ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD

(Department of Pakistan Studies)

Course: Geography of Pakistan Part-II (4656) Semester: Spring, 2021

Level: M.Sc Total Marks: 100
Pass Marks: 40

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 ASSIGNMENT No. 1

Q.UESTION: 01

Discuss the contribution of surgical instruments industry. Also elaborate the exports of
Pakistan in this regard. (20)

ANSWER:

Surgical Instruments
The surgical instruments industry is mainly clustered in and around the skirts of
Sialkot. Over 99% of the countries production is centered at Sialkot. The sector
comprises over 2300 companies, of which around 30 can be considered large and
the remainder can be split as 150 units of medium sized and remaining as small.
The industry produces on average over 150 million pieces a year with an
estimated value of around Rs 22 billion. Out of the total production,
approximately over 95% is exported1. The industry belongs to the light
engineering industry category, and is one that has specialized in skill and stable
export market share.
Besides small and medium units, a few units are large and have a 90% integrated
system. Most of the larger and medium sized firms are exporting, however, the
smaller/vendor units usually supply to commercial exporters/traders. The main
raw material used in the production is ‘steel’. Around 60% of this steel is
manufactured locally and the remaining 40% is imported from Germany mostly.
For the purpose of trade; four broad categories can be defined where Pakistan is
supplying in the export markets. The categories include; (i) HS Code 9018 –
Instruments for medical, surgical and dental; (ii) HS Code 9021 – Orthopaedic
appliances; (iii) HS Code 9022 – Equipment using X-rays, alpha, beta, gamma
rays. The exports of Pakistan predominantly fall in the category 9018.

Contribution of Surgical Instruments Industry to National Economy

Indicator Value
To GDP(%) 0.42%

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To Direct Employment (Numbers) 100-150,000

To Indirect Employment (Numbers) 400-450,000

To Exports (%) 1.21%

Source: Pakistan Cutlery & Stainless Utensils Manufacturers & Exporters

Association, Pakistan Economic Survey 2008-09 and UN Commodity Trade Data
Base

The sector employs around 100,000-150,000 workers. However, employment is

volatile as there is high degree of temporary and contractual employment. Over
the last four years the exports from the sector has grown by just under 48% to get
to US$245 million in 2009.

Pakistani exports make up only a small fraction of world trade in surgical and
medical device industry, which amounts to over $113 billion (just for above 4 HS
Codes). This is one sector where Pakistan has developed special capabilities to
penetrate high income markets such as Germany, USA, France, Belgium etc. The
average export price of goods made in Sialkot is around $1.5-2.5 (Note: some
products sell for much higher prices – the price quoted is the average trade price
for disposable products), which is much higher than what Chinese products fetch
(US$0.35 – in disposable products). However, the price is lower than some of the
more sophisticated producers such as Germany and France.
The sector, whereas, has achieved reasonable export performance growth in the
recent years has suffered from lack of product diversification, inadequate shift out
of low value disposable instruments to high value sophisticated products and
uncertain business environment. The major impediments of the sector are low
levels of productivity, inadequate technology upgrade and shortage of skilled
staff. The production process value chain analysis suggests several productivity
detractors. Moreover, most of the companies operate without any brands with
only a couple moving to branding of their products. Furthermore, the industry in
the years to come will face higher compliance requirements, especially as the
industry tries to diversify into more value added products and enter into more
sophisticated markets. Compliance, testing and certifications are going to be
critical for the the surgical industry to move up the value curve. Some firms have
developed basic design capabilities and often experiment by bringing in newer
designs into the market.
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QUESTION: 02

Analyze the role off cottage industries in the development of Pakistan? What are the
benefits of this sector in the country? (20)

ANSWER:

Infant Industry in Pakistan In Pakistan, cottage and household industries hold an

important position in rural set-up. Most villages and rural areas are self-sufficient in
the basic necessities of life. They have set up their own small industries and small
enterprises, they’ve their own carpenters, cobblers, potters, craftsmen and cotton
weavers. Most of the people have their income dependent on it. Nowadays, the
Cottage industries have gained immense importance in cities and towns. The
demand for their products has increased immensely. Hand-woven carpets,
embroidered work, brassware, rugs and traditional bangles have increased demand
now and very popular these days. They are now considered as important export
items and have gained demand in international markets. Encouraging these
industries is very important, as these cottage small-scale industries are highly labor
intensive and provide 80% of employment to the industrial labor force. In the
conservative areas, where women are not allowed to work outside, these industries
can be set up in houses to make the women increase their productivity. Trade
policies of Pakistan’s Infant Industry In Pakistan imports were restricted in the
country through tariffs and other quantitative restrictions in 1952. One of the
objectives of high protection in the past has been generation of revenue and to
compensate for the balance of payment situation. For this purpose

There are meagre resources to develop large-scale industries. However, a program

for developing and promoting small-scale industries both in rural and urban areas
is more feasible figure 1 shows the advantages of establishing such industries.

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Advantages of establishing small-scale cottage industries in Pakistan

1. Cottage and small-scale industries are labor-intensive and provide

employment to 80% of the industrial labor force. This reduces
the unemployment and offers opportunities for self-employment.
2. Traditionally, women are not encouraged to work outside their homes.
Cottage or small-scale industries like carpet-weaving, candle-
making and handicrafts can be established in houses and women can be
gainfully employed. This increases the active labor force.
3. These industries also meet the local demands for industrial goods, and save
foreign exchange spent in imports.
4. There is a demand for rugs, carpets, brassware, handicrafts and embroidered
work in the International market. These goods provide 30% of the export
receipts of the manufacturing sector.
5. When people are employed gainfully in villages, the migration of people
from rural to urban areas will reduce. The acute problems
of housing, sanitation, education, transport and health will be reduced in
urban areas.
6. Many districts are under-developed. With the expansion of such industries,
the regional disparity in income can be reduced.
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 7. These industries make effective use of local raw materials which also
promotes primary industries like agriculture and mining.
8. Small-scale industry does not require much capital and high technology. I.T
is suited to the traditional economic set-up.
9. Cottage and small-scale industries do not use much imported material or
equipment.
10. The waste of large-scale industries, particularly the
cotton, sugar and steel industries, can be used to make by-products.
11. Home Decoration

Types of cottage and small-scale industries in Pakistan

There is a web of cottage and books industries. In almost every village, there are a
number of such industries depending upon the size of the village and the demand
for the products. The establishment of such industry is closely related to the
availability of raw material traditional skills, climatic conditions and, in several
cases, the local specialization in the organized factory sector.

There is a large variety of handicrafts available in Pakistan. They are not only
aesthetically pleasing items, but they also serve the needs of local people.

Some of these industries produce important export items. Recently exports of

non-cotton products have faced increasing trade barriers as public opinion in
industrialized countries has expressed growing concern about child labor,
environmental and health standards. These concerns are being addressed now.

Carpets
In the small scale industries, the most important is the Carpet weaving and its
center are located almost all over the Pakistan. It is also significant in economic
terms and they make valuable contribution in exports. Cotton is the raw material
required for this industry. They also employ women for the production of fine
hand woven carpets and for the production of wool silk or a mixture of the two, as
the carpets are of great significance which generates equal economic
opportunities. It is valuable for gross domestic product of country.

Textiles
Textiles are found throughout the country with a variety of design and techniques.
The most famous among them are Khadar, Susi, Khes, Chunri, Boski, Karandi,
Shaal, and Ajrak. The designs are invariably brightly colored with traditional
emphasis on blue and red.
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Embroidery
Embroidery has developed to a fine art with distinctive regional designs and
patterns.

Jewelry
Gold and silversmiths are one of the largest communities of craftsmen. Much of
the jewelry made and sold in the cities is intricately fashioned and delicate.

Ceramics
Clay and terracotta pottery and utensils continue to be of great practical
importance. Many of the designs of urns, pitchers, bowls, jugs, plates, and pots
seen today are almost identical to those un covered at archaeological sites around
the country. Distinctive glazed blue tiles are used to decorate many of the
great mosques in Pakistan.

Cutlery
Wazirabad is the city of cutlery industry in Pakistan . This industry is growing
day by day and has share of 65 million US dollars in Export for 2010. High
Quality Damascus Steel [1][2][3]) is manufactured in this city and 95% of world
needs are produced here.

Woodwork

The Swat Valley is perhaps the most famous for its intricately

carved architectural woodwork and furniture, although wood-carving is common
throughout the northern mountains.

Sports goods

Sports goods earn about 3.7% of our total exports. The main raw material for the
sports goods industry are leather and mulberry wood that are available in Punjab,
but also imported PVC. Footballs, hockey balls, hockey sticks, cricket bats,
and rackets are mostly manufactured by hand. The skilled workers are available
in Sialkot and Lahore. In the industry large and medium size factories contract
work out to small-scale and cottage concerns. The local sports goods
manufacturing industry is one of the major source of foreign exchange earnings of
Pakistan. It is centralised in and around the city of Sialkot, where it has flourished
as a cottage industry with most of its production by generations of skilled
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craftsmen. At the time of independence, this industry was in an infant stage with a
nominal export of Rs. 0.82 million. The Government took immediate steps to
develop this industry by providing loans and subsidies to the manufacturers and
arrangements were made to market the manufactured goods. Since then, the
industry has flourished locally and enjoys good reputation in the international
markets as well.mostly these goods are provided to fatima syed productions

Production At present, there are more than 2000 units, mostly on small scale in
operation with an installed capacity of Rs. 20 billion per annum. The units are
operating on single-shift basis.

Pakistan produces a wide range of sports goods, accessories, games and athletic
equipment generally following the British, American and German specifications.

The Government is also enforcing on a compulsory basis, minimum quality

standards for sports goods manufacture. The Pakistan Standards Institute, a
government agency, has devised specific standards for different types of sports
goods. The important items being produced are tennis rackets, hockey sticks,
hokey balls, polo sticks, cricket bats and balls, footballs, (complete) and
numerous goods used in both in-door as well out-door games.

At present, Pakistan's sports goods enjoy a world-wide recognition mainly

because of the care that goes into their designing, manufacturing and selecting of
the finest raw materials. The basic raw materials required for the production of
sports goods, are leather, wood, glue, nylon guts, rubber and chemicals. Out of
these, leather and various kinds of wood are abundantly available in Pakistan. The
industry annually utilises materials worth Rs. 8 billion including imported raw
material.

Exports This industry is one of the major foreign exchange earners for Pakistan
and is, therefore, receiving full government backing in its development. It is
estimated that more than 75 per cent of the total production is exported every
year.

In fact, the export demand has acted as the main stimulus for the rapid growth of
this industry because of care that goes into designing, manufacturing and selecting
of raw materials. There are two factors which are responsible of this.
(i) Low price as compared to general price level
(ii) Durability plus good workmanship

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Export of sports goods increased from $136 million in 1990-91 to $384 million in
1997-98. Showing an average increase of 23 per cent annum as evident from
table-1. The export market for sports goods is fairly diversified. More and more
countries are being added to the list of their imports. In 1990-91 there were in all
50 countries importing these good from Pakistan. Thereafter, the list has
continuously expanded so that during the 1992-98 period, Pakistan exported
sports goods to 90 countries. However, the principal importing countries are
Germany, USA, UK, France and Italy. Others were Spain, Netherlands, Hong
Kong, Denmark, Canada, Belgium, Dubai and Chile. Country-wise export of
sports goods is given in table-2.

In the international market, India, Japan, Taiwan and South Korea are the main
competitors of Pakistan. They are supplying their products at lower prices. While
India has an advantage of cheap labour and raw material Taiwan, Japan, and
South Korea have semi-automotive and mechanised units and are always engaged
in introducing cheap sports goods such as metal rackets and cricket bats etc.

In order to encourage the export of sports goods, the Government has taken many
positive steps and has offered various incentives. Customs duty, sales tax and
excise duty rebates on f.o.b. value of exported various types of sports goods are
available.

Another incentive is that import of restricted and tanned raw materials are also
allowed on cash licenses against export of sports goods.

This industry is facing severe competition from Taiwan, India and South Korea.
Although the Government has provided various incentives and facilities to
modernise and mechanise the industry, the opportunity has not been availed. The
improvement in quality and consequently in exports earnings has been due to the
improved availability for leather for manufacture of footballs which constitutes
about 75 per cent of the total exports. Keeping in view the trends during 1991-98
about 23 per cent growth rate, improved quality available and competition faced
in the international markets the future demand is expected to growth the rate of 15
per cent during 1999-2000.[4]

Large scale Surgical instruments

Sialkot and Lahore are also noted for the manufacture and export of surgical
instruments. The most important raw material is stainless steel which has to be
imported. In this industry, also, medium scale factories contract work out to
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small-scale and cottage concerns. Also like the sports goods industry, most of the
output is exported. Sialkot is the biggest surgical maker in the world and India,
America, Australia and many other countries are importers of surgical instruments
from this city. Sialkot has the major role in making surgical instruments

Other small-scale industries

Other small-scale industries include electric fans, cutlery and general engineering.
″small scale industries are those which generally employed less than workers and
they run with or without electric powers, in or outside the home but there assets
do not exceed rs.2 million.for example; carpet industry, poultry forming, hand and
power loom industry, manufacturing of sports and leather goods, toy industry,
agriculture implements etc.″

QUESTION: 03

Critically analyze the establishment of fuel and coal-based energy projects given the facts
that Pakistan has innumerable opportunities of hydel power energy. Make a cost benefits
analysis. (20)

ANSWER:

However, there is a potential of more than 50,000MW. Hydroelectric power

development has suffered due to prolonged Kalabagh Dam controversy on which
national consensus could not be developed.

Sindh feared that Punjab would divert water depriving it of its share and that it
required extra water to flow down Kotri to push the encroachment of sea into their
land. Khyber-Pakhtunkhwa (K-P) feared that Nowshera would be inundated.

Dams are not a zero-sum game. Dams increase water supplies and are an
insurance against drought. Every country that has a river, builds a dam.

Hydroelectric power: K-P says work on energy projects in full swing

Total river flows are to the tune of 179 km3 in Pakistan against consumption of
126 km3, leaving an excess of 38 km3 that goes into the sea. It has been
established now that only 11 km3 is required for excess flow into the sea to
prevent sea intrusion. It means excess water to the tune of 27 km3 is available to
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build dams.

The capacity of Kalabagh Dam is only 7.5 km3. So practically, four such dams
can be built while having enough water to satisfy Sindh’s criteria and objections.
Fortunately, there is no controversy over Bhasha Dam and Kalabagh Dam has to
be postponed until there is water and food crisis?

It is the cheapest dam to build as it is close to plains and would have cost less than
half of Bhasha Dam. It would have irrigated a million acres in Punjab and a
million acres barren land in Sindh. A lot of time has been wasted in controversy
with no final output.

Mangla Dam’s height has been raised to increase its storage capacity. Now
Mangla is the largest storage dam of Pakistan in place of Tarbela whose storage
capacity has gone down due to siltation.

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Projects being implemented

Only lately some interest has been revived and many projects have been prepared
for implementation. The World Bank has agreed to finance Dasu Dam - a
4,400MW project to be built in two stages of 2,200MW each. Bids are expected
to be invited by 2018.

Tarbela Dam’s power generation capacity is being upgraded through two projects
Tarbela IV and Tarbela V with capacity of 1,410MW and 1,300MW respectively.

Tarbela IV is at advanced stage of construction and may be completed and

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commissioned in 2018. Tarbela V financing has been approved and is at initial
stages.

Extension projects do not require much time to complete as compared to the

traditional hydroelectric power projects.

Finally, Sukhi Kinari with installed capacity of 900MW has entered into the
implementation phase due to being taken under CPEC. It is perhaps the first or
second private sector hydroelectric power project.

Bhasha Dam of 4,500MW capacity is the most important project. It is a multi-

purpose dam that will produce electricity as well as store water. There is no
controversy surrounding it as there would be no canals and thus no water
diversion. Neither is there any issue of a city being inundated.

Being free of internal issues, it is mired in external issues as it is situated in what

India calls a disputed territory. International financial institutions have asked
Pakistan to get NOC from India which is obviously quite unacceptable to
Pakistan.

USAID has shown interest, but to the extent of scrutinising the design, which
should not have been opposed, but a hue and cry was created by some circles and
demands were made not to hand over the documents to USAID.

Any technical input should be welcome, while we are free to do what we can, if
we have the money.

PM orders timely completion of hydroelectric power projects

The government has, however, continued with the preparatory operations such as
land acquisition. More than Rs100 billion has been spent in the process making
many locals quite rich.

The project is ready for construction. Wapda has prepared a proposal for self and
local financing arrangement according to which the project would have two
stages.

Storage components would be built under public sector financing involving

Wapda’s own income stream, PSDP funding and local bank borrowing. In the
second stage, the power component would be implemented under the IPP regime.
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The proposal is quite reasonable and if nothing happens, we may have to go along
these lines.

Talks with China

There is a parallel stream of negotiations with the Chinese who have reportedly
presented a very grand and ambitious plan of owning and operating the whole
Indus cascade. It is a difficult issue and may involve a bitter debate in the political
arena and thus may be time consuming.

It may be desirable to separate Bhasha Dam from the grand scheme for the time
being and start its implementation with Chinese cooperation. They would be the
most probable builders and EPC contractors in any case.

The grand scheme can be discussed and negotiated and if consensus reached,
Bhasha can be retrospectively included. Pakistan should not delay Bhasha and
should start on its own, as is the case of Ethiopia which has built a similar project
in similar circumstances from its own meagre financial resources.

Problems and difficulties

First of all, all hydroelectric power plants do not have a water storage component.
Except for a few, like Tarbela, Mangla, Bhasha and Kalabagh, no other projects
would provide any significant water storage at all.

Apart from seasonal variations in water/electricity supply, there are long-term

variations as well. Brazil depends on hydroelectric power to the extent of 64-80%
and it has severe problems of power supply due to drought conditions recently.
Brazil is now taking steps towards access to more non-hydro sources.

Due to climate change reasons, it has been projected that in Pakistan there would
be large variations in precipitation and water supply, resulting either in
extraordinary floods or drought conditions.

Having a large component of power supplies coming from hydro would

compound our difficulties - no water and no power. Thus, there is an upper limit
on the ratio of hydroelectric power in the total energy mix.

A large construction period, environmental issues and displacement of people

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have been the other reasons discouraging the increase in hydroelectric power. The
advent of solar and wind power at 4-5 cents has created an altogether new
situation in power markets. Large capacity projects requiring expensive
transmission facilities would increasingly face tough competition from solar
power.

One or two of the major fallacies based on which popular support for
hydroelectric power has been built is that it is cheap and brings water also.

It is true that until recently, hydroelectric power tariff was Rs1 per unit. Now, it is
Rs3.50 per unit, partly as a result of increase in royalty payments to K-P. It is still
an attractive price compared to Rs5-10 per unit of fossil-based power tariff.

However, no more. All recent projects are to produce expensive hydroelectric

power. K-P government is developing expensive projects costing in excess of
$2.5 million per megawatt, resulting in a tariff of around Rs10 per unit,
approaching oil-based electricity.

Neelum-Jhelum has the same situation, although it has unique problems. There
are issues of high re-lending charges which will result in a tariff of Rs14 per unit.
In any case, the tariff cannot fall below Rs10 per unit, whatever financial
restructuring is done.

Golian Valley hydropower plants start working

In China and Canada, hydroelectric power is priced at 4 cents, which is its

average price internationally. In India, capital expenditure on hydroelectric power
is not so high. On the average, it is $1.5 million per megawatt, resulting in a tariff
of about 5 cents per kWh, which appears to be quite reasonable.

There is something terribly wrong or deficient in our hydroelectric power sector -

$2.5 million per megawatt vs $1.5 million elsewhere and a tariff of 8-10 cents
plus vs 5-6 cents elsewhere.

There is a difference of more than twice. May be there are design and engineering
issues, or the monopoly of contractors coming from only one country, perhaps
due to law and order situation.

As there is a long gestation period, there might be issues of escalation formulae

which are normally understood with difficulty and the multi-currency issues as
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well. There could be contract management issues as well.

As billions are involved, it may be worthwhile spending some money to

investigate the issue through credible international advice and a third-party input.

QUESTION: 04

Highlight the major industries of the country. Describe the production and contribution of
economy any one of the industries. (20)

ANSWER:

Pakistan, which had almost no large industrial units at the time of partition in
1947, now has a fairly broad industrial base, and manufacturing accounts for
about 17 percent of GDP. Cotton textile production is the single most important
industry, accounting for about 19 percent of large-scale industrial employment.
Cotton yarn, cotton cloth, made-up textiles, ready-made garments, and knitwear
collectively accounted for nearly 60 percent of Pakistan's exports in 1999-2000.
Other important industries are cement, vegetable oil, fertilizer, sugar, steel,
machinery, tobacco, paper and paperboard, chemicals, and food processing. The
government is attempting to diversify the country's industrial base and to increase
the emphasis on export industries. Small-scale and cottage industries are
numerically significant but account for a relatively small proportion of the GDP at
about 6 percent. Small-scale industry includes facilities, which employ fewer than
50 workers, and cottage industries (industrial units in which the owner works and
is aided by family members but employs no hired labor). In 1999, industrial
production grew by 3.8 percent.
Privatization of many state-owned enterprises is a key element of Pakistan's
reform program. In 1991, the government identified a group of 118 state-owned
industrial units for privatization. Of these, 97 units have been sold off. Industrial
units—including factories producing cement, chemicals, automobiles, food
products, etc.—have mainly attracted domestic private investors. The government
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plans to spend 90 percent of privatization proceeds for debt repayment and 10
percent for poverty alleviation. The government has laid out a time frame for
privatization of various organizations in the financial, oil and gas, power,
industrial, and telecommunication sectors, and the privatization process is to be
completed by 30 June 2002. In most cases, the government aims to find "strategic
investors" to buy up a certain stake of these firms and gain management control.
The privatization process is a very complex undertaking, since new regulations of
private sector entities in these sectors are still being established

Pakistan is an independent state located in South Asia and ranked as the world’s
55th country with the largest factory output. The country's industrial output is
approximately 4% of the country's GDP and has cotton textile production and
apparels manufacturing as the largest industry in the country accounting for 66%
of all export items and employs approximately 40% labor force in the industry.
The use of cotton has increased by about 5.7% in the country over the last five
years, and the economic growth has been averaging about 7%. As of 2010, the
spinning capacity in Pakistan had 10 million spindles, and textile exports were
valued at $15.5 billion, and some of the major industries in the country include
fertilizer, cement, edible oil, steel, sugar, chemicals, tobacco, machinery, and food
processing among others. 

Mining Industry
Pakistan has fast deposits of numerous minerals and other natural resources, and
some of the most important minerals in the country include limestone, chromite,
gypsum, iron ore, gold, silver, rock salt, copper, precious stones, coal, gemstones,
marble, graphite, fireclay, sulfur, and silica among others. The province of Punjab
has the world’s largest deposits of salt, while the province of Balochistan is an
area with rich deposits of oil and gas, although it has not been fully exploited or
explored. The government of Pakistan has recently pursued policies to develop
the region so that it can exploit the vast resources found in the region. Other
deposits of minerals such as zinc are found particularly in the southern part of the
country, while the western part has deposits of gold. 

Oil And Gas Industry

Oil was first discovered in Pakistan in 1952 at Suo Sui in the province of
Balochistan and in 1960 a the Toot oilfield in Islamabad in Punjab province with
production increasing steadily. Similarly, natural gas was also discovered 1952 at
the giant gas field Sui in the province of Balochistan. The country also is a major
producer of bituminous coal, lignite, and sub-bituminous coal. Pakistan started
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coal mining way back during the colonial period, and it has been used in the
country in different industries since independence in 1947. In 2005, a Canadian
based company signed an agreement with the state-owned Oil and Gas Company
of Pakistan to explore the Toot field. Natural gas in Pakistan is substantially large
and the levels of the remaining reserves are thought to so huge, and they are
expected to last for at least 20 years because of heavy use in the country.

Manufacturing Industry

Pakistan is one of the largest manufacturing countries in the world, and it is

ranked as the 30th largest. Manufacturing industry accounts for approximately
20% of the total output in the country, and over the last five years, the
manufacturing industry has experienced an average growth of 3.4% annually.
Manufacturing in the country can be categorized into two; that is large scale
manufacturing, which is valued at $28 billion and the small scale manufacturing
sector, which is valued at $653 billion. Manufacturing industry in Pakistan has
been growing steadily, and in the 2001-2003 financial years the growth in the
industry was about 7.7%, and for the twelve months that ended in June 2004, the
country’s large-scale manufacturing experienced growth of above 18% in
comparison to other years. The garment and textile industry together with its
related products is by far the single largest industry in Pakistan, and it is made up
of 453 textile mills which are composed of 403 spinning units, 50 integrated units
having 9.33 million spindles and 148,000 rotors. 

Prospects And Challenges Facing Pakistan

The current economic outlook of Pakistan presents some opportunities however

the country is also facing different challenges particularly in the long term where
it could severely affect the prospects of growth, and therefore the economy would
only experience some sporadic bursts of the growth as opposed to having a
sustained upward trajectory. Some of the challenges facing the Pakistanis
economy include increasing public debt, reducing exports and increasing imports,
lack of political consensus, low taxation and low investment, low savings and
high consumption-oriented society, and the shrinking share in world trade among
other major challenges.

QUESTION: 05

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Discuss the historical background of insurance companies in Pakistan? Discuss its role in
employment growth of the country. (20)

ANSWER:

INSURANCE INDUSTRIES IN PAKISTAN

Insurance, in law and economics, is a form of risk management primarily used to

hedge against the risk of a contingent loss. Insurance is defined as the equitable
transfer of the risk of a loss from one entity to another in exchange for a premium.
An insurer is a company selling the insurance. The insurance rate is a factor used
to determine the amount called premium, to be charged for a certain amount of
insurance coverage. Risk management, the practice of appraising and controlling
risk has evolved as a discrete field of study and practice.

HISTORY

Insurance appears simultaneously with the appearance of human society. We

know of two types of economies in human societies: money economies (with
markets, money, financial instruments and so on) and non-money or natural
economies (without money, markets, financial instruments and so on). The second
type is a more ancient form than the first. In such an economy and community, we
can see insurance in the form of people helping each other. For example, if a
house burns down, the members of the community help build a new one. Should
the same thing happen to one's neighbor, the other neighbors must help.
Otherwise, neighbors will not receive help in the future. This type of insurance
has survived to the present day in some countries where modern money economy
with its financial instruments is not widespread (for example countries in the
territory of the former Soviet Union).

The Greeks and Romans introduced the origins of health and life insurance in 600
AD when they organized guilds called "benevolent societies" which cared for the
families and paid funeral expenses of members upon death. Before insurance was
established in the late 17th century, "friendly societies" existed in England, in
which people donated amounts of money to a general sum that could be used for
emergencies. Insurance became far more sophisticated in post-Renaissance
Europe, and specialized varieties developed.

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The first insurance company in the United States underwrote fire insurance and
was formed in Charles Town (modern-day Charleston), South Carolina, in 1732.
Benjamin Franklin helped to popularize and make standard the practice of
insurance, particularly against fire in the form of perpetual insurance. In 1752, he
founded the Philadelphia Contribution ship for the Insurance of Houses from Loss
by Fire. Franklin's company was the first to make contributions toward fire
prevention. Not only did his company warn against certain fire hazards, it refused
to insure certain buildings where the risk of fire was too great, such as all wooden
houses. In the United States, regulation of the insurance industry is highly
Balkanized, with primary responsibility assumed by individual state insurance
departments. Whereas insurance markets have become centralized nationally and
internationally, state insurance commissioners operate individually, though at
times in concert through a national insurance commissioners' organization. In
recent years, some have called for a dual state and federal regulatory system
(commonly referred to as the Optional Federal Charter (OFC)) for insurance
similar to that which oversees state banks and national banks.

INSURANCE IN PAKISTAN

Pakistan is in the process of reshaping its economy to meet the challenges of a

global marketplace. The government has introduced a range of reforms designed
to promote and consolidate Pakistan’s position as an emerging market in the
region. The changes have resulted in a deregulated and liberalized financial sector
marketplace.

Pakistan's life insurance sector, nationalized in 1972, operated under the aegis of
the State Life Insurance Corp. and Postal Life Insurance until 1992, when the
government opened it to private sector participation. Foreign companies are no
longer barred from the life insurance business, but they are restricted to minority
ownership. Private companies function in nonlife insurance areas, but the
government insurance business is controlled by the National Insurance Corp. One
of the state's first steps was to standardize and reduce premium rates and to
encourage coverage among a wider segment of the population. In 2001, there was
US$$168 million of life insurance written in Pakistan.

Although filing of rates is no longer required, there are, however, separate parts in
the Ordinance on Market Conduct & Intermediaries which lay down the
duties/responsibilities of Direct Insurance Companies and of Intermediaries. The
developments in the regulatory environment in Pakistan are in line with those in
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the International markets. Compliance with regulations is becoming exceedingly
important.

ISLAMIC INSURANCE

Ibn Abidin (1784-1836) was the first scholar in the Muslim world to discuss the
meaning and legal character of insurance Islamicity of insurance has been under
discussion since then. Opinions regarding legitimacy, adoption, and adaptability
of insurance are numerous. Recently, however, a consensus was emerging for
adapting insurance in the name of takaful and solidarity. As a result, several
Islamic takaful and solidarity companies have been established since 1979.

A prime purpose of Takaful system and its products is to strike the right chord
with Muslim customers who may find conventional products unacceptable and
buy them reluctantly. The takaful system and product may be appealing to them.

The global takaful premium was US$ 1.3 bn. in 2002, although this excludes
premium in Iran. Including Iran, the figure was US$ 2.1 bn. It is estimated that
about 40% of global of global takaful business relates to family takaful. In 2002
there were an estimated 41 companies offering Islamic Insurance (either as
takaful companies or through Islamic windows) in some 23 countries around the
world. The number of takaful companies more than doubled to 87 companies in
just four years (by mid 2006) across 29 countries.

In a new report from Celent, An Overview of Islamic Insurance: The potential for
takaful is enormous given that insurance penetration in most Islamic countries
does not exceed 1% of gross domestic product. Many of the challenges facing
takaful operators are strategic. This market is trying to establish itself. While
skills and resources can be borrowed from conventional insurance markets, there
is significant investment required creating the business.

Insurance provides increasing employment in economy: One of the main

problems in economy is unemployment. Many countries suffer from this problem
nowadays. The number of unemployed people is increasing in developing
countries usually. But insurance system helps to solve this problem in economy.
So, insurance companies provides increasing employment with hiring new
workers. As we know, influential insurance companies such as AXA, Lloyds,
Allianz, Aig have big branches in developed and developing countries. Many
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people from different countries work in these insurance companies. This process
provides employment in economy.

Insurance provides increasing GDP: One of the main macroeconomic

indicators of each country is GDP. A lot of macroeconomic indicators are usually
considered as determinants of profitability. The development level of each
country is measured with volume of GDP. In modern period insurance companies
offer different insurance products to people. When people use these insurance
products they pay insurance premiums to insurance companies. Insurance
companies use these premiums in financial and investment activities of economy.
So, this process increases GDP in economy.

Insurance effects to economic growth positively: The insurance sector plays an

important role in the financial services industry, contributing to economic growth,
efficient resource allocation, reduction of transaction costs, creation of liquidity,
facilitation of economics of scale in investment, and spread of financial [1].
Insurance also helps to develop service, agriculture and industry sector of
economy. It is known that, insurance provides employment in economy and it
provides increasing GDP. With these advantages insurance also effects economic
growth positively.

Insurance effects stability of financial system positively: Insurance is one of

the main fields of service sector. Insurance companies are primary part of
financial system. Besides that, insurance companies play great role in forming
state budget. Because they are big tax payers of the state. As we know the big part
of the state budget is formed by taxes. For this reason, insurance sector plays great
role in providing stability of tax and financial system.

Insurance effects to balance of payments positively: The importance of the

insurance sector is growing due to increasing share of aggregate financial sector
in almost every developing and developed country. Insurance include services of
providing life insurance and annuities, nonlife insurance, reinsurance, freight
insurance, pensions, standardized guarantees, and auxiliary services to insurance,
pension schemes, and standardized guarantee schemes [7]. Insurance companies,
together with mutual and pension funds, are one of the biggest institutional
investors into stock, bond and real estate markets and their possible impact on the
economic development will rather grow than decline due to issues such as ageing
societies, widening income disparity and globalisation [5]. Insurance also effects
to balance of payments of the country positively. For example when one
insurance company insure large scale risk, this company transfers some part of
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risk to another insurance company. We call it reinsurance process. Reinsurance
helps to insurance companies reduce risks and it also prevent appearing financial
loss. Reinsurance also known as insurance for insurers or stop-loss insurance, is
the practice of insurers transfering portions of risk protfolios to other parties by
some form of agreement to reduce the likelihood of having to pay a large
obligation resulting from an insurance claim [10]. Reinsurance lets insurers cover
their risks by recovering some or all of the amounts they pay to claimants. In
reinsurance process insurer can transfer risk also to foreign insurance companies
situated in other country. It effects cooperation of insurance companies and also
countries. Besides that reinsurance effects trade operations of the country
positively. With these factors we can say that, insurance provides increasing
balance of payments of the country.

Insurance provides prosperity of people: Availability insurance in the world is

the best advantage. Nowadays people from different countries can use different
types of insurance. For example in modern period people use such as motor
insurance, property insurance, life insurance, medical insurance, travel insurance.
All these insurance types provides people’s safety and security. Availability
insurance in the world also provides people’s guarantee. It effects their life style
positively. It is known that, insurance increases savings of people. Especially we
can say that life insurance effects positively to people’s savings. When people use
insurance their property, also their life is under guarantee. These good advantages
provide prosperity of people.

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