the economy at a glance--shoaib(5836)
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THE ECONOMYAT A GLANCE
Shoaib Ahmed Khan
583619-11-2011
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Pakistan predominantly an agriculture based
economy exporting primary commodities andimporting manufactured goods
Produced 75% of the worlds production of jutebut did not possess a single jute mill
Under developed, hardly any manufacturingcapacity
One oil refinery, a few cotton and sugar mills,
some tea and cement processing capacity
HISTORICA L OVERVIEW
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o The exports mainly comprised of low valueagricultural production & imports comprised ofconsumer goods
o Untapped Resources - minerals, petroleumand power
ISSUES
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Pakistan - underdeveloped country
amongst the 'backward' countries
characterized by dual economies : a large
agricultural sector and a smallindustrialized sector
Profit margins and the potential to generate
economic surplus from agricultural productionwere and are still minimal
UNDERDEVELOPED COUNTRY
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The advent of industrialization in Pakistan started
mainly due to:
the need to manufacture products of its rawmaterials in its own territories
Lewis (1969)
To meet the requirements of the home market
to develop consumer goods industries
INDUSTRIALIZATION IN PAKISTAN
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Surplus of labor a massive shift of labor from theagricultural sector to the industrial sector, leading tosustained per capita growth
Low demand for primary commodities in the world butthe price of low value added produce did not help in thegrowth of income
Improvements in the balance of payments to beachieved through the large scale export of manufacturedgoods
PURSUI T OF RAPID
INDUS TRIALIZATION IN PAKISTAN -
REASONS
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Acknowledgement of GOP on the precarious nature ofthe base of Pakistans economy and identification ofareas and strategies to be given urgent consideration
1947-55 - the years when the foundations of the economicand industrial policies laid - Restrictions and economiccontrols placed
a period of huge change - demographic make-up of thecountry ; governments changed frequently
PRE-LIBER AL ERA
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Pakistan was able to achieve a phenomenal growth
rate despite
the refugee migrant influx,
the threat of being taken over by India and
the lack of an industrial base or skilled laborforce
The major impact of the policies in the 50s
-to transfer income away from the agriculturalsector to the new and growing manufacturingsector
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To ensure this, the government adopted a protectionistpolicy for the manufacturing sector using anovervalued exchange rate as a tool
In 1949, when the pound sterling was devalued alongwith several other currencies including that of India,Pakistans main trading partner, the Pakistanigovernment chose not to devalue the rupee
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Unfavorable exchange rates given to agricultural
exports and import of manufactures was curtailed
The prices of manufactured goods in the domesticmarket were kept high while those of agricultural
goods were kept low
This increased profitability of the manufacturingsector which attracted investment in this sector
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With controls imposed on imports, that is the importsubstitution policy, especially on consumer goods,increased the prices of these goods sharply in thedomestic market because these industries had the
highest protection
The government decided to provide protection tomanufacturing through the use of over valued exchange
rates, import licenses and quantitative restrictions
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Two more measures gave support to manufacturing:
The distinction made following the 1955devaluation between the primary and manufacturedgoods in terms of import entitlement
The provision made in the export subsidyintroduced in 1956 for the reimbursement of customduty on the import of raw materials used in the
manufacture of exports
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For a little more than two years between July 1950 and December
1952 there was substantial liberalization of imports as a result of
the OPEN GENERAL LICENSE [OGL]
During 1959-65 (Second Five Year Plan) there was liberalization of
controls and tendency towards indirect controls
EBS-Export Bonus Scheme introduced in 1959
In 1961, a new Open General License System was introduced and in1964 the Free List entitled a number of goods to be imported
without license
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Tariff Structure
Although the tariff structure still favoured thedomestic production of consumer goods, the roleplayed by tariffs in allocating resources between
different groups of industries was limited
Import licensing was more effective as a protectivedevice since the licensing authority had the power to
ban imports
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The third five year plan (1965-1970)
Emphasized liberation and indirect controls
Agriculture was given top priority and QRs were imposed on
consumer and non-development imports
In May 1972 the rupee was devalued, the import licensing and
EBS were scrapped and tariff rates were reduced.
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The industrial policy was changed and an
investment sanction was required for industrialdevelopment in different projects such as:
For projects exceeding Rs 500 million/ was onthe specified list;
Private foreign investment involved
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According to Little et al. (1970) estimates of value added in
manufacturing industries at domestic and world prices, the shareof manufacturing GDP at world prices is almost insignificant for
Pakistan
a. The exchange rate policy militated against agriculture vis--vismanufacturing,
b. within manufacturing against small scale vis--vis large-scale
manufacturing and
c. within large-scale manufacturing against labour vis--vis capital Result : redistribution of income among sectors and income
groups, emphasizing the already skewed distribution of income
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FACTS & FIGURES (cont.)
Lewis (1969) reported - access to import licenses resulted in 39%
extra value added for firms as compared with firms withoutlicenses
According to Papanek (1967)
Out of 3000 firms in Pakistan in 1959, only twenty-fourcontrolled almost 50 percent of all private industrial assets,
Furthermore, seven industrial families controlled 25 percent ofassets,
While 15 families owned about 75 percent of shares in banksand insurance companies
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FACTS & FIGURES (cont.)
Amjad (1982) found that
the seven banks controlled by the industrial familiesaccounted for 60% of total deposits and 50% of loans andadvances of all the banks
Moreover of the forty-seven Pakistani insurance companies,fourteen were controlled by the industrial families and theirshare of assets came to 76% of the total assets of insurancecompanies in 1970
During 1958-70, 65% of the total loans disbursed by PICIC went tothirty-seven industrial families, while more than 30% of the loansdisbursed by IDBP went to the industrial families during the1960s
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PRE-LIBER AL ERA (cont . )
Pakistan Law did not:
forbid open collusion,
price fixing etc.
Import licensing and
the interlocking trading and industrial interests also
helped to cartelize industries
barriers to entry and high industrial concentrationresulted in windfall profits for industrialists inPakistan
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WHAT GOP DID:
The govt. declared that companies that went publicwould pay taxes at a lower rate as compared withprivately held companies
In 1963, the National Investment Trust (NIT) and theInvestment Corporation of Pakistan (ICP) wereformed - purpose was to float mutual funds and act asstock brokers for small investors
PRE-LIBER AL ERA (cont . )
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Industrialization ; Pros & Cons
The industrial policy - used effectively to bring aboutrapid industrialization (during the 1960s)
but the socio-political fallout led to the abandonment
of an otherwise successful growth strategy
In 1972 with the induction of a new government these
policies were reversed
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Industrialization ; Pros & Cons & what happenedNext (cont.):
Initially, third-one firms belonging to ten industries werenationalized,
these were: iron and steel, basic metals, heavy engineering,
heavy electrical equipment, motor vehicles, tractors, petrochemicals, gas and refineries, cement and electricity
followed by the nationalization of the vegetable gheeindustry
A little later, banks and insurance companies were alsonationalized
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Started in 1987 - an era of return of high growth rates
and an increased role for the private sectors
Measures aimed to :
- removing the barriers to entry and exit of firms,
- an increase in the investment sanction limit
- reduction in tariff levels
Investors were allowed to set up projects,
THE ONSET OF LIBERALISM
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In order to improve efficiency in the public sector,
the government denationalized the industries(The fifth five year plan)
Out of a 150 nationalized industries, 97 had beende-nationalized by 1990
Major focus - on the privatization of utilities,infrastructure and energy.
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The state owned enterprises are being sold at lowprices
No proper sequencing between the different reforms
(capital market in Pakistan is not organized and mustprecede the privatization of major utilities as onlythen will it be possible to market the SOES throughthe stock exchanges)
PROBLEMS:
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The present manner in which the companies are beingsold is posing several problems such as:
Skewing the income distribution
Buyers of the strategic units comprising foreignerswhich is a threat to national sovereignty
Public monopolies are being converted into private
monopolies Privatization should improvecompetition and not result in deterioration ofefficiency, savings etc.
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POST LIBERALIZATIONERA
The growth of the economy during the 1990s has been
irregular
Particularly dismal over the two years 1992-93 & 1996-97
Reason:- Bad performance in agriculture and manufacturing sector of
0.1% and 1.2% respectively.
- Political uncertainity & impact of structural adjustmentpolicies
The recovery in manufacturing and agriculture in 1997 isattributed to favorable weather conditions & increase insupport prices
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Appropriate reforms should be carried out in the
financial as well as industrial fields
Stable economic management
Measures to keep the fiscal deficit under control Workforce: Technologically equipped
Achieving self-reliance through efficiencies and
tapping new resources.
There should be Well-thought regional policy for
industrial dispersion/concentration.
RECOMMENDATIONS
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Thank You
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