seminar industrial competitiveness

8/7/2019 Seminar Industrial Competitiveness

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The role of industry in Pakistans economic development

Contribution of industry to GDP and labour force

Pakistans major industries


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The Evolving Policy Framework


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Pre-liberal Era

Restrictions and economic controls in Pakistan during 1947-55

Protection to manufacturing through over valued exchange rates

Import licenses

Quantitative restrictions

Unfavorable exchange rates to agricultural exports

Curtailing import of manufactures

Domestic prices of manufactured goods maintained at a high level

Agricultural goods Prices kept low

Increased the profitability of manufactured goods causing rapid

increase in investment in the manufacturing sector

Impetus to manufacturing :

Devaluation between primary and manufactured goods

The provision made in the export subsidy


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Second five year plan (1959-65) Tendency towards indirect controls

Two liberalization measures Increasing the volume of imports

1. Export bonus scheme(1959) Marginal effect onliberalization

2. Open general license system(1964) Goods to be imported withoutlicense

Licensing system influenced the direction of industrialization in Pakistan

By giving greater protection to consumer goods rather than intermediate &investment goods

Pre-liberal Era


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Pre-liberal Era

Third five year plan (1965-70) Emphasized liberalization and indirect controls

Setbacks to liberalization on account of the indo-pak war,bad harvests during 1965-67 & a decline in foreign aid

Open the economy to competition (1972) Rupee was devalued

Import licensing and export bonus schemes scrapped

tariff rates were reduced

The value added approach (1970) share of manufacturing GDP at world prices is almost

insignificant for Pakistan

Problem no distinction between inefficiency and high profitability


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Exchange rate policy

Influenced manufacturing labor capital

Redistribution of income among income groups accentuating

the already skewed distribution of income

Investment & import license (1960s) Barriers to entry

High aggregate concentration in the economy

Industrial families had great leverage overPICIC and IDBP

by having their representatives on the board of directors

Characteristic of the corporate environment (1960s) Inter-locking directorates between industry, banking,

insurance and trade

Oligopoly in manufacturing market

Resulted in windfall profits for the industrialists in Pakistan

Pre-liberal Era


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Pre-liberal Era

Monopolies and restrictive trade practices

Promulgation of Control and prevention ordinance (1970)

Monopoly control authority (MCA) formation

Rapid industrialization in1960s

Socio-political fallout led to the abandonment of successful growth

strategy


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Pre-liberal Era

Policies Reversal

nationalization of industries including iron, steel, basic metals, heavyengineering, heavy electrical equipment, motor vehicles, tractors, petrochemicals, gas, refineries, cement , electricity, vegetable ghee, banks andinsurance companies

Nationalization

Ineffective in lessening the concentration of income & wealth

Converted private sector monopolies into public monopolies

Burden on the national exchequer


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Growth Performance of Components ofGNP

1978-85 1980's 1982-83 1984-85 1985-86 1986-87 (R ) 1987-88 (E)

Commodity

Producing Sector _ 6.5 5.8 _ _ 5.1 5.7

Agriculture 3.72 5.4 3.8 12 6.48 2.2 4.5

Manufacturing 9.63 8.2 7 8.58 7.84 7.5 7.6

Services Sector 5.74 6.6 7.9 _ 5.74 6.4 5.9

GDP (Constant

Factor Cost) 6.6 6.1 6.7 6.72 6.6 5.7 5.8

GNP (Constant

Factor Cost) 6.48 5.5 8.4 6.97 6.48 4.7 4.9


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The Onset of Liberalism

1987-1990

Removing the barriers to entry and exit of firms

Increase in the investment sanction limit

Removal of non-tariff barriers

Reduction in tariff levels

Only Four industries require government sanction

Arms and ammunition; security printing; currency and mint; highexplosives and radioactive substance

Dis-investment Programme

Denationalization of utilities, infrastructure & energy

Improving efficiency of public manufacturing enterprises


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The Onset of Liberalism

Problems :

SOEs are sold at low prices due to inadequate restructuring

Policy for allocation of certain percentage of the business toforeigners

Selling companies to individual buyers leads worsening alreadyskewed distribution of income & wealth

Foreigner buyers can undermine sovereignty of country

Converting public monopolies into private monopolies leads todeterioration in efficiency, savings, incentive structure etc

Beneficial privatization :

Only if public monopolies are converted into private competition


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Key Economic Indicators

IrregularGrowth (1990s)

- manufacturing sector depicting violent fluctuations

- Worst decline in GDP growth rate in 1996-97 @ 1.3% due to Political uncertainty

- Impact of structural adjustment policies leads to deceleration of growth rate of

manufacturing sector @ 1.2%- Growth performance of the small-scale sector leads to 7% increase causing GDP

registering an increase of 4.3%

- Dismal Growth performance in 1998-99

- Marginal increase in contribution of manufacturing sector 16.7% to 18.6%


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Growth Performance of Components ofGNP

1990's 1993-94 1994-95 1995-96 1996-97 (P) 1997-98 1998-99 1999-00

Commodity Producing Sector 4.6 50.9 5.66 5.6 0.54 5.3 2.2 3

Agriculture 4.4 24 6.57 5.8 0.06 3.8 1.9 6.1

Manufacturing 4.8 18.6 3.6 4.8 1.19 7.9 4.1 1.4

Services Sector 4.6 49.1 4.8 4.76 2.1 3.2 _ 4.8

GDP (Constant Factor Cost) 4.6 _ 5.24 5.15 1.3 4.3 3.2 3.9

GNP (Constant Factor Cost) 4 _ 5.75 _ _ 4.2 3.2 3.5

Source: Pakistan Economic Surveys 1994-95,1997-98, 1999-00, and 2000-01,


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Contribution towards Labor

Share of industrial employment increased until 1987, but declined with the advent

of the liberalization era

Tendency towards premature deindustrialization, with the country moving away

from being a manufacturing nation to being a trading nation

Decline in the industrial labour force and increase in the service sector labour force

is a post-industrial phenomenon

Labor force increased & estimated @ 38.6 million in 1999 - unemployment rate has

been estimated at a little over 6%


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Distribution Of Employed Persons Of 10 Years Age & Above By MajorIndustries

Division - TABLE 2.3


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Decline in growth rate increase in the Gini coefficient

reflecting increase in income inequality

Year GDP Growth Rates Household Gini coefficient

Theil

coefficient

1985-86 6.4 0.355 0.23

1986-87 5.8 0.346 0.22

1987-88 6.4 0.348 0.23

1990-91 5.6 0.407 0.3

1992-93 2.3 0.41 0.27

1993-94 4.5 0.4 0.27


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Small Scale Manufacturing

1,84,000 manufacturing units 1988

Textile, leather share 30% followed by food, beverage & tobacco

Metal products share 16 %

wood and furniture share 10% of the total, followed by mineral products

Small-scale manufacturing units in the rural areas are less than half of those in the

urban areas


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Growth of the Large-Scale

Manufacturing Sector

1960s Spectacular Growth higher than rates of growth of labor

& capital

Lost Decades 1970s - 1980s Lower than the rate of growth of

capital and labor negative productivity growth

textiles (20.1 per cent), wearing apparel (27.7 per cent), leather and

products (19.9 per cent), furniture and fixtures (20.8 per cent), printing

and publishing (21.0 per cent), industrial chemicals (19.9 per cent),

plastic products (24.3 per cent), iron and steel basic industries (20.8 per

cent), non-electric goods (19.9 per cent), transport equipment (19.6 per

cent), sports and athletic goods (32.5 per cent )


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Growth of the Large-Scale

Manufacturing Sector

Compound Annual Rates

of Growth

Period V alue Added Capital Labour

1955-56 to 1959-60 19.5 3.7 15.1

1959-60 to 1969-70 26 17.8 15.1

1969-70 to 1980-81 6.4 9.5 17.1

1980-81 to 1990-91 6.1 9.1 16.8

1955-56 to 1990-91 13 11.3 16.7


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INDUSTRIAL COMPETITIVENESS

THE CHALLENGE FOR PAKISTAN


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WRITERS

Sanjaya Lall( 13 Dec 1940- 18 June 2005)& John Weiss

Development economist, Professor of Economics & Fellow of GreenTempleton College, Oxford University, Senior economist at World Bank

Areas of interest included the impact of FDI in developing countries andthe economics of multinational corporations

33 books

Research Director, Asian Development Bank


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INTRODUCTION

Globalization carries opportunities and threats

Pakistans economy is at crossroads with

domestic policy changes and end of theinternational textile quota regime

The aim of the paper is to benchmark Pakistans

industrial performance against competitoreconomies and highlight the key lessons


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UNDERSTANDING INDUSTRIAL

COMPETITIVENESS

The ability to compete with firms at the international frontie

of best practice.

Government support to attain competitiveness.

Essence is to promote in-firm learning, skill development

and technological effort, supply of information and collectiv

learning processes.

Capabilities relating to physical infrastructure, human

capital, finance and technology.


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UNDERSTANDING INDUSTRIAL

COMPETIT

IVE

NESS

Competitiveness policy for efficiency and entry

into very complex and high technology activities.

Limited Government interventions to tackle clear

and well understood market failures

In Pakistan, there is a need for support of firmlevel upgrading and technical change.


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THE CHANGING NATURE OF

COMPETITIVENESS

Globalization is altering the environment facing developing countryenterprises

Competition requires use of new technologies and bestorganizational methods

International competition is bringing new market opportunities

Need to constantly upgrade technology

Need to shift the economy, its human capital and technology base,its institutions and infrastructure from a low to a highcompetitiveness path


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NEW DYNAMICS OF WORLD

MARKETS

High technology activities have grown faster inboth production and trade

Technology intensive industrial activities aredynamic and offer export possibilities.

Promote structural change

Developing countries export of manufacturedproducts grew faster than industrial ones


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The reasons for growing exports of technologically complex products in

developing countries are:

1. Domestic capabilities in high technology driven by strong industrial policy,

protection of infant industries, allocation of credit and promotion of localR&D.

2. Countries have become major high tech exporters through integrated

production systems, starting by performing relatively simple assembly.

3. Limited export growth in labor-intensive activities due to the very

demanding skill, design and branding requirements.

4. Growth of some resource-based and low tech products held back by trade

barriers, tariff escalation and subsidies in industrialized countries.


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Pakistan: the current policy

environment for manufacturing

International competitiveness requires ready access tointernational inputs and domestic market subject tocompetitive pressure

Highly protected domestic markets penalize the economy byallowing inefficient domestic producers

Infant industry support policy should be time-bound andperformance linked

Pakistan has liberalized its trade policies and it is one of themore open trade regime in South Asia.


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Pakistan: the current policy

environment for manufacturing

Average import tariff was 20% in 2001-2, 56% in 1995 andaround 80% in 1985

Investment policy introduced in 1997

Foreign investors are guaranteed national treatment, facelow import duties on plant and equipment and receive afirst year profits tax allowance

FDI inflows and domestic investment low due to nationaland regional political situation


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Pakistans current policy environment

Pakistan is a low wage, labor surplus economy

Wages are significantly higher than Bangladeshand slightly higher than India.

Higher cost location than China, India andBangladesh

Slow growth in private investment has been oneof the key constraints on Pakistans economicgrowth


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REGULATIONS

Heavily regulated business environmentindicated by the number of Governmentinspection visits to a factory in one year and thenumber of days to clear customs

Lengthy delay in customs clearance makes itdifficult for business to keep optimal level ofinventories

Regulation also judged by the time and costrequired to start up a new business


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Infrastructure Deficiencies

Infrastructure in the power sectorimpeding the operation of enterprises

Shortage of fixed line connections in thetelecom sector

Waiting time and connection costs forphone lines are both high by international

standards High transportation costs affecting

exports


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Benchmarking Pakistans

Performance

Manufacturing grew at a compound real annual rate of 5.5% between1980 and 20000 and per capita GDP at 2.2%

Value added grew at 7.2% in 1980s and at 3.8% in 1990s

Growth of around 3% in both 2001 and 2002

A very low share of medium and high tech products with very slowupgrading overtime

Largest export product in 2001 was made-up of textile articles


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Benchmarking Pakistans

Performance

Pakistan gained world market in cotton fabrics andlost in the textile yarn

Textile yarn is dynamic in world trade but mostapparel products are in the non-dynamic segmentof trade.

Pakistan requires upgrading of productioncapabilities , quality and marketing relative tocompetitors.


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Benchmarking Pakistans Skills &

Technological Capabilities

By most common indicators of skill creation, Pakistan performs poorly byregional standards. Pakistan ranks below all other South Asian economieseven Nepal.

By indicator of Government expenditure on education as percentage of GDP,

in 2001 Pakistan spent less on human capital than its comparators.

Per capita R&D spending is also the lowest and enterprise financial R&D isnegligible.

The no. of scientists engaged in R&D per million inhabitants, the no. of

technicians in R&D, the no. of scientific and technical journals and technicalfees per capita also highlights the weak position


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Lessons from East Asia

Newly industrialized economies like Korea, China, Hong Kong, Singapore,Malaysia & Thailand have each succeeded in diversifying out of traditionalprimary exports into more dynamic manufactured goods.

Governments using additional measures for promotion to raise theprofitability of exporting

Pakistan needs to diversify export structure and establish links with globalvalue chain.

Instead of direct intervention and involvement of Government in enterprisedecisions, Pakistan needs to undertake industrial promotion and support.


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Lessons from East Asia

Skill formation and training in Singapore

Stimulation & support for local technology

development in Korea ,Taipei and China

Initiatives of public-private collaboration and

suitable alliances to foster technological capability


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CONCLUSIONS The development of industrial strategies involve five main

steps.

1. A detailed assessment of the industrial sector and main sub-sectors

2. The development of a national strategic vision

3. To design policies and programs

4. To implement these policies & programs

5. To monitor the progress of the strategy, assessing theirsuccess and adjusting them as necessary.


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RECOMMENDATIONS

Setting up an industrial competitiveness agency by

combining the work of the EPB & the Board ofInvestment

Allocating resources and deciding on the main engines ofindustrial competitiveness

Examine closely the experience of countries successful in

developing competitive bases with the help of benchmarking& policy analysis


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RECOMMENDATIONS

Public investment in relevant technical and general education

as well as the strengthening of public R&D activities

Improve physical infrastructure, reduce bureaucraticrestrictions and ensure continued macro stability

Address critical competitiveness problems at the firm level

through Government support like cost sharing for variousconsultancy services


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Industrial Concentration & Aggregation


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Introduction

Industrial concentration concerns the distribution

of production within an industry

1960, Industrial policy led to rapidindustrialization

Rise to concentration of income & wealth

Study reveals the origin of concentration in

Pakistans various sector of economy.


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Earlier Studies

Sobhan (1965) - 75 manufacturing unitsreceive 43.8% of all value added.

Papanek (1967) - 7 individuals andcompanies controlled 25% of all privateindustrial assets, while 24 controlled nearly50%.

Mahboob-ul-Haq's (1968) - 20 familiescontrolled 66% of industrial efforts, 70% ofinsurance funds and 80% of total bankassets


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Earlier Studies

White (1974) - study on market/seller concentration,aggregate industrial, manufacturing, banking andinsurance concentration levels, their origin and effects.

33% concentration ratio is taken as the starting point ofoligopoly formation, over three -fifths of manufacturingvalue added originated in oligopolistic industries inPakistan.

Liberalization and privatization of Pakistans economyduring the 1990s might have affected the concentration

level of the economy.

The study aims at computing concentration for individualmarkets as well as for the entire economy for two points oftime i.e. 1992 and 2000


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Methodology

Market/Seller concentration is measured by

Concentration Ratio Where CRn = top 3 firm concentration ratio, and

Si = share of fixed assets of top 3 firms in industry fixed assets

Herfindahl Index

Si = share of fixed assets of each firm in total industry fixed assets squared.

For computing Aggregate Concentration the measure willbe;

AC = aggregate concentration / concentration of economic power.

n = 100

Si = proportion of fixed assets of top 100 financial, non-financial andservice sector firms in total fixed assets of these sub-sectors.


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Data Source

Data for computing market and aggregate

concentration have been taken from the balance

sheets of companies listed on the Karachi Stock

Exchange (KSE).

24 Financial, Manufacturing and service Sector

For computing aggregate concentration the top

100 firms in finance, industry and service

sectors fixed assets were added together.


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Estimates of Market/Seller

Concentration for Pakistan

For the 18 manufacturing industries Concentration level has increase

69.75 percent in 1992 to 78.64 percent in 2000 interms the CR3.

While according to the HI the overall increase hasbeen from .2464 to .3402.

For the financial sector Concentration level has increased

From 49.91 percent in 1992 to 60.04 percent in 2000in terms of the CR3.

But in terms of the HI the overall concentration levelhas declined slightly from .1946 to .1931 during thesame period


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Overall concentration level during 1992 to 2000 for the twoservice sector industries declined

from 93.93 percent to 82.71 percent in terms of CR3.

But the overall trend revealed by the HI reflects increase in the

overall concentration level from .4235 to .5605 during the same period.

Industries recording high and increasing levels of concentration

leather and leather products, tobacco, cotton weaving, textilecomposites, glass and ceramics, woolen and woolen textiles,chemicals, transport and communication (declining level

according to CR3) pharmaceuticals, cables and electricgoods, paper and board.

Industries recording high but declining levels of concentration

synthetic and rayon, fuel and energy, food, engineering,cement and mutual funds


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Concentration for Pakistan -

Comparison A comparison was also made for changes inconcentration level during the last three decades

There is an overall rising trend in the level of concentration for the last several decades .

Industries with a high level and rate of growth of marketconcentration edible oil, cigarettes, cotton spinning, cotton weaving, cotton

composites, leather goods, pharmaceuticals, woolen textilesand electric goods.

Iindustries with high initial levels but declining trends sugar, glass, paper and board and rayon textiles.

While the concentration level in the cement industry hasremained almost constant,


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Comparison

E ti t f M k t/S ll


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Comparison


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Estimates on Aggregate Concentration

of the Publicly Incorporated Sector Aggregate concentration was estimated for Pakistans economy

by the use of equation 3 discussed in Methodology. Top 100firms in terms of fixed assets were identified and the gross valueof their fixed assets added togetherin 1992.


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Impact of Concentration on

Performance

Impact on Research and Development

(R&D) and Innovations.

The question of whether competition or

monopoly is more conducive to technologicalprogress

The general consensus seems to be that by

and large, competition generates moreprogress for a given R&D, as it confers

higher rewards as well as forces firms to

innovate.


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Performance

Shephard (1997) states that though the replacement effect of innovations, through

destroying the value of existing products and capitalgoods operates on all firms, but for a monopolist theeffect falls entirely on its own products.

On account of this, a monopolist will bring newproducts and processes more slowly than the sociallyoptimal rate.

For a competitive firm on the other hand, thereplacement effect of innovations falls on products and

processes which are shared by many producers. Soinnovations take market share from other firms and notjust from the innovative competitive firm itself.

Such a firm is therefore likely to innovate at maximumspeed in order to capture maximum profits before thecompetitors do so.


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Performance

Innovations therefore tend to be led by smaller

firms in a market. The dominant firms invents

actively, but delays the innovation phase

The adverse impact of market power on

technological progressiveness is not likely to

afflict Pakistans manufacturing sector.

Most of the domestic companies do not engage in

meaningful R&D activities and the subsidiaries oftransnational corporations undertake R&D at their

home offices abroad.


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Performance

Impact on Efficiency, Profits and Prices Micro-economic theory states that prices are higher under

monopoly than under competition.

These high prices might be on account of X-inefficiency andor higher profitability. X-inefficiency is closely related tomarket power.

Research relating profit margins to concentration waspioneered by Bain (1951) and focused on relating price-costmargins to concentration ratios at the industry level.

The concentration profitability relationship is reinforced by astrong correlation between profit rates and market share atthe firm level in studies using this approach.

The interpretation of a positive concentration coefficient inthe profitability equation reflects market power according toCowling (1982) and luck according to Mancke (1974). Butthe new-Chicago school attributes it to efficiency. TheEfficient Structure Hypothesis states that larger firms higherrates of return reflects greater efficiency (Demsetz 1973).


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Performance

For Pakistan, White (1974), Sharwani (1976), Amjad (1977) and

(1982) and Wizarat (1992 and 2002) foundconcentration to be a significant determinant of profitability for Pakistans large-scale manufacturing

sector. The high profitability results in transferring income

from a large segment of the society to a few.

Ahmed (1980) and Wizarat (1989 and 2002) henceattributed the decline in the wage share of income tohigh profit margins for the period 19551991. Thewage share of income in Pakistans large-scalemanufacturing sector declined from 37.3 percentin1955-56 to 23.9 percent during 1990-91. There is,therefore, a causal link from concentration to profitmargin to wage share of income. High concentrationlevels causing high profitability and worsening theskewness in the distribution of income in Pakistan.


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Summary & Conclusion

This study has tried to fill the gap in the availability of estimates on market and aggregate concentration forPakistan.

Market concentration was computed using CR3 and HI for18 manufacturing, two service and four financial sectors

for the years 1992 and 2000. The overall increase in manufacturing concentration

For the financial sector the overall concentration level hasincreased

In the service sector the overall concentration level hasdeclined

Increase in the level of market and aggregateconcentration has ominous consequences on thedistributing of income in the country. In line with theexpectations of the Monopolistic Pricing theory there isevidence that high levels of market concentration lead tohigh profitability, thus adversely affecting the labor shareof income.


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Summary & Conclusion

And finally, the fear that keeps lurking the heart and mindof a research on account of the reliability of the estimates.

Do changes in concentration computed in this paper trulyreflect the competitive forces in the economy?

This concern is all the more pressing in view of Daviesand Geroski (1997) that changes in concentration usingindustry level data conceal as much as it reveals aboutthe nature of the competitive process. They find thatchanges in market share of surviving firms are thedominant influence on changes in industry concentration.

And while concentration is fairly stable, this stabilityconceals a great deal of turbulence in market shares ofthe leading firms. In view of this, further research onmarket shares of leading firms is called for, which wouldthrow more light on the nature of competitive forces inPakistans economy.

seminar industrial competitiveness

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