSESSMENT:
 Commitment to Development momentum disrupted by 1965 War
 ( Foreign Aid, Defense spending Investment)
 Growing Economic Disparity
 An era with exceptionally successful period of economic management

3. THE BAD LUCK YEARS (1971-1977):

FEATURES:
 This era brought fundamental structural and an institutional change is social, economic
and political sectors.
 Nationalization (Manufacturing industries, Banking, Insurance, Education etc.)
 1973 oil price shock Balance of Payment worsened
 Devaluation Pakistani rupee Foreign exchange earnings
 Worldwide recession Exports
  Massive floods 1973 and 1974
 Worst Inflation
 Fiscal deficit widened further

POLICY SUCCESS:
 Foreign exchange earnings
 Investment in Big industrial units
 Land and labor Reforms

POLICY FAILURE:

 Private sector investment

 Worst Inflation (15% p.a.) Real Incomes
 GDP growth
 Expenditure on defense and administration Budget deficit
 Development expenditure employment
 Socialism experiment leaves negative impact

4. THE SECOND MILITARY GOVERNMENT (1977-1988):

Military takeover by General Zia-ul-Haq in July 1977;

FEATURES:
 Improvement in growth rate
 Decline in Poverty
 Decline in unemployment
 Liberal economic policies
 Higher industrial growth
 Domestic debt Increases
 Defence spending Increased
 Development spending neglected
 Fiscal deficit

POLICY SUCCESS:
Two major initiatives of last tenure started paying off in this regime; i.e.

 Mega projects (such as Tarbela dam)

 Pakistani expatriates sent abroad
  Inflow of foreign remittances
 Foreign Aid (Afghan War)
(These two factors ease the fiscal pressure)
 Islamic interest free banking System
 GDP growth (4.9% to 6.6%)
 Agriculture growth
 Manufacturing growth

POLICY FAILURE:
 Domestic saving rate (below 10%)
 Exports as a percentage of GDP (below 10%)
 Inadequate investment in social & economic infrastructure
 Negative public saving
 Declining public investment
 Domestic debt explosion (large interest payment and fiscal deficit)
 Neglect of development spending
 National saving/GDP (16%) But used to finance large fiscal deficit
 Fiscal deficit a result of;
o Non-developmental expenditure
o Tax revenue/GDP ration

5. THE ERA OF STRUCTURAL ADJUSTMENT (1988-1999):

Structural Adjustment Era started in August 1988 (democratically elected regime)

FEATURES:
 Democracy (4 General elections)
 Political Instability
 Corruption in governance
 Law & order situation
 In-efficient state owned Banks
 Debt crises
 Economic liberalization
 Structural adjustment program (IMF & World Bank)

POLICY SUCCESS:
 Economic Reforms 1991
  Privatization of state owned enterprises & Banks Expenditure on subsidies
 Energy Policy (private power policy of 1994)

POLICY FAILURE:
 Debt crises]
 Rising unemployment (development expenditure declined)
 External deficit
 Worst Inflation
 GDP growth
 Poverty
 Declining private investment
 Macroeconomic instability

6. NEW LIBERALISM, DICTATORSHIP (1999-2007):

Military took over the Government in October 1999

FEATURES:
 Most sanctioned country (Post 1998)
 GDP growth
 Foreign exchange reserves
 Budget deficit
 Unemployment rate
 Real State development
 Modern services sector
 Foreign Direct Investment

POLICY SUCCESS:
 Government formulated comprehensive set of reforms for;
o Reviving the economy
o Establishing institutional basis to improved governance
 Substantial improvement in macroeconomic indicators
 Investment rate (17.2% of GDP in 2001 to 23% in 2006)
 Foreign direct investment (Investor confidence)
 GDP per capita (3.9% in 1999 to 6% till 2007)
 Stock Exchange performance (Best performing equities market)
  Education sector expanded (Record allocations for science and technology, education
sectors)
 Modern services sector development results in job creation

POLICY FAILURE:
 Continued widespread poverty
 Shortage of basic services
 Dependency on foreign inflow (Afghan War)
 Free media / press
 Investment in consumer products & domestic services cannot be basis of Long Term
Sustainable Growth.

ANALYSIS:
 Economically this era embarked the achievement of many milestones and demonstrated
excellent growth rates.

7. DEMOCRATIC TRANSITIONS (2007 ONWARDS):

Democratic Government started after General Elections in 2008;

FEATURES:
 (2008-2013)
[Declining GDP Growth]
 Inflation increases
 Global Financial Crisis
 Rising foreign debt
 Rampant Corruption
 Rising Unemployment
 Falling FDI
 Energy crises
 (2013-2018)
[GDP Growth improvement]
 Budget deficit
 Private sector confidence improved
 Inflation
 Improvement in Tax collection
 Imports
 Current account deficit
  Debt Burden

POLICY SUCCESS:

 FBR tax revenue

 Energy crises (up to 33000MW)
 Average inflation (4% in last five years)
 CPEC
 War on terror

POLICY FAILURE:
 Short term policies
 External debt
 Circular debt highest (Rs 922 billion)
 (Rs. 120 bn 2010)
 Strategic Trade Policy Framework (STPF)

SUMMARY ANALYSIS:
 32 Years of Military Government (3 times of different military governments)
 38 Years of democratic government (4 times of democratically elected governments)
 Healthy growth around 5% (falling trend since 1988)
 *39th poorest nation in world
 Highly dependent on Aid and foreign assistance
 Capitalist development (Role of private sector is important)
 Lowest performers in the South Asia Region on human development indicators,
especially in education
 Lowest female labor force participation rates in the region
 Tax-to-GDP ratio, at 12.4 percent, is one of the lowest in the world
 Corruption (score 32/100)
 Pakistan being blessed with;
 Skilled labor
 Sufficient natural endowments
 Could have grown much more.

MODULE # 02 – AGRICULTURE SECTOR OF PAKISTAN:

INTRODUCTION:
  Agriculture is the second largest sector of Pakistan’s Economy
 Around 20% towards GDP
 42.3% labor force employed
 Basic supplier of raw material to Industry (Such as Textile & Sugar)
 Agriculture performance has been unsatisfactory. It’s attributable basically to;
o Traditional methods
o Lack of motivation
o Lack of research
o Natural disaster (like pets attacks & floods)

AGENDA:
 Briefly narrate the history of agriculture development in Pakistan from the pre-colonial
Mughal times and examine the consequences of British rule.

A HISTORICAL ACCOUNT:
 Summarize the changes that have taken place over three centuries and conclude with a
picture of the agriculture sector at the time of independence in 1947.
 The development of Agriculture before the consolidation of British Rule.
 Two school of thoughts;
o Pre-colonial India was stagnant society; Colonial Impact brings modernization
and Development.
o Under development in south Asian sub-continent is result of colonial impact.
 India was a pre-capitalist social formation before the British Rule.
 Under the Mughal Rule all land was owned by the King alone.
 No private property in Land
 Permission for use granted by king

 MANSABDARS OR JAGIRDARS:
o Part of the ruling class who were supposed to maintain armies to serve the
Emperor.
o Paid salaries in cash or commonly given Jagirs
o transferred from one area to another
o responsible for collecting revenues from the peasants
o officials rather than feudal lords
 ZAMIDARS:
o Appointed by the emperor
o responsible for collecting revenues on behalf of King
o Influential individuals from village.
 o Local lord / master
o Presided over all the social and judicial matters at the village
o Did not own the land
 KHALISA LANDS:
o Revenue sent to the state directly
 No question of land being inherited by either the peasants family or the Zamindars
 No occupancy rights
 Zamindars and Jagirdars assert Authority over assigned tracts of land
 In 1707 (death of Aurangzeb) Mughal empire began to Decay
 Central authority weakened.
 Zamindars and Jagirdars became more strong where they could
 Tried to strengthen their claims on land and hold on the peasants

THE IMPACT OF BRITISH COLONIALISM:

 In the middle of 18th century, colonial expansion started in south Asia and by end of the
century British established direct or indirect control over the greater part of its land.
 The Impact the British rule brings three institutional changes which had important
consequences.

1. INSTITUTION OF PRIVATE PROPERTY:

o It was introduced in late eighteenth and early nineteenth century
2. A LEGAL SYSTEM:
o It was established with reference to the ownership of property
3. AN EFFICIENT GOVERNMENT:
o It systematized / settled multiple claims of land which emerged after decline of
Mughal Empire.
 As a result, the power of the landlord over the peasant was dissolved and re-structured
 Economic and political power separated.
 In 1793, in Bengal; Property rights given to revenue collectors / Zamindars (who had
taken land possession) , ensuring the revenue collection.
 In 1843, Sindh was taken over by the British Empire.
 The ryotwari system was established for land.
 A system in which State was landlord and the occupant was its ryot / tenant.
 Occupant was given Heritable and Transferable rights.
 Payment of land revenue was basic condition.
 The British granted ownership rights of large tracts of land (as Jagirs) to the influential as
they provided some kind of service to the British rulers.
 These owners became land lords of Sindh.
Steps By British Rulers;
1) Introduction of monetary tax
o Tax on cultivated land as well as on fallow land
2) Agriculture commercialization
o Emergence of agricultural market
o Product selling in market
3) Process of building canals (late 1870’s)
4) Proprietary rights were given to self cultivators (1912).

RESULT:
 Greater integration of Rural economy with rest of Indian sub-continent as a result
Agricultural commercialization.
 Agricultural development on Capitalistic lines.
 Cropped area (grew)
 Marketable agricultural product (grew)
 Land held by usurers under mortgages (emergence of debt market)
 In 1947,
o Punjab had 42% land with landlords and 58% was on lease.
o Sindh had 80% land with landlords.

FEUDAL OR CAPITALIST:
 British colonialism initiated capitalism in agriculture in the region.
o Absence of Agriculture revolution
o Economic expansion & modernization
o Quantitative increase (not qualitative)
o Greater integration (monetization)
 Capitalist form of agriculture did not emerge on significant scale so conclusion is clear
Agriculture remained feudal or at least pre-capitalist.
 According to many scholars, British instituted capitalism.
o Private ownership of land
o Emergence of agricultural market
o Rights of alienation & transfer
o Introduction of legal system
o Establishment of official sources of credit
o Protection of rights of land users
o Greater interaction & integration between town and country
o Quantity of crops grew (exported as well)
o Wage labor emergence
 o Setting up of agricultural zones
 These arguments are enough to support for Pre-capitalist to Capitalist type of Agriculture.

GREEN REVOLUTION:
INTRODUCTION:
 Most important events in Pakistan's agricultural history is Green Revolution occurred in
mid-1960s.
 Green revolution is significant increase in agricultural productivity resulting from the
introduction of technology package of high yield varieties (HYV) seeds, chemical
fertilizers and pesticides.
 This results in major changes in economic, social and political structure of the country.
 1949-1958 1.43% annual
(agriculture was stagnant in 1950s)
 1959- 1964 3.7% annual
 1965-1970 6.3% annual
 Increase in growth took place in TWO phases;
 1960-1964 Increase in irrigation facilities (tube wells)
 1965-1970 Use of high yielding variety of seeds, pesticides and fertilizers.
 Complete technology package of;
o Water
o Seed (two HYVs)
o Fertilizer
o Pesticides
 Most important ingredient in the technology package was water.
 Green Revolution was a resounding success; however there arise various issues as a
result.
 Issue of the tube wells
 Issue of mechanization (tractors)
 Regional & Income disparities

1. ISSUE OF TUBE WELLS:

o 1960 few hundred
o 1968 75000
o 1975 1,56,000
 But there arise three major issues in this regard.
 The Issue of the tube wells
i. Highly concentrated in canal colony districts of Punjab (91% in 1968). Very little
tube well development outside punjab.
 ii. Developed by landowners having more than 25 acres of land due to size and cost
of tube wells. (70% of tube wells with big farmers) Even the middle level peasants
could not afford its cost.
iii. 3. Large public subsidies were given for this investment. (Fuel, installation cost,
and maintenance)

2. MECHANIZATION ISSUE (USE OF TRACTORS):

 1960 2000 tractors
 1968 18,909 tractors
 But
 Most tractors were owned by the land lords with more than 100 acres of land. (38% in
Multan division)

3. REGIONAL & INCOME DISPARITIES:

o Installation of tube wells
o Tractorization
o Access to credit
 Inaccessible to poor farmers hence the result is interregional and income disparities.
 Since the NWFP and south eastern part of Sindh had inadequate access to water and the
HYV technology
 Thus,
 Landowners owning 50 to 100 acres of land, almost all of them from Punjab, produced
“Pakistan’s Green Revolution”

LAND REFORMS:
INTRODUCTION:
 Land reforms is changing the pattern of land possession to stop the concentration of land,
by reallocation of land between landless / small land owners by taking land from large
land owners.
 Pakistan had a long history of land reforms starting in 1947, focusing then nature of
tenancy and structure of land holdings.
 The objective of land reforms was to put ceilings on landholdings and supposed to be an
attempt to change tenancy regulations.
 1959 Land Reforms
 1972 Land Reforms
 1977 Land Reforms

1. 1959 LAND REFORM FEATURES:

  A ceiling of 500 acres of irrigated and 1000 acres of unirrigated land
 Tenants already cultivating lands
 Permanent ownership to occupants
 Compensation was paid (Rs. 5/ per PIU)
 Resumed land to be sold to landless tenants

CRITICAL ANALYSIS:
 Many landlords benefited by getting compensation for their poor quality land.
 By 1967, only 50% of the resumed land had been sold
 20% from this half of the resumed land was sold to landless tenants
 80% of this land was auctioned to rich farmers and civil, military officials.

2. 1972 LAND REFORM FEATURES:

 A ceiling of 150acres of irrigated and 300 acres of unirrigated land.
 Permanent ownership to occupants.
 No compensation was paid.
 Resumed land to be given to landless tenants free of cost.
 Pending dues of 1959 land reforms were written off for tenants.

CRITICAL ANALYSIS;
 Only 42% land was resumed in Punjab, 59% in Sindh.
 0.6 million acres land resumed (far less than 1959 figure).
 1% of the landless tenants and small owners benefited.

3. 1977 LAND REFORM FEATURES:

 A ceiling of 100acres of irrigated and 200 acres of unirrigated land.
 Permanent ownership to occupants.
 Compensation was paid (Rs. 30/ per PIU)
 Agricultural Income Tax to replace the land revenue. The irrigated land of 25 acres or
less, and the un-irrigated land of 50 acres or less were exempted.

CONCLUSION:
 Land reforms were always controversial. It was argued that they were un-Islamic and
that they violate the right to own, use and enjoy property as protected by the constitution.
 The reforms did not yield the expected results due to variety of reasons.
CRITICAL ISSUES IN AGRICULTURE SECTOR OF
PAKISTAN:
INTRODUCTION:
 Story of Agriculture
o Process of change
o Nature of Change
o How social and economic relations have changed over time

ISSUES:
 Agriculture Price Policy
 Agricultural Credit
 Mechanization
 Agriculture Income tax
 The water Crisis
 Land Reforms

1. AGRICULTURE PRICE POLICY:

 Government can play critical role in determining what, and How much to produce
through pricing policy.
 A good agricultural pricing policy can be defined as one which can act as an incentive to
produce certain goods in required quantities.
 National Commission of Agriculture report 1988;
o Low food grain prices
o Export duties on cotton
o Fixed prices of wheat and rice
o Inter-districts and inter-provinces restrictions
o Low prices of vegetable ghee
o Agriculture commodity import
 An extensive structure of agricultural input subsidies was evolved covering;
(1960’s,1970’s)
o Fertilizers
o Seeds
o Plant protection
o Tube wells
o machinery
  Agriculture suffered from output price policies And Large farmers get most out of input
price subsidies

2. AGRICULTURAL CREDIT:

 Formal sources of credit

o Complex procedures
o Limited access
 Informal sources of credit
o Simpler
o Flexible (little collateral)

3. AGRICULTURE INCOME TAX:

 Taxation is an Economic and Political Issues
 Economic Revenue collection to manage budget.
 Political some lobbies resist and some demand taxation.

ANALYSIS:

 Large number of direct, indirect and hidden taxes

 Agricultural income rises (Population and input cost rises)
 Higher taxation less saving for investment in agriculture
 Agricultural income rises more area under cultivation

4. THE WATER CRISES:

 Key factor behind success of green revolution was sufficient water availability but
Pakistan’s irrigation system has deteriorated with time and result is ‘Water Crises’.
 Pakistan does not have adequate reservoir capacity
 Canal water causing water logging and salinity
 No proper drainage system with irrigation infrastructure
 Inequality of power
 Insufficient maintenance of irrigation system

MODULE # 03 –INDUSTRIAL SECTOR OF PAKISTAN:

INTRODUCTION:
 Generally Industrialization implies “Growth and Development”
 At the time of independence, Pakistan had no industries to speak of, no industrial raw
material, and no significant industrial or commercial groups.
  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)

PROCESS OF INDUSTRIALIZATION (1947-1977):

 THREE PHASES:
 First phase is period 1947-58
 Second phase is 1958-1968
 Third phase is 1969-1977

FIRST PHASE IS PERIOD 1947-58:

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
 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.
 Economic development and Investment Tools in the first decade
 The impact of Exchange Rate
 The Trade Policy Regime
 Import Substitution Industrialization

1. 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,
o Announce the world Pakistan’s independent economic policy
o Sell raw material (jute) at higher price and import machinery at lower price
 Pakistan government imposed some controls on imports and exports to manage trade.
 India suspended trade with Pakistan in September 1949.
 As a consequence Pakistan;
o Either devalue the currency
o Find alternative market
  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.
 The decision NOT to devalue currency started Pakistan on the road to industrial and
economic development.

2. 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

PAKISTAN’S TRADE POLICY ASPECTS:

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

3. IMPORT SUBSTITUTION INDUSTRIALIZATION:

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

SECOND PHASE IS PERIOD 1958-68:

INTRODUCTION:
 Economic policies of the first decade initiated an era of industrial growth and
development.
 This laid the foundation for the decade of development between1958-1968.
  Growth rates in large scale manufacturing, Agriculture and GDP showed astonishing
trends over the ten years between1958-1968.
 Examine the nature of development through;
 Growth rates
 Policies pursued
 Consequences of policies

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%.

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.
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

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.

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).
 In 1965, Pakistan’s manufactured exports were greater than the combined manufactured
exports of South Korea, Turkey, Thailand and Indonesia.

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.
THIRD PHASE PERIOD 1969-77:
INTRODUCTION:
 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.

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.

MAJOR STEPS / ECONOMIC POLICIES:

 Nationalization of all basic industries and financial institutions. Nationalization policy
has three aspects;
o All those means of production that are generators of industrial advancement must
be taken in public hands
o All enterprises of national economy infrastructure must be in public ownership.
o Institutions dealing with medium of exchange (banking and insurance) must be
nationalized.
 The party’s promises to urban organized labor were fulfilled within six months of coming
to power through the labor 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.

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

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.

CRITICAL REVIEW:
 Generally economic performance remains poor /economic stagnation
 Lack of fiscal and monetary discipline;
o High budget deficit
o Monetary growth and inflation
 Period of domestic and international turmoil
 It was more external (Bad luck) factors than Bad management which resulted the
poor economic growth rates.

FOURTH PHASE PERIOD 1977-88:

INTRODUCTION:
 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.

FEATURES:
 Pakistan’s manufacturing sector became more capital intensive between1975-1986.
 There is little employment growth in almost all industries between1975-1986.
 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.

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.
STEPS TAKEN;
 Sep 1977, Denationalization of number of agro based industries.
 Dec 1977, numbers 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)
 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 were brought under Islamic laws and principles).
 On the whole the manufacturing sector in Pakistan has recorded impressive growth rates
during the 1977-88 periods.

STRUCTURAL ADJUSTMENT:1988 ONWARDS:

INTRODUCTION:
 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.

INDUSTRIAL SECTOR REFORMS:

 Further Deregulation
 Liberalizing the economy
 Privatization
 Tariff Reforms
 Regulation of foreign Investment
 Under the three year agreement (1988-1991) with the IMF, the industrial policy outlined.
Some points are as follows;
o Deregulating business decisions
o Enhancing export incentives
o Reducing level of protection
o Reducing the list of restricted imports
 o Divesting the shares of public sector companies to private sector

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.

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.

ANALYSIS OF INDUSTRIAL SECTOR IN 1990’S:

 All the governments relying on private sector to lead Pakistan on higher levels of
industrial development.
 It’s 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).

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 time’s 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.

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.

KEY ISSUES IN INDUSTRY IN PAKISTAN:

INTRODUCTION:
 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

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
 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.

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.

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.

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.

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.

PUBLIC SECTOR INDUSTRY:

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

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;
o Valuation of public enterprises
o Implementation of the bidding process
o Supervision of the transfer of the units to private sector.
 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;
o Lack of transparency / Corruption
o Incorrect bid evaluation process
o Inadequate attention to new management
o Favoritism, as the units transferred to the management with no previous
experience
o Inconsistency in 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.

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 ongoing energy crises have crippled Pakistan’s industry and economy. It is hitting
the industry at multiple levels;
o Energy tariff increases
o Un announced load shedding
o Voltage fluctuations
o Unavailability harms productivity of workers
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

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.