Industrialization

[chaand_nager]

INDUSTRIALIZATION

OR
DE_INDUSTRIALIZATION?

(Situation Analysis 2003)
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 funding for 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, imported 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 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.