INDUSTRIALIZATION

OR
DE_INDUSTRIALIZATION?
(Situation Analysis 2003)
Dr. Mirza Arshad Ali Beg
136-C, Rafahe Aam Housing Society, Malir Halt, Karachi-75210

Pakistan had, during its early years realized the need for development of
appropriate industrial infrastructure that included setting up industrial estates and
an engineering base. The first such estate was established beyond Lyari in Karachi
at the present Sindh Industrial Trading Estate, SITE at Manghopir road. It was
provided necessary facilities such as water, roads, and waste disposal system. To
augment the pace of industrialization, the Shipyard and Engineering Works was
created to cater to the needs of engineering material, plant and equipment.

The Pakistan Council of Scientific and Industrial Research, PCSIR was created in
1953 to develop technologies for utilization of indigenous resources, dissemination of
results of research and solving problems in processes and operations besides those
encountered by newly established industries. The Pakistan Industrial Development
Corporation, PIDC was created almost simultaneously to serve as the recipient of
technologies in heavy industries such as cement and in those for which private
investment may feel shy. PCSIR and PIDC were charged with the responsibility of
development of high level manpower which could strengthen its technology base and
assist in the process of technology transfer.

This might suggest that Pakistan did very well with the basics of planning for
industrialization. However, there were a number of odds, which had to be attended
to on an urgent basis. The Master Plan for Karachi had, in its early years, given top
priority to resettlement of refugees who were otherwise occupying buildings of
important institutions, schools, parks and footpaths all over the central district of
the city.

The refugees were provided space for permanent settlement in the trans-Lyari
urbanization scheme where the Sindh Industrial Trading Estate, SITE was also
being established around the same time. The Landhi township and Landhi
Industrial Area were developed almost simultaneously. Korangi township developed
in 1961-69 therefore considered the establishment of industrial estates as an integral
part of their planning and as the first and necessary step to ensure employment
within the new settlement for those being shifted.

In shifting the families from their temporary hutment on footpaths, it was the
considered view of the planners that the concerned families had been removed far
away from their place of work, whereas their income did not permit them to pay the
fares for the round-trip to and from their workplaces outside the new settlements.

Conditions prevailing at SITE at Manghopir, Landhi and Korangi were considered
most favourable for attracting industrial establishments, because new urban areas
had been organized based on a rational plan. Land was cheap and manpower
ample. The areas were easily accessible to the hinterland by railroad and the main
highway. They were near the only port of the country and were at that time well
endowed with communication facilities. It was thought that the development of the
industrial zone would benefit the industrial evolution of the entire country.

It was, however, soon realized that establishment of the industrial sectors in the
industrial estates was accompanied by an unforeseen intensive land use change. The
development processes proceeded in accord with the Master Plan and were keeping
pace with them but not with the influx of thousands of persons looking for better
opportunities of settlement and employment. The industrial estates and their
neighbourhood were constrained by the lack of pre-requisites i.e. they were not
provided the industrial infrastructure.

Water, power, fuel and roads the basic amenities were difficult to provide with
limited financial resources at the outset and very difficult to maintain subsequently.
The industrial infrastructure therefore could not be put in place for all those
interested in setting up industries. The available resources, because of the pressing
demand, had to be spread too thin. Furthermore, whatever was available could not
be maintained because of the lack of a suitable strategy for maintenance. This was
among the many reasons for the slow pace and non-sustainable nature of
industrialization in Pakistan.

Unlike the SITE on Manghopir Road, Korangi or Landhi, small sectors were
earmarked and made available in the North Karachi industrial estate to small scale
and medium size units and for building of stores and warehouses since the site was
almost adjacent to Super Highway which is used extensively for transportation of
materials from the hinterland and to the consumers in the upcountry as well as for
export.

It soon became clear that Pakistan had erred in industrializing the
country without having the appropriate industrial infrastructure in
place. Industrial Infrastructure has a large number of components and
includes entrepreneurship, availability of raw material, credit facilities, linkages
with local and export markets, communication infrastructure for transportation of
raw materials from and of manufactured products to markets, provision of
dependable facilities such as water and waste disposal system, electricity, telephone,
a chain of engineering industry units, high level manpower to strengthen the
technology framework by assisting in transfer and adoption of technology, and
above all the policies governing the security of investment and investors.

It must be pointed out here that the base of our industrial structure was laid on
import-substitution, which at best was a stop gap arrangement for launching on an
intensive industrialization programme. The Harvard group and the World Bank
had recommended it as the ladder to economic growth. No one among the governing
hierarchy of the time had the wisdom that acceptance of this route to development
would lead to an inefficient industrial base. What was needed was not the non-
sustainable import substitution type industrialization but efficient use of resources
for making the production system productive as well as sustainable. The miserable
failure of the import substitution-based industrial sector due to non-preparedness
for a self-reliant economy, is something, which will be remembered by the
generations to come since this has finally led to the present state of de-
industrialization.

The people of Pakistan perhaps already are aware that the country had the choice of
building institutions for development of technology and other industrial
infrastructure and/or a strong institution for planning. Pakistan opted assistance
from the USA in formulating economic development plans while both India and
Korea when offered similar options opted for establishment of institutes of
technology on the pattern of Massachusetts Institute of Technology, MIT. The KIST
or Korean Institute of Science and Technology and a chain of IITs or the Indian
Institutes of Technology were offered as technical assistance to Korea and India
respectively and both countries flourished on the basis of solid and self-reliant
foundations provided by the respective institutions.

In making the inappropriate choice Pakistan opted to remain a follower in
technology, whereas the other two countries took to grooming leadership. Pakistan
had to lean heavily on the Development Advisory Service of Harvard University to
provide the services of economic development experts for advising the Planning
Commission and Planning and Development Departments in Lahore and Dhaka.
The benefit of development of Pakistan Institute of Development Economics, PIDE
was harvested however, not by Pakistan but by what was to become Bangladesh
since much of its initial output was exploited by the East Pakistanis for identifying
regional disparities.

The governing hierarchy of the time did not foresee that the acceptance of the
import-substitution route to development would lead to an inefficient and non-
sustainable industrial base. What was needed was not the import substitution type
industrialization but efficient use of internal resources, including a knowledgeable
technology base, for making the production system productive as well as
sustainable.

Responding to the requirements of sustainable development, it would have been
most appropriate to establish industrial units that are specific to availability of raw
material and market, as is the case with small industrial units manufacturing
consumer goods e.g. flour mills, ice factories, soap factories, tobacco
crushing, carpet weaving, foot wear and brick kilns. They cater to the needs of
specific consumers or markets in the urban conglomerations all over Pakistan.
From such units one can proceed to establish semi-processing of the farm, livestock
and fisheries products at a location close to the local market. Subsequently the
semi-finished products can be processed at a site appropriately equipped with
infrastructure facilities. It is unfortunate that in a rush to industrialize the Country,
the traditional process to consolidate the industrial infrastructure was disregarded
and that is where we missed the bus.

Investment was invited in medium and large scale industries with grant of incentives
but without regard to sustainability of the activity, raw material and
manpower availability, site specificity and entrepreneurship.

The small scale manufacturing, based on indigenous or indigenised technologies,
continued to be the main contributor to economic development, more than the large
scale industries, until the late fifties. In the mid fifties the contribution of the large
scale manufacturing based on embodied technologies overtook that of the small
industries. The contribution of the latter was 30 of the total in mid sixties and
continues to be approximately 25 of the manufacturing sector. Subsequently large
and small industrial complexes were established in the cities of Karachi, Lahore,
Nowshera, Hyderabad, Sukkur, Nawab Shah, Mirpur Khas and Khairpur and
later on in Balochistan.

The above process helped the small industry in Sindh in the initial stages and in
other parts of the Country in the mid-1960s and 1970s to enter into new fields viz.
the sectors of engineering, chemicals, plastics, electronics, electrical goods,
garments, leather goods etc. The output of these industries is, however, marred by
the lack of quality control. Realizing that the contribution of small industries is
approximately 25 of the industries sector, amounting to a turn over of over Rs 5
billion per year, the Government had set up Small Industries Corporation in 1972,
in response to the need for absorption of transferred technology and to get the
maximum from them in all the provinces.

This required the development of infrastructure, input and assistance in the fields of
management, finance, technical assistance, training and marketing. The absentee
landowners and traders were encouraged to mobilize their savings for small
industries projects. The objective was to provide plots and infrastructure facilities
so that the rural and urban entrepreneurs could establish their business, based on
technology acquired from local or foreign sources. The feudal landlords thus
entered into the industrialization programme of the country.

The Government launched on this ambitious programme with great enthusiasm but
it only had short sighted political objectives in view. The need of the hour was to
adopt a sustainable approach and to consolidate the infrastructure facilities so that
the established units could keep themselves in operation. It did not for once consider
that it was spreading its financial resources too thin. The Corporations, being in the
Public Sector, were soon faced with a number of problems chief among them was of
course was social pollution that led to financial crisis and put a stop to the on going
schemes as well as to the maintenance of the infrastructure facilities.

The policies of the late 1970s and the provision of some facilities e.g. electricity,
brought a radical change in some industrial estates but that was short lived. It
induced investment into small industrial units invariably as family enterprises and
were operated by family members, while medium and large units were owned by
foreign investors or Multinational Corporations and employed hired labour which
was not entirely from the local population.

It was mentioned earlier that the planning process, while adopting the policy for
industrialization had duly addressed the issue of development of infrastructure
facilities in an integrated manner. However, the implementation of the policy was
constrained by political as well as financial commitment and hence the
communication infrastructure had only traditional linkages of the areas producing
raw materials viz. crops, crop residues, fisheries, livestock, forest products and
minerals with the industrial units and of the manufactured products with the
markets and the port.

Development of the communication system that is the backbone of industrial
infrastructure was painfully slow everywhere, including the industrial estates. The
total length of the broad-gauge railway line did not increase while the narrow gauge
railway line was abandoned at many places since it was not found economical to
operate. The road network on the other hand has improved albeit slowly. The road
density, however, continues to be low, the National average being 0.20 km/sq km; in
Balochistan it is only 0.055 km/sq km. This does not show much compatibility with
the goals of sustainable development since the road network for linkage of
production areas with the markets should have gone up by seven times during the
last 50 years of launching on industrialization.

The low road density appropriately describes the absence of (i) a coastal highway
and a network of roads required to provide access to coastal and far flung areas, (ii)
farm to market roads to provide easy and rapid transportation of farm produce to
the markets, (iii) mining roads to facilitate transportation of minerals from mining
sites to destinations at far distant locations, and (iv) rural roads to provide adequate
access of rural communities to urban areas where many key institutions like
revenue departments and financial, health, educational organizations and industrial
installations are located. The low road density only partly describes the existence of
roads constructed in the industrial estates, which not only provide access to the
industrial units from the highway but have also separate allocation of funds for
repair and maintenance of roads made by the industrial estate authority.

Being governed by public sector authorities, the maintenance of roads has met the
same fate as elsewhere in the country. In the industrial estates all over the country,
it has become worse owing to operation of heavy vehicles and lack of maintenance.
The slow pace of development brought in the private sector to build and maintain
non-metalled roads, purely out of necessity for transportation of goods and
materials which they had produced.

This is what happened in Balochistan. Transformation in quality of life of people in
this province can be attributed to the absence of appropriate fundingfor industrial
infrastructure, particularly provision of communication infrastructure. The people
in Balochistan could not sit idle to remain in poverty. In order to run their legal or
illegal business, they needed speedy transportation. They could no longer depend on
the camel for the rapid haulage of heavy consignments or contraband. They
themselves set to improve the infrastructure. By operating a tractor they leveled the
tracks to operate their wagon, which is either `gifted', purchased across the border
or smuggled. Running the vehicle is not expensive since the price of gasoline is 40
of what has to be paid in the rest of the country. Traveling in a wagon at 80 to 100
km per hour on the dirt road that is the present coastal road, is not hazardous. This
suggests that the operation of the transportation network in the present form by the
private sector is responding to the need of the people. The process has, nonetheless
damaged the social environment in promoting a culture that has no place in the
values of life in an Islamic state.

Water availability to the industries and industrial estates constitutes a major
component of the industrial infrastructure but it has met the same fate as the
communication system. The SITE needs 11 MGD but gets only 4 MGD. Landhi,
Korangi, North Karachi or you name it have to face acute water shortage. They are
all dependent on either groundwater resources or on tankers which supply a mix of
groundwater and public water supply. The Hub Industrial Area is faced with the
worst crisis since many of its units were water intensive and have had to close down.
Water scarcity has been the main cause for Balochistan to have only 110 medium
and large industrial units in the Province.

The manufacturing sector that contributes to the industrialization programme of
the country is the production system in small industries in the unorganized sector.
This sector has flourished despite the several constraints of availability of industrial
infrastructure. It has the technology grounded by local manpower to the extent that
fabrication and installation of plant and machinery can be handled locally. This
holds true of units like the auto repair shops, brick kilns, carpet weaving, dairy
products, engineering workshops, fabrication/substitution of small parts, flour mills,
food products, foot wear, foundries, garments, ice factories, oil expellers, printing
presses, rice mills, soap factories, and tobacco crushing, all over the Country.

The unorganized sector has flourished mainly because it is self-reliant. Quite in
contrast, availability of technology, plant, machinery and manpower is a constraint
for medium and large scale industries, for which the required the raw materials also
have to be imported. In fact the performance of this sector depends on imported
machinery, raw material and technologies. This necessitates the balancing
modernizing and replacement of parts and machinery to keep updated in the
manufacturing process. The products will otherwise be outdated and may not
remain competitive. The plants supplied are on turnkey basis and carry the
technologies embodied in them, since the industrialized countries sell complete units
and are reluctant to trade mechanical equipments. Production technology was being
transferred in Pakistan to a limited extent, through terms of trade which carry a
deletion programme as part of the deal, but that is not being strictly observed.

The only possible way to circumvent these difficulties is to be self-reliant in
technologies. It was in view of the constraint on availability of technology that
Research and Development Institutions were created with the specific objective of
development of technologies. The option of Korea and India to build institutional
capability was key to their success in having a sound industrial base. But not
Pakistan which opted for the stop-gap arrangement and the gap was never filled.

The research and development institutions when established were treated like other
bureaucratic organizations and were starved of funds. Instead of contributing to
development of technologies for self-reliance the institutions had to fight for their
very survival. The governing hierarchy has been maintaining the rhetoric that it has
the scientific potential comparable to the best in the world but it knows very well
that it has itself made it a show-piece at best.

In the mean time and in fact all the time, technology embodied or otherwise did not
concern the investors who established the plants in quite a few industrial estates e.g.
HITE, Hatar and others which enjoyed tax holidays. They were attracted by the
lucrative offer of tax holidays, incentives, concessions, subsidies and payment of
customs duty at substantially reduced rate. They had a demonstrated preference for
ventures involving small investments, yielding high profits and having an early
payback. It can just as well be stated that the preference for imported plants was a
major deterrent in the establishment of a base for technology transfer in Pakistan.

The demonstrated preference for ventures involving small investments, yielding
high profits and having an early payback had other catastrophic effects was
incidentally the psyche of the industrialists that developed as a result of the import-
substitution-based industrialization programme. When industrial estates with
adequate infrastructure facilities were established to attract investment in medium
and large scale industries, such investors responded with great enthusiasm who had
apparently no commitment to the process of industrialization. The incentives were
for a limited period and when they were withdrawn in 1995, the number of closed
units increased by 75.

The closure of units shows that there was some thing fundamentally wrong with the
strategy for industrialization. Except the small industries in the unorganized sector,
the primary requirement of building the industrial infrastructure through
mobilization of local resources, manpower and entrepreneurial capability had not
been met. Obviously the backward linkage of the industries and forward
linkages with the markets had not been established. For this purpose such policies
and guidelines were needed that encouraged investment by local entrepreneurs and
subsequently enabled them to compete with investors elsewhere.

The reason that the small industries have been operating successfully in the
unorganized sector is that they were established in the private sector; they were
small in size, labour intensive, oriented towards import substitution and export;
they were based on local raw materials, locally fabricated machinery, simple
technologies and employed local labour force. Contrarily the medium and large
scale industries which were based on imported raw materials, e.g. plastics, im-
ported machinery and equipments e.g. textiles, and on high level manpower that
was not indigenous failed to achieve the objectives of industrialization. Industrial
development therefore did not achieve the objectives of resource endowments of the
Country and did not generate employment opportunities at local level.

The result of the eschewed development strategy was bound to bring about De-
industrialization, which has already shrunk the size of our market and added
grossly to poverty. According to rough estimates poverty has, during the last five
years, taken 55 of the population in its fold. The purchasing power of the middle
class has, in this import-based economy and the ever-increasing utility charges, been
eroded by the rapid devaluation of the rupee against the dollar from Rs 30.90 in
1995 to Rs 51.99 in 1999 and to Rs 58.00 as of today. It had gone down to Rs 67
three years back and has improved only during the last two years.

The industry sector in Pakistan is inherently at a disadvantage in the production-
volume game compared with the global system. The technology is out-dated since
there has been sluggish balancing, modernizing or replacement which is necessary if
the production system is based on imported raw material, technology, plant and
equipment and above all on import-substitution. There has been no improvement in
the process of production and the industrial productivity continues to be low, since
both need a sound research and development base which is conspicuous by its weak
structure and output. Moreover the economy is not knowledge-based. On the
contrary there is abundant illiterate labour force in a socially polluted environment
that is studded by greedy entrepreneurs and corrupt bureaucracy.

The import substitution syndrome has already paved the way for globalization and
is of course in fulfillment of IMF conditionalities. Production costs have been
encouraged by the eschewed development policies to shoot up and are in a few cases
nearly twice as much as in Europe. Energy costs are fleecing the consumers alive
and have encouraged the industrialists to resort to short-cut methods. Some of the
industrialists who could not opt for irrational methods have had to resort to trading
if not smuggling. The GST has already taken its toll of the industrial sector since it
has raised the cost of production by 16.5 compared with the unorganized sector.

That paints a gloomy picture whereby the process of De-industrialization has been
heralded. This process has either given rise to a decrease in the contribution of
textile manufactures, or has, as per statistics compiled by Federal Bureau of
Statistics, kept it stagnant at about 62.94 per cent of total exports. This is why the
emphasis is on primary commodities whose share in exports has increased to 12
and above. The contribution of textile manufactures to the manufactured exports
also dropped from 75 to less than 70. Thanks to devaluation of the rupee, there
has been a continuous drop in unit prices of textile manufactures and hence the
export earning has seen only a dismal increase. For instance the quantity of cotton
yarn exported may be 500,000 tons a year but the foreign exchange earned is up by
only 1 to 2. The increase in export of cotton fabrics may be up by 10, but the
foreign exchange earnings are invariably down by 3 to 7.

The general downward trend in the export volume is explained by the export
performance of the leather industry. The loss of market of the latter commodity is
attributed to escalation of the processing cost. The leather industry comprising over
500 tanneries processes all the hides and skins locally produced and even imports
them; the raw materials and the semi-finished wet blue and finished or crust leather
are all consumed to the extent that it has been allowed to import them duty free, to
meet the local as well as export market demand. The tax structure, and cost of
utilities have since decelerated the export performance of this industry which has
been recording a negative growth trend for quite some time.

The export performance of the leather industry has been dismal because its leather
products, despite being of superior quality are unable to compete with the
competitors viz. India, China and Bangladesh. Since the cutting edge is the price
which is higher, the advantage of better quality products are being lost.

The increase in the price of furnace oil is translated in the escalation in electricity
tariffs and consequently in the power charges. Consumer prices are made up of the
cost of petroleum and gas on which there is additional excise duty imposed, the cost
of the imported raw material on which the tariff was raised, the cost of processing
or manufacture or value addition, the distribution cost of the product which was
raised sequel to the increase in POL prices, advertising which accounts for at least
20 of the cost of the commodity, and above all, the legal and illegal commission
and the damages paid to the service providers. The taxes and utility bills account for
more than 50 of the cost of manufactures.

The levy of taxes should have been the last resort in the management of the economy
by a government which aims at welfare of the common man. The devaluation of
currency should similarly have been the last resort for a manufacturing country
which depends on import of raw materials and capital goods, including plant and
machinery. The governing hierarchy was forced to opt for the last resort because
the structural adjustments imposed by IMF conditionalities demand that this has to
be done.

The Continuum of the socio-economic transition stage which the country entered in
1985-86 is marked by serious mismanagement of the economy at the hands of the
second and then the third generation bureaucracy and the morally bankrupt
landlords. The process of downgrading the currency has been a continuous process
and so is the financial emergency in the country. Despite the poor performance of
the economy, the dominant influence of the wizards of economics in manipulation
and of the shrewd bureaucrats in connivance with the military bureaucrats and
landlords in mismanagement, has continued to corrupt the system.

It was during this landslide that Pakistan was told that almost half of the development
budget was being siphoned away and even the so-called prestigious Social Action
Programme of $8 billion could not be saved from corrupt practices and gross
misappropriation of funds. The disbursement was delayed by the IMF, the World Bank and
the Asian Development Bank in the late 1999 for a period of 14 months and was released
under the condition that the government would address the issue of corruption which has
continued to haunt despite the tall claims being made by the government.

The Billion Boys Club which includes some top bureaucrats, landlords and
industrialists, not only deprived the exchequer of the revenue but also got the loot
transferred to the foreign banks. It is estimated that the loyal Pakistanis` have kept
about $100 billion, mostly illegal, corrupt or criminal earnings, including through drug
trade as part of their hidden assets in the tax havens of the West e.g. 1ersey, Isle of Man,
Luxumberg etc.

The service providers i.e. the middlemen always take advantage of the deteriorating
situations and enter the market in a big way in each field. Inefficiency, an expression
of social pollution, that has already been deeply rooted, percolated deep down into
every fabric. This has made the manufactured goods more expensive in the local
market and less attractive in the export market. The alternative was to either close
down the unit till such time that conditions improve or go by default.
The industrialists resorted to both.

There was a time when almost half of the companies listed with the Karachi Stock
Exchange were defaulting in being quoted 50 below the price, and in their failure
to declare bonus and dividend for the last several years. Almost 30 of these
companies comprised textile-spinning enterprises. Small enterprises in the
unorganized sector, however, continued to contribute despite several deterrent
factors that included the imposition of sales tax that only raised the cost of
production.

Practically every sphere of production activity and each product
whether agricultural, home made or machine made, or those imported at great risk,
has been impacted by social pollution expressed as mismanagement since the onset
of the Continuum in transition set in the mid-1980s.

The present position is that while exports have a rising trend, imports have also followed a
spiralling curve. This poses the question of plausibility of maintaining a trade deficit at a
level of $1 billion fixed for the whole year. In case these two trends persist, there will
certainly emerge a degree of macroeconomic destabilization. However, this was expected for
the economy of Pakistan since it has emerged out of a long period of stagnation. Following
the pathway dictated by IMF conditionalities, the exports did go up, the agriculture sector
has shown signs of improvement, private sector credit has picked up, share prices have been
rising while bank interest rates have been lowered and there is a sharp improvement in the
balance of payments since 2001-02 and the current account has remained in surplus.

Developments were already indicating that the target of 4.5 per cent growth in GDP in
2002-03 would be surpassed. With better GDP growth, the targets fixed for both the fiscal
deficit and trade deficit were likely to be realized despite the rising trend in expenditures
and imports.

Unfortunately the visible minimum level of growth has been attained through higher
spending and increased imports. Higher economic activity and not industrial activity has
been achieved by higher expenditure. In fact industrial activity in the large-scale
manufacturing sector has not contributed to the economic growth, though claimed to have
done so. This has not served the purpose of generating employment but has created greater
demands for goods and services. This last demand has been fulfilled by the industries in the
unorganized sector, which despite its contribution to the economy, is considered a step child
of the industry sector.

The goals of import substitution based industrialization, whose foundations were laid in the
early history of the country, have been achieved but the country has remained poor and its
industries dependent on imports. These are unfortunately the characteristics of a pseudo-
affluent society, which tends to maintain a yawning gap between poverty and affluence. It is
not in the interest of an Islamic State to continue with this gap but it certainly serves the
objectives of the donors, and financial institutions in funding their so-called poverty
alleviation programmes.

As if the state of deindustrialization stated above is not enough that Pakistan is being made
to realize that if the country, for fear of causing macroeconomic destabilization, cuts the
expenditure to fit a higher income target or makes attempts at curtailing the imports to
achieve a certain export target, the chances are that it would depress the growth and the
economy would return to recession. This warning is sufficient to ring the alarm bells for any
attempt at providing a self-reliant status to industrialization in Pakistan.

The above narrative has demonstrated that the stagnating economy of the past did not
generate employment nor did it improve the lot of the poor. It however, did de-industrialize
the country. It is nonetheless clear that the so called buoyant trends promoted by the
structural adjustments imposed by IMF conditionalities are only storms on the tea cup and
are likely to make the country poor, and the poor man poorer still.