Private and Public Enterprises in the Economic Development of Pakistan Author(s): Nurul Islam Source: Asian Survey, Vol.

3, No. 7 (Jul., 1963), pp. 338-346 Published by: University of California Press Stable URL: http://www.jstor.org/stable/3023630 . Accessed: 11/03/2014 09:47
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IN THE ENTERPRISES AND PUBLIC PRIVATE OF PAKISTAN ECONOMICDEVELOPMENT

NURUL ISLAM

Pakistan's economic structure presents the spectacle of a mixed economy in which private and public enterprises coexist in the same and related fields of economic activity. While on the one hand, the government has adopted various measures to encourage and assist the development of private enterprises, it exercises at the same time a large measure of direct and indirect control over private enterprise. From the beginning it was recognized that in view of a great need for development there was ample room for both private and public enterprise and that both are desirable agencies for development. The first government policy statement in 1948 reflected the view that monopolies and public utilities were peculiarly suitable for nationalization, and that communication and transport services such as posts, telegraph, telephone, wireless, broadcasting, railways and air transport should be owned and operated by the government. In road transport, where both public and private enterprise coexisted at that time, and in river transport, which was entirely within the private sphere, the prospect of their eventual nationalization was not ruled out. With the exception of three other specific arms and ammunition, (b) the generation of hydel fields of activity-(a) power and (c) the manufacture of railway wagons, telephones, telegraph and wireless apparatus-private enterprise was given full scope to operate, though the government reserved the right to "take over or participate in any other industry vital to the security or economic well-being of the State." Moreover, it was decided that if adequate private capital did not come forward in any particular industry of national importance, the government might set up "a limited number of standard units [more] as a measure of attracting private enterprise than for any other object."' In the restatement of industrial policy made a decade later, an even greater emphasis is placed upon private enterprise.2 The 1959 statement pledges to give maximum scope to private enterprise in the development of the resources of the country within the framework of the national Five Year Plans. The fields reserved for public enteprise are again (a) arms and ammunition, (b) railways, air transport and tele-communications and (c) the production of atomic energy. River transport is reserved for private enterprise and no longer with any threat of ultimate nationalization. Road
Government of Pakistan, Statement of Industrial Policy, April 2, 1948. Government of Pakistan, "New Industrial Policy," Pakistan Trade, (January 1959), pp. 8-12.
1 2

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transport is to continue to be both private and state in character. The general provision that the government may take over any industry considered essential or vital has been removed. Where private enterprise is inactive, the government intends to establish such industries as are essential to the life of the community through specially constituted corporations, which are then to be transferred to private firms as circumstances permit. Indeed, in recent years the government has been actively following a policy of transferring state enterprises to private hands. The Second Plan document reiterates the basic economic policy in the following words: No doctrinaire assumptions underlie the plan, and neither an exclusively capitalist nor an exclusively socialist economy is postulated. The approach throughout is pragmatic. The fundamental problem is how under severely limiting conditions, to find some way towards the liberation of the people from the crushing burden of poverty.... Progress must, however, be sought mainly through inducement, less through direction. The creative energies of the people can be best harnessed to the needs of development, if policies of economic liberalism are pursued.
. .

. Controls

which

have a strangulating

effect on

private initiative will need to be relaxed, and replaced progressively by fiscal and monetary measures and operation of the market mechanism.3 The relative quantitative importance of public and private investments in the economic development of Pakistan is evident from the following
table.4 TABLE I Investment Year Public Private Total

1951-52 ..... 1952-53 .. 1953-54 ..........710.8 1954-55 ..........787.1 1955-56 ...............770.0 1956-57 1957-58. .. 1958-59 ............1370.0 1959-60 ......

..

524.9
688.5

920.0 1210.0 . 1680.0

700 690 820 750 900 930 1000 1000 1000

1224.9 1378.5 1530.8 1537.1 1670.0 1850.0 2210.0 2370.0 2680.0

The magnitude of public investment has increased through the years and since 1957-58 has exceeded the amount of private investment. The projected investment for the Second Five Year Plan is Rs. 14620 million in the public sector and Rs. 8380 million in the private sector.5 The relaThe Second Five Year Plan (1955-60), June 1960, pp. XIII-XIV. The private investment figures and public investment figures up to 1954-55 are obtained from unpublished documents of the Planning Commission, Govt. of Pakistan. The figures for private and public investments after 1954 are given in the Second Five Year Plan, op. cit., Table I, p. 26. 'Second Five Year Plan (Revised Estimates), p. 7.
3 4

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tive amounts of public and private investments in the first two years of the plan period are Rs. 1737 million in the public sector and Rs. 1062 million in the private sector in 1960-61, and Rs. 1737 million and Rs. 1350 million, respectively, in 1961-62.6 Rough estimates of the magnitude of investments in the nonmonetized sector place them at Rs. 400 million, Rs. 450 million and Rs. 500 million, respectively, in 1959-60, 1960-61 and 1961-62.7 Even if these sums are added to the private investmenttotal, it is still evident that public investment has constituted an increasingly larger share of total investment activity in Pakistan.8 The public sector program is administeredeither directly by government departmentsor by semi-autonomouspublic corporations. Railways, posts, telegraph, telephones, social service facilities, schools, hospitals, water supply, sanitary or conservancy services, defense and other exclusively community type installations are mainly run by government departments directly. Public corporations operate in such fields as manufacturing, air lines, road transport, electricity, water and power development, development of ports and towns, marketing and provision of finance in the fields of agriculture and industry. During the Second Five Year Plan, 25% of the total investment program in the public sector is expected to be undertaken by public corporations. Fifty-three per cent of their total investment would be in the field of industry, and 31% would be in such fields as communications, transport, town planning and development, while the rest would be in miscellaneous other activities, including electric supply and housing for industrial workers.9 The patterns of private and public investment are different. The major proportion of public investment is concentratedin social overhead capital, i.e., water, power, transport and communications, housing and training, with the percentage of total public investment in such sectors during the two Five Year Plan periods being 71.2% and 68.4%, respectively. Around 53% of the private investment during the period of the Second Plan is expected to be in the fields of industry, fuels, and minerals, that is, in immediatelyprofitableprojects rather than in low yielding projects of long maturity or gestation lag or in projects which require large investments. The coexistence of private and public enterprise often stimulates queries as to their relative efficiency in Pakistan. One can compare the efficiency of the same enterprise in two situations-under P.I.D.C. management and when it is transferredto private management. One can also compare the relative efficiency of P.I.D.C. and private firms coexisting in the same in6 Private investment figures given above include only investments in the monetized sector of the economy. The investments in agriculture by numerous individual cultivators do not enter into the monetized sector in the sense that real investment resources which originate in the farms are reinvested in the selfsame farms without entering into the market mechanism. Besides agriculture, such investment activity also takes place in handicrafts and rural cottage industries. Government of Pakistan, Planning Commission, Mid-Plan Review, (Karachi, October 1962), p. 49. 7 8

Ibid. Ibid.
Second Plan, p. 39, Table 9.

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dustry at the same time. Available data are not adequate to provide a conclusive answer to these questions. However, it is clear that circumstances surrounding an enterprise in its early years, especially in the hitherto unknown branches of industry, are radically different from those confronting the same enterprise after it has successfully overcome the initial handicaps and has gained experience in techniques, management and marketing. It is only at this later stage that an enterprise, initially developed by the P.I.D.C., has been transferred to private hands. Moreover, as between two time periods, one has to concede that the supply and demand conditions may change. A comparison between private and the P.I.D.C. enterprises co-existing in the same field raises different issues. Insofar as the private antedate the public enterprises in the same field, depreciation costs of the former are often much lower partly because older private enterprises may have largely written down the value of their capital equipment. Moreover, the P.I.D.C. enterprises often have higher overhead costs due to the less strict observance of economy, an all-too-frequentcharacteristic of large government organizations. As state-financed institutions, they are generally expected to serve as model employers and to offer additional benefits and facilities to employees, which may not be counter-balancedby higher productivity. In deciding the location of a state enterprise, moreover, less attention may be paid to the criterion of minimum cost than to an effort to attain a more regionally balanced distribution of industries, either because of a limited mobility of labor or because of the undesirable social and human consequences of overconcentration. While a large segment of the economy has been left to private enterprise, the government seeks to retain a general control and supervision over the economy as a whole. The quantity and direction of private economic activity are regulated so as to bring them into conformity with the Five Year Plans. The government has also adopted various measures to induce and encourage private enterprise to develop both generally as well as in specific directions. The government provides a wide range of assistance in many forms to private enterprise. In the field of private industry, for example, the provision of financial assistance through a number of statesponsored financial institutions,10 which derive their funds either wholly from the government or jointly from government and private sources, has been of significant importance. In addition, private industries have been aided by the establishment of industrial estates and the provision of tax incentives-all designed to encourage investment in the private sector. Small scale and cottage industries have received special financial and technical assistance through the medium of a number of "Small Scale Industries Corporations"established by the government in various parts of the country. These measures are over and above the sheltered home market which the government ensures by means of strict control over foreign exchange and imports.
10 Government of Pakistan, Ministry of Finance, Government Sponsored Corporations, (1959).

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There are other direct measures of control and regulation exercised by the government such as control over the allocation of foreign exchange, the licensing of imports, controls over the location of industry and the allocation of materials in short supply. Before establishing an industry, an investor has to register his company, secure the government's permission to set up the specific industry (if it falls within the set of priorities laid down by the government), obtain a sanction of the controller of capital issues and secure a permit from the controller of imports and exports for the import of materials and equipment. These various controls are administered by different agencies and often involve delays and inconveniences for the private entrepreneurwho has to deal with a number of government agencies. The extent of coordination between different agencies and departmentsis far from satisfactory. In an attempt to mitigate the inconvenience arising from this division of responsibility a new agency called the Investment Promotion Bureau was established in 1959 to disseminate information among prospective investors, both domestic and foreign, about investment opportunitiesin Pakistan, to receive and process all investment applications and proposals from private investors, and to help in obtaining speedy decisions on them. Moreover, it. assists private investors in obtaining power, water, land, building materials, licenses for imported equipment and materials, appropriate technical help and other facilities for which approval or sanction by the different government departments is necessary. It is, in short, expected to act as a sort of clearing house for the various problems confronting private investors. In agriculturethe major public institutions engaged in the improvement of agricultural methods are the Agricultural Development Corporations, one each in West Pakistan and East Pakistan. The A.D.C. undertakes to arrange the procurement and distribution of seeds, fertilizers, and implements, etc., to farmers. The Agricultural Bank of Pakistan-another statesponsored and financed organization-is engaged in the supply of credit to agriculturists. Both these organizations have yet to show any remarkable results. It is difficult to organize supplies either of materials or of credit for a multitude of small farmers scattered all over the country. It is ultimatelythe incentives affordedto and decisions made by the numerous small cultivators, whose reactions are often difficultto measure or predict, that decide the amount and pattern of agriculturalproduction. The government has also at various times undertaken more direct measures of control and regulation of the production and prices of such agricultural commodities as jute, cotton, wheat, tea and sugar. The area under jute was controlled until recently by the licensing of jute growers.1' For a number of years in the past the government followed a policy of compulsory procurement of major food grains at fixed prices from surplus areas in Pakistan and their subsequent distribution among low income groups in selected urban and rural areas under a system of rationing. Recently, the
" N. Islam, "The Economic System of Pakistan," Economic Systems of the Commonwealth, (Durham, U.S.A.: Duke University Press, 1962), p. 454455.

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control over prices and distribution of major food grains has been abandoned with a view to stimulating agricultural production through the utilization of higher prices as an incentive to the farmer. The avowed policy of the government is to allow reasonable inequalities of income and wealth in order to provide incentives for private enterprise. At the same time, it intends to seek a liberalization of opportunitiesfor the masses through land reforms, the developmentof cooperative organizations, and an increase in social services, such as improved health and educational measures.12 However, both the economic policies followed and the play of market forces have tended to create a relative concentration of wealth and income. The limitation of the size of the market and the presence of economies of scale leave room only for a few large scale modern enterprises in each of the branches of industry and trade. The government,as already pointed out, regulates entry into trade and industry. The import trade is regulated by means of import licenses which are issued in limited numbers so that the recipients can be assured of an adequate volume of business. The distribution of licenses among importers has been undertakenwith reference to their performancein trade as well as their financial position, and established import firms continue to grow in size. New licenses can be issued to newcomers only when the total value of private import trade records a substantialincrease so as to assure a sizable volume of business to the new firms. Moreover, a large part of import trade is in the hands of private industrialists, and involves such items as industrial raw materials, spare parts and equipment, which constitute an increasing component of total imports in recent years. Coupledwith the policy of encouraging industries to engage in export trade under the "Export Bonus Scheme," this policy contributes in no small measure to the concentration of economic power via the integration of manufacturing and trading activities. In manufacturing industry, the existence of a highly sheltered domestic marketwidens the scope for a monopolistic market structure. Even though existing demand is far in excess of domestic production, and the addition to total output made by new firms may not be so large vis-a-vis the existing output as to bring about a significant fall in prices or profits, the scarcity of both foreign exchange and domestic capital and enterprise inhibits the emergence of new firms. The low level of income not only inhibits the growth of a domestic market, but also works in a vicious circle to restrict the supply of foreign exchange and domestic savings. The export market has been severely limited by the high cost and relative inefficiencyof nascent domestic industries, but the presence of a protected domestic market removes the need for industries to reduce costs or improve efficiency. The extent of concentration in the manufacturing industry is evident from the fact that around 6% of the total establishments control about 51% of the total output covered in the census of 1957. About 87% of the
12

First Five Year Plan, pp. 4-5.

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total establishmentsemploy less than 100 workers.13 However, the degree of concentration as well as the predominantsize of firms varies as between different industries. It is very great in such industries as tobacco, footwear, paper and paper products, non-metallic minerals and basic metal industries in each of which one firm produces 56.52%, 57%, 83.25%, 24.41% and 38.14%, respectively, of total output. Similarly, in the manufacture of wood products,three firms produce 64%, and in rubber products two firms produce 62.43% of the total output. In the jute manufacturing industry, one of the fourteen firms in operation controls about 35 % of the total loomage and four firms control about 62% of the total loomage in the industry.14 There are no data available on the extent of vertical or horizontal integration in industry. However, indirect evidence suggests that it exists on a significant scale. For one thing, the managing agency system which prevails widely among larger enterprises serves as a ready medium for the integration of managerial and financial control. Moreover, a large part of the growth in capital investment in manufacturing in recent years has taken place through a reinvestment of profits generated in the existing enterprises. This very process has enabled existing firms to extend their control over the economy in both vertical and horizontal directions. A recent study of the rise of industrial entrepreneurshipin Pakistan shows that persons whose primary occupation before 1947 (or before entering industry, if this was later) was trade, furnished almost half the entrepreneurs for Pakistan's industry. The traders were the ones to set up the larger or more rapidly growing firms and by 1959 controlled nearly 70% of the capital. Similarly, 14% of the total finances for industrial investment during the years 1949-59 came from trading profits. The usual pattern has been for trading profits to provide the initial capital for setting up a new enterprise, while the subsequent expansion of such enterprises was financed more by the reinvestmentof profits than by the diversion of profits from the trading sector. Similarly industrial profits reinvested in the same or new enterprises constituted 44% of the total invested capital during the period between 1949 and 1959.15 The public enterprises are often of much larger size than the private, and have access to larger financial and technical resources, both domestic and foreign. This is evident in the paper and paper products industry, jute, cement, chemicals, fertilizers, and sugar where public enterprises occupy a prominent position and where the number of large concerns as well as the degree of concentration is higher. In the course of transferring public enterprises to private control, those which were monopolistic under state control become private monopolies, as happened in the case of the paper industry which has recently been transferredto private hands. The
13 Government of Pakistan, Central Statistical Organization, Census of M1anufacturing Industries 1957, (Karachi, 1958). 14 Ibid. 15 G. Papanek, "The Development of Entrepreneurship," Papers and Proceedings of the American Economic Association, (May 1962), p. 10.

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governmentpolicy tends to emphasizethe need to husband scarce resources and to avoid duplication of effort, with the result that encouragement is not given to establishing additional firms just for the sake of increasing competition. The usual tendency is to let the existing firms run to their full capacity before any new ones are allowed to compete for such scarce resources as foreign exchange, though this principle has not always been observed. Under this system, it is not easy for new firms to obtain a free entry into a field, no matter how remunerative,as may happen under free competition. Access to the public officials exercising regulatory and permissive powers over industry is often very difficult for a new entrepreneur. This deters the entry of the newcomer with limited means. It is easier for an already established large-scale enterprise to wield sufficient influence over and access to the sources and seats of authority.16 In addition to various regulatory measures, the government exercises a number of controls over private enterprise such as controls on prices, profits, production, foreign exchange, and trade, intended primarily either to protect the real income of particular groups, or to regulate the allocation of resources between and the relative growth of different sectors in accordancewith predeterminedpriorities. For example, the Essential Supplies Act of 1946, extended and modified in 1953, enabled the government to declare any commodity essential, and to impose such controls as the specification of a number of approved dealers or traders in respect of a controlled article, determination of quantities to be sold by importers or producers to approved dealers, fixing of maximum prices, as well as compulsory submission by producers or importers of information regarding detailed items of cost of production or of import, quantities produced or imported, and details on the disposition of the commodity produced.17 However, in the past, controls have developed in a haphazard manner, often in response to compelling demands of isolated and often temporary situations, resulting in a certain amount of overlapping and duplication. They have, moreover, undergone frequent changes, creating uncertainty in the minds of businessmen and a consequent discouraging effect on their long-term commitments. The maintenance of controls has made heavy demands on a limited administrative machinery, and many of them have been only partially effective owing to inadequate enforcement.The administration of controls over industry and trade concentrates great power in the hands of public officials, and has led to corruption and abuses. In16 "A small number of family groups control a sizable proportion of industrial investment in Pakistan. These industries yield handsome profits, thanks to tariff protection and other of fiscal and commercial incentives provided by Government." In most industrial concerns, a substantial proportion of the share capital is retained in the hands of the promoters and directors while a further concentration of wealth is brought about through the practice of interlocking directorship and the managing agency system. Dr. S. A. Meenai, An Appraisal of the Credit and Monetary Situation in Pakistan, (Karachi: State Bank of Pakistan, September 1962), p. 87. 17 Government of Pakistan, Ministry of Industries, Economic Controls Manual 1954 and 1959.

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creasingly, the government is attempting to rationalize the system of controls, to retain and to administer efficiently a few indispensable ones, and to substitute, if possible, physical direct controls by taxes and subsidies as regulatoryweapons.

DR. NURUL ISLAM is Professor and Head of the Department of Economics at the University of Dacca.

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