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The Evolving Policy Framework
Restrictions and economic controls in Pakistan during 1947-55 Protection to manufacturing through over valued exchange rates Import licenses Quantitative restrictions
Unfavorable exchange rates to agricultural exports Curtailing import of manufactures Domestic prices of manufactured goods maintained at a high level Agricultural goods Prices kept low
Increased the profitability of manufactured goods causing rapid increase in investment in the manufacturing sector
Impetus to manufacturing : ± Devaluation between primary and manufactured goods ± The provision made in the export subsidy
2.Pre-liberal Era Second five year plan (1959-65) Two liberalization measures 1. Tendency towards indirect controls Increasing the volume of imports Marginal effect on Goods to be imported without Export bonus scheme(1959) liberalization Open general license system(1964) license Licensing system influenced the direction of industrialization in Pakistan By giving greater protection to consumer goods rather than intermediate & investment goods .
Pre-liberal Era Third five year plan (1965-70) ± Emphasized liberalization and indirect controls ± Setbacks to liberalization on account of the indo-pak war. bad harvests during 1965-67 & a decline in foreign aid Open the economy to competition (1972) ± Rupee was devalued ± Import licensing and export bonus schemes scrapped ± tariff rates were reduced The value added approach (1970) ± share of manufacturing GDP at world prices is almost insignificant for Pakistan Problem ± no distinction between inefficiency and high profitability .
Pre-liberal Era Exchange rate policy ± Influenced manufacturing labor capital ± Redistribution of income among income groups accentuating the already skewed distribution of income Investment & import license (1960s) ± Barriers to entry ± High aggregate concentration in the economy ± Industrial families had great leverage over PICIC and IDBP by having their representatives on the board of directors Characteristic of the corporate environment (1960s) ± Inter-locking directorates between industry. insurance and trade ± Oligopoly in manufacturing market ± Resulted in windfall profits for the industrialists in Pakistan . banking.
Pre-liberal Era Monopolies and restrictive trade practices ± Promulgation of Control and prevention ordinance (1970) ± Monopoly control authority (MCA) formation Rapid industrialization in1960s ± Socio-political fallout led to the abandonment of successful growth strategy .
motor vehicles. gas. vegetable ghee. heavy electrical equipment. refineries. petro chemicals. cement . heavy engineering. tractors. banks and insurance companies Nationalization ± ± ± Ineffective in lessening the concentration of income & wealth Converted private sector monopolies into public monopolies Burden on the national exchequer . basic metals.Pre-liberal Era Policies Reversal ± nationalization of industries including iron. steel. electricity.
5 8.72 6.4 3.74 6.6 6.72 5.Growth Performance of Components of GNP 1978-85 Commodity Producing Sector 1980's 1982-83 1984-85 1985-86 1986-87 (R ) 1987-88 (E) _ 6.8 6.6 7.48 4.7 5.9 .5 Manufacturing 9.2 7 8.74 6.6 Services Sector GDP (Constant Factor Cost) GNP (Constant Factor Cost) 5.7 6.1 6.4 6.97 6.1 5.5 5.48 2.2 4.84 7.63 8.4 5.8 _ _ 5.7 Agriculture 3.7 4.9 6.9 _ 5.8 12 6.58 7.48 5.5 7.6 5.
security printing. currency and mint.The Onset of Liberalism 1987-1990 ± ± ± ± Removing the barriers to entry and exit of firms Increase in the investment sanction limit Removal of non-tariff barriers Reduction in tariff levels Only Four industries require government sanction ± Arms and ammunition. infrastructure & energy Improving efficiency of public manufacturing enterprises . high explosives and radioactive substance Dis-investment Programme ± ± Denationalization of utilities.
The Onset of Liberalism Problems : ± SOEs are sold at low prices due to inadequate restructuring ± Policy for allocation of certain percentage of the business to foreigners ± Selling companies to individual buyers leads worsening already skewed distribution of income & wealth ± Foreigner buyers can undermine sovereignty of country ± Converting public monopolies into private monopolies leads to deterioration in efficiency. savings. incentive structure etc Beneficial privatization : ± Only if public monopolies are converted into private competition .
3% Dismal Growth performance in 1998-99 Marginal increase in contribution of manufacturing sector 16.Key Economic Indicators Irregular Growth (1990s) manufacturing sector depicting violent fluctuations Worst decline in GDP growth rate in 1996-97 @ 1.6% .2% Growth performance of the small-scale sector leads to 7% increase causing GDP registering an increase of 4.7% to 18.3% due to Political uncertainty Impact of structural adjustment policies leads to deceleration of growth rate of manufacturing sector @ 1.
5 Source: Pakistan Economic Surveys 1994-95.2 3.9 6.2 3 Agriculture 4.9 GNP (Constant Factor Cost) 4 _ 5.6 0.8 1.1 Manufacturing 4. 1999-00.6 3. .Growth Performance of Components of GNP 1990's 1993-94 1994-95 1995-96 1996-97 (P) 1997-98 1998-99 1999-00 Commodity Producing Sector 4.75 _ _ 4.76 2.6 49.4 Services Sector 4.54 5.9 4.8 4.1 4.1997-98.57 5.8 0.8 18.2 _ 4.8 1.1 3.3 3.15 1.6 _ 5.6 50.3 2.66 5.2 3.3 4.4 24 6.6 4. and 2000-01.06 3.1 1.2 3.24 5.9 5.8 GDP (Constant Factor Cost) 4.19 7.
unemployment rate has been estimated at a little over 6% . but declined with the advent of the liberalization era Tendency towards premature deindustrialization.Contribution towards Labor Share of industrial employment increased until 1987. with the country moving away from being a manufacturing nation to being a trading nation Decline in the industrial labour force and increase in the service sector labour force is a post-industrial phenomenon Labor force increased & estimated @ 38.6 million in 1999 .
TABLE ± 2.3 .Distribution Of Employed Persons Of 10 Years Age & Above By Major Industries Division .
27 .407 0.41 0.8 0.23 1986-87 5.22 1987-88 6.4 0.4 0.27 1993-94 4.23 1990-91 5.5 0.3 0.4 0.3 1992-93 2.Decline in growth rate increase in the Gini coefficient reflecting increase in income inequality Year GDP Growth Rates Household Gini coefficient Theil coefficient 1985-86 6.355 0.348 0.6 0.346 0.
followed by mineral products Small-scale manufacturing units in the rural areas are less than half of those in the urban areas . beverage & tobacco Metal products share 16 % wood and furniture share 10% of the total. leather share 30% followed by food.Small Scale Manufacturing 1.000 manufacturing units ± 1988 Textile.84.
9 per cent). industrial chemicals (19. printing and publishing (21. non-electric goods (19.8 per cent). iron and steel basic industries (20.9 per cent). wearing apparel (27. transport equipment (19.Growth of the Large-Scale Manufacturing Sector 1960s & capital Spectacular Growth higher than rates of growth of labor Lost Decades capital and labor 1970s .7 per cent).9 per cent).5 per cent ) . furniture and fixtures (20.6 per cent).3 per cent). plastic products (24.8 per cent).1980s Lower than the rate of growth of negative productivity growth textiles (20. sports and athletic goods (32.1 per cent).0 per cent). leather and products (19.
4 9.7 .1 1980-81 to 1990-91 6.7 15.1 1959-60 to 1969-70 26 17.Growth of the Large-Scale Manufacturing Sector Compound Annual Rates of Growth Period Value Added Capital Labour 1955-56 to 1959-60 19.8 15.5 3.1 16.3 16.8 1955-56 to 1990-91 13 11.5 17.1 9.1 1969-70 to 1980-81 6.
INDUSTRIAL COMPETITIVENESS THE CHALLENGE FOR PAKISTAN .
WRITERS Sanjaya Lall( 13 Dec 1940. Asian Development Bank . Senior economist at World Bank Areas of interest included the impact of FDI in developing countries and the economics of multinational corporations 33 books Research Director. Professor of Economics & Fellow of Green Templeton College. Oxford University.18 June 2005) & John Weiss Development economist.
INTRODUCTION Globalization carries opportunities and threats Pakistan¶s economy is at crossroads with domestic policy changes and end of the international textile quota regime The aim of the paper is to benchmark Pakistan¶s industrial performance against competitor economies and highlight the key lessons .
Government support to attain competitiveness. Capabilities relating to physical infrastructure. skill development and technological effort. . human capital. Essence is to promote in-firm learning.UNDERSTANDING INDUSTRIAL COMPETITIVENESS The ability to compete with firms at the international frontier of best practice. finance and technology. supply of information and collective learning processes.
UNDERSTANDING INDUSTRIAL COMPETITIVENESS Competitiveness policy for efficiency and entry into very complex and high technology activities. Limited Government interventions to tackle clear and well understood market failures In Pakistan. there is a need for support of firm level upgrading and technical change. .
THE CHANGING NATURE OF COMPETITIVENESS Globalization is altering the environment facing developing country enterprises Competition requires use of new technologies and best organizational methods International competition is bringing new market opportunities Need to constantly upgrade technology Need to shift the economy. its institutions and infrastructure from a low to a high competitiveness path . its human capital and technology base.
NEW DYNAMICS OF WORLD MARKETS High technology activities have grown faster in both production and trade Technology intensive industrial activities are dynamic and offer export possibilities. Promote structural change Developing countries export of manufactured products grew faster than industrial ones .
starting by performing relatively simple assembly. The reasons for growing exports of technologically complex products in developing countries are: Domestic capabilities in high technology driven by strong industrial policy. tariff escalation and subsidies in industrialized countries. design and branding requirements. Growth of some resource-based and low tech products held back by trade barriers. 2. . protection of infant industries. allocation of credit and promotion of local R&D. 4. 1. Limited export growth in labor-intensive activities due to the very demanding skill. Countries have become major high tech exporters through integrated production systems. 3.
Pakistan: the current policy environment for manufacturing International competitiveness requires ready access to international inputs and domestic market subject to competitive pressure Highly protected domestic markets penalize the economy by allowing inefficient domestic producers Infant industry support policy should be time-bound and performance linked Pakistan has liberalized its trade policies and it is one of the more open trade regime in South Asia. .
56% in 1995 and around 80% in 1985 Investment policy introduced in 1997 Foreign investors are guaranteed national treatment. face low import duties on plant and equipment and receive a first year profits tax allowance FDI inflows and domestic investment low due to national and regional political situation .Pakistan: the current policy environment for manufacturing Average import tariff was 20% in 2001-2.
India and Bangladesh Slow growth in private investment has been one of the key constraints on Pakistan¶s economic growth .Pakistan¶s current policy environment Pakistan is a low wage. labor surplus economy Wages are significantly higher than Bangladesh and slightly higher than India. Higher cost location than China.
REGULATIONS Heavily regulated business environment indicated by the number of Government inspection visits to a factory in one year and the number of days to clear customs Lengthy delay in customs clearance makes it difficult for business to keep optimal level of inventories Regulation also judged by the time and cost required to start up a new business .
Infrastructure Deficiencies Infrastructure in the power sector impeding the operation of enterprises Shortage of fixed line connections in the telecom sector Waiting time and connection costs for phone lines are both high by international standards High transportation costs affecting exports .
2% in 1980s and at 3.2% Value added grew at 7.8% in 1990s Growth of around 3% in both 2001 and 2002 A very low share of medium and high tech products with very slow upgrading overtime Largest export product in 2001 was made-up of textile articles .5% between 1980 and 20000 and per capita GDP at 2.Benchmarking Pakistan¶s Performance Manufacturing grew at a compound real annual rate of 5.
. Pakistan requires upgrading of production capabilities . quality and marketing relative to competitors.Benchmarking Pakistan¶s Performance Pakistan gained world market in cotton fabrics and lost in the textile yarn Textile yarn is dynamic in world trade but most apparel products are in the non-dynamic segment of trade.
of technicians in R&D. Per capita R&D spending is also the lowest and enterprise financial R&D is negligible. in 2001 Pakistan spent less on human capital than its comparators. Pakistan ranks below all other South Asian economies even Nepal. of scientific and technical journals and technical fees per capita also highlights the weak position . of scientists engaged in R&D per million inhabitants. the no.Benchmarking Pakistan¶s Skills & Technological Capabilities By most common indicators of skill creation. The no. the no. Pakistan performs poorly by regional standards. By indicator of Government expenditure on education as percentage of GDP.
Singapore. . Instead of direct intervention and involvement of Government in enterprise decisions.Lessons from East Asia Newly industrialized economies like Korea. Malaysia & Thailand have each succeeded in diversifying out of traditional primary exports into more dynamic manufactured goods. Pakistan needs to undertake industrial promotion and support. China. Governments using additional measures for promotion to raise the profitability of exporting Pakistan needs to diversify export structure and establish links with global value chain. Hong Kong.
Taipei and China Initiatives of public-private collaboration and suitable alliances to foster technological capability .Lessons from East Asia Skill formation and training in Singapore Stimulation & support for local technology development in Korea .
1.CONCLUSIONS The development of industrial strategies involve five main steps. A detailed assessment of the industrial sector and main subsectors The development of a national µstrategic vision¶ To design policies and programs To implement these policies & programs To monitor the progress of the strategy. 4. 3. assessing their success and adjusting them as necessary. . 2. 5.
Setting up an industrial competitiveness agency by combining the work of the EPB & the Board of Investment Allocating resources and deciding on the main engines of industrial competitiveness Examine closely the experience of countries successful in developing competitive bases with the help of benchmarking & policy analysis
Public investment in relevant technical and general education as well as the strengthening of public R&D activities Improve physical infrastructure, reduce bureaucratic restrictions and ensure continued macro stability Address critical competitiveness problems at the firm level through Government support like cost sharing for various consultancy services
Industrial Concentration & Aggregation
Industrial policy led to rapid industrialization Rise to concentration of income & wealth Study reveals the origin of concentration in Pakistan¶s various sector of economy.Introduction Industrial concentration concerns the distribution of production within an industry 1960. .
70% of insurance funds and 80% of total bank assets .20 families controlled 66% of industrial efforts. while 24 controlled nearly 50%.Earlier Studies Sobhan (1965) . Papanek (1967) .8% of all value added.75 manufacturing units receive 43. Mahboob-ul-Haq's (1968) .7 individuals and companies controlled 25% of all private industrial assets.
Earlier Studies White (1974) . their origin and effects. The study aims at computing concentration for individual markets as well as for the entire economy for two points of time i. ± 33% concentration ratio is taken as the starting point of oligopoly formation. banking and insurance concentration levels.e. aggregate industrial.study on market/seller concentration. manufacturing. Liberalization and privatization of Pakistan¶s economy during the 1990s might have affected the concentration level of the economy. over three -fifths of manufacturing value added originated in oligopolistic industries in Pakistan. 1992 and 2000 .
AC = aggregate concentration / concentration of economic power. and Si = share of fixed assets of top 3 firms in industry fixed assets Herfindahl Index ± Si² = share of fixed assets of each firm in total industry fixed assets squared.Methodology Market/Seller concentration is measured by Concentration Ratio ± ± Where CRn = top 3 firm concentration ratio. For computing Aggregate Concentration the measure will be. n = 100 Si = proportion of fixed assets of top 100 financial. . non-financial and service sector firms in total fixed assets of these sub-sectors.
industry and service sectors fixed assets were added together. ± 24 Financial.Data Source Data for computing market and aggregate concentration have been taken from the balance sheets of companies listed on the Karachi Stock Exchange (KSE). . Manufacturing and service Sector For computing aggregate concentration the top 100 firms in finance.
64 percent in 2000 in terms the CR3.91 percent in 1992 to 60. ± While according to the HI the overall increase has been from .2464 to .3402.04 percent in 2000 in terms of the CR3. ± But in terms of the HI the overall concentration level has declined slightly from .75 percent in 1992 to 78.1931 during the same period .1946 to . For the financial sector ± Concentration level has increased ± From 49.Estimates of Market/Seller Concentration for Pakistan For the 18 manufacturing industries ± Concentration level has increase ± 69.
engineering. cotton weaving.Estimates of Market/Seller Concentration for Pakistan Overall concentration level during 1992 to 2000 for the two service sector industries declined ± from 93.5605 during the same period. But the overall trend revealed by the HI reflects increase in the overall concentration level ± from . food. cement and mutual funds . tobacco. chemicals. textile composites. Industries recording high but declining levels of concentration ± synthetic and rayon. paper and board. fuel and energy. Industries recording high and increasing levels of concentration ± leather and leather products.71 percent in terms of CR3. cables and electric goods. glass and ceramics.4235 to . transport and communication (declining level according to CR3) pharmaceuticals. woolen and woolen textiles.93 percent to 82.
Estimates of Market/Seller Concentration for Pakistan .
Estimates of Market/Seller Concentration for Pakistan .
glass. . pharmaceuticals. Industries with a high level and rate of growth of market concentration ± edible oil. woolen textiles and electric goods. cotton weaving. While the concentration level in the cement industry has remained almost constant. cotton spinning.Estimates of Market/Seller Concentration for Pakistan Comparison A comparison was also made for changes concentration level during the last three decades in There is an overall rising trend in the level of concentration for the last several decades . cigarettes. cotton composites. Iindustries with high initial levels but declining trends ± sugar. paper and board and rayon textiles. leather goods.
Estimates of Market/Seller Concentration for Pakistan Comparison .
Estimates of Market/Seller Concentration for Pakistan Comparison .
Top 100 firms in terms of fixed assets were identified and the gross value of their fixed assets added together in 1992. .Estimates on Aggregate Concentration of the Publicly Incorporated Sector Aggregate concentration was estimated for Pakistan¶s economy by the use of equation 3 discussed in Methodology.
competition generates more progress for a given R&D. as it confers higher rewards as well as forces firms to innovate. . ± The question of whether competition or monopoly is more conducive to technological progress ± The general consensus seems to be that by and large.Impact of Concentration on Performance Impact on Research and Development (R&D) and Innovations.
Impact of Concentration on Performance Shephard (1997) states that ± though the replacement effect of innovations. . ± For a competitive firm on the other hand. a monopolist will bring new products and processes more slowly than the socially optimal rate. So innovations take market share from other firms and not just from the innovative competitive firm itself. ± Such a firm is therefore likely to innovate at µmaximum speed¶ in order to capture maximum profits before the competitors do so. but for a monopolist the effect falls entirely on its own products. through destroying the value of existing products and capital goods operates on all firms. ± On account of this. the replacement effect of innovations falls on products and processes which are shared by many producers.
but delays the innovation phase The adverse impact of market power on technological progressiveness is not likely to afflict Pakistan¶s manufacturing sector.Impact of Concentration on Performance Innovations therefore tend to be led by smaller firms in a market. The dominant firms invents actively. ± 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. .
But the new-Chicago school attributes it to efficiency.Impact of Concentration on Performance Impact on Efficiency. The Efficient Structure Hypothesis states that larger firms higher rates of return reflects greater efficiency (Demsetz 1973). X-inefficiency is closely related to market power. ± The interpretation of a positive concentration coefficient in the profitability equation reflects market power according to Cowling (1982) and luck according to Mancke (1974). . ± 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. ± 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. ± These high prices might be on account of X-inefficiency and or higher profitability. Profits and Prices ± Micro-economic theory states that prices are higher under monopoly than under competition.
9 percent during 1990-91.3 percent in1955-56 to 23. There is. High concentration levels causing high profitability and worsening the skewness in the distribution of income in Pakistan. Sharwani (1976). . ± White (1974). The wage share of income in Pakistan¶s large-scale manufacturing sector declined from 37. Amjad (1977) and (1982) and Wizarat (1992 and 2002) found concentration to be a significant determinant of profitability for Pakistan¶s large-scale manufacturing sector. ± Ahmed (1980) and Wizarat (1989 and 2002) hence attributed the decline in the wage share of income to high profit margins for the period 1955±1991. therefore. ± The high profitability results in transferring income from a large segment of the society to a few.Impact of Concentration on Performance For Pakistan. a causal link from concentration to profit margin to wage share of income.
Market concentration was computed using CR3 and HI for 18 manufacturing.Summary & Conclusion This study has tried to fill the gap in the availability of estimates on market and aggregate concentration for Pakistan. thus adversely affecting the labor share of income. In line with the expectations of the Monopolistic Pricing theory there is evidence that high levels of market concentration lead to high profitability. . two service and four financial sectors for the years 1992 and 2000. The overall increase in manufacturing concentration For the financial sector the overall concentration level has increased In the service sector the overall concentration level has declined Increase in the level of market and aggregate concentration has ominous consequences on the distributing of income in the country.
Summary & Conclusion And finally. And while concentration is fairly stable. Do changes in concentration computed in this paper truly reflect the competitive forces in the economy? This concern is all the more pressing in view of Davies and Geroski (1997) that changes in concentration using industry level data conceal as much as it reveals about the nature of the competitive process. . this stability conceals a great deal of turbulence in market shares of the leading firms. In view of this. further research on market shares of leading firms is called for. They find that changes in market share of surviving firms are the dominant influence on changes in industry concentration. the fear that keeps lurking the heart and mind of a research on account of the reliability of the estimates. which would throw more light on the nature of competitive forces in Pakistan¶s economy.
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