1: FORMATIVE PHASE1947-1958

Hamna AhmedLecture Two

Problems

Scant Industrial Infrastructure Large-scale population movement and

heavy influx of refuges Jinnah’s death 1948

Assassination of Liaqat Ali Khan

String of Prime Ministers between 1951-58

Initial Conditions - Industry

Predominantly agricultural economy

Industry contributing 1% to the national income

Lack of Industrial infrastructure Eg: East Pakistan producing 70% of raw jute

of India but did not have a single jute mill West Pk: Large cotton growing region, but

only 3 small cotton textile mills in 1947

Of 14,677 factories in United India, only 1414 (9.69%) were located in Pakistan.

Of these 41% were small scale establishments such as: Flour and rice mills Cotton ginning factories Processing of food grains and agricultural

raw materials

Initial Conditions - Industry

The scant industrial infrastructure was largely in the hands of Hindus, Parsees and Europeans. Upper class muslims largely military officers,

government officials or landlords. West Pk: 80% of the industrial undertakings

before 1947 belonged to non-muslims Lahore: Non-muslims owned 167 out of215

indigenously owned factories. Karachi: 80% of landed property and foreign

trade controlled by non-muslims. East Pk: Picture even more dismal – very few

muslims engaged in trade, commerce and industry.

Initial Conditions - Industry

Initial Conditions - Refugees

Estimated that 7 million refugees entered West Pakistan as compared to about 5 million Hindus and Sikh refugees who had left Pakistan for India.

Before 1947: Karachi had a population of 600,000; equally divided between hindus and muslims.

By 1951: only 4400 hindus recorded out of a population of 1.1 million.

The immediate problem of shelter, food, clothing and medical attention.

Broad Objectives

1. Rehabilitation of refugees

2. Commitment to strengthening defence capability

3. Industrialization

Broad Objectives - Rehabilitation

1. The rehabilitation of refugees

About 7 and 1.25 million refugees entered West and East Pakistan respectively.

Resources; both monetary and managerial were directed towards provision of food, clothing, shelter, medical attention. rehabilitation

Eg: Total central government expenditure on refugees by 1958 was almost Rs.491 million

Broad Objectives - Security

2. Commitment to strengthening defence capabilityDefence expenditure as a proportion of revenue receipts,

development expenditure, and GNP

1949-50 1954-5 1957-8

Defence expenditure 625.4 635.1 854.2

1)% of Central government revenue receipts 63.7 46.6 48.0

2)% of total development expenditure 193.0 114.8 60.7

3)% of GNP 3.0 - 2.0

2. Commitment to strengthening defence capability Government spent about half or more of its

revenue receipts on defence.

Broad Objectives - Security

Broad Objectives - Industrialization Industrialization:

Emphasis on private sector development Government restricted industrial

investment activity to: Arms and ammunition Generation of hydro-electric power Building infrastructure; railway wagons,

telephones, telegraph and wireless equipment. Rest of the industrial field opened to private

development

Broad Objectives - Industrialization Policies and incentives to promote

industrialization and private sector development Over-valued exchange rate, Exchange and import controls, Low direct taxation, Fiscal incentives to promote private industry.

Tax concessions on industrial profits Exemption of capital goods from custom duties

Price controls to keep prices of agricultural raw materials and food products low.

Prices of manufactured consumer goods kept artificially high

Policies and incentives to promote industrialization and private sector development. Set up industrial projects through Pakistan

Industrial Development Corporation (PIDC), handing them over to private sector once established.

Broad Objectives - Industrialization

Development of Industry

Industrial development during the first decade can be studied in three phases:

1947-52 1952-55 1956-58

Establishment of Muslim Merchant Capital;1947-52 Development of two main business and industrial

centres: Karachi; businesses specialized in spices and textile

trade Lahore-Lyallpur areas of Punjab; businesses specialized

in trade of hides, skins, leather, rubber goods etc. Immigration of traditional Muslim trading

communities from Bombay, Calcutta, Gujrat and elsewhere Started new businesses as well as took over the

commercial establishments abandoned by non-muslims

Development of Industry

Development of indigenous entrepreneurship in East Pakistan did not parallel industrial development levels in West Pakistan. Only 2 prominent business families immigrated

to East Pakistan; Adamjees and Ispahanis Despite government’s efforts, emphasis of

private sector was on trading rather than on moving into industry during the first few years; 1950-52

Reason: Korean war boom

Development of Industry

Large increase in prices of raw cotton and jute in international markets, while domestically their prices were kept artificially low.

These traders would buy at low prices domestically and sell at very high prices internationally, making windfall gains.

Development of Industry

From merchant capital to industrial capital;1952-55 A period of high industrial growth With the end of the Korean war boom:

Compared with agriculture and trading, industry became the most attractive sector.

International prices of raw materials collapsed; trade became unattractive

Export earnings fell; to avoid a foreign exchange crises, controls on import of consumer goods were levied.

As a result prices of these goods increased sharply in the domestic market; gave entrepreneurs an incentive to develop domestic industry.

Development of Industry

Growing economic problems;1956-58 Between 1952-55, industrial sector grew at

the expense of the agricultural sector Prices of agricultural raw materials were kept

artificially low while prices of manufactured consumer goods were very high

Real wages remained stagnant Very little employment generated in the

industrial sector; investments were largely in capital-intensive, large scale industry.

Development of Industry

Growing economic problems;1956-58 Agricultural growth rate was less than that of

population; food grains had to be imported; a drain on foreign exchange reserves.

Per capita income remained stagnant b/w 1947-58

Stagnation of the agricultural sector While the industrial sector did well during the

earlier part of the decade; the sector accounted for a small share of manufacturing in GNP

Development of Industry

Growing economic problems;1956-58 The emphasis of development policy

shifted towards agriculture In 1956, a new agricultural development

policy was announced which proposed: Plans to increase distribution of fertilizers Disbursement of subsidies Availability of improved seeds to farmers Control of soil erosion, salinity and

waterlogging Introduction of mechanized farming Emphasis on expansion of irrigation facilities.

Development of Industry

Overall Performance

The overall growth for Pakistan for the period 1949-50 to 1950-60 was 2.5% per annum.

Par capita income growth was negative in East Pakistan and only moderately positive in West Pakistan.

Dismal Performance of Agriculture

The biggest policy failure in Pakistan’s early years was agriculture failure.

Agriculture was less than population growth growing at 1.7% annually.

Causes:

Internal: Policy makers laid more emphasis on industrial growth.

External: Severe floods in the Sindh and Punjab in 1948. Floods adversely affected food grain shortages. In 1951, the failure of the monsoon, continued drought

conditions and locus attacks led to a disastrous wheat crop harvest.

Development of Institutions

Institutional growth was very rapid and impressive. Establishment of Pakistan Industrial Finance

Corporation (PIFC) in 1949 National Bank of Pakistan in 1949 Pakistan Industrial Development Corporation

(PIDC) in 1950 The major objective of PIDC was to help establish

industries which were handed over to private sector when they were completed

PIA in 1956 WAPDA in 1958.

In your opinion what is the biggest challenge/weakness that the economy faces today and why? Suggest possible solutions for overcoming that challenge.