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Industrial Policies

University/College: University of Arkansas System
Date: November 13, 2017
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Industrial Policies

In contrast, Industrial growth rates In the East Aslant countries have been consistently high. In the eighties and nineties Industrial growth rates In Pakistan and Bangladesh remained at the long-run South Asian level of between five to ten per .NET while the East Asian countries continued to industrialized rapidly. 1 The high growth rates in manufacturing in Pakistan for 1950-55 are to some extent a statistical artifact as the country started from an exceptionally low industrial base in 1947.

Nevertheless, we need to examine how Pakistan managed to kick-start industrialization in this period given its unpropitious initial endowment. More significant is the acceleration in industrial growth rates In the early sixties when It adopted Industrial policies that were initially quite similar to (and in fact pre-dated) South Korea. Nevertheless, unlike the East Aslant states, Pakistan could only sustain high growth for a very brief period before reverting to the South Asian norm by the late sixties.

The failure of Pakistan to sustain East Aslant growth rates Is therefore interesting in providing insights into the political economy of growth in the South constraints that made rapid industrial growth difficult to sustain? Section 1 identifies the issues raised. Economists looking at India and Pakistan have usually focused on policies to account for relatively poor performance. However, most conventional explanations have important shortcomings.

In particular, they are difficult to sustain in a comparative context if we look at India, Pakistan and the East Asian countries together. Convincing explanations of relative performance have to identify features which were common to the subcontinent’s countries but which distinguished them from the East Asian industrialized. We suggest an alternative explanation that looks at the economic effects of the growing conflicts within the middle classes over resources allocated by the state.

This explanation focuses on a feature which India and Pakistan shared despite important regional variations. This as a shared tradition of political manipulation by emerging “middle” classes. Section 2 looks at the early phase of Pakistanis industrialization and Section 3 at the industrial policy period of the sixties. The sixties are particularly interesting because by comparing the high growth rates of the early sixties with the decline in performance in the late sixties we are able to test a number of competing hypotheses explaining poor industrial performance in Pakistan.

The importance of the professional members of the middle classes was recognized by Bernhard (1984) who described them as an equal member of the dominant class location in India along with capitalists and landlords. In our use of the term “middle 2 class”, we would include not only the professional classes but also the much bigger group of educated and salaried sections of the population. These are groups who have some education, a little capital and who have organizational abilities that distinguish them from the broad masses of the poor.

Not all of them are employed. The importance of these non-capitalist intermediate classes in subcontinent’s politics far outweighs their numbers that in any case would run into many tens of millions. It was precisely in terms of these inherited traditions of state-society interaction that Pakistan differed significantly from the East Asian countries and in particular South Korea. When Pakistan briefly attempted in the sixties to implement an exclusionary industrial policy, its evolution and results were quite different from that in South Korea.

We argue that the social power of excluded groups and their ability to draw on traditions of incorporation and manipulation were important factors explaining why Pakistan performed so differently from South Korea despite the similarities in their policies and institutions. The mechanisms through which the social power of emerging “middle classes” translated into economic consequences are examined. This is also why Pakistanis industrial performance in the long run is so similar to that of India despite the differences in their institutions and policies in the sixties.

Pakistanis early industrial development in the fifties was based on import substituting industrialization under tariff barriers and an overvalued exchange rate. After the first easy phase of import substituting industrialization, industrial strategies evolved into a more coherent industrial policy in the sixties under Bayou’s military chime which took over in 1958. Industrial credit was subsidized and its allocation was controlled by the state through two publicly owned industrial banks.

At the same time, enterprises were set up in the public sector and subsequently divested as running ventures to the private sector. Incentives were offered to exporters under an innovative “Bonus Voucher” scheme to promote exports. This period produced some of the highest industrial growth rates ever enjoyed by either Pakistan or post-1971 Bangladesh. Yet, the industrial policy of the sixties collapsed as political opposition to it grew in both East and West Pakistan. The role of political opposition in West Pakistan in sealing the fate of industrial policy is often not recognized.

While it is clear that the political crisis in the country led to Bangladesh war of independence and thereby terminated the industrial policy period, it is often not recognized that political manipulation had begun to affect the implementation of the policy as early as the mid-sixties. As a result, industrial policy in Pakistan would have been radically altered even in the absence of the dramatic events that followed. Moreover, even without the growing Bengali nationalism in East

Pakistan led by Music and the Miami League, Bout and his Pakistan People’s Party in West Pakistan would probably have brought down Bayou’s industrial policy anyway and at about the same time. Indeed, opposition to Baby began in West Pakistan and only subsequently spread to the East. Bayou’s industrial policy was a central target for the emerging middle classes who felt excluded by these policies. From the mid-sixties, their manipulation began to affect the implementation of the policy and began to reduce the rate of growth for reasons that we will carefully examine later.

Eventually it led to its abandonment, though the aromatic way in which this actually happened had other determinants. In 1970 East Pakistani politicians won a majority in the first elections to an all-Pakistan parliament held under military rule. The subsequent attempt by Western political leaders (including Bout) and the military to prevent them from taking their seats without prior conditions led to the descent into civil war in 1971 which in turn escalated into Bangladesh war of independence.

Political economists divide into two major groups when it comes to evaluating the experience of industrial policy in Asia in the fifties and sixties. Statistics” argue that industrial policy worked where states were strong, where they could act autonomously of sectional interests and where they had coherent policies and institutions. In contrast liberals argue that state intervention was largely unsuccessful everywhere. The true explanation of the relative success of East Asia was that intervention was relatively limited and where it happened it was “market friendly’ serving to develop and promote markets rather than supplement them. Educing free-riding by recipients of subsidies whose industries remained less efficient than they would otherwise have 4 en. An examination of the rise and fall of Pakistanis industrial policy in the context of the political and social changes which were happening in that country is interesting for an evaluation of these two positions. There is now considerable evidence from East Asia in favor of the assist perspective that differentiated incentives can help to significantly accelerate the creation of a capitalist sector based on advanced technologies and capable of competition on the world stage.

While the proposition is in principle correct, it appears that the implementation of such strategies has been inconsiderably more difficult in the South Asian countries. Despite differences in their institutions and policies, the state in both Pakistan and India tried to accelerate industrialization in the fifties and sixties by centrally allocating resources and creating incentives for the introduction of modern technologies. These policies did two sets of things. On the one hand, they excluded large middle class groups from the immediate benefits of development.

On the other, their long-term viability depended on the successful imposition of discipline on the capitalist recipients of state subsidies. These two apparently unrelated features of the development strategy became strongly linked over time. The social and political features of the South Asian countries ruled out any sustained exclusion of the middle classes and the way in which their opposition was accommodated in turn compromised the efficiency of industrial policy.

In India, their exclusion was never as dramatic as in Pakistan but in both countries, there were significant increases in the pressures for incorporation from the mid- sixties onwards. Because of these pressures, a significant proportion of subsidies and sciences had to be allocated in response to political demands rather than on rational economic criteria. This development had far-reaching implications for the effectiveness with which the state could police the allocation of subsidies to capitalists as well.

As rational political actors, capitalists in the South Asian countries began to develop their affiliations with powerful political players who would protect their interests. As a result, while the East Asian states were evolving towards a carrot and stick approach to the capitalist sector in the mid-sixties, prodding them to ever rater productivity, 5 the stick was never attempted in the South Asian countries. This is particularly interesting in Pakistan where the state ostensibly had the authoritarian trappings to attempt such disciplining.

In India, industrial policy of the Pakistani type was never attempted but even Nirvana planning with its concessions to many more social demands proved eventually to be too difficult to administer by the late-sixties. By then the ability of the central state apparatus to implement policies had declined brokers in a way remarkably similar to what was happening in Pakistan. If this explanation captures significant elements of the South Asian state failure story, both the assist and liberal interpretation of the strategies followed by Pakistan and India in the fifties and sixties have to be re-evaluated.

The assist position stresses the importance of getting institutions and policies right. However, our explanation suggests that the problem may have been the incompatibility of Pakistanis economic strategy with its underlying society and politics. If Pakistanis industrial policy could not evolve in the South Korean direction this may have had less to do with policy errors of its leaders and more to do with the compromises induced by its social structure.

If so, we need to ask whether some other type of policy which was more compatible with its social structure may have been more efficacious for technical progress and accumulation. In other words, if Pakistanis political structure was incompatible with its economic strategy either one or both would have to change. Baby attempted to change the polity. He introduced a new constitution, which aimed to undercut the urban middle class dominated political parties, and he aimed to make the possibility of repression credible.

His successor Yah Khan was forced into exercising repression on a large scale in an experiment that ultimately failed. The possibility of constructing an alternative economic and institutional strategy, which may have better achieved the objectives of technical progress and growth, were never discussed. The liberal argument seems to have been vindicated from the mid-seventies onwards as the three large subcontinent’s countries, India, Pakistan and Bangladesh, have all converged towards liberalizing. Moreover, performance has appeared to improve in all of them if only by a little.

However, even if liberalizing was responsible for this 6 better performance, this does not mean that the mechanisms identified by liberal economics are correct. If poor performance under assist policies was due not to the inherent irrationality of such policies but rather the costs of implementing them in the political context of the Indian subcontinent, liberalizing may be producing better results simply be removing some economic activities from the domain of the state. Nevertheless, even liberal policies can only work if the state can efficiently provide a large chunk of public goods such as infrastructure and education.

If political conversation over resource use was responsible for the failure of assist policies in the sixties, it may eventually result in no less serious problems for liberal strategies as well. Thus, the debate over why the static of the fifties and sixties failed in both Pakistan and India may be of great relevance for our understanding of the future prospects of the subcontinent’s countries. 2. The sass: Import-substitution The early phase of import substituting industrialization in Pakistan describes the rapid growth of industries in the fifties.

The context in which this happened was one f deepening political crisis. The ©magi© leadership of the Muslim League had its areas that constituted the new country of Pakistan. It was forced in 1947 to forge a viable nation-state out of the two non-contiguous territories that constituted Pakistan. Although the social structure of Pakistan was broadly similar to Indian’s, it faced a number of special problems that created severe tensions between state and society and at the same time forced the state apparatus to play a more centralizing role.

Three factors were particularly important in differentiating Pakistan from India in the immediate aftermath of independence. First, the level of development of industry in the areas that initially comprised Pakistan was exceptionally low. Secondly, the political and bureaucratic leadership felt militarily vulnerable and perceived the need to build up military capability at a much more rapid rate than their counterparts in India. Thirdly, the political and organizational base of the Muslim League, which formed the government, was exceptionally weak.

The tensions created by the Joint operation of these three factors largely determined the contours of early development strategies in Pakistan. We consider them in turn. 7 Industrial Underdevelopment. The areas of India out of which Pakistan was formed were overwhelmingly non-industrial. They were composed primarily of the raw material producing agrarian hinterland of India. East Bengal, which became East Pakistan, had previously supplied raw Jute to the Jute mills located around Calcutta. West Punjab, the most important component of West Pakistan, provided raw cotton to the Bombay cotton textile industry.

Some figures will indicate the extent of economic backwardness that the new economy faced. At the time of partition, the two wings of Pakistan constituted 23 per cent of the land mass of India, possessed 18 per cent of TTS population but inherited less than 10 per cent of its industry Loyal 1990: 64). It also possessed relatively little in the form of natural resources or known mineral deposits (important deposits of oil and gas were discovered much later). In short, the new state had been carved out of Indian’s agricultural hinterland.

Table 2 Comparative Compositions of National Product: Pakistan and India Pakistan (East and West) At 1960 factor cost and expressed as % of GNP 1950 1960 1970 Agriculture Manufacturing (I) Large-Scale (it) Small-Scale Others 60. 0 53. 3 5. 9 1. 4 4. 4 9. 3 5. 0 4. 3 44. 4 12. 2 9. 3. 2 43. 4 India At 1980 pence and expressed as % of AND 1950 50. 1 11. 4 1970 41. 8 15. 3 34. 1 37. 4 38. 5 42. 9 Sources: Mamas (1982): Table 1. 2, Indian National Accounts Statistics 1990. While manufacturing accounted for only 5. 9% of GNP. Large scale manufacturing accounted for a mere 1. % of GNP. In comparison, in India in 1950 the share of 8 agriculture in AND 1 was 50. 1% and the share of manufacturing was almost double that of Pakistan at 1 1. 4%. Modern manufacturing in Pakistan was therefore roughly half as developed as in India even after adjusting for the smaller size of its economy. This difference had substantial implications. The low share of manufacturing and particularly of large-scale manufacturing meant there was no indigenous industrial capitalist class that could become a developmental partner of the state.

It also meant that the state felt much more vulnerable militarily than its relatively low population alone would suggest. This explains why compared to India, the state in Pakistan took much more drastic steps to encourage primitive accumulation to create an entrepreneurial class. On the one hand it used the state machinery to create enterprises using bureaucrats as entrepreneurs and then sold these off at attractive prices. In addition, the state induced the emergence of a new capitalist class by providing exceptional incentives to the private sector.

Thus, the state quite deliberately created the conditions that pushed a small group of merchants into industry in a short period in the early fifties. Military Threat Perception. Several authors have identified the perceived military threat in early Pakistan as an important factor determining the actions of state officials and politicians (for instance Jail 1990). Rightly or wrongly, Pakistan did feel heartened by Indian’s overwhelming military superiority in the context of the bitterness and unresolved territorial disputes following partition.

Pakistan inherited 30 per cent of the defense forces of united India, which was more than proportionate to its population Loyal 1995: 22) but it inherited much less than its share of weaponry and military hardware. Moreover, in conventional warfare, absolute numbers matter and Pakistanis army was hopelessly outnumbered by its larger neighbor. Its military leaders not only felt the need to expand the army but also were also to become a powerful constituency supporting industrialization. They were eventually to take over the running of the country in 1958.

However, while the threat perception was important and was no doubt nurtured by the military leadership, other factors were Net Domestic Product. The sector shares in Indian’s Gross National Product (GNP) are not likely to be significantly different. 9 required to provoke the extreme centralization in economic policy-making that was beginning to emerge. Funds. The demands on the budget to maintain an army that could begin to match India as well as protect the potentially vulnerable North-West placed intolerable strains on other sectors.

India, it is worth recalling, was four times as populous as Pakistan and more industrially developed. The military imperative resulted in starving spending on social sectors. Jail points out that in 1950-1 the central government of Pakistan could sanction a paltry RSI. Mm for provincial development programmer that included health and education. In contrast, India at that time was spending RSI 250 to 300 million in provincial development programmer. Allowing for the factor of 5 by which Indian’s population exceeded Pakistanis, its per capita spending on provincial development was 6 times larger compared to Pakistan Loyal 995: 22).

This in turn meant that Pakistanis development could not be broadly based and the available resources were inevitably concentrated in a few hands where it was much more conspicuous. This was ultimately going to accelerate the manipulation of excluded “intermediate classes” in Pakistan much before the demands of similar classes gathered strength in India at a later stage. The Weak Political Roots of the Muslim League Leadership. The most important factor distinguishing Pakistan from India was the weak social base of the political elites who took over after independence.

While the Congress Party in India had developed a nation-wide representative structure over a long period, the Muslim League in Pakistan lacked a similar political and organizational base in the areas that came to constitute Pakistan. Thus while the Congress Party could serve in the early years as an institutional mechanism for accommodating competing factions and interest groups, the Muslim League in Pakistan could not perform the same function. This difference is important. The Muslim League’s social and organizational strength was concentrated in the Muslim-minority provinces of middle India, such as the

United Provinces and the Bombay Presidency from whence Zinnia himself came. The Muslim elites in these provinces feared they would be permanently swamped in a 10 future Hindu-dominated India and their fears provided a powerful motivation for a separate Muslim organization to demand constitutional guarantees for the Muslim minority. In contrast, the most important Muslim majority areas of India were Punjab and Bengal but in both these provinces, the Muslim elite were doing quite well in provincial politics.

Although some of them belonged to the Muslim League, many others belonged to other parties. Most of them were not at all interested in the incept of a separate Pakistan at least until the early to mid-forties. In Bengal, an upcoming Muslim rich peasant class known as the Jotters class were challenging the economically dominant and more established Hindu landlord class of seminars. As elsewhere, Beanbag’s emerging Muslim “middle classes” demanded access to government Jobs and places in educational establishments.

Partition was not on the agenda for the bulk of the Muslim Jousters simply because it did not suit position in a united Bengal. In the Punjab, the class distinction between Muslims, Hindus and Sikhs was not so clear cut but even here, the majority Muslims were less advanced in economic and social positions compared to the other communities. But as in Bengal, the Punjabi Muslim political elite were generally not separatists and did not believe they had much to gain from a partition of their province.

If the Muslim-majority provinces were not separatist, the interesting question is whether Zinnia and the other leaders from the Muslim-minority provinces were. It is hard to see what these leaders had to gain from partition since even if they were to migrate; the millions of Muslims in the minority provinces who were their constituency were unlikely to do so. In fact, while this group frequently made separatist noises, they were equally frequently engaged in making deals with Congress that promised constitutional protection for minorities.

The most coherent interpretation of Jinni’s strategy was that he was attempting to obtain constitutional protection for the Muslims in the Muslim-minority provinces in exchange for appearing to deliver the Muslim-majority provinces of Bengal and Punjab to the Indian union Loyal 1985). That this was really the Muslim League’s goal is supported by a number of key 1 1 actions such as the Locknut Pact with Congress in 1916 and most spectacularly

Jinni’s acceptance of the Cabinet Mission Plan of 1946 which would have allowed India to stay together as a federal country if substantial powers were transferred to the provinces. Zinnia not only accepted the Cabinet Mission Plan, he is on record for having torn up the plan for an independent Pakistan literally months before the country was actually born. Nehru and eventually the Congress rejected the Cabinet Mission Plan no doubt thinking that the price of partition was worth paying to avoid a weak centre, which would have resulted from the Cabinet Mission’s model of federalism.

Nehru ambition was to modernize India under a strong centralized state. The Congress leadership may also have calculated that Jinni’s demand for Pakistan was a bluff and the time had come to call it or even that if Pakistan was created it would soon collapse and return to the Indian union as an enviable economy (Olivia 1983: 46-7). In the end, what transpired proved to be an extremely costly denouement for both sides. In Pakistan, the result was a rapid descent towards authoritarianism.

The Muslim League leadership had to abandon its constituency in North India and run territories in which it had no political roots. They soon discovered that the regional leaders of Pakistan had different priorities. Whether they were originally landlords or rich peasants, in the days of united India they were primarily involved in redistributive politics using their ability to organize their constituencies to compete for resources with the economically more advanced Hindus.

Their redistributive demands suddenly made far less sense when the old Hindu elites disappeared and resources had to be allocated to create a new industrial base. The Muslim League leadership they increasingly had to rely on the bureaucracy. Olivia (1983: 78-9) is therefore robbery too harsh in attributing the turn towards bureaucratically in early Pakistan largely to the poor quality of the political leadership. Yet, the use of bureaucratic methods certainly further weakened the political leadership and strengthened the bureaucracy and the military.

Thus, ironically, the imperative of industrialization and the need to over-ride the regional demands of emerging classes converted the Muslim League from a party of 12 federalism into a party of strong centralism. There are obvious parallels between the Muslim League’s responses to regional politicians in the new Pakistan and Nehru ejection of the Muslim League’s earlier federalist demands. In fact, the Muslim League faced a worse predicament than Nehru. Unlike Nehru who had a constituency which supported planning, the Muslim League had no such constituency in Pakistan.

As we have seen, Pakistan was largely a rural hinterland whose politicians were primarily regional power brokers. Already in 1954, the lower-middle classes in East Pakistan who dominated the polity (the Jousters in the countryside and the urban petty bourgeoisie) revolted against the Muslim League and elected a United Front government. The East Pakistani political elite had simply discovered that the Muslim League was not receptive to its demands for more autonomy for (and hence local access to state power in) East Pakistan (Assayed, K. 1960 and 1967).

The central bureaucracy however quickly suppressed political assertion by the class that had won East Bengal for Pakistan. The East Pakistan legislative assembly was dismissed and Governor’s Rule imposed. These political experiences provided the backdrop to the development of the capitalist class in the fifties through the policies of import substituting industrialization. Creating Capitalists through Import Substitution. It was in this context that the Muslim League government in the fifties began to look around for a strategy to create a new industrial base.

The key plank of the early strategy was to push the tiny merchant capitalist class many of whom had emigrated from India to become a new class of industrialists. The Muslim League leadership had personal contacts with some of these ©magi© traders dating back to pre-partition days. These traders in India in alliance with the Muslim League had established ‘Nation Building Companies’ eke the Mohammad’ Steamship Company and Habit Bank Limited, and they provided obvious candidates when individuals or companies had to be offered industrial projects (Rash & Gardenia 1983: 1-8).

However, Rash and Gardenia describe this phase of Pakistanis economic policy as a period of mercantilism where trading interests were given priority. This interpretation is not consistent with the quite explicit objective of the state to create a new industrial capitalist class. It is more accurate to describe policy in this phase as attempting to create at least a few 13

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