1947-1958 industrialization of pakistan

8/13/2019 1947-1958 Industrialization of Pakistan

1/43

The Initial Phase 1947 -1958

Presented by : Maham FaiyazI.D # 6889


2/43

Introduction

The presentation is divided into the following

parts:

Problems faced at the time of partition Economic and Financial Development


3/43

Events 1947 - 1958


4/43

Problems faced at the time of Partition

With the birth of a new state, every thing came to a grinding

halt.

The industrial base was virtually non existent.

We were producers of some of the major items of rawmaterial but did not have the processing facilities, the new

state also woefully lacked in administrative, entrepreneurial,

business and financial expertise.

Means of transport and communication were in shambles.

Millions of unexpected refugees swarmed the new state and

required rehabilitation at an enormous cost.


5/43

Influx of Refugees

Till the end of 1955 it is estimated that about 7 million

refugees entered West Pakistan (in East Pakistan it was 1.25

million) as compared to about 5.6 million Hindus and Sikh

refugees who had left Pakistan for India.

The extent of the impact of the refugee influx on the local

population can be gauged by the fact that (according to the

1951 census) the migrants, as a percentage of the total

population of Karachi, were 55 per cent and, in the case of

the Punjab, 25.6 per cent.


6/43

Non Existent Industrial Base

Statement of Industrial Policy of April 1948,stated: A country producing nearly 75 per cent of the world's

production of jute does not possess a single jute mill.

There is an annual production of over 15 lac [1.5 million]

bales of good quality cotton, but very few textile mills toutilize it.

Abundant production of hides and skins, wool, sugarcane,

tobacco.

Pakistansconsiderable resources in minerals, petroleum andpower remain untapped.

In laying down any policy of industrialization, note has to be

taken of these deficiencies and handicaps, and a concerted

effort made to overcome them.


7/43

Collapse of Banking System

The banking and financial sector suffered a similar fate due to

partition, which had eventually collapsed because of

migration of Non Muslims to India who had dominated the

Banking System

Pakistan had no central bank or banking system worth the

name.

The Reserve Bank of India, which was legally a common

property of both India and Pakistan, continued to operate as

a currency and banking authority for Pakistan, and had itsoperation directed and controlled from New Delhi until June,

1948.


8/43


United India had 3,496 branches of scheduled banks,

but only 631 were located in the areas that were to

become Pakistan (East and West). The paid-up

capital and reserves of these banks amounted to nomore than 10 per cent of the total paid-up capital

and revenues of undivided India.


9/43


Of the 631 branches before partition, only 213 were

functioning when Pakistan came into being. The paid-up

capital and reserves decreased from to a mere 1.5 per cent

after partition.

A year later, when the State Bank of Pakistan was established,

the number of branches of scheduled banks had dwindled to

only 195, of which only 65 existed in Pakistan


10/43


The Hindus migrated to India with all economic activity

coming to a standstill. With a large number of commercial

banks ceasing to function, sources of all types of credit for

trade, commerce, and agriculture dried up.

The only scheduled bank that remained in Pakistan was the

Muslim-owned Australasia Bank - too small and ill-equipped

to handle the business. The acute shortage of skilled staff was

a key factor in inhibiting the evolution of even a basic systemof banking.


11/43

Economic and Financial

Development


12/43

Trade relations with India

PAKISTAN - net importers of industrial goods from India

- produced agricultural commodities, such as

cotton, wheat, and jute

In 1948/9, Pakistan's major trading partners were India and

the UK, which together accounted for 67 per cent of

Pakistan's trade, and Pakistan, along with both these

countries, was a member of the sterling area.


13/43

Non Devaluation Decision in 1944

Reasons

One reason why this decision was taken was to announce to

the world that Pakistan was an independent country and did

not mimic Indian economic policy.

Other reasons were to continue to sell raw jute to India (since

Pakistan had no jute mills) at a now higher price, and to be

able to import machinery and capital goods at a cheaper

price.


14/43


Consequences

India punished the newly-born Pakistan by suspending trade

between the two countries and refusing to accept Pakistan's

independent stand.

1948/9, India imported

55.8 per cent ofPakistan's exports


15/43


Options available

Pakistan would have been forced:

to devalue, as was the motive for Indian trade suspension or Pakistan would need to hurriedly find alternative markets for

its exports.

Neither decision was easy


16/43

The onset of Korean War in 1950

Countries began stock piling and storing raw materials and as

demand for them increased so did their price. Jute and cotton

were both in heavy demand and Pakistan was able to make

spectacular profits on its exports.

India and Britain now no longer reigned supreme as Pakistan

was able to diversify into new areas

Pakistani exportsconsisting of jute and

cotton rose by 109%.

BOP improved.


17/43

Liberal Import Policy

Government liberalized trade to the extent that by June 1951

as much as 85 per cent of the imports- were virtually without

licence, importable on the Open General Licence System

(OGL).

India also recognized Pakistan's new exchange rate, and trade

was resumed after a suspension of eighteen months, but on a

smaller scale than earlier


18/43

End of Korean War and Depression In Export Earnings

By mid 1951 world prices of raw materials began to

decline and export earnings also saw a decrease.

But Pakistan was too slow to react, and policiescontinued as if nothing had changed.

In 1952 jute and cotton prices fell, as did exportearnings and Pakistan was facing a serious balance of

payments crisis and sharply falling reserves


19/43


20/43

Imposition of Controls after War

As it did in 1949, the government decided not to devalue and instead

imposed very strict exchange controls and a set of physical controls on

imports and exports.

Export taxes on jute and cotton were raised as a result Exporters of suchcommodities received low rupee prices.

The probable reason for not devaluing in 1952 despite deterioration in the

balance of payments was that capital goods were now needed to start the

process of industrialization and devaluation would have raised theirprices.


21/43

Industrial Development

Background

The Korean War export boom resulted in traders and

merchants amassing considerable amounts of wealth.

Conversion of merchant capital into industrial capital due to

collapse in prices.

With controls imposed on imports, especially on consumer

goods the Prices of these goods increased sharply in the

domestic market which changed the terms of trade in favor of

industry and against agriculture


22/43

And so began the process

of industrialization in Pakistan


23/43


The Trade Policy

Three major aspects:

overvaluation of the rupee relative to other

countries

use of quantitative controls on imports to regulate

the level and composition of imported goods

highly differentiated structure of tariffs on imports,and export taxes on the-two principal agricultural

exports: jute and cotton


24/43


25/43


Import licensing system as exchange-saving device

Direct quantitative controls were dominant in setting prices

and incentives.

Through their substantial impact on relative prices, these

controls speeded the process of structural change both by

imposing the inducements to invest in various industries and

by transferring substantial amounts of income to industrialists

who reinvested them in the profitable manufacturing sector


26/43


Import substituting industrialization

The policy pursued can be put simply as follows:

Produce anything that can be reasonably produced

domestically. Once production has started domestically, ban

imports of competing goods so as to save foreign

exchange.


27/43


Import substituting industrialization

Import substitution progressed easily and very rapidly in thoseindustries that had the highest protection, i.e. consumption

goods, and those that had cheap and ready access to

domestically produced, primarily agricultural, raw materials,

such as cotton, jute and leather


28/43



29/43


Results

Towards the end of the 1950s, Pakistan was in a position to

produce export surplusesas well.

foreign exchange could be savedregardless of cost, and its

desire to produce domestically almost anything that

technologically could be produced.

Private sector initiativein economic growth. The annual

returns on investment ranged from 50 to 100 per cent in the

early 1950s, but dropped to between 20 and 50 per cent in

the latter part of the decade.


30/43

Rehabilitation of Banking System & setting up of SBP

State Bank of Pakistan (SBP), which took over central banking

from the Reserve bank of India (RBI) with effect from July 1,

1948

The payments system was strengthened by establishing the

National Bank of Pakistan (NBP)

The State Bank of Pakistan began operations on 1 July 1948

and became the sole note-issuing authority but the

government of Pakistan at that time had no note printing

press to print them on. The State Bank of Pakistan was facedwith the huge task of establishing a banking system after the

collapse at the time of partition


31/43

Rehabilitation of Banking System & setting up of SBP

Several Banks and Financial Institutions were set up.

MCBin 1947

NBP (National Bank of Pakistan)was set up in 1949. The role

of the National Bank of Pakistan until June 1950 was

restricted to financing jute operations.

ADFC (Agricultural Development Finance Corporation Act)

was set up in 1952. It was set up to meet credit needs of the

agriculturalists and to provide long term finance for the

purchase of mechanical and other equipment.

PIFC (Pakistan Industrial Finance Corporation)was set up in

1949. Important task was to make medium and long-term

credit available to industrial concerns in Pakistan


32/43

Setting Up Of PIDC 1952-53

Private industrialists were not very keen to invest.

Large number of set up by the PIDC in the area ofcement, pharmaceuticals, iron and steel which were

then over to the private sector.

Major objective was to help

establish industries which were

handed the private sector when

they were completed

A i lt S t N l t d th t


33/43

Agriculture Sector was Neglected growth rate

1.2%

The industrial sector, mostly agro-based continued

to obtain supplies of agricultural raw material prices

at prices far below the world prices.

The government ensured that the prices of

agricultural commodities continued to remain low

through combination of price controls and export

duties on agricultural products.


34/43

"Development Board"was established in 1948

under the Minister for Economic Affairs, with

Secretaries of development ministries as

members. D.B was directly answerable to theCabinet or the "Economic Committee of the

Cabinet".


35/43

The COLUMBO plan - 1951-7

Published in 1951 Six Year Development Plan, a

collection of projects, rather than a serious planning

exercise, without any sectoral growth rates or

production targets or a macro framework.

No Aggregate targets were mentioned for the

economy as a whole nor was there any attempt to

relate particular projects to overall targets.


36/43

The First Five Year Plan

Planning Board had serious problems:

shortage of staff

the absence of statistical data

An uncertain status in the government and

resentment from other strongly entrenched

Ministries and Departments particularly the Ministry

of Finance and the State which regarded it as a rivalinstitution.


37/43

The First Five Year Plan

For these reasons that the First Five Year plan could not be

published till April 1957, two years after the First Plan period.

It was officially published as late as March 1957 and was

never given approval by the legislature.

After the two years had passed, it was exceedingly difficult to

follow the strategy as outlined Plan document. One major

factor contributed towards this was the frequent changes of

political governments during this period.


38/43

Monetary Policy

One of the objectives of money policy was to develop the

various aspects of financial sector particularly the banking

system.

In the early years of the country's economic history size of

private sector was small and banks were very conservative in

lending so the private sector used only 25% of the total bank

credit during 1947-58.

Government used 75% of the bank credit during 1948-58.


39/43

Monetary Policy

Bulk of the credit was used by the government to meet its expenditures; it was used to financeforeign trade and commerce. Though the private sector got very small parts of the bank credit.

The number of branches of the commercial banks expanded in the 1950s, these banks

continued to mobilize increasing domestic saving and also supplied credit to domestic industries.

In 1952 the total advances made to different sectors were from:

38%by Pakistani banks

22%by Indian banks 40%by foreign banks

In 1953, 48% of all advances by banks were focused on commercial activity. The bulk

of loans were utilized in financing the wholesale and retail trade of the country.

Advances were made:

16% to manufacturing

One third for metal products and one fifth for textiles.

Not surprisingly, a greater share of credit was extended to West Pakistan to East Pakistan.


40/43

Monetary Policy

71%

24%

5%

Percentage Share in Total Credit

1950-51 to 1959-60

Government Sector Private Sector Other Items


41/43

Issues In Monetary Management

Monetary policy gave

importance to asset side

of the banking systemand up to 1960 bulk of

monetary expansion was

on account of credit to the

government sector- used

75% of the bank creditduring 1948-58

Size of private sector was

small and banks were

very conservative inlending so the private

sector used only 25% of

the total bank credit

during 1947-58

Public sector Private sector


42/43

Issues In Monetary Management

Period Private

sector

Governme

nt sector

Other

items

Total

bank

credit

1951-55 12.8% 73.25% 14% 100%

1956-60 23.95% 70.98% 5% 100%


43/43

Conclusion

Between 1949 and 1958 the growth rate of industry in Pakistan was amongst the

most rapid for any country in the world.

Large-scale manufacturing grew at a phenomenal 23.6 per cent between 1949 and

1954, and afterwards, by the still very impressive 9.3 per cent up to 1960.

With industry growing at high rates, there was' a reverse picture in the agricultural

sector. The most developed areas within the year 1948 to 1958, was the rehabilitation of

the banking sector which improved gradually because most of the banks were

dominated by non Muslims of United India.

Investments in education and health were minimal and they had very low priority

in the total development expenditure.

This era also marked the reason for the now independent Bangladesh, because of

the biasness showed by the government to West Pakistan.

1947-1958 industrialization of pakistan

Documents