issues in pakistan’s economy

ISSUES IN PAKISTAN’S ECONOMY

PRESENTATION BY:THAWBAN ANWAR BAIG

B09-016

TABLE OF THE CONTENT

• 8.5) THE PRIVATIZATION PROCESS– PRIVATIZATION IN PAKISTAN– GOVERNMENT POLICIES– CRITICISM

• 8.6) THE DEBATE OVER EFFICIENCY IN THE INDUSTRIAL STRUCTURE– PAKISTAN’S IMPORT SUBSTITUTING INDUSTRIALIZATION POLICY– STUDY OF little et al– COUNTER ARGUMENTS ON STUDY OF little et al– CONCLUSIONS

(8.5) THE PRIVATIZATION

PROCESS

WHAT IS PRIVATIZATION

PRIVATIZATION, ALSO SPELLED PRIVATISATION, MAY HAVE SEVERAL MEANINGS. PRIMARILY, IT IS THE PROCESS OF TRANSFERRING OWNERSHIP OF A BUSINESS, ENTERPRISE, AGENCY, PUBLIC SERVICE OR PUBLIC PROPERTY FROM THE PUBLIC SECTOR (A GOVERNMENT) TO THE PRIVATE SECTOR, EITHER TO A BUSINESS THAT OPERATE FOR A PROFIT OR TO A NON-PROFIT ORGANIZATION. IT MAY ALSO MEAN GOVERNMENT OUTSOURCING OF SERVICES OR FUNCTIONS TO PRIVATE FIRMS, E.G. REVENUE COLLECTION, LAW ENFORCEMENT, AND PRISON MANAGEMENT.

PRIVATIZATION IN PAKISTAN

• THE STRUCTURAL ADJUSTMENT PROGRAMME OF 1988

• PRIVATIZATION PROGRAMME BEGUN IN 1990

• PRIVATIZATION PROGRAMME STARTED BY NAWAZ SHARIF GOVERNMENT IN 1990


• THE DISINVESTMENT AND DEREGULATION COMMITTEE

– TO MAKE RECOMMENDATIONS ON HOW THE PRIVATIZATION PROCESS SHOULD TAKE PLACE

– POLICY MAKING FOR THE PRIVATIZATION OF INDUSTRIES

BENAZIR’S FIRST GOVERNMENT

• PRIVATIZATION IN BENAZIR’S REGIME:

– LIP SERVICE

– PROMISED TO PRIVATIZE STATE-OWNED SECTOR

– IN REALITY NO PRIVATIZATION TOOK PLACE IN MANUFACTURING SECTOR

BENAZIR’S FIRST GOVERNMENT

• REASON GOVERNMENT GAVE IN RESPONSE TO ITS FAILURE:

“IT WANTED TO CONDUCT AN EXERCISE THAT WAS TRANSPARENT , WELL CONCEIVED AND BROAD BASED”• CRITICISM:

– GOVERNMENT LACKED COMMITMENT

– LACK OF POLITICAL WILL

DISINVESTMENT AND DEREGULATION COMMITTEE

• ESTABLISHED FOLLOWING PRINCIPLES:– GOVERNMENT SHOULD COMPLETELY RETIRE FROM

PRODUCTION OF INDUSTRIAL GOODS– IDENTIFIED 109 INDUSTRIAL UNITS FOR

PRIVATIZATION– IDENTIFIED 4 OF THE 5 NATIONALIZED COMMERCIAL

BANKS FOR PRIVATIZATION • THE COMMITTEE WAS DISSOLVED IN 1991 AND

WAS REPLACED BY A PRIVATIZATION COMMISSION

THE PRIVATIZATION COMMISSION OF PAKISTAN

• THE MANDATE OF COMMISSION WAS:

– VALUATION OF THE ENTERPRISES THAT WERE TO BE PRIVATIZED

– THE VALUATION WAS BASED ON THE ASSESSMENT OF INDEPENDENT CONSULTANTS

– IMPLEMENTATION OF BIDDING PROCESS

– SUPERVISE THE TRANSFER OF UNITS FROM PUBLIC TO PRIVATE SECTOR


• IN ITS EARLY PHASE THE PRIVATIZATION PROCESS WAS UNSUCCESSFUL BECAUSE:

– DUE TO FEW NUMBER OF BIDDERS

– THE PRIVATIZATION WAS NOT THE MAIN FOCUS OF GOVERNMENT’S ECONOMIC POLICY


• DUE TO UNSUCCESSFUL EFFORTS BY PRIVATIZATION COMMISSION, GOVERNMENT DECIDED TO REVISE ITS PRIVATIZATION POLICIES BY:– IMPROVING THE LEGAL AND ADMINISTRATIVE PROCEDURES– DECIDED TO ADVERTISE THE 105 OF 109 INDUSTRIAL UNITS

FOR IMMEDIATE SALE• ATTEMPTS WERE MADE TO MAKE THE WHOLE

PROCESS “TRANSPARENT”• ONE OF THE MAIN REASONS FOR PRIVATIZATION AT

THAT TIME WAS TO RAISE THE REVENUE


• BY NOVEMBER 1992

– 67 OF 109 INDUSTRIAL UNITS HAD BEEN ISSUED LETTERS OF INTEREST TO SALE

– OUT OF THESE 67 INDUSTRIAL UNITS, THE MANAGEMENT OF 49 UNITS HAD BEEN TRANSFERRED TO PRIVATE SECTOR

– RS. 6 BILLION OUT OF TOTAL 13 BILLION FOR THESE 67 PRIVATIZED UNITS HAD BEEN RECEIVED BY THE GOVERNMENT


• WHY THIS PRIVATIZATION PROCESS WAS SLOW AND DIDN’T DEVELOPED AS IT WAS PLANNED:

– MOST OF THE UNITS THAT WERE OFFERED FOR PRIVATIZATION WERE ALREADY BANKRUPT

– HENCE THE INTEREST OF PRIVATE SECTOR TOWARDS BUYING THESE UNITS WAS VERY LOW


• GOVERNMENT’S UTMOST PRIORITY WAS TO PRIVATIZE THE FOLLOWING THREE INDUSTRIAL SECTORS:

1. ENERGY SECTOR.

2. TELECOMMUNICATION SECTOR.

3. FOUR NATIONALIZED COMMERCIAL BANKS.


• BY LATE 1995 THE TELEPHONE AND TELEGRAPH SECTOR HAD BEEN PARTIALLY PRIVATIZED

• TWO BANKS HAD BEEN PRIVATIZED:– ALLIED BANK WAS SOLD TO ITS EMPLOYEES– MCB TO A PRIVATE BUSINESS HOUSE

• PRIVATIZATION OF BANKS IN MUSHARRAF’S ERA:– HBL– UBL– TWO INDUSTRIAL BANKS

NATIONAL DEVELOPMENT FINANCE CORPORATION INDUSTRIAL DEVELOPMENT BANK OF PAKISTAN

THE INSTITUTE OF DEVELOPING ECONOMIES IN JAPAN’S REPORT

• PRIVATIZATION IN PAKISTAN WAS NOT SUCCESSFUL BECAUSE:

– BID EVALUATION PROCEDURES WERE INCORRECT– PROCESS SUFFERED FROM FAVOURITISM– THE INFORMATION WAS NOT OPEN TO ALL PRIVATE

PARTIES– TRANSFER OF UNITS TO INEXPERIENCED PARTIES

AND THEY HAD NO PREVIOUS RECORD OF RUNNING AN INDUSTRIAL UNIT AT ALL

(8.6) THE DEBATE OVER THE EFFICIENCY IN THE

INDUSTRIAL STRUCTURE

INDUSTRIAL STRUCTURE OF PAKISTAN

• THE INDUSTRIAL BOOM OF 1960’S, THE COLLECTIVE VIEW OF ANALYSTS AND ECONOMISTS WAS:– HIGH GROWTH WAS ACHIEVED AT VERY CONSIDERABLE COST– BUT THE ENTIRE INDUSTRIAL STRUCTURE OF PAKISTAN WAS

SEVERELY INEFFICIENT

• THE INEFFICIENCY WAS DUE TO STATE’S INTERVENTION IN DISTORTING PRICES IN DOMESTIC MARKETS

• THUS AFFECTED THE MANUFACTURING SECTOR OF PAKISTAN ADVERSELY

PAKISTAN’S EARLY INDUSTRIAL AND ECONOMIC GROWTH

• PAKISTAN’S IMPORT SUBSTITUTING INDUSTRIALIZATION POLICY:

– MOST OF THE YOUNG DEVELOPING COUNTRIES FOLLOWED THE SAME POLICY

– PROTECTED DOMESTIC INDUSTRY

– CREATING TRADE BARRIERS SUCH AS TARIFF, MULTIPLE EXCHANGE RATES AND IMPORT LICENSING

DEBATE OVER THE INEFFIECIENT NATURE OF PAKISTAN’S INDUSTRIAL STRUCTURE

• THE STUDY BY IAN LITTLE, SCITOVSKY AND MAURICE:– AMONGST THE DEVELOPING COUNTRIES STUDIED, PAKISTAN

HAD THE HIGHEST EFFECTIVE RATES OF PROTECTION IN MANUFACTURING SECTOR

– AFTER THE PRECISE CALCULATIONS, THE AUTHORS REVEALED THAT MANUFACTURING SECTOR’S CONTRIBUTION TO VALUE-ADDED ACTUALLY GREW AT NEGATIVE RATE AND NOT AT 16% AS BELIEVED

– THE CONCLUSIONS OF THE STUDY WAS THAT MANUFACTURING SECTOR HAD BEEN GIVEN TOO MUCH EMPHASIS WHILE AGRICULTURAL AND MANUFACTURED EXPORTS HAD SUFFERED


• THE POLICY TOOLS RESPONSIBLE FOR THE INEFFICIENCY WERE MAINLY:– MULTIPLE EXCHANGE RATES– IMPORT LICENSING– TARIFF STRUCTURE

• EXPORTERS IMPORTED THEIR INPUTS AT BELOW PAR EXCHANGE RATE AND THEN EXPORTED THEIR GOODS AT A HIGHER RATE

• EXPORT TAX WAS A DISINCENTIVE FOR THE EXPORTERS OF LEATHER AND COTTON

• IN 1964 ABOUT 64% OF ACTUAL VALUE ADDED WAS DUE TO DISTORTIONS IN THE INDUSTRIAL STRUCTURE

• DUE TO THIS PROTECTION THE MANUFACTURING COST OF VALUE ADDED WAS INCREASED BY 300% ON AVERAGE


• THE DISTORTIONS WERE CREATED DUE TO FOLLOWING GOVERNMENT’S PROTECTION POLICY:– EXCESSIVE EMPHASIS ON THE MANUFACTURING

SECTOR– RESULTED IN POOR EXPORT PERFORMANCE– NEGLECTED THE AGRICULTURAL SECTOR– A DISTORTED SECTORAL DISTRIBUTION IN THE

INDUSTRY


• CRITICISM ON THE STUDY OF LITTLE et al:– AKBAR NOMAN HAS ARGUED THAT THE CLAIMS

BY LITTLE et al ARE HIGHLY MISLEADING– THE STUDY SUFFERED FROM PROBLEMS IN DATA

AND THEIR INTERPRETATION– WORLD PRICES FIGURES WERE USED THAT WERE

OVERSTATED– THE INEFFICIENCIES OF PAKISTAN’S

INDUSTRIALIZATION IN 50s AND 60s HAVE BEEN MUCH EXAGGERATED


• CONCLUSIONS:– INDUSTRIAL POLICY WAS PROTECTIONIST AND

DISTORTIONARY– GIVING RISE TO DEEP ROOTED INEFFICIENCES– LATER CAUSED THE INDUSTRIAL CRISIS IN 1970s– THREE SUCCESSFUL SUBSECTORS EMERGED AND

ARE ACCORDING TO INTERNATIONAL STANDARDS1. CHEMICALS2. ENGINEERING3. TEXTILE

DEBATE OVER THE INEFFIECIENT NATURE OF PAKISTAN’S INDUSTRIAL STRUCTURE– THE INEFFICIENCY IDENTIFIED BY little et al

ACTUALLY EXISTED– THERE IS A CONSENSUS AMONGST PAKISTANI

ECONOMISTS THAT PAKISTAN’S INDUSTRY HAS BEEN INEFFICIENT, DUE TO HIGH PROTECTION AND WARPED INCENTIVES

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