Economists and policymakers believe that industrialization guarantees economic growth and development. Additionally, industrial development has historically been very important to every state. The economy is directly proportional to wellbeing and political stability. So, industrialization is a prime factor in order to boost the economy up and to be in frontline for development. In this regard, initially, this paper aims at showing the historical development in the industry of Pakistan. Contemporarily, factors and policies are also analysed to know growth as per policies of 1972-1977 (after the separation of East Pakistan). Secondly, an approach of policy evolution from the policy cycle is applied to analyse things thoroughly. Therefore, the literature on industrialisation and economic policymaking has been reviewed to meet this framework. Additionally, desk research is applied in order to evaluate all policies of the industrial sector in the aforementioned period. Following this whole mechanism, this research falls in an interpretive paradigm owing to the nature of topic which possesses multi realities perspective.
Keywords: Industrialization, Pakistan, Policymaking, Economic growth, Bhutto Era, analysis of Industrial Policies.
An overview of Industrial Strategies
Historically speaking, since the very first decade of 1950-60 Pakistan too remained inclined towards the strategy of import substitution industrialization (ISI) which was the priority of the most developing countries at that time. And during the second decade of 1960-70, ISI and protection of selected industries continued. Moreover, the pro-business approach was followed in order to attract private investment. If the evaluation of the initial policies regarding industrial sector would be made, those ensured impressive industrial development during the first two decades but, on the other hand, it also caused income inequalities and regional disparities. “The resultant political, social, and economic polarization had numerous implications including the dismemberment of Pakistan in 1971.” Initial, period between 1947 to 1971 is remembered as a period of rising and fall of industrial policy in Pakistan. But, the time of 1972-77 has been period of nationalization and state capitalism. During this period massive investments were made in the public sector which bore fruits in the subsequent decade.
Research Methodology and Literature Review
Rationally, this analysis falls in an interpretive paradigm owing to its multi real perspective so in this research paper, the methodology is qualitative and as far as the data is concerned, it is purely secondary. In this regard, the literature on Pakistan’s approach towards industrialization and economic growth is reviewed. Through this literature review, the main issues and background knowledge about the industrial sector and its policies are built and data on industrial performance or its policies is gained. In addition, the work of researchers like Dr Akbar Zaidi and works of various other authors and scholars are gone through.
The Following Literature is reviewed for this analysis:
- Ahmed, V. & Amjad, R. (1984). The Management of Pakistan’s Economy 1947-82. Oxford University Press, Karachi.
- Burki, S. J. (1974 December). Politics of Economic Decision making during the Bhutto period. Asian Survey, 14, 12, 1126-1140
- Colman, D. & Nixson, F. I. (1994). Economics of Change in Less Developed Countries. Cambridge University Press, Cambridge.
- Gustafson, W.E. Economic Problems of Pakistan under Bhutto. Retrieved from: http://online.ucpress.edu/as/article-pdf/16/4/364/67189/2643212.pdf.
- Khan, M. H. (2000). Political Economy of Industrial Policy in Pakistan 1947-71, Working Paper Series No. 98. Department of Economics, School of Oriental and African Studies, London, pp. 1-39.
- Wade, R. (1990). Governing the Market. Princeton University Press, Princeton.
- Zaidi, A. (2015). Issues in Pakistan’s Economy: A political economy perspective (3rd edition). Oxford University Press.
Historical Developments in Industrial Sector: an overview 1947-1977
Pakistan possesses the very inconsistent industrial performance and shows episodes of rising and fall of the manufacturing sector which commences from the classical Import Substitution Industrialization (ISI) and reaches to export-led growth. Since the beginning, the approach of Pakistan towards the industrial sector was very serious and it was considered as a main pillar of development. At the time of independence, Pakistan faced severe economic as well as many other problems.
The structural transformation of a predominantly agricultural, inefficient, and low performing economy was needed, and the early economic managers decided to favour processes of industrialization in the early 1950s. Another compelling factor to pace ahead towards industrialization for Pakistan was falling export prices of raw agricultural commodities and deterioration of the balance of payment situation. Therefore, “the government developed trade policy instruments, economic incentives, and profits which facilitated industrial activity and discouraged other investment alternatives such as trade.”
In Pakistan, the basic strategy for industrialization was to use the public sector for capital accumulation and investment and then transfer the productive resources to the private sector. In the absence of any significant large-scale industry, the early industrial policy identified cotton and jute as the main primary exportable commodities along with the development of local consumer goods sector. Interestingly, Pakistan was producing 75% of the world’s production of jute without having a single jute mill and 1.5 million bales of cotton with a few textile mills. The strategy worked and the country started making progress towards industrialization. “Between 1947-58, Pakistan achieved around 3% of the economic growth rate while the industry grew at the rate of 23.6% between 1949-54 and maintained growth rate of 9.3% by 1960.
In the first decade, Pakistan massively favoured the policy of Import Substitution Industrialization (ISI) which is marked as a classical and successful period of ISI. “The strategy laid the basis for rapid growth in the manufacturing sector for the subsequent decades and helped create exportable surplus as well.” (Zaidi, 2015). The state intervened for creation and distribution of rents as well as tried to influence investment decisions in line with industrial priorities through licensing system, facilitating the import of capital and intermediate goods with overvalued exchange rates. “Policies such as protection against the import of consumer goods along with the provision of financial subsidies and availability of credit provided an environment in which high profits in the industrial sector were possible in the early 1950s.
The decade of 1958-68 is marked as the decade of development by the government of Pakistan. The first five years of the decade witnessed around 17% rate of growth in the large scale manufacturing sector which ended in a 10% rate of growth in overall manufacturing. However, the manufacturing output was around 13% between 1960-70. Growth in agriculture was a key difference from the previous decade, owing to the application of Green Revolution high yielding varieties and improvement in water storage. But the year of 1971completely changed the nature of Pakistan in all terms. The independence of East Pakistan, in fact, created a new Pakistan. Owing to this, the significant shifts in patterns of trade and industrial development occurred. “Before December 1971, around 50% of West Pakistan’s products were exported to East Pakistan and 18% of its imports were from the Eastern wing.
The Eastern wing was no longer part of Pakistan. On the political front, a civilian and democratic setup settled in power which promised to address the issues of inequality. “The revelation by Dr Mahbub ul Haq that 22 families and business houses have accumulated 66% of industrial assets owing to the wrong economic policies of the previous decades had created a charged environment against the private capital. In other estimates, it was revealed that around 65% of loans from Pakistan Industrial Credit and Investment Corporation (PICIC) were given to thirty-seven monopoly houses while 70% of this disbursement was siphoned off by thirteen big business houses.
Therefore, the civilian regime while acting on its election manifesto against inequality nationalized the industrial and financial sector. Industries related to capital and intermediate goods were the first targets and by the middle of the third-decade banking and insurance sector were also brought under the public sector. The regime strategically tried to break the nexus between financial and industrial capital. As a result of such policies, with some exceptions, it is popularly believed that socialist populism under nationalization schemes precipitated a long-term downturn in the economy and retarded the pace of industrialization. Others dispute such claims since a decline in private investment had already started before 1972.
During 1970s, bad luck factors such as bad harvest, floods, and oil shock of 1973-74 were significant reasons behind a perceived economic decline. Economic performance of the regime in comparison with 1950s was not dismal. Zaidi argues that contrary to popular perception, the growth rate of overall GDP was higher than 50s, agriculture growth was almost equal, though there was some decline in the manufacturing sector.
Factor of Foreign Aid in Industrial Development
Pakistan’s development is directly proportional to foreign aid and it played a vigorous role for it. “Industrial credit expansion through the over-valued exchange rate during 1960s was also possible due to foreign aid. In this regard, many scholars argue that it was only foreign aid that caused development in 1960s for Pakistan. The massive inflow of Pakistan paved the way for building economic and social infrastructure for Pakistan. Surprisingly, many researchers have portrayed the development era of Pakistan as a foreign aid-dependent regime in which industrialization massively depended on foreign aid. There is the witness that Pakistan suffered greatly in terms of industrial performance when onwards 1965 foreign aid dried up. Verily, there was not any alternative formed in the absence of external finance. There were no innovative domestic resource mobilization mechanisms. This strategy was adopted in order to achieve technological and industrial upgrades and control over consumption but simultaneously ensuring social well-being of the public.
Industrial Policies of 1972-1977 (Bhutto Era): A Policy Evaluation perspective | An Introduction to Bhutto Era
If we will have a brief look on Pakistan after 1971 or Pakistan in Bhutto Regime, we’ll come to know that Pakistan after 1971 was completely a new one, more than half of the country has seceded and a new country emerged from Pakistan namely Bangladesh in 1971. Keeping in this view, we can analyse that Bhutto had inherited a new Pakistan defeated in war by India. Interestingly, he was first democratically elected Prime Minister of Pakistan and before him, the country was solely ruled by military and bureaucrats. Bhutto’s set up was not only politically different but also his economic policies in general and industrial policies in specific made a sharp break from the pro-private sector strategies of early years. Owing to this, the Bhutto regime highly accused of having the worst economy as compared to the first two decades.
If evaluation and criticism over his policy of socialism would be done, it caused dismissal in growth rates and resulted in high inflation rates which Pakistan has ever witnessed. There were poor policies and bad economics that caused malaise in his era. Contemporarily, nature too was not in his favour, for there came massive floods (bad luck factors) in his regime which one or other way affected economy of state at a high level. There is no doubt that growth rates of the 1950s and 1960s were particularly impressive but in Bhutto’s regime the mega mishap was the breaking of East Pakistan and it directly affected the economy at a broader level.
Industrial Policies of 1972-1977 and its outputs: An application of Policy evaluation
As soon as Bhutto came into power, he as pretended in manifesto nationalised all the basic industries and financial institutions. As far as his economic policies were concerned, he had endorsed that the means of production that are the creators of industrial advancement and on which other industries depend would not be given into private hands. Secondly, all enterprises that constitute the infrastructure of the national economy that must be in the hands of the public and for that there would be public ownership. Thirdly, he also nationalized the institutions dealing with the medium of exchange i.e. banking and insurance. Briefly, economic policies of Bhutto government depended on the premise that the control of leading enterprises was to be in the hands of the state.
In the first phase, the large scale manufacturing sector, essentially in the capital and intermediate goods industry was nationalized. A small share of the total value was produced and added to the sector (less than 20%) owing to this. Since much of the growth in this sector has taken place in the consumer goods industries. Sooner, nationalization started expanding to the vegetable oil sector, cotton ginning and at last in rice milling. The nationalization of banks and insurance companies was a critical assault on the close link that had built up industrial and financial capital since the mid-1950s. Economic concentration occurred due to this and it was one of the causes of this link and it turned into a political issue in the late 1960s. “The party’s promises to urban organised labour, as to rural peasants and agricultural workers, were fulfilled within six months of coming into power through the labour reforms and land reforms of 1972”.
Furthermore, the devaluation of Pakistani rupee by 131% had important consequences and at once the removal of subsidies the industrialists were receiving in the earlier period owing to the overvalued exchange rate. This reform had increased the prices of all agricultural goods and it was an attempt of deliberate alteration of pro-industry from agriculture as of the previous growth strategy. In this regard, the Bhutto regime also abandoned the export bonus scheme of 1960s.
If an evaluation of this government’s policies is done, it will be important to see what this government had inherited. The mishap of breaking Pakistan, if for no other reason was important, because 50% of West Pakistan’s products found their way into East Pakistan in 1969-1970. And, the loss of such a huge market was cause for concern enough. Additionally, 18% of West’s imports came from East Pakistan (present-day Bangladesh). So, following this, new Pakistan had to form new markets to meet this massive loss of market. The success of devaluation was transparent when new markets were found and the value of export to areas other than former East Pakistan increased by 41% in the financial year 1972 and 39% in the financial year 1973.
This reflected both a sharp jump (about one-third) in the size of the cotton crop in the exports of cotton and cotton textiles and the successful diversion of the most of flow cotton, textiles, rice and other goods with which West Pakistan previously reimbursed East Pakistan for its flow of jute and jute earnings to West Pakistan. In the year 1972-1973 exports increased at the level of 153% as compared to the previous year and as far as the manufacturing export was concerned, it rose up to 19% in the year 1973-1974 which was owing to favourable world demand condition of cotton textiles, and the capacity available for production for exports following the loss of east wing market in 1971 according to Asian Development Bank (ADB).
This growth in exports was followed by the growth in industrial output between 1972 and 1974. Moreover, agricultural output too rose up and this happened because of higher support prices for wheat, rice, sugar, and adequate supply of essential inputs. In all this, credit availability played a vital role for improving the performance, because in May 1972 when the government had successfully tightened its grip over the banking system, this provided the plenty of credit for export sector and for farming at a low level. In 1973, the State Bank of Pakistan initiated the export refinanced scheme, and it availed the lower lending rate than the nominal banking rate or market rate.
But as it is rightly said, nothing is permanent so that happened to Pakistan. The economic vigorous boom of 1972-1973 and 1973-1974 stayed shortly and was attributed to the rebound of domestic demand following the disruption in an economy in the early 1970s and to worldwide commodity boom. However, the world recession after 1974 slowed the demand for Pakistani exports. After the remarkable about two and a half years of impressive growth, the last three years of the Bhutto regime suffered dismissal in growth rates. Last three years of Bhutto Regime also faced a big push simultaneously in public sector investments which caused a dismissal in performance of both i.e. agricultural sector and industrial sector.
If the policy of nationalisation is evaluated, we will notice its massive consequences. This policy of nationalization highly affected private and public investment with a complete reversal. “The substantial contribution by the private sector in 1960s was cut down at a high stoke. In 1974-1975, the height of Bhutto Regime’s nationalization programme, private sector investment was only 15% of its 1969-1970 level. In 1970-1971, the public sector investment was 5% that rose up to 75% at the end of the Bhutto era.
It had been an ambiguous factor that Bhutto’s nationalization was only responsible for that but here is worth noticing in order to analyse that private investment had already started to decline before nationalization was implemented in 1972. The anti-industrialists’ policies of and great uncertainty of the 1972-1977 period were also the reason behind lessening the private sector investment. Moreover, the private sector had lost all the trust in government because Bhutto had not fulfilled his promises. He had promised that there would be no further nationalization (after the nationalization of the vegetable oil industry in 1973) until the elections of 1977 but his all promises remained incomplete. So, the remaining little bit confidence in his regime was completely gone now, for such promises were broken time and time again.
An evolution of Bhutto Regime’s Industrial Policies (1972-1977) in the lenses Bad Luck Factors
It is transparently clear that our economy suffered massively after 1974. The wrong policies i.e. demotivating private investment and nationalization could be considered the main factors behind this. But, contemporarily there occurred many reluctant and natural disastrous events which government was not able to deal with, those were responsible too for poor performance of the economy after 1974. Like, the reluctant issue of increase in prices of imports following the oil price rise in 1973 which resulted in inflation at close to 30% in 1973-1974.
The gain of exports was highly affected when oil price rise had just begun and resultantly, a positive balance of trade of 1972-1973 was wiped out. Contemporarily, there was some positive sign in export growth but at a slow place and owing to this, the import bill had significantly grown. “In one year alone, oil imports rose from 60 Million US Dollars in 1972-1973 to 225 Million US Dollars in 1973-1974, fertilizers increased from 40 Million US Dollars to 150 Million US Dollars in the same period. This huge rise in oil prices was an international recession that was far from Bhutto’s grip.
In addition to this, industrial production was highly affected in five years of Bhutto government due to floods and pest attacks which severely damaged crops. In 1974-1975, failure of cotton crop occurred at a time when there was a surge in international prices. Hence, Pakistan could not turn those situations into her advantage. The remaining worsening blank was filled by massive floods in 1976-1977 which had devastated large areas of cultivated lands. Inflation was clearly visible in Bhutto’s regime and it was noticed him the greatest of failure, but a close analysis of the management of economy and growth of monetary assets would suggest that much of inflation was imported.
The analysis also portrays that excessive monetary occurred only in the first and last of his (Bhutto’s) five and a half years. The year 1971-1972 was basically a good increased year due to the necessitated adjustments by the loss of East Pakistan and to the increase in exports. His regime could be marked unique in terms of economic management without deficit financing if floods did not occur and monitory expansion was kept well in line with GNP Growth and was made limited to the private sector only. There is an ambiguity in the literature produced regarding the Bhutto era that the economy in his period was in a shamble only comparing it with the growth rate of the sixties. “But, Shahid Javed Burki, otherwise a critic of Bhutto’s politics, also maintains that ‘Pakistan’s performance during the seventies appears unsatisfactory only when compared to that of the sixties. The seventies produced a better overall record compared to the fifties.
Rationally, the key causes behind the low growth in the mid-1970s were in fact extremely adverse weather cycle together with the international recession. In this regard, there was also a massive blank of effective government policies which were not rationally set on agenda and were not critically evaluated. Like, industrialists were considered as suspicious and in response, industrialist paid government into its own coin by generation deliberate and artificial crises. Simultaneously, the organised labour was elevated with the psyche of greater right to the share of industrial production that caused more fears and outright of nationalization for industrialists. The worst thing was entrepreneurs were demotivated and demoralised, so they were reluctant to invest massively. Capital and capitalists had gone out of the country for business and investment that too had created a vigorous crisis for the industrial sector.
Ironically, may what the factors were but it was clear that Bhutto’s regime was economically worst for Pakistan. “Nawab Haider Naqvi and Khuwaja Sarmad have argued that this period was a period of domestic and international economic turmoil, significant external shocks and economic dislocation and disruption. Concisely, it can be concluded that things in Bhutto’s Regime were not as worse as those have been depicted keeping inherited Pakistan after the Fall of Dhaka in view. Secondly, this regime possessed the more natural disastrous incidents which caused low growth rates or haunted economy in greater means than the poor management. But we could not ignore its socialism and nationalization policies which were his deliberate policies and had affected economy massively.
The industrialization has been the priority of Pakistan since its inception, for this was a way that could lead towards development; the utmost element for Pakistan in order to survive. So, in this regard, the first two decades depict massive economic growth due to the advancement of the agricultural sector and was followed by the industrial sector. But the Bhutto Regime was significant in many terms specified in the terms of Breaking of Pakistan which caused a new shape of the country and many difficulties. Despite these issues, his first two years from five and a half of years tenure showed exemplary growth by any standard. In the very same years, such incidents happened over which Bhutto had not any control and which slowed down the growth rate. There was dual kind of mishaps, first was of bad policies into which private investment was discouraged and second was bad reluctant and natural incidents which thwarted economic growth.
The Author is Research Scholar at Quaid-e-Azam University, Islamabad.