The Separation Of East Pakistan Economics Essay

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Pakistan after 1971 was a new country in many respects, not least because of the industrial and economic policies followed between 1972 and 1977. The role of the public sector was increased substantially and the economy did not do well. After 1980, Pakistan was much influenced by the new world order of globalization, privatization, openness and neo-liberal economic policy. The Structural Adjustment Program sponsored by the IMF and the World Bank much determined the industrial policy of Pakistan. During the 1990s and onward replacement of direct control with market - oriented forces, liberalization of import policy, rationalization of tariff structure, drawback of customs duties and taxes could not improve the pace of industrialization in the country.

STATEMENT OF THE PROBLEM

The manufacturing industrial sector plays a vital role in the economy of Pakistan. After independence Pakistan embarked upon a policy of industrialization to eradicate poverty and reduce unemployment. Pakistan was widely acclaimed as a model of industrial development during the 1960's and 1970's. This period saw remarkable industrial progress due to various pro-industrial policies followed by the Government. However, this trend began to decline gradually during the 1990's and 2000 onward. This was mostly due frequent changes of Governments, their inconsistent policies, law and order situation and financial insecurity felt by the industrialists and entrepreneurs. This period also witnessed sharp changes, from nationalization to privatization and more reliance was placed on private sector. The level of efficiency and performance of public sector industries also declined sharply. There has been considerably less research on Pakistan's industrialization during this period. Currently Pakistan's manufacturing industrial sector is at cross-roads.

This paper is aimed to examine the comparative growth or otherwise and trends & phases of industrialization in Pakistan during the periods of 1960 - 1980 viz-a-viz 1980 - 2010. Further the causes of decline in industrialization are also discussed. The research would also focus on industrial policies and strategies pursued in these two periods and the levels of efficiency and performance in the manufacturing industries. Furthermore the options and strategies to enhance industrialization and its challenges are also the subject matter of this paper.

HYPOTHESIS

"The comparative decline in industrialization in Pakistan during the periods of 1960 - 1980 viz-a-viz 1980 - 2010 is due to lack of interest, frequent changes of regimes, inconsistent policies of consecutive governments and political posturing."

SCOPE OF THE STUDY

The research aims to examine the comparative growth and trends & phases of industrialization in Pakistan during the periods of 1960 - 1980 viz-a-viz 1980 - 2010. The periods of 1960s and 1970s is called the "Era of Industrialization" in the annals of Pakistan. However, the pace of industrialization started to decline in the subsequent years. The causes of decline in industrialization shall be discussed. The research would also focus on industrial policies and strategies pursued in these two periods and the levels of efficiency and performance in the manufacturing industries.

Keeping in view the industrialization trends, a rationalization of the situation would therefore be required. The study would also highlight the options and strategies to enhance industrialization in the country.

METHODOLOGY

The research methodology involves a review of academic sources and earlier researches on the subject and the analysis of secondary data. The study would concentrate on the time periods of 1960 - 1980 viz-a-viz 1980 - 2010 to study Pakistan's comparative experience with industrialization. The experience of Pakistan would be analyzed to test our hypothesis.

The secondary sources of data include books, journals, government reports, magazines, articles, news reports, e-journals, web-sites etc. Inferences will be drawn from these secondary sources and some policy recommendations will be given based on the lessons drawn from the review.

REVIEW OF LITERATURE

A review of literature related to the issue will be undertaken to carry out an analysis of comparative growth or otherwise and trends & phases of industrialization in Pakistan during the periods of 1960 - 1980 viz-a-viz 1980 - 2010. In this regard the "Five Yearly Plans" of the Government will be reviewed. Further the role of "Pakistan Industrial Development Corporation (PIDC)" and "Industrial Development Bank of Pakistan (IDBP)" will also be taken into account. The steps taken by 'Ministry of Industries and Production' will also be considered. Further "Pakistan Development Review" issued by 'Pakistan Institute of Development Economics (PIDE)' shall also be looked into.

Various books, journals, government reports, magazines, articles, news reports, e-journals, web-sites etc., relating to the topic will also be consulted. Interviews with the experts and the concerned people and discussions with colleagues shall also be made while preparing the paper.

OUTLINE OF PAPER

The introduction would present a brief background of industrialization in Pakistan. The statement of problem, hypothesis, scope of research, methodology and the review of literature would be discussed here.

Section 1: The Process of Industrialization during 1960 - 1980

1.1 Industrialization: Trends and Phases

1.2 The Era of Industrialization: 1958-68

1.3 Bhutto's Nationalization Program: 1972-77

1.4 The Early Zia Years: 1977-80

1.5 Analysis and Performance of Major Industries

Section 2: Privatization and Industrialization during 1990 - 2010

2.1 The Privatization Program

2.2 Large Scale Industrialization

2.3 Role of SMEDA

Section 3: Key Issues in Industrialization

3.1 Inconsistent Industrial and Trade Policies

3.2 Lack of Diversification

3.3 Weak Infrastructure

3.4 Higher Cost of Domestic Production

Section 4: Conclusions and Recommendations

Conclusions would be drawn here and recommendations based on the various aspects of the study would be made.

SECTION-I

THE PROCESS OF INDUSTRIALIZATION DURING 1960 - 1980

INDUSTRIALIZATION: TREND & PHASES

At the time of its creation Pakistan was totally under-developed as compared to other parts of the sub-continent with people living barely above the subsistence level. Its agriculture was at a primitive stage and it had very little manufacturing industries. The situation was further aggravated by lack of credit and technical institutions. The nascent Government was mindful to the crucial role which industry could play in the economic development of the country. Realizing this fact the founder of the country Quaid-e-Azam Mohammad Ali Jinnah said "Government will seek to create conditions in which industry and trade may develop and prosper…I would like to call to your particular attention the keen desire of the government of Pakistan to associate individual initiative and private enterprise at every stage of industrialization". [2] 

Therefore, soon after independence Pakistan embarked upon a policy of industrialization as there was a general perception that industrialization implies economic growth and development. Without industrialization the countries would continue to remain undeveloped or under developed. The end of the Korean boom found Pakistan with the class of merchants who had accumulated sizeable fortunes during a period of an overvalued exchange rate, rising imports and scarcities created by the disruption afraid with India.

THE ERA OF INDUSTRIALIZATION: 1958-68

With the advent of Ayub Khan's Military regime in 1958 the country entered a new stage of economic planning udder the philosophy of laissez-faire. The policy was based on the following propositions. The state machinery would (i) guarantee the freedom to competition the market place (ii) look after national defence (iii) establish those public institutions which were not in the self interest of the individuals to create. Guidance was sought from Adam Smith - accumulation of capital to be encouraged by giving full reign to personal greed and preservation of colonies (a function performed by East). Direct controls were lifted to ensure fully play of market forces & possibility of high profits encouraged greed. Policies were formulated with the help of the Harvard Advisory Group in favour of growth sectors. They emphasised that through

economic incentives, subsidies and foreign exchange endowments, a capitalist class could be created who would save more capital for re-investment. The emphasis was on the growth of the pie rather than in distribution. Thus industrial policy so framed deliberately concentrated on growth and economic development without regard for social consequences of such capitalist

oriented policy. The role of the Govt. was confined to providing, assisting, sustaining private initiative through adequate infrastructure, favourably exchange rate, tax concessions, specialised financial institutions and to take up through the public sector fields where the private sector did

not show the capacity or competence. The concessions to private investors included liberal depreciation allowances on plants and machinery &-buildings; exemptions, on new investments made in approved industries, exemption on interest on foreign loans; 5-10% rebate in super tax holidays for 2-6 years on industries depending upon their location etc., Incentives to foreigners were given in the form of tariff protection repatriation of capital investments including

capital gains, unrestricted remittances of profits, income tax exemption in salaries of foreign technicians etc. Specifically the following measures were undertaken:-

Export Bonus Scheme: Introduced in January 1959 with a view to stimulating exports, especially of manufacturing goods by means of bonus on export earnings. Bonus vouchers earned could be converted into licenses to import specified items which were wide ranging including consumers goods industrial raw material and capital goods.

Export Credit Guarantee Scheme: Introduced in 1962 to protect exporters against certain financial risks not normally covered by insurance on realising the sale proceeds of goods from foreign buyers. Likewise, Export Promotion Bureau, Export Promotion Council, Pakistan House International, Fairs and Exhibitions were all steps taken to boost exports.

Financial Institutions: Contributed to the growth of industry by providing large funds at reasonable rates - Pakistan Industrial Credit & Investment Corporation (PICIC) provided assistance to large scale industries; The Industrial Development Bank of Pakistan(IDBP) designed for medium and Small Industries Corporation (SIC) for small scale industries. The IDBP provided loans both in local and foreign currency to the private sector establishment of new units and for balancing; expansion and modernisation of existing ones.

A number of institutions were set up with foreign collaboration. The Sweedish Pakistan Institute of Technology (SPIT) set up in Karachi, Kaptai and Gujrat in 1965 aiming at the development of small scale industries.

P.I.D.C: This was set up to promote enterprise which private industrialists were unable/unwilling to undertake. The emphasis of the Corporation was on promotion and not ownership of industries. It would set up industries and disinvest as soon as the shyness of capital in any field was overcome. At times it undertook projects and turned them over as running concerns to private industrialists at bargain prices. It also provided technical information and advice, carrying out feasibility studies for any private enterprise willing to enter the industry.

Import Policy : There was a distinct industrial bias in the Government's commercial policy, a process initiated in 1963-64 of gradually withdrawing the licensing controls from essential import items. The number of items placed on the free list was raised covering a wide range of essential raw materials and consumers goods.

During the period of July 1965 - June, 1986 the Govt. announced its decision for grant of protection to a number of industries.

The application of the above measures continued over the Five Year Plans formulated under the umbrella of the perspective Plan (1965-85). The First Plan (1955-60) aimed at increasing the national income by 15% and per capita by 12%. However, the increase in the income was 11% which was due to the increase in the population. There was no increase in per capita and the standard of the people remained the same.

By the end of the Second Plan (1960-65) the impact of the industrial policy was being distinctly felt on the economy. The Plan envisaged a total expenditure of Rs.2300/- crores out of which 48% was to be financed through foreign assistance - U.S.A. being the major contributor. In the words of the Planning Commission, "Foreign assistance as such played quite a decisive role in accelerating the rate of investment in the economy and in raising growth rates". As such the GNP increased by 30% (against the target of 24%) annual growth rate was 5.6% and per capita income increased from Rs.326 - Rs.368; contribution of the industrial sector to GNP increased from 6% in 1949-50 to 11% in 1964-65 the domestic savings increased from 8.9% to 12.3% in 1964-65. The growth rate was estimated to be 83% for 1967-68 which is a record for developing countries. Indeed at that time Pakistan was hailed as the practical "Model for Developing Countries". [3] 

On the basis of the optimism generated by the success of the Second Plan, Third Five Year Plan was prepared, based on the assumption of constant flow of foreign assistance. The September war of 1965 with India and the suspension of foreign assistance from U.S.A. placed Pakistan in difficult economic condition. This made the Govt. appraise the impact of its policies on the economy. Efforts at industrialisation had led to the growth of "industrial houses" who also become the owners of "financial houses". An exhaustive survey of industrial assets in Pakistan carried out by G. Papnek showed the distribution of control in private industry for the year 1959. [4] 

Sixty industrial groups controlled 60.6% of all private industrial assets and 43.5% of all private industrial sale. Out of these sixty, seven only controlled 24.4% of the total private sales. These 7 are Adamjee, Dawood, Saigol, Valika, Colony, Fancy & Bawany. Apart from the sheer momentum of the start that these groups got, the conditions in which they invested were so favourable and the rates of profits so high that they were able to recover their investments within 6 months to a year'. Further the Government associated itself directly with the private sector in setting up industries for them. The role of P.I.D.C. is important in this regard. Adamjee, Dawood, Isphani & Karim were all beneficeries of the disinvestment policy of the P.I.D.C. in East Pakistan. Saigol bought the Jauharabad Sugar Mills and so on Members of the same industrial houses were on the Board of Directors of P.I.D.C. - Isphani, Adamjee, Syed Amjad Ali. The three major banks Habib, United and Muslim were under the control of the Habib, Saigol and Adamjee groups which together accounted for 80% of the assets of private commercial banks.

The ICP & PICIC showed favourable lending policies to these industrial houses as the same were on the Board of Directors of these institutions.

The existance of extreme concentration of wealth in industrial, banking and insurance sector expressed itself in the popular slogan of "22 families". The talk of the "twenty two" families owes its popularity to a speech in April 1968 made by the then Chief Economis of the Planning Commission at a meeting in Karachi in which the claimed that twenty two families owed 87% of the banking and insurance and 66% of the industrial assets in the country. The solgan of 22 families signified the peoples resentment against the capitalist class which they maintained had not only exploited the working class in amassing great wealth but had also through conspicuous consumption wasted the country's resources. The belief that the growth of economy under laissez-faire would automatically bring improvement in the standard of population at large (trickle down affect) resulted in disturbances that led to a 3 tier antagonism.

i) Between East & West Pakistan;

ii) Between urban & rural sector as the terms of trade moved against the rural sector;

"There was considerable transfer of savings from the agriculture to the industrial sector...as terms of trade were deliberately turned against agriculture through such policies as licensing of scarce foreign exchange earned primarily by agriculture to the industrial sector, compulsory government procurement of food grains at low prices to subsidise the cost of living in the cities, industrial incentives for commercial agriculture investment. The vast majority of the Pakistani population probably has a lower standard of living to day than when the country achieved its independence in 1947". [5] 

iii) Within the urban sector the wages of the workers were depressed and the workers resented the decline in the real wages at a time when industrial expansion was proceeding at a rapid pace. The fixed salaried faced the same dilemma.

All this created an explosive situation which on the one hand led to the break up of East Pakistan into Bangladesh on the other a political party (Peoples Party) whose economic programme though socialistic in name, but essentially basic needs come to power.

BHUTTO'S NATIONALIZATION PROGRAM: 1972-77

The breakup of Pakistan in 1971 was followed by a major change of industrial policies and the first oil shock. There was a reversal of government policies from private to public ownership. This was also a period of liberalization episode with devaluation and unification of the exchange rate. Large Scale manufacturing growth was meager and agricultural growth was also slow due to draught, floods and a measure pests attack on cotton. During this period the GDP growth averaged 4.8 percent a year. [6] 

In 1972 the government adopted the principle of 'nationalization' which was a major shift in government policy. During this period 10 basic industries were transferred to public sector which inflicted heavy blows to the private sector. The details of the 10 basic industries transferred to public sector are as under: -

Private Sector

1972-77

Government

Industries Nationalized

Iron and Steel industries

Basic metal industries

Heavy engineering industries

Heavy electrical industries

Assembly & manufacture of motor vehicle

Heavy and basic chemical industries

Petrochemical industries

Cement industries

Public utilities

Public Sector

Board of Industrial Management Corporation

Federal Chemical and Ceramic Ltd

Federal Light Engineering Corporation.

National Design and Industrial Services Corporation.

National Fertilizer Corporation of Pakistan Ltd.

Pakistan Automobile Corporation Ltd

Pakistan Steel Mills Corporation.

Pakistan Industrial Development Corporation.

State Cement Corporation Ltd.

State Heavy Engineering & Machine Tool Corporation Ltd.

State Petroleum Refining & Petro-Chemical Corporation Ltd

Since the nationalization of industries in 1972, the pace of industrial development has remained slow. The uncertain polices of the government reduced the level of investment in the private sector. Foreign investors were also reluctant to invest. The investment climate for the private sector was not favourable.

In 1977 the government reversed its industrial policy. The Martial Law Government gave assurances that no further industries would be nationalized. Many of the nationalized industries were given back to their former owners.

Pakistan at this time was passing through a period of great economic uncertainty. The private sector that had showed such dynamism seemed to lose confidence in the economic future of the country, there was a sharp decline in the savings & investment in 1971-72, and the loss of East Pakistan had created severe foreign exchange crisis (Jute & Tea the main foreign exchange earners) and a loss of market for Pak. manufacturers - East Pakistan absorbed 40% of this. These goods could not be sold abroad as they were uncompetitive due to the heavy protection. The Bhutto regime had already spelt out in its manifesto the industrial measures it proposed to take after coming into power "the party accepts the possibility of a mixed economy - the existence of a private alongwith the nationalised sector. However it is within the public sector that the major source of production of wealth will be placed". The main objectives of the industrial policy therefore stemmed from the socio-economic policies of the Government. As a means of dealing with economic crisis nationalisation of industries was prescribed and through the Economic-Reforms Order (1972) took over 31 units operating 10 basic industries:

i. Iron and Steel.

ii. Basic Methods.

iii. Heavy Engineering Industries.

iv. Heavy Electrical.

v. Assembly & Manufacture of Motor Vehicles.

vi. Tractor Plants- assembly & manufacture.

vii. Heavy and Basic Chemicals.

viii. Patro Chemical Industries.

ix. Cement Industry.

x. Public utilities: a) Electricity generation Transmission & distribution.

b) Gas.

c) Oil Refineries.

"These are industries, which "the President (Bhutto) remarked "bear upon the life of every citizen and form the base without which no industrial development in the real sense can take place. The control of these industries now rests with the State of Pakistan for the benefit of the people of Pakistan. The people are now in charge of the course of their own industrial development" [7] . The purpose behind this order was to correct a situation where the fruits of economic development were confined to a priviledged few, to the detriment of the comman man. This however was not an entirely true picture, but was meant to appease the leftist element in the Govt. end to bolster the public image of the P.P.P. as a saviour of the nation. For the factual position in 1972, was that the large scale industrial sector accounted for 12.8% of the GDP employed only 2.4% of the total labour force & its contribution to exports was only 6.3%. It was obvious that the state of poverty could not be blamed on the large scale industrial sector and this step therefore did not necessarily create an environment for a health economy. The reaction of the industrialists was embodied in the words of Ahmed Dawood on industrial. "If you kill (a) cow, you can have meat for one day only. But if you keep the cow, you can have milk every day. Pakistan needs milk now".

But nationalisation did not stop here. Despite Bhutto's promise that in future no nationalisation would take place, the vegetable Ghee (Oil) industry was nationalised. The little confidence that the businessmen had developed in this regime was lost. In January 1974, Bhutto announced the nationalisation of all private and domestically owned banks. Nationalisation took place in the following sequence:-

i. January 1972 - 32 manufacturing units.

ii. March 1972 - 32 Life Insurance companies.

iii. September 1972 - 26 Vegetable oil (Ghee)

factories.

iv. January 1974 - All Banks, Petroleum & Shipping Co.,

v. July 1976 - About 2000 Rice, Flour & Cotton.

For the effective management and control over the affairs of taken over industries, the Govt. replaced the existing Board of Directors with its own Managing Directors. The Board of Industrial Management was set up consisting of Chairman (The Minister for Production) and 5 memebers belonging to senior professional executive posts in the industry. To improve the working of these units and to run them on sound business principles, they were organised into the following Corporations:-

i. State Heavy Engineering and Machine Tools Corporation.

ii. Federal Chemical and Ceramics Corporation Limited.

iii. State Cement Corporation of Pakistan.

iv. Natural Fertilizer Corporation of Paksitan Limited.

V. State Electrical Corporation of Pakistan Limited.

vi National Design and Industrial Services Corporation Limited.

vii. State Petroleum, Refining and Petro-Chemicals Corporation.

viii. Pakistan Automobile Corporation.

ix. Federal Light Engineering Corporation.

X. Mineral Development Corporation.

The nationalisation of the Ghee units was an important step for, so far nationalisation had effected the 22 families but a good proportion of the Ghee industry was owned by small and middle sized enterprizers some of whom had been active PP supporters and/or were sympathetic towards it. The Govt.'s encroachment into this industry was therefore resented by its own constituency and generated pressure for reducing the influence of the left in the economic decision making.

The tension generated by these structural reforms led to a change in the decision making - the biggest was the departure of the Finance Minister. Bhutto tried to involve the bureaucrates in decision making as had been done by Ayub. But the Ayubian model could not be reconstituted due to reasons - Bhuttos personality and the drastic changes that he had made in the structure of the bureaucracy itself (the Administrative Reforms). Bhutto also could not accept the discipline of confining himself to the planning framework (the Five Year Plans) or to the requirement of the Planning Commission regarding feasibility reports and the cost benefit methodology prescribed on the PC-I form. Thus decision to construct the Steel Mill in Karachi, to build a highway on the left bank of the Indus River connecting Karachi with Western parts of Sind and Northern area, to construct a series of nuclear plants including a plant for reprocessing nuclear fuel - were all taken without PC-I feasibilities. However, the effect of these policies showed that all was not well.

The expansion in the role of the public sector, erosion in the confidence of the businessmens community and a sharp rise in the share of wages (Labour Reforms) in the industrial earnings all had a profound impact on the development of the industrial sector. One of the important impacts was the flight of businessmen and their capital from Pakistan to countries in Africa & the Middle East. A number of industrial houses branched out in different countries - The saigol family started enterprise in Kenya, Tanzania U.A.E. Service in Saudi Arabia and a number of staff moved from nationalised banks to institutions in the Middle East. These businessmen who remained behind diversified into other areas - Dawood went into rice trading, Fancy into deep sea fishing, Saigols into construction etc. As a result therefore, potential investment funds went into trading, transport, house building, puchase of urban land or for projects with small gestation period. These movements in capital and managerial skill resulted in sharp decline in private sector investment in manufacturing as indicated by the following table:-

Public and Private Manufacturing Investment (Rs. Million in 1959/60 constant prices)

Year

Private

Investment Public

Total

The Ayub Period 1960/61 to 1964/65 (annual average)

992

57

1069

1965/66 to 1969/70 (annual average)

930

106

1036

1970/71

908

43

951

The Bhutto Period

1971/72

1972/73

1973/74

1974/75

1971/72 to 1975/76

(annual average)

757

572

648

740

682

61

68

175

154

115

828

640

828

894

797

Source: Computed from Government of Pakistan Economic Surveys for the period 1964/65 to 1976/77

As a result of nationalisation, the public sector investment increased dramatically. During the last year of Bhutto this investment was 6 times to the level that had prevailed during the Ayub period. The investment also increased as the economy to achieve self-sufficiency in basic industries went for investments with long gestation periods such as Steel Mill etc.

The neglect of small industrialists and small merchants and middle sized formers - three groups that had brough dynamism to Pakistan economy, led to a sharp decline in the rate of growth after 1974. During 1974-77 it was 2.7% per annum or 0.3% less than the rate of population and the percapita income was lower than it had been in 1974. The government was having problems with nationalised industries. First these units had been managed by professional managers who were gradually being replaced by bureaucrates, resulting in the BIM becoming a redundant organisation without any distinctive objective and function: "A technical bureaucracy with industrial background could be expected to monitor and ensure effective accountability of industry; perhaps the same could not be expected from one which'basis its management

expertise on maintaining law and order in a district". Nationalisation increased the public sector expenditure as many of them had been running at a loss due to protection, multiple exchange

rates etc. Most managers faced serious cash flow due to economic disruptions of 1969-71 and resources needed to pay back wages and to bring them to work at normal capacity was all done with Government's resources. The increase in the minimum wages (due to Labour Reforms) and other benefits effected profits. Oil and world economic crisis also coincided with nationalisation and contribute (to the collapse of the private industrial investment. On the one hand the market for Pakistan exports like cotton collapsed and on the other the rise in the prices of capital goods and current inputs rose as the prices of energy rose. This in turn led to the rise in the prices as the state had to bear the burden of rising costs.

Moreover the run down absolute - and inefficient machinery, in the textile was overdue for renewal. But the investment climate as already mentioned was bleak-not one in which the businessmen would undertake large capital investments. Their attention was turned towards profitable alternatives in the Middle-East.

The economy became stagnant and the financial burden became unmanageable. This led to the dissatisfaction of the urban middle class. The Rightist parties provided leadership and the country went through another revolution which brought in the army government.

THE EARLY ZIA YEARS: 1977 -80

The rapid industrialisation in 1976-77 had increased the role of public sector leading to a sharp increase in the public sector enterprises. There were strong indications that all was not well the state owned enterprises were not working as efficiently, having problems with management and production; large public outlays had increased the burden of foreign debt and a completely demoralised private sector which had virtually gone on investment strike. As the situation presented itself, the outcome from this malaise lay in (i) reviving the confidence of the private sector, (ii) appraising the public sector with a view to improving its efficiency/divestiture, (iii) laying the guide lines of a future industrial policy, (iv) defining the role of the private and public sector & a firm announcement of a clear cut policy against nationalisation in future, thereby bringing a mixed economy in practice.

One of the key links missing for any private entrepreneur to make investment was the absence of investment schedules and five year plans. After 1971-72 there were only Annual Plans. In March, 1978, the Fifth Five Year Plan was announced, that stressed the completion of the ongoing projects while encouraging private enterprise to play a full role in the development of the country. New investments in the public sector were restricted to balancing and modernising of existing facilities and taking up those projects considered absolutely necessary for creating links to enable the existing projects to utilise their full capacity.

The Industrial Policy of 1984, stated that the Government had no intention to nationalise any private sector industry in future and that it (Government) will continue to pursue the pattern of mixed economy with the private and the public sector complementing each other. The private sector would however shoulder the major responsibility for future industrialisation. "One of the goals of the Industrial Policy is inward looking domestic market approach, boldly facing competition and aggressively seeking a high share of the world market through a process of tariff Nationalisation, modernisation, quality control rather than providing excessive protection". There was therefore a distinct shift in the Industrial Policy from import substitution to state owned enterprises to export-led industrialisation.

The main vehicle for implementing the Industrial Policy was the Sixth Five Year plan. Structural adjustment was the key element including a liberal framework for industrial sanction. The major instrument of growth would be the private sector with latter "seeking support through public sector in some difficult enterprises". The total industrial investment of around Rs.82.50 million was projected with only Rs.20.50 million earmarked for the public sector. In support of the above, the following were to be used:

Commercial Policy:

Rationalise the tariff structure to provide incentives for resource allocation into the desired investment avenues.

Exchange rate to become a potent & flexible tool of development policy.

Foreign Exchange availability to investors to be augmented.

Interest rates on long-term loans for capital formation should reflect costs to be borne by various industries.

Liberal licensing for industrial machinery & raw material.

Fiscal Policy:

Compensatory rebate system to be further streamlined.

Corporate tax structure geared to the need for mobilising investiable funds.

Foreign Private Investment:

It would enjoy the organisational flexibility of entering on investment field direct or collaborate with the public or private sector; development of facilities in the Export Processing Zone. The foreign investor to be attracted in two ways through direct advantages offered to them & through the lure of dynamic domestic industries. Other measures include promoting of small scale industries and to attain desequlation of industry through the removal/relaxation of sanctioning procedures.

Denationalisation/Divestiture:

In keeping with its "privatisation" policies the government took steps towards denationalisation. The first denationalisation was that of the flour and cotton mills in September, 1977, three units have transferred under this scheme (Jeroy P. Jones...). The government also appointed two Commissions first under the chairmanships of Mr. N. M. Uqvaili in October, 1977 & the second under Brig. Atta Mohd. in February, 1978 to review policies of the state owned industrial enterprises. The following is the extract from the Uquaili report:

"The findings provide authentic evidence regarding the deteriorating financial and physical performance of the state enterprises. Out of the 54 units, only 15 were in a position to maintain positive profitability position during all the six years (1972-77) reviewed by the Commission.

These findings acted as the guidelines of the governments future policy regarding industrialisation in the country.

Lahore Engineering (now Ittefaq foundry) was returned to its previous owner in 1979, having accumulated a deficit of $12.06 million during its seven years public operation. Following 5 months of renovation & in 7 month's operation, December 1979 to June' 80 its sales were Rs.145 million with 1200 employees (pre-nationalisation) compared to a high of Rs.90 million er year under public ownership with 300 employees. Nowshera Engineering is said to be experiencing the same change. Likewise in 1970 Baunu Sugar Mills and a paper mill, were disinvested.

Despite governments Committment to disinvest, no clear formulae for its sale could be agreed upon except whatever made a 'reasonable' offer (Minister for Production) a rather vague statement. Two re-rolling mills, one located in Lahore and another near 'Peshawar have been returned to their erst-while owners whereas similar mills in Karachi have been retained in the public enterprise ("No clear cut policy, for disinvestment" Dawn Economics Desk, 3rd March, 1984). The range of governments disinvestment policies included:-

i) Complete dis-investment: In certain enterprises where the government feels that they should be handled by the private sector e.g. Pakistan PVC, Pak Iran Textile Mill, Bolan Textile Mill & Terbela Textile Mill for which offers were also received.

ii) Partial Disinvestment: These are those enterprises where the government is retaining the management and control through 51% share holding, 49% of the shares were to be unloaded to the public through the Stock Exchange. On Board of such industries nominees of private sector will sit and share in decision making and direction. Policy however will remain with the Govt. retaining 51% equity interest. Disinvestment of the sort was to begin with three selected industries- Ghee, Cement and automobile. Partial disinvestment of some units would partly meet the demand for denationalisation of the unjustly taken over untis of the private sector. Another form of disinvestment envisaged was by inducing a private management with minority shareholding and offering shares of on-going concerns to as large a number of people as possible the idea being that the capital market of Pakistan which is very thin should become broad based.

The Industrial Policy package 1989 lays emphasis on the following:

i) Provisions of physical and Social infrastructure facilities in the industrial estates as well as backward area.

ii) Development of key industries particularly those using at least 70% of local raw material, fertilizers, textile, engineering, electronics and other high-tech products.

iii) Creation of employment opportunities by encouraging labour intensive projects as well as small- scale industries.

iv) Balanced regional growth through dispersal of industries to the less developed area.

v) No nationalization of industry.

Great reliance is being placed on the private sector to achieve the above mentioned goals. To this end the 7th five year plan has provided sector (i.e. 90%) as against Rs.9.00 million in the public sector. Further effective monetary and fiscal incentives have been given to attract private investment that include Tax Holidays. Exemption from Customs duty, sales tax, Income Tax Rebates, Import Duty, Duty Draw backs etc. Under this Industrial Policy the sanctioning procedure has been liberalised with maximum liberty to the entrepreneur for selection and establishment of industries. Also the sponsors can apply, directly to the commercial banks/development financial institutions. To alternate the difficulties faced by the local as well as foreign entrepreneurers in obtaining sanctions for the establishment of industrial units, the requirement of the Government sanction has been dispensed with to a large

extent. The three tiers have now been reduced to one i.e. BOI/COI. The projects depending upon their size and type will be sanctioned by either the Board of Investment headed by the Prime Minister or the Committee of Investment headed by the Minister for Industries. Specifically the sanction of the Government will be required for the following:-

i) Industrial units with a capital cost of more than Rs.1000 million;

ii) Industrial units based on imported raw material provided their products are not on the import list, the duty on such products is more than 80%.

iii) Industries which have been placed in the Specified List.

iv) Projects requiring cash foreign exchange of more than Rs.60 million for plant and machinery;

v) Projects involving import of second-hand machinery except under Non-Repatriable Investment(NRI) Scheme;

vi) Projects based on repatriable investment except in key industry.

Further, concessions and facilities have been given to overseas Pakistani to use a growing proportion of their savings for investment in the industrial field.

ANALYSIS AND PERFORMANCE OF MAJOR INDUSTRIES

COTTON TEXTILE INDUSTRY

The textile industry is the largest and the most important sector of Pakistan's economy. It provides employment to 50% of the industrial labour force. It has been developed at various locations out of which Karachi, Hyderabad and Faisalabad are the main centers of this industry. Raw cotton, cotton yarn, cotton cloth and all sorts of readymade garments and knit-wear are exported to many countries worldwide as well as being consumed domestically.

SUGAR INDUSTRY

The sugar industry is one of the vital industries of Pakistan. Sugar mills are located in difference part of Punjab, Khyber Pakhtoon Khua an Sindh where sugarcane, being the raw material for this industry, is abundantly grown. As sugarcane starts losing is sugar content soon after it is harvested, therefore, it needs to crushed immediately to get maximum yield out of it. Further since sugarcane it bulky and heavy so its transportation cost to other places would be expensive as well as hazardous. Molasses and baggasse are the bye-product of sugar industry. Molasses is used in the manufacturing of various types of acids in the chemical industry. Baggasse can be used as fuel in sugar mills and is also used to make chipboard, paper and animal feed. Currently there are 76 sugar Mills in Pakistan as per the following distribution:-

Province

No. of Sugar Mills

Punjab

39

Sindh

31

KPK

06

Total

76

The major sugar industries in Pakistan are as under: -

Habib Sugar Mills Limited

Mirpukhas Sugar Mills Limited

Dewan Sugar Mills Limited

Seri Sugar Mills Limited

FERTILIZER INDUSTRY

Fertilizer industry is one of the major industries of Pakistan. Chemical fertilizer have cons livery increase since the 'Green Revolution of the 1960s'. Fertilizer are very important for increasing agricultural production. Various raw materials such as sulphur, phosphate and gypsum etc. are used to make different types of fertilizers. Nitrogenous fertilizer is most commonly used (92% of the total production) because the soils are deficient in organic matter.

Faisalabad, Shekhupura, Multan and Daud Khel in Punjab, Haripur in KPK and Dharki in upper Sindh are the main location for fertilizer companies. The major fertilizer companies are as under:-

Pak Arab Fertilizer Company

Fauji Fertilizer Company

Engro Chemicals Pakistan

CEMENT INDUSTRY

The cement industry of Pakistan is another major industry which is also exporting cement to some extent to UAE and Afghanistan. Many favourable factors have contributed to the development of cement industries locally viz

Availability of raw material (limestone & gypsum)

Good domestic market with high demand from the construction company

Availability of coal as a cheap fuel

In the recent years however, the prices of cement has shown and upword friend because of the rise of demand and the impact of physical policies of the government.

IRON AND STEEL INDUSTRY

The establishment of a steel industry is considered to be a milestone on the road to industrialization. In the early years the emphasis was on the production of consumer goods. However, in the late 50s, the establishment of the steel industry was considered essential for industrial development. Finally, the Pakistan Steel Mill Corporation, with technical and financial assistance from the USSR, was established on December 30, 1973 at Pipri. It is located about 40 km east of Karachi on Gharo creek near port Qasim.

Pakistan Steel provides raw materials to the engineering and construction industries. These industries depend on Pakistan Steel's products and by-products as inputs.

The products of steel mills are coke, pig iron/hot metal, rolled and cast billets, galvanized products and raw steel.

One of the markets in Karachi for Pakistan Steel's products. An important market outside Karachi is at Taxila in 1979 with Chinese assistance.

It is the major heavy engineering centre of Pakistan, which has the compability for the designing and manufacturing of industrial plants and machinery. The Heavy Forge Factory (HFF) at this complex has also proved crucial for Pakistan's defence production needs. HMC is also manufacturing equipment for hydro-electric power plants, thermal power plants, oil & gas processing plants, and chemical & petro-chemical plants, etc. boilers, cranes, construction machinery, material-handling equipment, steel structures and railway equipment are some of the other products, which are produced on a regular basis. The company's capabilities also include engineering and manufacturing of machinery for sugar mills. The products conform to international standards and are made in accordance with customer requirements.

SECTION-II

PRIVATIZATION AND INDUSTRIALIZATION DURING 1990 - 2010

THE PRIVATIZATION PROGRAM

The main objective of Privatisation Policy through PPP model was to put national resources and assets to optimal use, particularly to unleash the productive potential inherent in Pakistan's State Owned Enterprises (SOEs). The policy of Privatisation specifically aims at enhancing the value of Government shareholding, maximization of profits, modernization and up-gradation of State Owned Enterprises; exploration and creation of new assets; management and technological transfer benefit, increasing investments in the SOEs by identifying business benchmarks and outputs, remedial measures, and generation of employment. Government would continue to ensure that divestment does not result in alienation of national assets and reduction in quality of production and service detrimental to its people. In this regard the Cabinet Committee on Privatisation and the Cabinet had approved a comprehensive Privatisation Plan through Public Private Partnership. [8] 

LARGE SCALE INDUSTRIALIZATION

ROLE OF SMEDA [9] 

Developing a group of diverse and competitive small and medium enterprises (SMEs) is a central theme towards achieving sustainable economic growth. SMEs are crucial to the economic growth process and play an important role in the country's overall production network. Some advance economies have succeeded because SMEs form a fundamental part of the economy, comprising over 98% of total establishments and contributing to over 65% of employment as well as over 50% of the gross domestic product. Although the numbers might be lower in Pakistan, SMEs have the potential to contribute substantially to the economy and can provide a strong foundation for the growth of new industries as well as strengthening existing ones, for Pakistan's future development.

Definition of SMEs.

1. SMEDA Definition

Small & Medium Enterprises are defined as follows, as approved in SME Policy 2007.

Enterprise Category Employment Size Paid Up Capital Annual Sales

(b) (c)

Small & Medium

Enterprise (SME) Up to 250 Up to Rs. 25 Million Up to Rs.250 Million

State Bank of Pakistan

According to State Bank of Pakistan, SMEs are organizations which Fulfills one of the following criteria:

A trade / services concern with total assets at cost excluding land and buildings up to Rs 50 million.

A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million.

Any concern (trade, services or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.

Importance of SMEs

The ideology behind the promotion of SMEs comes from the perceived failure of large enterprises in creating adequate productive jobs to absorb as ignificant share of the rapidly growing labor force in many developing countries. This perception inspired emphasis on the development of small industries by stressing benefits such as income generation, dispersal of economic activities to small towns and rural areas, and mobilization of entrepreneurial talents.

Following are some points which will reveal the importance of SMEs.

SMEs are more labor-intensive than large enterprises.

SMEs are as efficient as LEs or more efficient than large enterprises.

SMEs are more equitable in distributing the income they generate than large enterprises.

SMEs are more likely to play a higher role in rural development than large enterprises.

The significance of SMEs is associated primarily with their role in stimulating economic growth.

SMEs create employment opportunities as they are labor-intensive.

SMEs enhance regional development.

Create more equitable income distribution.

SMEs play a complementary role in relation to larger firms--as suppliersand distributors.

SMEs serve as a training ground for developing the skills of workers and entrepreneurs.

The presence of SMEs curbs the monopoly power of larger firms.

A country can reduce its vulnerability to financial crises by strengthening its SMEs.

SMEs are the backbone of a national economy, particularly in developing countries.

SME provide the platform for small & medium entrepreneurs to work as an arm taking of economic and social indicators of a country.

Objectives of SMEs

Following are some broad objectives of SMEs.

Economic Growth

Economic Development

Poverty Reduction

Employment

Social and economic sustainability

Characteristics of SMEs

Following are some common characteristics of SMEs.

Owner is the manager & few employees

Owned & operated independently

Relatively small investment, production, sales, dealings etc.

Inadequate efficiency of business operations.

No relationship with other firms or parties for Investment, Management, finance, tax

Statistical facts regarding SMEs

ACCORDING TO THE ECONOMIC CENSUS OF PAKISTAN

Sales below Rs.0.5M 84%

Sales below Rs.1.0M 93%

SMEs less than 5 Year old 19%

Survive beyond 25 years 4%

Business enterprises nation-wide 3.2M

SMEs 2.96MHousehold Units 0.18M

Province wise Distribution of SMEs

Name of Area SME Units

Pakistan 2.96 Million

Punjab 65%

Sindh 18%

Khyber Pakhtunkhwa 14%

Baluchistan 3%

Distribution of SMEs According to the No. of Employees

Total SMEs units 2.96 million (100%)

SMEs employing 1-5 Persons 2.85 million (96.6%)

SMEs employing 6-10 Persons 79,000 (2.67%)

SMEs employing 11-50 Persons 26,000(0.87%)

SMEs employing over 50 Persons 1617(0.054%)

Economic Contribution of SMEs

Employment 78%

GDP 40%

Value Addition 35%

Exports 25%

SMEs Share in Sub-Sector

Sub-sectors Percentage Share of SMEs

Cotton Weaving 13%

Other Textiles 6%

Metal Products 7%

Carpets 4%

Art Silk 5%

Grain Milling 16%

Jewelry 4%

Wood & Furniture 10%

Others 35%

Barriers to SMEs Growth

SMEs are facing various barriers in the way of their growth and development. Following are some main barriers SMEs are facing these days.

Govt. & SME Interaction

Taxation

Finance

Labor Legislation

Human Resource Development

Technology

Market & Industry Information

Lack of Infrastructure

Environmental issues & compliance

Social compliance issues

Intellectual Property Rights

Small and Medium Enterprise Development Authority (SMEDA)

Premier institution of the Govt. of Pakistan under Ministry of Industries and Production, SMEDA was established in October 1998 to take on the challenge of developing Small & Medium Enterprises (SMEs) in Pakistan. With a futuristic approach and professional management structure it has focus on providing an enabling environment and business development services to small and medium enterprises. SMEDA is not only an SME policy-advisory body for the government of Pakistan but also facilitates other stakeholders in addressing their SME development agendas.

SMEDA Objectives

1. Formulate Policy to encourage the growth of SMEs in the country and to advise the Government on fiscal and monetary issues related to SMEs.

2. Facilitation of Business Development Services to SMEs.

3. Facilitate the development and strengthening of SME representative body's associations/chambers.

4. Set up and manage a service provider's database including machinery and supplier for SMEs.

5. Conducting sector studies and analysis for sector development strategies.

6. Facilitation of SMEs in securing financing.

7. Strengthening of SMEs by conducting and facilitating seminars, workshops and training programs.

8. Donor assistances for SME development of SMEs through programs and projects.

9. Assist SMEs in getting international certifications (such as UL,CE, DIN,JIS, ASME, KS, etc.) for their products and processes.

10. Identification of service opportunities on the basis of supply/demand gap.

SMEDA Services

SMEDA is currently offering following services to promote regulate and enhance SMEs in Pakistan.

Consultant Services

Training Services

Business Plan Division

Financial Services

Information Resource Centre (IRC)

Intellectual Property for Business Success

Legal Services

Policy and planning

Training services

SMEDA organizes training programs, seminars, workshops and conferences of short duration in major cities across the country for raising awareness and capacity building of SMEs. These need based training programs are affordable, appropriate and innovative. These programs are aimed at improving knowledge, skills and competencies in the technical, marketing, financial, compliance, policy, regulatory, legal, and commercial and other important functions. These programs help to improve major performance indicators such as productivity, quality, competitiveness and sustainability etc. The results include improvement in export potential, investment promotion, business transparency, human resource development, managerial capacity building etc. These programs help decreasing the level of SME mortality and increasing efficiency.

Business Plan Division

Business Plan development services is one of the key services provided to enable existing as well as potential investors to make well researched and informed investment decisions.

Financial services

Financial Services Group (FSG) is one of the support units of SMEDA. As the name suggests, FSG is responsible for all financial consulting and advisory services that SMEs may require. As for all the support functions, FSG caters to both internal sector teams as well as any external walk-in SMEs. In addition to such consulting services, FSG also acts as coordinator of government schemes, which involve financial institutions.

Information Resource Centre (IRC)

SMEDA Information Resource Centre (IRC) has been established to cater to the information needs of SMEs and stakeholders from both the public and private sectors. IRC maintains a collection of more than 3400 books and CD-ROMs/DVDs besides subscribing leading newspapers and more than 20 journals of international repute on diverse business sections and related fields. A number of full text online journals are also available for SMEs and

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