KEY ISSUES IN INDUSTRY IN PAKISTAN

The Small Scale Sector

1950s Phenomenal growth experienced in the industrial sector (large-scale

manufacturing): 1950 – 1954 (23.6 %) 1954 – 1958 (13.6 %)Major reasons:i. Started from a non-existent industrial baseii. Conducive government policiesiii. Import substitution based growthiv. Main focus on consumer goodsv. Low gestation period vi. High profit marginsvii. Protection provided to industry through high tariff wallsviii. Availability of ready marketix. Korean war provided the much needed investment capitalx. Industrialization efforts supplemented by PIDCxi. Availability of industrial credit through financial institutions

1960sLarge-scale manufacturing continued to grow during the

1960s: 1958 – 1964 (13.3 %) 1965 – 1970 (10.4 %)Major reasons:i. Continuity of economic policiesii. Change in the method of directing industrialization through

‘trade policy’ or ‘trade-led growth’.iii. Trade liberalization policies including Bonus Voucher

Scheme, free list (4-50 items), OGL, etc.iv. Availability of increased foreign aid (from 2.5% of GDP in the

1950s to 7% of GDO in the 1960s)v. Impressive growth rates achieved in all sector of the

economy including agriculture.

1970sSubstantial reduction in large-scale

manufacturing due to bad management (nationalization, massive devaluation, etc.) and bad luck factors (dismemberment of the country, floods, crop failure, pest attacks, etc.)

Growth of large-scale manufacturing (1971-77): 1.7 %

Increased growth of small-scale manufacturing (1970-1977): 7.3 %

1980s Return to very impressive growth in manufacturing and other sectors. 1977-1986: Manufacturing GDP grew at an annual average growth rate of 9.5

% Investment in medium and large-scale industry grew at an average rate of

18.2 % p.a. Private sector investment expanded at 15.6 % p.a.Main reasons:i. Continuity of economic policies for 11 yearsii. Coming on-stream of public sector heavy industrial projects established

during the 1970siii. Revival of confidence of the private sector (privatization, incentives, etc.)iv. Increase in remittances totaling $ 3 billion(1982-83)v. Increased foreign aid /reserve inflows a result of Pakistan’ role in the

Afghan war.vi. Increase in the average share of investment in GDP, which roe to 20% in

1977vii. Increased public sector investment (averaging 11.6% of the GDP)

Trends Emergence of small-scale sector experiencing impressive growth

rates (annual average growth rates): 1950 – 1962 : 2.3 % 1963 – 1970 : 2.9 % 1971 – 1977 : 7.3 % 1977 – 1989 : 8.4 % 1990s – onwards: 5.3 %i. Small-scale sector became more dynamic than large-scale sectorii. Shift from large-scale sector to small-scale sector particularly in

textiles(fragmentation)iii. Manufacturing growth has been more or less table in the last 5

decades, though there have been fluctuationsiv. The Growth rates of some sector have been more volatile

including mining and quarrying, construction, electricity and gas.

Small-scale Manufacturing Sector Small-scale sector in Pakistan is an informal sector, which is by

far more:DynamicExhibiting impressive growth rates in employment, output and

contribution to value-added It has dominated employment in the construction, wholesale &

retail trade, hotels, transport, communication and storage industries in the urban sector

In 1972-73, the formal sector dominated urban employment in manufacturing but by 1984-85, the informal sector began to dominate urban manufacturing.

In the urban manufacturing sector, as many as 98% of manufacturing units were in the small-scale unregistered units

In terms of urban manufacturing employment, 51.4% worked in the informal sector while only 48.6% were in the formal sector.

Estimates of Share of Informal Sector in Urban Employment by Industry

Formal and Informal Sector Employment in Urban Sindh and Punjab (1984 – 85)

Characteristics of Formal and Informal Manufacturing in Urban Pakistan (1983 – 84)

Emergence and Growth of Small Scale Sector

1961-65: Mechanization of agriculture (Green Revolution)1967-70: Introduction of Green Revolution technologiesIn 1960: Units producing small diesel engines and water

pumps hardly existed In 1961: In Daska (near Sailkot) there were a few

machine shopsIn 1965: There more than 120 machine shops in Daska Large units employing 6000 labour force started

producing small diesel engines and water pumpsIn 1968: There were 20,0oo power looms producing cloth

in the non-mill sector in the Punjab

Emergence and Growth of Small Scale Sector (contd.)

Demand for farm machinery resulted from impressive growth rate of agriculture after the Green Revolution.

Possibly the single mot important factor in the increase in the SSI growth rate in the 1970s was ‘massive devaluation of 1972’ and ‘abandoning of multiple exchange rate’, which led to a level playing field for the SSI.

During Bhutto’s regime, there was a considerable bias towards SSI as:i. Government credit to SSI increased by 122%, between 1972 to

1974, which further increased in 1976.ii. Devaluation also helped in putting up industrial plants costing less

than R. 200,000, to be freely imported against cash. iii. Due to lack of fear of nationalization, the private sector was more

attracted towards SSI.iv. Another catalyst was the passing of the “Cottage Industries Act of

1972”, after which the textile sector was mot affected and led to ‘fragmentation’.

Issues Affecting the Small Scale Sector (SSS)

1. The SSS (small enterprises and household units) appear to be expanding more rapidly.

2. The SSS provides employment to the majority the urban work force.3. The SSS comprises of informal units (labour intensive).4. Capital intensity in real terms is growing more rapidly in the formal

sector. 5. Large productivity differences exist between the two sectors a

labour productivity for the large-scale sector I expected to be higher due to high capital-out ratio.

6. The SSS does not have economies of scale.7. The SSS also experience lack of availability of formal source of

credit due to lack of collateral, lengthy procedures and paper work involved in the formal credit procedure.

8. The SSS also lacks product quality.9. Being in the informal sector, the SSS also evades the tax net.