Fall

08
16

Spring

INDUSTRIAL POLICY [1947-78]

Group members:

Tasmia Khan
Syed Hira Abbas
Tasneem Qaizar
Naveed Ashfaq
Saud Shakeel

A N A LY S I S
J A F F E RY

OF

PA K I S TA N I

INDUSTRIES-

by

TA H I R A

M.

Table of Contents
INDUSTRIAL POLICIES 1947-58..................................................................................3
What lead to Industrialization in 1950s?..........................................................................3
Slowed growth of Agricultural sector:................................................................................3
Trade Regime Policies and Korean Boom:..........................................................................3
Licensing:.......................................................................................................................... 4
Import Substitution Industrialization (ISI):.........................................................................5

INDUSTRIAL POLICIES 1958-1968..............................................................................5

Growth in Agricultural Sector due to Green Revolution:....................................................6
Privatization and its causes:.............................................................................................. 6
Textile and Small Scale Industry:....................................................................................... 6
Trade policy:...................................................................................................................... 6
Bonus Voucher Scheme (EBS):.......................................................................................... 7
Foreign Aid:....................................................................................................................... 7
Repression of wages:......................................................................................................... 7

BHUTTOS ERA [1972-77]..........................................................................................8

Nationalization: [to ensure a fair and equitable distribution of income]............................8
Managing agency system:................................................................................................. 8
Land and Labour Reforms:................................................................................................ 8
Economic boom 1972-74:.................................................................................................. 9
The Bad luck Factor:.......................................................................................................... 9
Agricultural sector:............................................................................................................ 9
Small-scale manufacturing sector:.................................................................................. 10
Impact on Investment:.................................................................................................... 11
Textile industry:............................................................................................................... 11
Conclusion:...................................................................................................................... 11

References..............................................................................................................12

INDUSTRIAL POLICIES 1947-58

After gaining independence, Pakistan was solely dependent on its agricultural sector, and the country
also faced several economic issues like rehabilitation of refugees and lack of industrial base. Exports
mainly constituted of jute and cotton in raw material form, without having any value addition. Although
starting from a barely-existent industrial base, against all odds, Pakistan achieved very impressive
growth rates in its early years.

What lead to Industrialization in 1950s?

The situation of Pakistans economy at that time was marked with a contrast between abundance of
natural resources and industrial backwardness. Pakistan was producing 75% of the worlds jute and
unfortunately no Jute mill was there to process and manufacture the jute items. There was an annual
production of 15 lac bales of cotton but very few textile mills to utilize it. Similarly, there was a mass
production of hides, skin, wool, sugarcane and tobacco but our Mineral, petroleum and power resources
remained untapped. These deficiencies triggered the need for Industrialization in order to manufacture
products of its raw materials. These products had an assured market at home and abroad.
At the same time, efforts were made to manufacture consumer-goods industries for which Pakistan was
dependent on outside sources. These efforts resulted in phenomenal growth of the industry especially the
large scale manufacturing sector. The investment rate also doubled during the 1950s. During 1947-58,
Pakistan achieved around 3% of economic growth while the industry grew at a rate of 23.6%. It was the
most rapid industrial growth as compared to any country in the world.

Slowed growth of Agricultural sector:

With industries growing at a higher rate, there was a reverse picture in agricultural sector which only
once in this period achieved double-digit growth. This is also the period when agriculture suffered a
negative growth rate. Moreover, with slowed growth rate of agriculture, the growth of manufacturing
sector was also restricted to some extent. Decline in agricultural growth resulted in food shortages,
political unrests and serious fallouts. Since the Agricultural growth was not enough to cope with the
population growth, per capita consumption of food grain also decreased turning the annual food grain
export surplus of Rs. 14 million in 1952-54 into the deficit of 220 million.
The agriculture suffered mainly due to the government policies which were unfavourable to the
agricultural sector, reflecting the dominance of urban and industrial based interests. The major impact of
the economic policies at this time was the transferring of income away from agriculture and urban
consumers to the new rapidly growing manufacturing sector. The basic strategy for industrialization was
to use the public sector for capital accumulation and investment, and then transfer the productive
resources to the private sector. The strategy worked and the country started making progress towards
industrialization.

Trade Regime Policies and Korean Boom:

The tools and mechanisms, which influenced the investment and economic development in the first
decade, were exchange rate control, import and licensing control, economic incentives, fiscal subsidies
etc. All these factors along with the fortunate changes at the international level facilitated industrial
activity.

Following the DEVALUATION of pound sterling in 1949, the currencies of numerous countries
including that of India, Pakistans main trading partner, devalued to a greater extent. Pakistan being proindustrial bias at that time chose not to devalue its currency. One major reason behind this decision was
that Pakistan was a monopoly exporter of Jute therefore wanted to sell jute at higher prices in order to
reap higher profits and to be able to import machinery and capital goods at cheaper prices in order to run
industrial processes. Pakistan had also imposed some controls on imports and exports in order to
manage trade with countries that had devalued, as their imports were now cheaper. India retaliated by
suspending all such exports which couldve pressurised Pakistan to either devalue its currency or to find
new markets for its exports. But Pakistans luck changed when Korean War broke out in 1950 and there
was a fear of World War Three.
Countries began stockpiling raw materials, and as demand for them increased, so did their prices. Jute
and Cotton were both in heavy demand and Pakistan was able to make spectacular profits through
trading worldwide. The Korean boom ended in 1952 but by the mid-1951, world prices of raw material
began to fall heading towards recession. In 1952 export earnings decreased with the fall in prices of Jute
and cotton causing Pakistan to face serious balance of payment crisis and reducing reserves. The
government then decided not to devalue and instead imposed strict controls on import, export and
exchange rates and lowered the taxes on exports. The Korean War export boom enabled traders and
merchants to make large profits as compared to the profits earned through industries. After the collapse
of raw material prices, with controls imposed on imports, especially on consumer goods, the prices of
these goods increased sharply in the domestic market which changed the economic conditions in favor
of industry attracting traders and merchants who had gathered wealth during Korean boom to transfer
capital to the industry. Hence the government policies in this era proved to be successful.

Licensing:
Government also used the strategy of licensing system (licensing import of only certain goods) which
facilitated import of capital and intermediate goods at a cheaper price with overvalued exchange rates.
Moreover, Policies such as protection against import of consumer goods along with provision of fiscal
subsidies and availability of credit provided an environment in which high profits in industrial sector
were possible in the early 1950s. Government also introduced differentiated tariff structure to
maintain a tight control over luxury items, and consumer goods and easy access to capital goods and raw
material. The role of tariff protection was minor as compared to the role of licensing system and direct
quantitative controls which speeded up the industrialization process. Licensing system directed the
required investment structure in different industries because through licensing government made sure
what sort of item is being imported and in which industry should the investment be done.
The consequences of all of the above measures taken to boost industrialization were implementation of
these policies:

Produce anything that can be produced domestically and once the production has started
domestically then ban import of competing goods to save foreign exchange.
High incentives for domestic production of those products for which the domestic market is smallest
such as luxury and consumer goods. Import of these goods was heavily penalized to save foreign
exchange. Whereas, mass consumption items received more protection than raw materials.

Import Substitution Industrialization (ISI):

All the policies resulted in decline of imports of some manufactured goods, the rise of those imports
related to investment activity and the emergence of certain manufactured exports. Towards the end of
1950s, Pakistan was in the condition to produce export surpluses as well. These results indicated the
success of Import substitution industrialization (replacing foreign imports with domestic
production) where the emphasis was on consumer goods rather than on intermediate or capital goods.
The newly established ISI contributed significantly in the exports of jute and cotton and also the
production of consumption goods which saved foreign exchange. Consumer goods industries which
accounted for 70% of the manufacturing, contributed less than half of the growth after that period
mainly because in early 1950s the country had started with a low base in the first place. Due to the
restrictive measures profits were very high and government encouraged private sector to take initiative
in economic growth. State institutions, like PICIC (Pakistan Industrial Credit and Investment
Corporation) and PIFCO provided funds to the industries which were large in size and yield high profits.
Another prominent organisation, PIDC (Pakistan Industrial Development Corporation) which pioneered
in industries and areas which were neglected by the private investors during the early period of
industrialization.
Moreover PICIC and PIFCO concentrated on industries which were located in West Pakistan.
Throughout 1950s East Pakistan had surplus in trade and West Pakistan had deficit in trade but overall
trade figures for united Pakistan were in surplus due to the East Pakistans exporting jute. East Pakistan
was instrumental in supporting the process of industrialization in West Pakistan.
The policies pursued during the first two decades ensured impressive industrial development but, on the
other hand, gave rise to income in-equalities and regional disparities (Between East and West Pakistan).
The resultant political, social, and economic polarization had numerous implications including
dismemberment of Pakistan in 1971.
In 1960s the changes in the structure of production were somewhat smaller, and in different directions
due to increased flows of aid financed imports and the more rapid growth of agriculture.

INDUSTRIAL POLICIES 1958-1968

This period of rapid economic growth, achieved mainly as a result of policies pursued is objected for
creating economic tensions. Increasing disparities in regional income between the provinces, a
concentration of Industrial wealth and the failure of real wages to increase significantly, all contributed
to the negative impact of this government. Despite these adverse consequences, the growth rates in
agriculture, large-scale manufacturing and GDP showed quite astonishing trends over the ten years from
1959 to 1968 and therefore its termed as the Decade of Development. In 1960s there was a shift in the
establishment of consumer goods industries to heavy industries such as machine tools, petro-chemical,
electrical complex and iron and steel. The amount of Foreign Aid boosted which contributed as another
factor for impressive growth rates.
The high growth rates in large-scale manufacturing, which had its root in 1950s, continued rising in
Ayubs regime. Apart from the Industry, Agriculture also marked improvements in 1960s compared with
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the dismissal situation in 1950s. The reason for this growth was the recognition in the late 1950s that the
excessive pro-industrial bias was affecting agriculture very negatively and that a redress was necessary.
Some steps were taken but it was the Green Revolution that was responsible for the very high growth
rates in 1960s.

Growth in Agricultural Sector due to Green Revolution:

The term Green Revolution refers to the adoption of the new high yielding varieties (HYV) of food
grains in the 1960s. The introduction of high yielding varieties spurted the production of wheat and rice
that eventually made Pakistan self-sufficient in wheat and one of the largest exporters of rice.
Abandonment of food grain rationing, establishing of support prices for wheat, 50 percent subsidy on
fertilizer and a more liberal promotion of private tube wells were the other key features of the new
policy on agriculture. The completion of the Indus Basin works including the Mangla Dam was a major
breakthrough.
The privately and publicly owned resources were sought to be reclaimed for cultivation through a land
utilization ordinance empowering the government to resume all lands uncultivated for two years and
lease them out to the tenants and at the same time, leasing out government lands to the peasants who
were landless or whose holdings were uneconomic.

Privatization and its causes:

This initial push to the private sector led to a spiral effect as the private sector earned high profits from
the industries and reinvested them in new industrial units mainly cotton, textiles and jute. As the profits
became more widespread, an entrepreneurial class emerged and provided the dynamism that had been
absent in the 1950s. This class helped accelerate the rate of growth in the large scale manufacturing to
more than 15 percent during the decade.

Textile and Small Scale Industry:

During 1960s, Pakistan was among the leading underdeveloped countries that were emerging in the
world cotton markets. Following the growth in textile and agricultural sector in 1960s, a number of
small scale industries were started in Punjab. In 1968 there were 20,000 power looms producing cotton
cloth in the non-mill sector in Punjab. The small-scale agriculturally related engineering industry
producing small diesel engines and water pumps, which hardly existed in 1960, employed a labor force
of 6,000 by 1965. The emergence of a completely new sector without government assistance, also
served to intensify our economic growth.

Trade policy:
There was a general relaxation of restrictive controls on imports that were imposed after the Korean War
recession. The new trade policy in 1959 shifted away from direct controls and towards indirect controls
on imports and on domestic prices of other goods. A number of measures were taken in import licensing
that determined the composition of imports and the distribution of import licenses. It was the Export
Bonus Scheme or the Bonus Voucher Scheme that lead to the import liberalization process in Pakistan.
The selective import licensing of the 1950s, which was based on importers ability to import during the
Korean boom, was replaced in 1961 by the Open General License (OGL), which allowed newcomers
to enter the trading sector. This liberal trade policy, in turn, helped in the stimulation of the high rates of
growth in the industrial sector. Imports of components, raw materials, spare parts and machinery enabled

rapid installation and utilization of industrial capacity. The main objectives of the import policy were
full utilization of industrial capacity, strengthening of export industry, gradual reduction in the import of
goods that can be produced locally and speeding up of the development of less developed areas. Due to
the import liberalisation the import of goods was encouraged which also boosted our investment sector.

Bonus Voucher Scheme (EBS):

Under the export bonus scheme, an exporter received, in addition to the amount of rupees converted at
the official exchange rate, Bonus vouchers equivalent to some percentage of his export. The bonus
voucher could be used to import any item from the free list of importable items that changed from
time to time. The exporter could import item himself, or he could sell the Bonus vouchers at a premium
in the market. Bonus vouchers acted as import licenses, and since they were sold at 150% above so the
cost of importing to importers had increased. However the only advantage to the importer was the
expedition of delivery period through it. EBS helped the import substitution and export growth both.
This resulted in overvalued exchange rate which enabled Pakistani importers to import industrial
machinery at low prices, while EBS transferred subsidies to manufactured goods.

Foreign Aid:
The main reason why the government could be so generous in its import policy was mainly the
availability of foreign aid, which was used to serve our foreign exchange. In 1965, after the Indo Pak
war, foreign aid was curtailed due to which the import liberalisation policies were abandoned. Once
these aids slowed down, the foreign aid dependent system found it difficult to sustain the impressive
growth.
Apart from being foreign aid dependent, income inequalities was also one of the negative consequences
of Ayubs policies. According to his policies, the resources were directed towards the industrial sector
which has a higher propensity to save, and that agriculture and wages should bear the brunt of this
transfer. Efforts were made to increase industrial profits which lead to the reduction of wages and
concentration of wealth in the industrial sector. The famous 22 families controlled 66% of the industrial
assets.

Repression of wages:
Income inequalities had increased during 1960s and there was no substantial increase in the level of real
wages. There was a deliberate repression of wages. It was felt that low wages for industrial workers and
the restriction of trade union activity would help industry acquire the critical mass for industrial take off.
These features of authoritarian governance built up frustrations over time that ultimately led to the
downfall of Ayub Khan and the political momentum gained by Mr. Z.A. Bhutto.
After the cut in foreign aid in 1965, with foreign exchange down and defense spending up, the economic
crisis between 1965 and 1967 was a key cause of Ayub Khans downfall. In 1966-1967 growth rate of
economy decreased significantly due to Indian aggression in which countrys main crops were affected.
The situation was further deteriorated due to the interregional disparity between the two wings of
Pakistan. This gap had mainly created due to the transfer of resources from East to the West wing, with
getting very little in return. Even the development in various sectors that took place since the
independence had mostly occurred in West Pakistan, which aggravated differences between the two
wings.

BHUTTOS ERA [1972-77]

Following the chaotic conditions of 1970-71, Pakistan lost its Eastern wing [now known as Bangladesh].
Bhuttos government took power in December 1971 in adverse circumstances. The conditions of that
time caused a major setback to the economy as 50% of West Pakistans products found way into markets
of East Pakistan, and 18% of West Pakistans imports came from East Pakistan. Pakistan was not just
facing problems economically but also morally as the people had lost confidence and purpose. Bhutto,
Pakistans first democratically elected leader, was determined to shape a completely new Pakistan
economically as well as politically.

Nationalization: [to ensure a fair and equitable distribution of income]

In their election manifesto, PPP had promised that the control of the leading enterprises was to be in the
hands of the state. Early in 1972, 31 of largest manufacturing firms were nationalized, followed by
vegetable and ghee industry in 1973. Banks and shipping followed in 1974. Nationalization of a
significant part of the industry and of the entire financial system, including banking and insurance,
raised serious problems:

Public sector management: There has been a governance deficit in the elite civil service of
Pakistan as direct interventions by the state was used as tools to increase political patronage.
Lost investor confidence: The government not only took these industries from private sector,
but also restricted them from participating in such activities to a large extent; no industrial unit
could be set up or expanded without government permission; foreign participation was subject to
government approval. There was a restrictive import regime under which, the Ministry of
Commerce strictly regulated import of goods, commodities and services. Due to increased
intervention by the state and the falling profit margins of that time, private investors lost
confidence in the market.

Managing agency system:

Under this, the production, pricing and other decisions of major firms were coordinated, which lead to
the creation of monopolies. This system was abolished in 1972 as it provided with a mechanism which
had enabled a few families [22 to be exact according to Dr. Mahbub-ul-Haq, Chief economist at the
planning commission of Pakistan in 1968] to get control over the industrial sector. These families had
control over 66% of Pakistans industrial base and 87% of financial sector. Bhuttos regime acted on its
election manifesto against inequality by nationalizing these two sectors.

Land and Labour Reforms:

The Land Reforms of 1972 restricted the individual holdings to 150 acres of irrigated and 300 acres of
un-irrigated land. The excessive land holdings were taken over by the without paying compensation.
Due to these measures agricultural land resumed thus far is over 800,000 acres.
Comprehensive labour reforms were introduced by the Government in July 1972 and further elaborated
and enlarged in August 1972 after threadbare discussions and analysis at a Tripartite Labour Conference
at Islamabad. They guaranteed the workers their long over due fundamental rights of freedom of
association and collective bargaining, and assurance of greater security of service; representation in

management, group insurance, old age pension, free education for children and housing and medical
facilities. These reforms paved the way for a new workable relationship between the employers and
employees for the future.

Economic boom 1972-74:

As explained in the era prior to Bhuttos, imports were restricted through tariffs and quotas. Certain
products could be imported only under bonus lists. On the other hand, exports were encouraged through
Export Bonus Scheme, pay-As-You-Earn Scheme and similar other incentives.
With the abolition of Export bonus scheme by the new government, in May 1972, Pakistani rupee was
devalued by 131%. According to Mr. Aftab Ghulam Kazi [Minister of Finance], the reason for this
devaluation of currency was mainly to stop over invoicing of imports and under invoicing of exports,
correct the misallocation of resources, curb uneconomic import substitution, foster competitive
production, check resource transfer from agriculture to industry, and improve the balance of trade.
The effect of the devaluation measure was apparent soon, when new markets for exports were found and
Exports in 1972/73 increased by 153 percent over the previous year while manufactured exports grew by
19 percent in 1973/74. Made possible due to favorable demand conditions for cotton textiles, Pakistan
seized this opportunity, resulting in exports being a key factor in growth in industrial output in 1972-74,
benefitting the textiles sector particularly.

The Bad luck Factor:

Factors outside of Bhuttos control that affected the industry [following the short-lived economic boom]
were:

Four fold increase in oil prices in 1973 leading to imported inflation.

Massive floods hitting the country in 1973, as well 1976-77.
World Recession following the rise in oil prices.

The 1972-rupee devaluation had increased the costs of imported equipment, materials and foreign loans.
A major factor, however, responsible for the increase in prices of imports was the oil price rise in 1973.
Inflation [mainly imported] was recorded at close to 30% in 1973-74. All the gains that the country
enjoyed in the economic boom, were wiped out in one go from the balance of trade. Moreover, floods
and pest attacks hit the country twice in the last five years of Bhuttos government, severely affecting
agricultural and industrial output.

Agricultural sector:
Agriculture in Pakistan is closely linked to the rest of the country:

It supplies a regular flow of workers to the non-agricultural sector [by feeding the population
which have increased at more than doubling rates and also generating employment].
It is taxed [providing revenue for the government].
Agricultural crops, such as cotton and sugarcane, are used as raw materials for the most
important industries in Pakistan, such as textile and sugar.

On the demand side, it consumes fertilizers manufactured domestically. It consumes electricity

and engineering goods. Thus, the problems and prospects of agriculture are likely to have
important implications on the overall economy of Pakistan.

The growth dropped in first two years partly due to the unfavorable natural conditions, and mainly due
to the inefficient government intervention in the supply of agricultural inputs. Massive floods hit the
country in 1973 putting pressure on the whole economy. Food grain also had to be imported creating a
fiscal burden on the country. The bad performance is attributed to an extremely adverse weather cycle.

Small-scale manufacturing sector:

Small-scale sector (or the informal sector) dominates our lives:

Generating employment much larger than the large-scale manufacturing sector [especially for the
low-income groups]. Provides non-agricultural jobs
Great potential for earning foreign exchange for the country by exporting goods like ready-made
garments, carpets and rugs, footwear, surgical instruments, sport goods etc.
Creating demand for the domestic capital goods industry. It also adds value to manufacturing
industry.

Before Bhuttos policies, LSM industries had a cost advantage as government had subsidized their
imports, while SSI had to pay free market rate to import items from abroad. But 1970s recorded a
growth rate of 7.9% of small scale sector [It is to be noted that this rate is much lower than the actual
growth because a large part of SSI is informal, hence not recorded]:

Bhuttos policy of devaluation and abandoning the multiple exchange rates under Export Bonus
scheme made things better for the small scale-manufacturing sector according to Asian
Development Bank.
The goods produced in the SSI sector are mostly export oriented, so it gave a larger boost to
their revenues, when compared to LSM industries, which had become more oriented towards the
domestic market.
Small-scale sector also did not fear nationalization, thus attracted investment too. Labor laws
were also not very strict for this particular sector.
SSI was exempted from sales tax and excise duties [Export Finance scheme: The Export Finance
Scheme (EFS) is in operation since 1973 with the objective to boost exports of the country.
Under the scheme short term financing facilities are provided to exporters through Banks for
exports of all manufacturing goods especially value added products. More credit was made
available to the export sector and small farmers, with a lending rate lower than the normal
banking rate]
From late 1970s, large inflow of remittances and increased purchasing power increased
consumer demand, which was fulfilled by a small-scale sector eager to expand.

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Impact on Investment:
Private investment was paralyzed by the fear of nationalization and declining profit levels. Investment in
traditional industries especially in the textiles industry, fell to below replacement rates. Private sector
investment which was onl (Abbasi, 2009) (Kemal, 1997)y 15% in 1975, which is drastically lower than
the previous decades number. This was due to the lack of trust placed by the private sector in the
government.
Public sector investment in industry was, by design, in capital-intensive intermediate and capital goods,
thus it reduced the employment-creating impact of public investment. Infrastructure investment to
expand capacity was chosen rather than improving the utilization of existing capacity. The result of
investing in the public sector in mid-70s showed result in the 80s.
Some claim that Bhuttos nationalization scheme triggered the reduced amount of investment; others
claim that investment had already started to fall since after 1965:

Low investor confidence

Lack of demand in international markets as our goods were unable to compete in the export
market due to Protection. Since there was no demand for our goods, nobody invested in our
industry.
Adverse political conditions after 1965 Indo-Pak war.
World Recession following Oil Prices rise in 1973.

Textile industry:
Pakistans economy is built around textiles, accounting for large scale industrial employment as well as
export earnings. In 1972, Pakistan held about 3.5% of world market in textiles, which dropped to 1.5
percent in just four years. The textile sector lost its importance because:

The government emphasized more on the creation of Public sector intermediate and capital
goods, and it was no longer on the growth of manufacturing exports.
Other countries like South Korea and Hong Kong adapted a more dynamic approach to increase
their export earnings and capturing larger market share.
Pakistan failed to diversify into other products in the same industry as no proper attention was
given to this sector in the industrial policy. The problems in this mainly came from political
interference, poor policies, bad management and the inability of the industry to adapt to
changing world demands.

Conclusion:
Pakistans performance in the 70s appears unsatisfactory only when compared to that of 60s. To make a
rational judgement, one must keep in mind factors outside the control of the government. Things were
not as bad as they seemed, given the conditions inherited and odds against Bhutto. It was more bad luck
than bad management that resulted in poor economic growth rates. The first two years of Bhuttos rule
show exemplary growth by any standard. For rapid industrialization, the first important step is to
develop policies that are all integrated. The state should not facilitate change, it should take features of
an entrepreneurial institution to CAUSE a viable change.

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References
Abbasi, Z. (2009). Analysis of the political economy of Industrial policy in Pakistan. Impact consulting.
Amjad, V. A. (1984). The Management of Pakistan's economcy 1947-1982. Oxford University press.
Kemal, A. (1997). Pakistan's industrial experience and Future directions. The Pakistan Development
Review, 929-944.
Naik, E. A. (1993). Pakistan, economics situation and future prospects. Pakistan Development
economics, 67.
Naik, K. A. (2005). The economy of Pakistan. Lahore: Oxford university press.
Zaidi, A. S. (n.d.). Major issues in Pakistan"s economy. Karachi: Oxford university press.

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