The Economy at a Glance--Shoaib(5836)

8/2/2019 The Economy at a Glance--Shoaib(5836)

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THE ECONOMYAT A GLANCE

Shoaib Ahmed Khan

583619-11-2011


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Pakistan predominantly an agriculture based

economy exporting primary commodities andimporting manufactured goods

Produced 75% of the worlds production of jutebut did not possess a single jute mill

Under developed, hardly any manufacturingcapacity

One oil refinery, a few cotton and sugar mills,

some tea and cement processing capacity

HISTORICA L OVERVIEW


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o The exports mainly comprised of low valueagricultural production & imports comprised ofconsumer goods

o Untapped Resources - minerals, petroleumand power

ISSUES


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Pakistan - underdeveloped country

amongst the 'backward' countries

characterized by dual economies : a large

agricultural sector and a smallindustrialized sector

Profit margins and the potential to generate

economic surplus from agricultural productionwere and are still minimal

UNDERDEVELOPED COUNTRY


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The advent of industrialization in Pakistan started

mainly due to:

the need to manufacture products of its rawmaterials in its own territories

Lewis (1969)

To meet the requirements of the home market

to develop consumer goods industries

INDUSTRIALIZATION IN PAKISTAN


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Surplus of labor a massive shift of labor from theagricultural sector to the industrial sector, leading tosustained per capita growth

Low demand for primary commodities in the world butthe price of low value added produce did not help in thegrowth of income

Improvements in the balance of payments to beachieved through the large scale export of manufacturedgoods

PURSUI T OF RAPID

INDUS TRIALIZATION IN PAKISTAN -

REASONS


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Acknowledgement of GOP on the precarious nature ofthe base of Pakistans economy and identification ofareas and strategies to be given urgent consideration

1947-55 - the years when the foundations of the economicand industrial policies laid - Restrictions and economiccontrols placed

a period of huge change - demographic make-up of thecountry ; governments changed frequently

PRE-LIBER AL ERA


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Pakistan was able to achieve a phenomenal growth

rate despite

the refugee migrant influx,

the threat of being taken over by India and

the lack of an industrial base or skilled laborforce

The major impact of the policies in the 50s

-to transfer income away from the agriculturalsector to the new and growing manufacturingsector


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To ensure this, the government adopted a protectionistpolicy for the manufacturing sector using anovervalued exchange rate as a tool

In 1949, when the pound sterling was devalued alongwith several other currencies including that of India,Pakistans main trading partner, the Pakistanigovernment chose not to devalue the rupee


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Unfavorable exchange rates given to agricultural

exports and import of manufactures was curtailed

The prices of manufactured goods in the domesticmarket were kept high while those of agricultural

goods were kept low

This increased profitability of the manufacturingsector which attracted investment in this sector


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With controls imposed on imports, that is the importsubstitution policy, especially on consumer goods,increased the prices of these goods sharply in thedomestic market because these industries had the

highest protection

The government decided to provide protection tomanufacturing through the use of over valued exchange

rates, import licenses and quantitative restrictions


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Two more measures gave support to manufacturing:

The distinction made following the 1955devaluation between the primary and manufacturedgoods in terms of import entitlement

The provision made in the export subsidyintroduced in 1956 for the reimbursement of customduty on the import of raw materials used in the

manufacture of exports


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For a little more than two years between July 1950 and December

1952 there was substantial liberalization of imports as a result of

the OPEN GENERAL LICENSE [OGL]

During 1959-65 (Second Five Year Plan) there was liberalization of

controls and tendency towards indirect controls

EBS-Export Bonus Scheme introduced in 1959

In 1961, a new Open General License System was introduced and in1964 the Free List entitled a number of goods to be imported

without license


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Tariff Structure

Although the tariff structure still favoured thedomestic production of consumer goods, the roleplayed by tariffs in allocating resources between

different groups of industries was limited

Import licensing was more effective as a protectivedevice since the licensing authority had the power to

ban imports


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The third five year plan (1965-1970)

Emphasized liberation and indirect controls

Agriculture was given top priority and QRs were imposed on

consumer and non-development imports

In May 1972 the rupee was devalued, the import licensing and

EBS were scrapped and tariff rates were reduced.


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The industrial policy was changed and an

investment sanction was required for industrialdevelopment in different projects such as:

For projects exceeding Rs 500 million/ was onthe specified list;

Private foreign investment involved


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According to Little et al. (1970) estimates of value added in

manufacturing industries at domestic and world prices, the shareof manufacturing GDP at world prices is almost insignificant for

Pakistan

a. The exchange rate policy militated against agriculture vis--vismanufacturing,

b. within manufacturing against small scale vis--vis large-scale

manufacturing and

c. within large-scale manufacturing against labour vis--vis capital Result : redistribution of income among sectors and income

groups, emphasizing the already skewed distribution of income


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FACTS & FIGURES (cont.)

Lewis (1969) reported - access to import licenses resulted in 39%

extra value added for firms as compared with firms withoutlicenses

According to Papanek (1967)

Out of 3000 firms in Pakistan in 1959, only twenty-fourcontrolled almost 50 percent of all private industrial assets,

Furthermore, seven industrial families controlled 25 percent ofassets,

While 15 families owned about 75 percent of shares in banksand insurance companies


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FACTS & FIGURES (cont.)

Amjad (1982) found that

the seven banks controlled by the industrial familiesaccounted for 60% of total deposits and 50% of loans andadvances of all the banks

Moreover of the forty-seven Pakistani insurance companies,fourteen were controlled by the industrial families and theirshare of assets came to 76% of the total assets of insurancecompanies in 1970

During 1958-70, 65% of the total loans disbursed by PICIC went tothirty-seven industrial families, while more than 30% of the loansdisbursed by IDBP went to the industrial families during the1960s


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PRE-LIBER AL ERA (cont . )

Pakistan Law did not:

forbid open collusion,

price fixing etc.

Import licensing and

the interlocking trading and industrial interests also

helped to cartelize industries

barriers to entry and high industrial concentrationresulted in windfall profits for industrialists inPakistan


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WHAT GOP DID:

The govt. declared that companies that went publicwould pay taxes at a lower rate as compared withprivately held companies

In 1963, the National Investment Trust (NIT) and theInvestment Corporation of Pakistan (ICP) wereformed - purpose was to float mutual funds and act asstock brokers for small investors

PRE-LIBER AL ERA (cont . )


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Industrialization ; Pros & Cons

The industrial policy - used effectively to bring aboutrapid industrialization (during the 1960s)

but the socio-political fallout led to the abandonment

of an otherwise successful growth strategy

In 1972 with the induction of a new government these

policies were reversed


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Industrialization ; Pros & Cons & what happenedNext (cont.):

Initially, third-one firms belonging to ten industries werenationalized,

these were: iron and steel, basic metals, heavy engineering,

heavy electrical equipment, motor vehicles, tractors, petrochemicals, gas and refineries, cement and electricity

followed by the nationalization of the vegetable gheeindustry

A little later, banks and insurance companies were alsonationalized


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Started in 1987 - an era of return of high growth rates

and an increased role for the private sectors

Measures aimed to :

- removing the barriers to entry and exit of firms,

- an increase in the investment sanction limit

- reduction in tariff levels

Investors were allowed to set up projects,

THE ONSET OF LIBERALISM


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In order to improve efficiency in the public sector,

the government denationalized the industries(The fifth five year plan)

Out of a 150 nationalized industries, 97 had beende-nationalized by 1990

Major focus - on the privatization of utilities,infrastructure and energy.


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The state owned enterprises are being sold at lowprices

No proper sequencing between the different reforms

(capital market in Pakistan is not organized and mustprecede the privatization of major utilities as onlythen will it be possible to market the SOES throughthe stock exchanges)

PROBLEMS:


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The present manner in which the companies are beingsold is posing several problems such as:

Skewing the income distribution

Buyers of the strategic units comprising foreignerswhich is a threat to national sovereignty

Public monopolies are being converted into private

monopolies Privatization should improvecompetition and not result in deterioration ofefficiency, savings etc.


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POST LIBERALIZATIONERA

The growth of the economy during the 1990s has been

irregular

Particularly dismal over the two years 1992-93 & 1996-97

Reason:- Bad performance in agriculture and manufacturing sector of

0.1% and 1.2% respectively.

- Political uncertainity & impact of structural adjustmentpolicies

The recovery in manufacturing and agriculture in 1997 isattributed to favorable weather conditions & increase insupport prices


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Appropriate reforms should be carried out in the

financial as well as industrial fields

Stable economic management

Measures to keep the fiscal deficit under control Workforce: Technologically equipped

Achieving self-reliance through efficiencies and

tapping new resources.

There should be Well-thought regional policy for

industrial dispersion/concentration.

RECOMMENDATIONS


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Thank You

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The Economy at a Glance--Shoaib(5836)