Policy Implications of Evidence on Productivity

,
Concentration and Income Distribution from Pakistan’s
Large Scale Manufacturing Sector

Dr Shahida Wizarat
Director, Applied Economics research Centre

1. Introduction

In this paper empirical evidence on productivity, concentration and income distribution
contained in previous research done by the author are being drawn together to derive
implications for industrial policy for Pakistan in 2030. The models, data analysis, etc have
not been discussed. But the original paper and chapters from books whose results have been
produced are available with the author for the interested reader. Following this brief
introduction I discuss productivity growth in Pakistan’s large scale manufacturing sector in
Section 11. In Section 111 estimates on market and aggregate concentration for Pakistan are
presented. Section 1V contains estimates on income distribution for Pakistan’s large scale
manufacturing sector, while implications of the three sections on public policy are discussed
in Section V.

11. Productivity growth

In Wizarat 2002 (Ch 4) using neo-classical growth accounting techniques, Total Factor
Productivity (TFP) index for Pakistan’s large-scale manufacturing sector was computed for
the period 1955-91. The estimates are presented in Table 1. Rates of growth of these indices
are contained in Table 2. Labour productivity (LP) was also comp uted for the same period.
The estimates on LP are contained in Table 3. The indices increase continuously from the
mid-1950s to the mid-1960s and decline thereafter. The secular downward trend started in
the 1970s continued unabated during the 1980s, reflected in terms of declines in the rates of
growth of both labour and total factor productivity. Gauging by the present state of affairs in
the economy generally, and the manufacturing sector more specifically, the decline must
have been steeper during the 1990s. Comparing the LP and the TFP estimates computed by
me with similar estimates obtained from other studies for the developed countries I find the
manufacturing sector in Pakistan diverging from the manufacturing sectors in Germany,
United Kingdom and Europe at an alarming rate (Table 4)

In Wizarat (2002 Chapter 6) I find empirical evidence 1 to support the Verdoorn effect.
Empirical evidence does not provide support the neo-liberal view that trade liberalization
increases efficiency on account of new technology, reduction in X-inefficiency and
international inter firm learning. On the contrary, I find both exports and imports have a
negative and significant effect on manufacturing productivity. The negative impact of exports
1

1

on productivity reflects that the policy of export expansion, by diverting resources towards
low productivity export industries, producing simple products, and employing unskilled
labour is reducing the level of productivity in Pakistan’s manufacturing sector. Moreover, the
negative effect of imports on productivity rejects the positive effects on account of spillovers
and reduction in inefficiency propounded by the New Growth Theory. Vertical integration is
affecting productivity positively, lending support to Levy (1984), McGee and Bassett (1976),
Contini (1984) and Davies and Caves (1987) of a positive relationship between productivity
and vertical integration. The result reflecting that when manufacturers control their input
supply, productivity tends to be higher. The positive effect may also be due to economies on
account of transaction costs, reduction in real costs, attainment of maximum production
efficiency and avoidance of bilateral monopoly. The coefficient on owner proprietors is
negative and significant, reflecting that owner managed industries are small sized units
paying low wages.

Another important finding emanating from my research (see Wizarat 2002 Ch 8) is the
absence of the cycle running from productivity growth to price decline, causing increase in
demand, leading to increase in output and employment. This is borne out by the finding that
increase in productivity does not lead to a decline in price. Moreover, the cycle running from
decline in price to increase in demand is also missing, while increase in employment due to
increase in output is less than proportionate. As a result, the manufacturing sector is unable to
set a multiplier process into action, which once started could gather its own momentum.

Table 1

The Value-Added Index, The Aggregate Input Index And
The Total Factor Productivity Index
(Using Partial Elasticity Weights)

Year Value Added Aggregate Total Factor
Index Input Index Productivity Index
1955-56 52.56 73.90 71.72
1957-58 63.89 80.16 79.70
1958-59 98.92 89.99 109.92
1959-60 100.00 100.00 100.00
1962-63 261.99 210.99 124.17
1963-64 273.40 232.31 117.69
1964-65 343.01 259.09 132.39
1965-66 365.94 294.26 124.36
1966-67 412.62 333.85 123.59
1969-70 516.88 462.79 111.69
1970-71 533.42 528.44 100.94
1975-76 553.53 951.99 58.15
1976-77 626.79 1038.49 60.36
1977-78 733.38 1040.57 70.96

2

00 23.42 1986-87 1571.32 1985-86 1372.98 36.04 1790.84 3769.00 SUB-PERIODS 1955-56 to 1959-60 19.64 36. The Aggregate Input And The Total Factor Productivity Indices Using partial elasticity weights Value Aggregate Total Factor PERIOD Added Input Productivity Index Index Index 1955-56 to 1990-91 13.80 Source: Wizarat (2002) TABLE 3 The Labour Productivity Index Labour Productivity Year Index 3 .48 53.50 7.00 3.30 12.40 -6.40 -7.01 2814.14 1984-85 1324.01 2499.30 1980-81 to 1990-91 6.98 41.53 34.62 2141.81 1990-91 1681.00 15.40 13.77 4612.53 Source: Wizarat (2002) TABLE 2 Annual Rates Of Growth Of The Value-Added.16 6583.00 1969-70 to 1980-81 6. 1980-81 941.12 13.47 42.02 3203.16 1982-83 1115.51 51.39 44.30 1959-60 to 1969-70 26.61 1983-84 1186.84 1987-88 1605.60 -2.43 4265.00 1981-82 1095.78 25.

2 0.37 1957 – 58 89. 1955 – 56 100.7 .38 Source: Wizarat (2002) TABLE – 4 Productivity Trends: A Comparison of Countries/Regions Period U.0 .48 1990 – 91 15.92 1970 – 71 113. LP 5.12 1964 – 65 153.58 1966 – 67 136.8 -3.6 1.5 0.16 1982 – 83 32.3 -7.01 1969 – 70 126.51 1958 – 59 113.22 1987 – 88 24.15 1965 – 66 169. LP 4. LP 0.45 1977 – 78 46.00 1962 – 63 135.8 Mfg. Europe Germany Pakistan 1960-73 TFP in industry 2. 3.8 -7.1 2.85 1976 – 77 45.0 2.56 1981 – 82 39.77 1985 – 86 27.0 Mfg. 6.87 1983 – 84 31.4 1.63 1975 – 76 46.2 1973-79 TFP in industry 0.27 1986 – 87 26.12 1984 – 85 30.15 1980 – 81 40.3 3.2 Mfg.2 .2 1979-89 TFP in industry 1.K.64 1959 – 60 100.8 TFP = Total factor 4 .66 1963 – 64 131. 2.5 1.4 0.

93 percent to 82. glass and ceramics. Source: Wizarat (2002) 111. But in terms of the HI the overall concentration level has declined slightly from 0. These estimates pertain to the financial. (1991a) and O’ Mahony and Wagner (1994) quoted in Crafts (1996).71 percent in terms of CR3.1946 to 0.1931 during the same period. Estimates on Aggregate Concentration of the Publicly Incorporated Sector Aggregate concentration was estimated for the publicly incorporated sector (i. These estimates are presented in Table 5 and 6 respectively. OECD.4235 to 0. cables and electric goods.75 percent in 1992 to 78. fuel and energy. chemicals. The latter also includes the construction sub-sector as well as a miscellaneous 5 . all firms registered on the KSE) by the use of methodology discussed in the paper.productivity LP = Labour productivity Source: Maddison (1991). woolen and woolen textiles. Market and Aggregate Concentration Market concentration was estimated for Pakistan’s industrial. Overall concentration level during 1992 to 2000 for the two service sector industries declined somewhat from 93. For Pakistan my computations are based on the CMI data.04 percent in 2000 in terms of the CR3. food. textile composites. leather and leather products. cement and mutual funds. Industries recording high and increasing levels of concentration are vanaspati and allied. The computations show that concentration levels have increased during the decade of the 1990s. cotton weaving.91 percent in 1992 to 60. For the financial sector the overall concentration level has increased from 49. paper and board.2464 to 0. tobacco. transport and communication (declining level according to CR3) pharmaceuticals. manufacturing and service sector firms registered on the KSE.5605 during the same period. For the 18 manufacturing industries overall concentration level has increased from 69.64 percent in 2000 in terms of CR3.3402. engineering. financial and service sectors by estimating Three Firm concentration Ratios (CR3) and Herfindahl Indices (HI) for 18 manufacturing. According to the HI the overall increase has been from 0. Industries recording high but declining levels of cencentration are synthetic and rayon. But the overall trend revealed by the HI reflects an increase in the overall concentration level from 0. four financial and two service sectors for the year 19922 and 2000 in Wizarat (2003).e.

5 22 Investment & Banking Cos. Manufacturing and Service Sector Firms 1992-2000 Industry No of CR3-92 No of CR3-2000 Firms Firms 1 Vanapati & Allied 6 64.8 6 .26 16 Auto & Allied 18 51. This is a phenomenal increase in a short span of eight years and brings to the fore the increase in the skewness in the distribution of income and wealth of the publicly incorporated sector that has come about during the first decade of the liberalization era. TABLE 5 Three Firm Concentration Ratio for Financial.19 9 85. service and miscellaneous sub-sectors at Rs.37 17 Textile Spinning 29 21.7 8 89.09 7 68.35 11 Food 7 86.12 19 64.24 21 Modarabas 37 29.540011.22 7 74.62 6 98.72 13 56.145379.5mn. both of which were not included in the computation of market concentration presented earlier.9mn which is 95. These come to Rs.2 percent of the total fixed assets of the financial.07 20 Paper & Board 9 58.74 7 52.74 9 Woolen & Textiles 3 100 4 100 10 Chemicals 14 76.group. 30 41.67 2 100 2 Leather & Leather goods 3 100 3 100 3 Tobacco 4 96. The estimates on aggregate concentration are contained in Table 7 and displayed in Figure I.54 4 88.63 8 78.41 16 51. manufacturing. manufacturing.6 percent of the total fixed assets of the financial.85 4 100 15 Sugar 16 31.24 19 66.27 18 Textile Composite 13 57.49 12 59. From these sub-sectors top 100 firms in terms of fixed assets were identified and the gross value of their fixed assets added together in 1992.02 8 92.72 Communication 7 Weaving 13 42.57 12 Engineering 6 85.28 15 56. Eight years later the total fixed assets of top 100 firms increased to Rs.5 5 Fuel & Energy 19 88.24 13 Pharmaceuticals 8 60. 35 58. service and miscellaneous sub-sectors at Rs.2mn which is 79.183667.564717.66 19 Cement 11 69.71 14 Cable & Electric Goods 4 96.58 8 Glass & Ceramics 5 84.49 15 66.59 2 100 4 Synthetic & Rayon 19 72.2mn in 2000 .56 28 30.7 6 Transport & 6 99.34 9 75.05 23 Leasing Cos.

45 23 65.8 Total Firms 356 248 Source: Wizarat (2003) 7 .24 Mutual Funds 23 70.

2289+ 12 0.4457 2 0.1603 9 0.0409 28 0.1450 22 Investment & Banking Cos.0860 18 Textile Composite 13 0.1370 23 Leasing Cos.5649 21 Modarabas 37 0.2312 14 Cable & Electric Goods 4 0.3355 3 0.3244** 9 0. 35 0. 30 0.6280 10 Chemicals 14 0.7220 2 Leather & Leather goods 3 0.3690 4 0.2508 19 Cement 11 0.1584 7 0.1857 6 Transport & 6 0.4610 4 0.3640 3 Tobacco 4 0.3310 8 0. TABLE 6 HI for Financial.0997 7 0.2997 13 0.2241 13 Pharmaceuticals 8 0.3193 Total Firms 356 248 ** 1994 + 1995 * 1996 Source: Wizarat (2003) 8 . Manufacturing and Service Sector Firms 1992-2000 Industry No of HI – 92 No of HI – 2000 Firms Firms 1 Vanapati & Allied 6 0.3240 9 Woolen & Textiles 3 0.2865 19 0.5126 15 Sugar 16 0.1535 8 0.1916 5 Fuel & Energy 19 0.1408 20 Paper & Board 9 0.2847 12 Engineering 6 0.2187 8 Glass & Ceramics 5 0.5605 6 0.3662 8 0.1953 17 Textile Spinning 29 0.9353 Communication 7 Weaving 13 0.0981 15 0.1780 2 0.3900* 23 0.0758** 7 0.1710 24 Mutual Funds 23 0.1189 19 0.2880 4 0.0531* 15 0.1488 16 Auto & Allied 18 0.4332 11 Food 7 0.2372+ 16 0.6036 4 Synthetic & Rayon 19 0.

2 183667. 1992 2000 Fixed assets Total fixed assets % Fixed assets Total fixed assets in % of top 100 in the financial.2 540011.60% 79.80% 4. firms industrial and firms industrial and service sectors service sectors registered on the registered on the KSE KSE 145379.20% Top 100 Others TOP 100 Others 9 .5 95.5 79. listed on the Karachi Stock Exchange Source: Wizarat (2003) Figure 1 1992 2000 20.6 Sources: Balance Sheet Analysis of cos.TABLE 7 Aggregate Concentration Estimates for Pakistan’s Economy In mn Rs.40% 95. of top 100 the financial.9 564717.

aggregate manufacturing concentration.e.7mn which comes to 53.1 percent of the total assets of non-financial companies listed on the Karachi Stock Exchange.7% of manufacturing in 1968. competition generates more R&D. Profits and Prices I would like to explore how the market power prevailing in Pakistan is likely to impact on the performance indicators mentioned above.1 percent. Scherer and Ross (1991). In order to gauge the impact of market power on (R&D) and innovation. Mansfield et al (1971). 2. On the other hand. Impact on Efficiency. industry. Impact of Concentration on Performance Market power affects performance and thus gives rise to social effects which can be categories into the following:- 1. 1. My estimates on aggregate concentration are not strictly comparable with White’s. White (1974) stated that 43 industrial families controlled 98 listed non-financial companies with total assets worth Rs. White reported that the four largest banks had over 75 percent of total deposits and just under 66 percent of earning assets. For banking. Engro Chemicals Pakistan and Maple Leaf Cement. the four largest insurance companies controlled 53 percent of all assets in the insurance industry. The general consensus seems to be that by and large. Impact on Research and Development (R&D) and Innovation. This has been the subject of a wide body of literature. Kamien and Schwartz (1975). It is also interesting to note that out of the top ten firms in 1992 only one firm i. Similarly. 20 leading private organizations raise aggregate manufacturing concentration to 42. White has given separate estimates on aggregate industrial concentration. This is symptomatic of the opening up of the economy as a results of liberalization policies of the 1990s. banks and insurance companies controlled by the 43 Pakistani business families.1 percent. as it confers higher rewards as well as forces firms to 10 . it is pertinent to pose the question whether competition or monopoly is more condusive to technological progress. This is because I have derived estimates on aggregates concentration by taking the percentage of top 100 firms fixed assets in total fixed assets in the manufacturing. These are Hub Power Company. Jewkes et al (1968). His estimates on aggregate manufacturing concentration reveals that ten leading private companies controlled 29. Impact on Research and Development (R&D) and Innovations. It is interesting and useful to look back at the concentration of economic power in Pakistan during the 1960s. etc. but eight years later in 2000 out of the top ten firms three are multinationals. for example. while 50 companies raise aggregate manufacturing concentration to 58. His major focus is on the percentage of total assets in manufacturing. ICI Pakistan was a multinational firm.5165. finance and service sectors and a miscellaneous group of firms. aggregate banking concentration and aggregate insurance concentration.

So innovations take market share from other firms and not just from the innovative competitive firm itself. (Shephard 1997). Profits and Prices Micro-economic theory states that prices are higher under monopoly than under competition. But the new-Chicago school attributes it to efficiency. consumers continue to pay more than they would have paid after technological change had brought the prices down. a monopolist will bring new products and processes more slowly than the socially optimal rate. Hirch (1990). The interpretation of a positive concentration coefficient in the profitability equation reflects market power according to Cowling (1982) and luck according to Mancke (1974). First. there might be two exceptions. This is because most of the domestic companies do not engage in meaningful R&D activities and the subsidiaries of transnational corporations undertake R&D at their home offices abroad. letting smaller firms take the lead and the associated risks that are entailed. Bennenbrock and Haris (1995) found concentration to be an important determinant of profitability for the USA and the UK. the dominant firms will then try to catch up and imitate. through destroying the value of existing products and capital goods operates on all firms. Hart and Morgan (1975). al (1975). Innovations therefore tend to be led by smaller firms in a market. The Efficient 11 . if there are large economies of scale in R&D. since the innovation occurs more slowly under monopoly conditions. dominant firms and monopolies develop X-inefficiency as there is no compulsion on them to keep costs down. Research relating profit margins to concentration was pioneered by Bain (1951) and focused on relating price-cost margins to concentration ratios at the industry level. the replacement effect of innovations falls on products and processes which are shared by many producers. However. If the innovation proves to be successful. Oligopolies. Impact on Efficiency. For a competitive firm on the other hand. The dominant firms invent actively.4 The concentration profitability relationship is reinforced by a strong correlation between profit rates and market share at the firm level in studies using this approach. The replacement effect thus reduces monopolists net gains which will be smaller than the competitive firms net gains. but for a monopolist the effect falls entirely on its own products. On account of this. These high prices might be on account of X-inefficiency and / or higher profitability. The adverse impact of market power on technological progress is not likely to afflict Pakistan’s manufacturing sector. 2.innovate. Cowling et. Cowling and Waterson (1976). And second. the free rider problem might discourage induced innovation.3 Moreover. The studies by Weiss (1971). Shephard (1997) reports that X-inefficiency often raises costs by more than 10 percent. Nickle and Metcalf (1978). X-inefficiency is closely related to market power. Such a firm is therefore likely to innovate at ‘maximum speed’ in order to capture maximum profits before the competitors do so. but delay the innovation phase. Shephard (1997) states that though the replacement effect of innovations.

causation from concentration to profitability to wage share of income. So the adverse consequences of concentration on income distribution are on two accounts. Translating these deviations into dollars of excess profit as a proportion of total sales. the inability of prices to decline proportionately prevents the consumers from sharing the fruits of productivity increase. In the Kalecki model9 (1954) wage share is an inverse of the degree of monopoly / profit margins. Baran and Sweezy (1966) and Sutton (1975) have examined such behaviour. The high profitability results in transferring income from a large segment of society to a few. 1980s and the 1990s. thus causing an increase in profit margins. These studies extend over four decades i. First.8 Using firm level data for the USA and UK.Structure Hypothesis states that the higher rates of return of large firms reflects greater efficiency (Demsetz 1973). Sylos Labini (1969). The latter examined the nexus between productivity. 1970s. For Pakistan. causation from concentration to productivity to price. There is. The skewness in the distribution of income is being worsened also on account of downward price rigidity that results from an oligopolistic market structure. 1960s. demand.e. therefore. The analysis. price. reveals that when productivity increases. Cowling and Mueller’s estimate of welfare loss from monopoly power range between 4 – 13 percent of corporate output. increase in productivity on account of technological change does not lead to a proportionate decline in prices. Cowling and Mueller (1978) object to the use of unity price elasticity in the Harberger study. Sharwani (1976).1% of US GNP. White (1974). output and employment and reported the absence of the virtuous circle between productivity.5 Using a partial equilibrium approach Harberger estimated dead weight loss due to deviation of monopoly price from the competitive price for 73 US manufacturing industries.9 percent in 1990-91. Amjad (1977) and Wizarat (1992 and 2002) found concentration to be a significant determinant of profitability for Pakistan’s large-scale manufacturing sector. therefore. a causal link running from concentration to profit margin to wage share of income. price. But Harberger’s estimates have been criticized by Stigler (1956)6 and others7. demand.3 percent in 1955-56 to 23. High concentration levels causing high profitability are worsening the skewness in the distribution of income in Pakistan. output and employment in Pakistan. Public policy that tries to reduce concentration levels in the manufacturing sector will promote 12 . while Ahmed (1980) and Wizarat (1988 and 2002) find the theory relevant for Pakistan’s large-scale manufacturing sector. Harberger’s estimates quantify the maximum welfare loss equal to 0. And second. They assume that price – cost margin is the inverse of the price elasticity of demand. The wage share of income in Pakistan’s large-scale manufacturing sector declined from 37. In such a market structure. Ahmed (1980) and Wizarat (1989 and 2002) therefore attributed the decline in the wage share of income to high profit margins for the period 1955–1991.

etc. furniture and fixtures. income and opportunities from the many to a few monopolists and have been recognized by Shephard (1997). 13 . during which there was a slight increase in the wage share from 37. which was at an all time low at 18. more profound than is commonly perceived. price. The advent of the industrialization era in the 1960s was accompanied by a continuous decline in the wage share.1 per cent in 1990-91. There was a slight increase thereafter. leather and leather products. but on account of the persistent decline during the latter half of the 1970s. after which it declined again. The benefits from promoting competition through the enforcement and effective implementation of an anti-trust policy are. The overall impact of conc entration on the socio-economic-political fabric of the society are for more expansive but not amenable to as precise a measurement as the impact on technological progress. Othe r sub-sectors in which declines occurred are food manufacturing.diversity.9 per cent and the profit share at 76.3 per cent in 1955-56 to 39.6 per cent in 1980-81. printing and publishing. The behaviour of the profit share was converse to that of the wage share. ginning. with the wage share standing at 23.7 per cent).1 per cent in 1957-58. During the first half of the 1970s the wage share increased to 26 per cent. with the wage share standing at 20. efficiency. pressing and spinning fibers. but also in the wage shares of individual industries during 1955 to 1991 as shown in Table 9. and increased again in the following year. The first phase covers the period of the 1950s.5 per cent at the end of the 1960s.social benefits both on account of increase in the labour share of income as well as consumer surplus and welfare growth.. The decline in labour intensive sub-sectors such as textiles. profits. flexible society in which merit and personal values take primacy over control from the top. glass and products is astonishing. non- electric machinery and sports and athletic goods. a Chicago school economist. He goes on to note that competition fosters belief in “….3 per cent in 1965-66. 1949). There is a decline not only in the aggregate wage share. the wage share was 19. rubber products. On the whole. (The corresponding figure for the profit share being 81. 1V. These arise on account of the impact of shifting wealth. becomes the basis for an open. therefore. The recovery during the 1980s was quite modest. tolerance and individual iniative which are blocked by monopoly”.” Also pertinent is the thought provoking warning of Simmons. And that competition “…. the extent of the decline in the wage share and increase in the profit share during the 1950s was modest. that monopoly will destroy democracy (Simmons. The behaviour of wage and profit shares can be divided into three distinct phases. Distribution of Income ANALYSIS OF WAGE AND PROFIT S HARES There has been a persistent decline in the wage share and a continuous increase in the profit share during the period 1955-56 to 1990-91. except for a few years which did nothing to alter the trend (Table 8).

therefore.1 Source: Computed from the CMIs.1 1962–63 24.e.5 1982–83 21. Ahmed (1980) using Thirlwalls’s methodology tried to decompose the decline in the aggregate wage share into two components. i.4 1990–91 23.3 79.9 78.9 76.5 79.3 78.0 74.1 1986–87 21.9 78. TABLE –8 Factor Shares in the Large-Scale Manufacturing Sector Year Wage Share Profit Share 1955–56 37.2 78.9 65.4 1981–82 19.3 81.8 76.6 76.1 1964–65 21. Impact of Growth on Key Economic Variables The labour share of income is defined as: 14 . iron and steel and non-ferrous metal industries.5 80.3 1980–81 19. various issues.6 78.4 1975–76 26.4 78.7 1984–85 20.6 80.1 1969–70 20.7 77. the effects of shifts in the industrial structure and change in the wage and salary component within constituent industries. (Wizarat (2002) The sectors in which there was a noticeable increase in the wage share are footwear.8 1983–84 20.7 68.7 1965–66 18.3 78.9 75.6 1988–89 23.1 79..1 60.4 75.9 1958–59 31.5 1970–71 21. His result suggesting that the decline in the wage share is dominated by the decline in labour’s share in the constituent industries (except where base year weights are employed which results in a large residual term) is consistent with my analysis. drugs and pharmaceuticals.2 1977–78 22. does seem to suggest that the decline in the aggregate wage share can be explained by the decline in labour’s share in the constituent industries.6 1963–64 24. The foregoing analysis.7 1957–58 39.9 1985–86 21.7 1987–88 21.7 1966–67 21.3 62.0 1976–77 23.3 1959–60 34.

1 Photographic & Optical goods – 43.5 15.8 26.3 21.7 23.9 49 35 23.7 11.2 40.2 Scientific.3 12.4 19.5 16.6 21.9 20 16.2 34.6 Printing & Publishing 67.7 43 38.1 6. 1955-56 to 1959-60.1 41.7 29.6 23.5 12. China & Earthenware 48.5 25.6 55.1 14.4 33.2 50.9 15 .9 39.L/S where WAGSH = wage share in manufacturing value-added W = average nominal wage L = employment S = manufacturing value-added In order to study the impact of growth in the large-scale manufacturing sector on wages share.1 Sports & Atheletic goods 56.7 29.4 Rubber Products 42.3 38.4 13.1 12.5 58.2 32.1** 25.2 17 Other Chemicals 24. employment (L) and value added (S).6 20.8 17.9 36.5 34.4 22.7 38.3 29.6 16.4 41 43.5 30.5 30.7 47.3 69.8 30 21.8 28.3 24.4 26.2 Fabricated Metal Products 50. Precision & Measuring Equipment 48. 1962-63 to 1969-70.5 52.5 Total Manufacturing 37.8 39.2 28.9 Glass and Glass Products 48.8 16.1** 23.1 Wearing Apparel – 50.8 26. Table 10 shows the growth of these variables during the four sub-periods.4 13.6 13.7 Paper & Paper Products – 17.6 14 Tobacco – 6.6 24.5 Footwear – 31.3 22.6 17.4 25.6 67.3 Plastic Products – 33.4 20.4 Machinery except Electrical 56.1 55.7 45.8 18.6 31.3 23.5 4.7 41.4 Electric Machinery.4 Other Non-Metallic Mineral Products – 14.3 9.1 Other Industries 19.2 Textiles 40.6* 49.5 38.8 39.4 3. WAGSH = W.2 59.2 Pottery.5 29.6 33.2 11 10.4 38.9 28 30.9 32.5 34.5 43.1 Industrial Chemicals 29.9 46. 1970-71 to 1980-81 and 1981-82 to 1990-91.5 Transport Equipment 52 25.1 19.5 36.4 24.1 30.8 7.3 Non-ferrous Metal Industries 42.3 37. it is of interest to know how growth has affected wages (W).8 42. Apparatus & Appliances – 26 37.7 48 Leather & Leather Products 30.7 Ginning.7 Furniture & Fixtures – 58.6 44.5 13.8 43.8 Drugs & Pharmaceuticals 20.7 23.6* 34.3 32.3 Beverage 7.2 Iron & Steel 42.8 Wood & Wood-cork Products – 30. There is a three fold impact of growth in the manufacturing sector on wage share: TABLE – 9 Share of Wages and Salaries in Net Output Industries 1955 1965-66 1975-76 1980-81 1990-91 Food Manufacturing 33.4 28.6 3. Pressing & Spinning Fibers 39.1 18.

3 14.0 10. real wages (W/P) increase by . earthenware. This has ominous consequences for the distribution of income between labour and capital.. A rapid increase in value-added (S) (Table 10) causing the deno minator in the ratio W. therefore. First. the labour share of income might be declining.5 22.0 13. ** In 1955 iron and steel and non-ferrous metal industries were grouped under one heading.3 14. while the spectacular growth of value-added during the 16 .75 per cent only. Rapid growth accompanied by increase in productivity means decline in labour cost per unit of output. Moreover.e. Second. but rapid industrialization caused the growth of employment to decline. glass and glass products were grouped under one heading.7 3. The very high rate of growth of value-added during the sub-period 1955-56 to 1959-60 may be on account of starting from scratch. i. this objective does not have to be achieved by reducing the wage rate.8 20. the empirical evidence in the previous chapter reflects that when productivity increases by 1 per cent.6 1981-82 to 1990-91 3. unless real wages (W/P) are increasing as rapidly as productivity. Table 10 shows that the average annual growth of employment (L) has declined sharply and continuously during the period 1955-56 to 1980-81. – The data have not been shown to avoid disclosure of information. coupled with a high rate of value-added growth would lead to a rapid decline in the labour coefficient during the period under review. On both accounts. china. but increased somewhat during 1981-82 to 1990-91. So when the government is formulating a policy aimed at increasing the level of employment. Second. increase in prices is causing a decline in real wages. workers have been at a disadvantage on two counts. The limited expansion of employment is better explained by the adoption of capital intensive techniques of production.9 1970-71 to 1980-81 0. Wages and Value-Added in Large-Scale Manufacturing Year EmploymentAverage NominalValue-Added (L) Wage (W) (S) 1955-56 to 1959-60 11. Source: Wizarat (2002) There is no empirical support for the neo-classical argument that wage increases are constraining the level of employment in the large-scale manufacturing sector. * In 1955 pottery. The table shows that the growth of employment was rapid during the latter part of the 1950s.L/S to increase more rapidly than the numerator will cause the ratio to decline.7 1962-63 to 1969-70 2. the labour coefficient (L/S) which would lead to a decline in the wage share (WAGSH).5 18.6 Source: Wizarat (2002) 1. 2. TABLE –10 Average Annual Rates of Growth of Employment. This. productivity increases are not passed on to the workers.

the denominator was higher than the rate of growth of variables which form the numerator. needs to be conducted to capture the devastation these might have caused to the manufacturing sector in the post-1991 scenario. For example. Second. rather than specialization in a selected range. with the resultant high cost of production. however. This led to the production of a wide range of goods at volumes less than the minimum efficient scale.e. It also needs to be borne in mind. profitability would be higher. growth in the agricultural and service sectors cannot be sustained without a vibrant and growing manufacturing sector. It. V. policies towards industry have been a major factor affecting productivity in Pakistan’s manufacturing sector. However. causing increase in the prices of domestically manufactured goods. This way the pitfalls of the ISI model on account of lack of specialization and high cost due to limited market size could have been avoided. This. On account of this.Moreover. need not produce a wide range of manufactured products. Industrial Policy A common feature of import substitution (ISI) policies has been the production of a wide range of products manufactured. came after 1990-91. therefore. but is due to the fact that most of the LDCs that used this model tried to domestically produce almost every good that was imported.. and reversed. if the manufacturing sector has to be revived and allowed to play its due role in the economic development of the country. appears that the growth of manufacturing value- added i. we find that the negative relationship between productivity and prices is non-existent. Greater specialization in the production of a selected range of products for a group of countries through an industrial programming type of approach would have been the correct approach. policies towards industry have become very unfavourable with the advent of the liberalization era in the late 1980s. however. First. that.liberal policies introduced in the late 1980s. Adoption of the ISI model. since it is inconsistency in the policy environment that turns away the investor.viable in this country. sub-period 19703. nationalization of industries during the early 1970s set a secular decline in the industrial sector. is not a reflection on the inefficacy of the ISI strategy. the cost of production of domestic manufacturing has increased rapidly. These policies need to be eva luated. The most important sources of productivity growth would be improvement in 17 . This. the positive impact emanating from policies favourable to manufacturing during the 1960s is discernible in the high rate of growth of productivity during that period. Moreover. and the denominator would not decline as it would if prices were flexible. due to which the ratio might be declining. Enhancing the productivity of the manufacturing sector with a view towards making it more competitive so as to withstand competition from competing imports is to be emphasized. along with reduction in maximum tariff levels. therefore.-71 to 1980-81 might be due to very rapid growth of manufacturing prices during this sub-period (at the rate of 14. however. which was accentuated by the neo. Further research. The major thrust of these policies. The adoption of such policies in the 1960s gave rise to industries with low productivity growth. Policies play a pivotal role in economic development and two things need to be borne in mind.9 per cent per annum). is rendering manufacturing non. As a result of increase in tariffs on utilities and the markup on lending. consistency in policy towards industry is very important.

It is only through fostering competition that some of the fruits of productivity growth in the future may be enjoyed by the consumers. 18 . They state that ‘inequality impedes economic performance by obstructing the evolution of productivity enhancing governance structures’. which has become dormant over the last several years. Bowles and Gintis recommend that the objective should be to design incentive compatible policies for productivity enhancement through egalitarian redistribution. This is on account of improvements in nutrition.efficiency and technological change. provision of health and education services to the lower income groups. (c) Using static comparative advantage for the industrial development of the under developed and remote areas and a nurturing a dynamic comparative advantage for the industrial development of the cities. that would not only provide basic amenities of life to the working people. they meet the needs of the less well off segments of the society. only a particular industry locating in a specific area will be entitled to the incentive. for on the one hand. Bowles and Gintis (1995). (b) The eligibility of industry to receive the incentive to be determined by the availability of raw material. it will have a soothing and harmonious impact on the strife torn and turbulent situation prevailing in the country at present. but also enhance the level of productivity in the manufacturing sector. minerals or other important inputs. micro finance availability. i. in view of my finding that wages are an important determinant of intra-sectoral productivity differential. More than that. If the same industry were to locate in some other area it will not be eligible for the incentive. Other policies that can be used for ensuring better distribution of income and assets will be land reforms. This decline in the labour share of income has ominous consequences for the growth of productivity in the manufacturing sector.e. The increase on account of the latter would come about as the government starts subsidizing R&D as WTO regime allows governments to give subsidies to industries undertaking Research and Development Formulation of industrial policy with the following major characteristics: (a) Provision of incentives that are industry-cum-area specific. they increase the level of productivity. Such productivity enhancing egalitarian policies will go a long way in increasing the level of productivity in industry and other sectors of the economy. This is why Keynesians treat egalitarian policy interventions as welfare enhancing. rightly recommend that policy should aim at altering the constraints and incentives that govern the pace of productivity growth. health and housing standards that become affordable with higher wages. Hopefully the newly renamed Competition Commission will play a role in fostering such a competition. This calls for productivity enhancing egalitarian policies. growth of industrial and service sector employment opportunities. etc The analysis on concentration underscores the importance of fostering competition in the economy through an active competition policy. therefore. ‘The notion of productivity- enhancing asset redistribution suggests a level playing field by redistributing wealth and enhancing productivity through a more appropriate alignment of incentive and fostering competition’. while on the other.

Attaran and Saghafi (1998) however do not find concentration to be a significant determinant of profitability for the UK. Harberger’s use of elasticity of demand equal to unity leads to under-estimating the effect of monopoly. the effect of monopoly is under estimated. 7 Posner (1975) states that costs incurred in acquiring a monopoly like bribes to government officials. Harberger estimated deviations of industry profit rates from the average for all manufacturing. And finally. it has been indicated in the table. 3 This strategy is referred to as the ‘fast-second strategy’. See Sherphard (1997) 4 Holterman (1973). Harberger made insufficient allowance for capitalization of monopoly profits in reported asset value. 5 But Shephard (1997) states that the same reflects greater market power by firms with higher market shares and rejects the Efficient Structure Hypothesis 6 Stigler’s criticisms relate to the following aspect of Harberger’s study: One.Notes 1 Inter industry productivity differentials study in Wizarat (2002) 2 For some industries the data are not available for 1992. but for a latter year. should be added when computing the cost of monopoly. 8 In the Cowling and Mueller model ? = 1/E E = 1 /(?P/P) Where ? = price cost margin E = price elasticity of demand P = price ?P = change in price 9 Also see Weintrab (1958) and Moroney and Allen (1969) 19 . The observed rates of return on assets thus tended to be unduly equal. Khalilzadeh – Shirazi (1974). Where ever this is the case. But since industry profit rates are higher than that in the economy as a whole. Third. Posner thus reports a much larger estimate of welfare loss due to monopoly power. monopoly profits might be absorbed by payment to other factors. advertising etc. Second.

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