chemical industry analysis

8/16/2019 Chemical Industry Analysis

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Key Issues in Industrial Growth in Pakistan

A. R. Kemal*

Abstract The author here looks at problems in the manufacturing sector. One

macro enigma is that while growth had recently risen to 8%, investment levels as a ratio of GD seem to have fallen. One reason for this is the re!evaluation upwards of the GD. "ut the same issue emerges inmanufacturing with very high growth rates coinciding with falling investment levels. The declining investment levels could be due to a number of factorsincluding high production costs, transaction costs, policy continuity risks,skills and wages and changes in the demand structure.

* Former Director, Pakistan Institute of Development Economics, Islamabad.


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I. Introduction

Over the last couple of years the manufacturing sector has grown atthe rates of 14.1 and 12.5 percent and large scale manufacturing at evenmore rapid rates of 18.2 and 15.4 percent1. These growth rates are morethan twice the growth rate of the rst three years of the present decade andmore than three times those observed in the 1!s. On the other handinvestment in the manufacturing sector during the two years has declined ata rate of 2." percent# 8.5 percent growth in 2!!$#!4 and 12." percentdecline in 2!!4#!5. %s a percentage of &'( investment increased from $.2percent in 1#2!!! to $." percent in 2!!$#!4 but declined sharply to 2.percent in 2!!4#!5. The low levels of investment cast serious doubts on thesustainability of growth rates of manufacturing output. The low and)uctuating rate of investment is a cause for concern and has beenresponsible for the slow and )uctuating growth of the manufacturing sector.

The manufacturing sector of (a*istan su+ers from various structuralproblems resulting in slow growth rates of investment, output, and e-ports. These include among others lac* of diversication, allocative, technical and#ine/ciencies, poor 0uality of products, and low levels of ' activitiesresulting in slow growth rates of productivity ma*ing (a*istani productsuncompetitive in the world mar*et. The traditional industries such as foodand te-tile industries still account for an overwhelming share of themanufacturing output3 food industries accounted for 1$.8 and te-tiles for24.! percent of the total manufacturing value added in 2!!!#!1. On theother hand industries based on modern technologies such as electrical andnon#electrical machinery and automobile industries accounted for ust 4.4and 4. percent of value added respectively. 6ven though chemicalindustries accounted for around 15.2 percent of manufacturing output2,most of the chemical industrial output is concentrated in low#tech and lowvalue added industries$.

7ecause of high protection rates, value added of the manufacturingsector at world prices has been ust a fraction of that at domestic mar*et prices. The productivity levels in most of the manufacturing industries continue to below, ma*ing it increasingly di/cult for (a*istani producers to compete in theworld mar*et. ow 0uality of products, lac* of standardi9ation, low value addedproducts sold without any brand names, lac* of innovation, and low levels of productivity are the legacy of import substitution industriali9ation and indicatethe need for maor restructuring of the manufacturing sector.

1 During the first quarter of the current ear the large scale manufacturing sector has gro!n at a rate of around "

percent.# $he chemical sector is defined as the industries producing pharmaceutical products, industrial and other chemicals.

$heir share in the manufacturing value added in #%%%&%1 is '.(, ).# and 1. percent respectivel. It does not include petroleum refining, rubber and plastic products.( Pharmaceutical industries are +ust a packaging industr, and the other chemical industr ecept fertili-er is +ust

formulation based on the imported compounds.


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:hy are entrepreneurs still reluctant to invest, which limits productivityand competitiveness of the manufacturing sector;


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Total $arge Scale SmallScale

14#5! ".$ 1.8$ 4.5"

15#"! .1 5." 4.2$

1"#! 1$.44 1!.4" 2.81#8! 14.51 1!.55 $.5

18#! 1.5 12.! 4.8

1#2!!! 1"."" 11."5 5.!$

1#2!!! 14.81 .5 5.22

2!!!#!1 15.! 1!.45 5.45

2!!1#!2 1".11 1!.4 5."2

2!!2#!$ 1".42 1!.$ 5."

2!!$#!4 1."! 11.2 5."8

2!!4#!5 18.2" 12.! 5.5"


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Source: 5! @ears of (a*istan Aolume < ?ummary, akistan #conomic$urvey , various issues.

Over the 15!#2!!5 period the manufacturing sector has grown at arate of .5 percent, and the large and small scale manufacturing industries

at rates of .2 and 5.5 percent. Bowever, the average growth rate of themanufacturing industries conceals wide )uctuations across decades andwithin each of the decades. >or e-ample, rather high growth rates wereobserved in the 15!s, 1"!s, and 18!s and over the last few years andrelatively low growth rates in the 1!s and 1!s.

=anufacturing industries grew at a rate of . percent during the15!s and the large#scale industries at a phenomenal rate of 15.8 percent. The industrial policy during the period aimed at manufacturing the productsbased on indigenous raw materials such as cotton, ute, hides, and s*ins, forwhich there was an assured mar*et at home and abroad, and developing the

consumer goods industries to meet the re0uirements of the home mar*et forwhich the country was heavily dependent on imports. The two maincharacteristics of the policies during the 15!s have been direct controls onimports, investment, prices etc., and a large anti#e-port bias.

Table%" Growth Rates of Manufacturing Sector

&ear Manufacturing Sector

Total $arge Scale Small Scale

15!s .$ 15.5 2.$!

1"!s .1 1$.$ 2.1

1!s 5.5! 4.84 ."$

18!s 8.21 8.1" 8.4!

1!s $.88 $.54 5.!"

2!!1#!5 .$8 1!.4 ".25

2!!!#!1 .28 1!.5 ".22

2!!1#!2 4.4" $.51 ".2

2!!2#!$ ".! .22 ".$!

2!!$#!4 14.!" 18.22 ".2!2!!4#!5 15.42 12.4 ".25

15!#2!!5 .5$ .21 5.$2


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Source: 5! @ears of (a*istan Aolume < ?ummary, akistan #conomic$urvey , various issues.

&rowth of the manufacturing sector accelerated even further to .1percent during the 1"!s. % number of initiatives helped in reali9ing the high

growth rate, which included a liberal import policy, subsidy to e-portsthrough a number of schemes such as 6-port 7onus ?cheme, ta- rebates,ta- e-emption, 6-port (erformance icensing, and (ay#%s#@ou#6arn ?chemes.(rotection rates in the period were rather high resulting in e-cessive protsfor the producers. =oreover, ta- holidays and accelerated depreciationallowances further increased the post#ta- prots of the manufacturingindustries.

The growth rate of the manufacturing sector fell to 5.5! percent andfor large scale manufacturing to ust 4.84 percent during the 1!s. Themost important initiative was the nationali9ation of heavy industry and a

number of sectors including cement, fertili9er, oil rening, engineering, andchemicals, which were e-clusively reserved for the public sector and thepolicy of divesting protable public sector units was discontinued. =oreover,the industrialists faced a number of restrictions including price controls bythe government under the (roteering and Boarding %ct. These measurescreated a considerable amount of uncertainty, resulting in a fall in privateinvestment and )ight of capital. =oreover, these policies had long runimplications for the industriali9ation process manifested in the reluctance of the private sector to invest, which continues to date.

'uring the 18!s the process of de#regulation, de#control and

denationali9ation was initiated and various measures were ta*en to restorethe condence of investors. %dministrative controls were replaced withmar*et#oriented forcesC the import policy was liberali9ed, and the tari+ structure was rationali9ed, the par value of the rupee was brought nearer toits e0uilibrium value and it was made convertible on the capital account,investment licensing was abolished, prices were de#controlled, and theperformance of public enterprises improved due to the signaling system. Themar*et friendly policies resulted in acceleration of the growth rate to 8.21percent.


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:hile the process of deregulation continued and a large number of manufacturing public enterprises were privati9ed, the growth ratedecelerated to $.88 percent in the 1!s. The performance of large#scalemanufacturing was even more disappointing which grew at a rate of only$.54 percent. % number of economic and non#economic factors have been

responsible for the deceleration of growth. (rominent factors have beenpolitical instability, worsening of the law and order situation in the maorgrowth poles of the country, reduction in protection rates resulting in theclosure of a number of industries, emergence of signicant infrastructuralbottlenec*s in transport and other sectors, inade0uate power supply alongwith fre0uent brea*downs of power supply in the early part of the !s andsharp increases in the prices of power in the later years, and inade0uateindustrial investment.

The growth rate of manufacturing output has increased sharply since1#!!3 the average growth rate of the manufacturing sector over the ve

years has been .4 and the large and small scale industries growth rateshave been 1!. and ".$ percent respectively. The growth rate hasaccelerated despite low levels of investment because of the demandstimulus in the form of credit for the purchase of consumer durables and asharp increase in e-ports after the 0uota restrictions were removed.

III. Structural Problems 'onfronting the Manufacturing Sector

The performance of the manufacturing sector in (a*istan has beenmarred by a number of factors. These problems may broadly be grouped intoindustrial and trade policy distortions, a narrow industrial base, low

productivity levels, poor 0uality of products, the role of public sectorenterprises, higher costs of production, problems in the regulatoryframewor*, and wea* infrastructure.

Industrialization Strategy and Pattern of Demand

(a*istan has all along pursued the


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:hile trade policy reforms in recent years have e-posed domesticenterprises to international competition, these enterprises continue to su+erfrom the legacy of import substitution and have yet to re#position themselvesto compete e+ectively in the global mar*et. >urthermore, the trade policystill has an import substitution bias for certain critical sectors such as

automobiles, whose imports are subect to tari+ pea*s. The continuedprotection to these sectors has not helped these enterprises to becomeglobally competitive.


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To sustain the competitiveness in the activities where the country has acomparative advantage and attain comparative advantage in those that atpresent it does not have, growth rates of productivity need to be higher thanthat of competitor countries. 'uring the period 12#2!!1, labor productivityin the manufacturing sector grew at a rate of 2.2 per cent, which though

higher than that of 7angladesh and


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Table," Annual a-erage $abor Producti-ity Growth /0" !11%2!

'ountry Growth rate of labor +roducti-ity

(a*istan 2.2$

7angladesh 1.8?ri an*a 2."8


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Source: Demal et. al. E2!!!F, K(a*istan Hountry eportL, &lobal esearch(roect.

>or the period 1"4#"5 to 2!!!#!1, total factor productivity ET>(F in themanufacturing sector grew at a rate of $.21 percent ETable#"F. :e may notethat the sharp increase in the growth of productivity in the manufacturing

sector shows a high degree of ine/ciency in the sector in the base yearre)ected in the very high 'H estimates for the earlier years. >or e-ample 'Hwas $.$1 in 18!#81 which declined to 1.2! by 1!#1.

Table5" Trends in Total 4actor Producti-ity in Manufacturing Sector

SectorGrowth Rates

T4P6alueAdded

'a+ital $abor

Period

1"4#"5 to2!!!#!1 ".$ 2.2$ !.4 $.21

1"4#"5 to1"#!

8. 2." 1.8 4.2"

1!#1 to1#8!

5.48 2.!4 1.4$ 2.!1

18!#81 to18#! 8.! 2.1! !."1

5.$8

1!#1 to2!!!#!1

$. 2.! !.25 1."4


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Source: %uthors own calculations using data from akistan #conomic$urvey , various issues.

T>( growth in the manufacturing sector e-ceeded 4 percent in the1"!s and 5 percent in the 18!s. ( in other countries has also increased it might not have

impacted the productivity di+erentials. The main sources of productivitygrowth, in particular human resource development, ' activities, andengineering industries that provide machinery in accordance with the factorendowments of the country, have received relatively less attention in(a*istan and growth rates of productivity can be sustained provided theseactivities are promoted.

Table7" 8uman Resource #e-elo+ment Acti-ities" %22!


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'ountry)*+enditure on

education / of G#P0

)*+enditure onhealth/ of G#P0

R9#Personne

lthousan

ds0

R9#e*+enditure / of

G#P0

7angladesh

4.!2 !.! # #

Hhina ".1 5. 1$8.4 2.1"


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Source: %(O E2!!$F.

Note: >or


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E(ercentF;o.

Industry'lassiood =anufacturing 8.41 8.5" 1".24 2!.12 14.!5 15.1 1$.

2 7everage


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Source: ensus of &anufacturing 'ndustries, Aarious


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"egulatory and Legal %nvironment

Though (a*istan has strived to improve the overall business climateand accordingly her ran*ing in terms of de#regulation has improved,wea*nesses still remain in the regulatory and legal framewor*.

7usinessmen still have to comply with a host of regulations relating to thewor* environment including health and sanitation, product standards,ta-ation, etc. 6-cessive discretionary powers in the hands of the enforcingagencies often lead to harassment of enterprises and opens up avenues forcorruption resulting in the loss of business condence. To develop a viableindustrial sector, there is a need to put in place a regulatory and legalenvironment that is conducive for private businesses.


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)eak Infrastructure

:ea* physical infrastructure has been a maor factor hindering theperformance of the manufacturing sector. :hereas the lac* of repair andmaintenance has resulted in the deterioration of physical infrastructure,

ine/ciencies in the public sector utilities have contributed to high costs of production, thus eroding the competitiveness of domestic manufacturers.

Poer Su++ly

'espite e+orts to encourage e/cient utili9ation of energy resources,the technical, nancial, and operational e/ciency of the power sector hascontinued to deteriorate resulting in costly yet unreliable power supply.%ccording to a survey conducted by the :orld 7an*, the maority of respondents identied problems related to power supply as a maor obstacleto business e-pansion.


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according to a recent estimate, ine/ciency in transport alone is rec*oned tocost the economy s.$2! billion a year.1!

oad transport is the dominant mode, but the current state of roads isfar from satisfactory. ac* of repair and maintenance of e-isting roads has

resulted in the rapid deterioration of the road networ*.


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The main beneciaries of s*ills improvement are the producersthemselves whose output, productivity, and prots are e-pected to go up.Bowever, despite dearth of s*ills, very little e+ort has been made byproducers to improve the s*ills of wor*ers.


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• A ;ew Global Trading Regime" :ith the advent of the :orld TradeOrgani9ation, production structures are in)uenced by the variousagreements and countries have become interdependent. Thegoverning methods, legislations, and trading relationships are toin)uence the manufacturing structures of each country.

• ;ew Patterns of Geogra+hic #i-ision of $abor" :hereas :TOcalls for multilateral trading arrangements there have beenmovements towards regionalism and more recently >T%s with variouscountries.


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The strategy of industrial development should comprise the provision of a level playing eld for domestic and foreign investors and for small andlarge scale producers. =anufacturing growth may be based on private sectorparticipation and the role of the government is restricted to the provision of the necessary physical, social, technological and nancial infrastructure and

regulatory framewor*s. %ugmenting the science and technology apparatus of the private sector, bringing research institutions up to internationalstandards, and the streamlining of technology creation, absorption anddi+usion systems are essential if (a*istan wants to diversify her productiontowards new technology based industries. Towards this end, foreign directinvestment would be rather helpful.

The =T'> calls for a *nowledge economy and that re0uires thedevelopment of science and technologies, ' institutions, and s*illdevelopment. =anpower development programs need to be e-panded, andthe human development policies outlined by the government need to be

e+ectively implemented. :hereas ade0uate nancing has been assured for?T organi9ations for their research programs, a more conduciveenvironment has been prepared to attract and retain good scientists andtechnologists through an appropriate reward and incentive system andproper facilities. in*ages among local ' agencies and the local systemwith the international community will be intensied.


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%ll these are important initiatives and su/cient resources need to beallocated and e/ciently used for improved scientic and technologicalmanpower. The private sector needs to be inducted and the governmentshould provide ta- incentives to the rms that invest in s*ill developmentand '.

Industrial $lusters, Industrial $ities and -ones

:hereas clusters may themselves become established, or foreign rmsestablish clusters because of the availability of infrastructure, the governmentmay also set up clusters by developing vertical and hori9ontal relationshipsamongst rms. Hlusters having critical mass can help in sharing *nowledgeand resources and stimulating creativity, innovation, and entrepreneurship.?ustained competitive advantage can be produced by mutual support and thecoordinated development of demand, competition, factor availability, andsupport to industries. :e may note that good clusters include rich technical

resources and its distribution media, human resource with high adaptabilityand organi9ations for development and training, abundant nancial resources,well#developed infrastructure for software and hardware, and fair#scale groupsof customers with discriminatory ability.

Hlusters are most important for ?=6s because they provide cost#e+ective opportunities to deliver targeted technical assistance for theupgrading of technology, management, and mar*eting. Hlustering leads togreater e/ciency and )e-ibility not attainable by individual rms operatingin isolation.

$ommon &acility $enters

7y introducing new technology, the production of better 0uality goodsand higher productivity levels, Hommon >acility Henters enable industry tocompete in terms of price and 0uality both in the local mar*et as well as inforeign mar*ets. ?ince micro, small, and medium enterprises neither havethe *nowledge nor the resources to ac0uire new technology, the governmentmust initially set up such centres but eventually they should be transferredto the private sector. These centres can provide testing facilities and e-tendadvisory services for higher productivity with standardi9ation to the sub#contractor. ?upport centres help in gaining greater competitive strength anddevelop collective e/ciencies3 providing common services to improve

forward and bac*ward lin*ages with mar*ets and with suppliers of inputs3cooperation between rms in upgrading technology3 organi9ing consultativemeetings and disseminating information3 development of sub#sectorbusiness associations to provide leadership and coordination3 provision of essential machining facilities, which should be need based3 and forging lin*sbetween enterprises and the research and technological development beingunderta*en in institutions of higher learning and publicly nanced researchcenters.


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Incubators


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?*illed manpower resources have to be made available so that thedevelopment programs of the country can be e+ectively implemented. Thedevelopment of an e/cient vocational system at all levels is most urgent. The system should aim at ma*ing the best use of limited resources andproviding s*illed manpower according to the re0uirements of the labor

mar*et in the country.


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The growth of the large scale manufacturing sector at the rates of 14.1and 12.5 percent in 2!!$#!4 and 2!!4#!5 has created the euphoria of highgrowth rates over the long run. ?ince investment rates have been )uctuatingaround a low level, the proected sustained growth of the manufacturingsector seems to be 0uite ambitious. =oreover, the manufacturing sector is

su+ering from various structural problems including lac* of diversication,allocative, technical and #ine/ciencies, poor 0uality of products, and lowlevels of ' activities resulting in slow growth rates of productivity, ma*ing(a*istani products uncompetitive in the world mar*et.

:hereas (a*istan has all along pursued the


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?ustained competitive advantage can be produced by mutual supportand coordinated development. Hlusters play an important role in improvingcompetitiveness. Hommon >acility Henters provide testing facilities ande-tend advisory services for higher productivity with standardi9ation to thesub#contractor.


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References

&overnment of (a*istan, 1, () *ears of akistan in $tatistics +-/!-/0Aolume < ?ummary, >ederal 7ureau of ?tatistics.

&overnment of (a*istan, ensus of &anufacturing 'ndustries, Aarious ederal 7ureau of ?tatistics,

chemical industry analysis

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