1: Formative phase1947-1958 Hamna Ahmed Lecture 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
Initial Conditions - Industry • 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 - Refugees • Estimated that 7million 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 • Rehabilitation of refugees • Commitment to strengthening defence capability • 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 capability
Broad Objectives - Security • 2. Commitment to strengthening defence capability • Government spent about half or more of its revenue receipts on defence.
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
Broad Objectives - Industrialization • 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.
Development of Industry • Industrial development during the first decade can be studied in three phases: • 1947-52 • 1952-55 • 1956-58
Development of Industry • 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.
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.