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Policy Implications of Evidence on Productivity, Concentration and Income Distribution from Pakistans Large Scale Manufacturing Sector Dr Shahida Wizarat Director, Applied Economics research Centre 1. Introduction

In this paper empirical evidence on productivity, concentration and income distribution contained in previous research done by the author are being drawn together to derive implications for industrial policy for Pakistan in 2030. The models, data analysis, etc have not been discussed. But the original paper and chapters from books whose results have been produced are available with the author for the interested reader. Following this brief introduction I discuss productivity growth in Pakistans large scale manufacturing sector in Section 11. In Section 111 estimates on market and aggregate concentration for Pakistan are presented. Section 1V contains estimates on income distribution for Pakistans large scale manufacturing sector, while implications of the three sections on public policy are discussed in Section V. 11. Productivity growth In Wizarat 2002 (Ch 4) using neo-classical growth accounting techniques, Total Factor Productivity (TFP) index for Pakistans large-scale manufacturing sector was computed for the period 1955-91. The estimates are presented in Table 1. Rates of growth of these indices are contained in Table 2. Labour productivity (LP) was also computed for the same period. The estimates on LP are contained in Table 3. The indices increase continuously from the mid-1950s to the mid-1960s and decline thereafter. The secular downward trend started in the 1970s continued unabated during the 1980s, reflected in terms of declines in the rates of growth of both labour and total factor productivity. Gauging by the present state of affairs in the economy generally, and the manufacturing sector more specifically, the decline must have been steeper during the 1990s. Comparing the LP and the TFP estimates computed by me with similar estimates obtained from other studies for the developed countries I find the manufacturing sector in Pakistan diverging from the manufacturing sectors in Germany, United Kingdom and Europe at an alarming rate (Table 4) In Wizarat (2002 Chapter 6) I find empirical evidence1 to support the Verdoorn effect. Empirical evidence does not provide support the neo-liberal view that trade liberalization increases efficiency on account of new technology, reduction in X-inefficiency and international inter firm learning. On the contrary, I find both exports and imports have a negative and significant effect on manufacturing productivity. The negative impact of exports 1

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on productivity reflects that the policy of export expansion, by diverting resources towards low productivity export industries, producing simple products, and employing unskilled labour is reducing the level of productivity in Pakistans manufacturing sector. Moreover, the negative effect of imports on productivity rejects the positive effects on account of spillovers and reduction in inefficiency propounded by the New Growth Theory. Vertical integration is affecting productivity positively, lending support to Levy (1984), McGee and Bassett (1976), Contini (1984) and Davies and Caves (1987) of a positive relationship between productivity and vertical integration. The result reflecting that when manufacturers control their input supply, productivity tends to be higher. The positive effect may also be due to economies on account of transaction costs, reduction in real costs, attainment of maximum production efficiency and avoidance of bilateral monopoly. The coefficient on owner proprietors is negative and significant, reflecting that owner managed industries are small sized units paying low wages. Another important finding emanating from my research (see Wizarat 2002 Ch 8) is the absence of the cycle running from productivity growth to price decline, causing increase in demand, leading to increase in output and employment. This is borne out by the finding that increase in productivity does not lead to a decline in price. Moreover, the cycle running from decline in price to increase in demand is also missing, while increase in employment due to increase in output is less than proportionate. As a result, the manufacturing sector is unable to set a multiplier process into action, which once started could gather its own momentum. Table 1

The Value-Added Index, The Aggregate Input Index And The Total Factor Productivity Index

(Using Partial Elasticity Weights)

Year Value Added Aggregate Total Factor Index Input Index Productivity Index

1955-56 52.56 73.90 71.72 1957-58 63.89 80.16 79.70 1958-59 98.92 89.99 109.92 1959-60 100.00 100.00 100.00 1962-63 261.99 210.99 124.17 1963-64 273.40 232.31 117.69 1964-65 343.01 259.09 132.39 1965-66 365.94 294.26 124.36 1966-67 412.62 333.85 123.59 1969-70 516.88 462.79 111.69 1970-71 533.42 528.44 100.94 1975-76 553.53 951.99 58.15 1976-77 626.79 1038.49 60.36 1977-78 733.38 1040.57 70.96

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1980-81 941.04 1790.48 53.00 1981-82 1095.62 2141.51 51.16 1982-83 1115.01 2499.39 44.61 1983-84 1186.01 2814.47 42.14 1984-85 1324.02 3203.98 41.32 1985-86 1372.84 3769.98 36.42 1986-87 1571.43 4265.64 36.84 1987-88 1605.77 4612.53 34.81 1990-91 1681.16 6583.78 25.53

Source: Wizarat (2002) TABLE 2 Annual Rates Of Growth Of The Value-Added, The Aggregate Input And The Total Factor Productivity Indices

Using partial elasticity weights Value Aggregate Total Factor

PERIOD Added Input Productivity Index Index Index

1955-56 to 1990-91 13.00 15.60 -2.00 SUB-PERIODS 1955-56 to 1959-60 19.50 7.30 12.30 1959-60 to 1969-70 26.00 23.00 3.00 1969-70 to 1980-81 6.40 13.40 -7.30 1980-81 to 1990-91 6.12 13.40 -6.80

Source: Wizarat (2002) TABLE 3

The Labour Productivity Index

Year Labour Productivity

Index

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1955 56 100.37 1957 58 89.51 1958 59 113.64 1959 60 100.00 1962 63 135.66 1963 64 131.12 1964 65 153.15 1965 66 169.58 1966 67 136.01 1969 70 126.92 1970 71 113.63 1975 76 46.85 1976 77 45.45 1977 78 46.15 1980 81 40.56 1981 82 39.16 1982 83 32.87 1983 84 31.12 1984 85 30.77 1985 86 27.27 1986 87 26.22 1987 88 24.48 1990 91 15.38

Source: Wizarat (2002)

TABLE 4

Productivity Trends: A Comparison of Countries/Regions Period U.K. Europe Germany Pakistan

1960-73 TFP in industry 2.3 3.0 2.5 0.2 Mfg. LP 5.0 - 6.1 2.2

1973-79 TFP in industry 0.6 1.4 1.8 -3.0 Mfg. LP 0.7 - 3.4 0.2

1979-89 TFP in industry 1.5 1.2 0.8 -7.8 Mfg. LP 4.2 - 2.3 -7.8 TFP = Total factor

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productivity LP = Labour productivity Source: Maddison (1991), OECD, (1991a) and O Mahony and Wagner (1994) quoted in Crafts (1996). For Pakistan my computations are based on the CMI data.

Source: Wizarat (2002)

111. Market and Aggregate Concentration

Market concentration was estimated for Pakistans industrial, financial and service sectors by estimating Three Firm concentration Ratios (CR3) and Herfindahl Indices (HI) for 18 manufacturing, four financial and two service sectors for the year 19922 and 2000 in Wizarat (2003). These estimates are presented in Table 5 and 6 respectively. The computations show that concentration levels have increased during the decade of the 1990s. For the 18 manufacturing industries overall concentration level has increased from 69.75 percent in 1992 to 78.64 percent in 2000 in terms of CR3. According to the HI the overall increase has been from 0.2464 to 0.3402. For the financial sector the overall concentration level has increased from 49.91 percent in 1992 to 60.04 percent in 2000 in terms of the CR3. But in terms of the HI the overall concentration level has declined slightly from 0.1946 to 0.1931 during the same period. Overall concentration level during 1992 to 2000 for the two service sector industries declined somewhat from 93.93 percent to 82.71 percent in terms of CR3. But the overall trend revealed by the HI reflects an increase in the overall concentration level from 0.4235 to 0.5605 during the same period.

Industries recording high and increasing levels of concentration are vanaspati and allied, leather and leather products, tobacco, cotton weaving, textile composites, glass and ceramics, woolen and woolen textiles, chemicals, transport and communication (declining level according to CR3) pharmaceuticals, cables and electric goods, paper and board. Industries recording high but declining levels of cencentration are synthetic and rayon, fuel and energy, food, engineering, cement and mutual funds. Estimates on Aggregate Concentration of the Publicly Incorporated Sector Aggregate concentration was estimated for the publicly incorporated sector (i.e. all firms registered on the KSE) by the use of methodology discussed in the paper. These estimates pertain to the financial, manufacturing and service sector firms registered on the KSE. The latter also includes the construction sub-sector as well as a miscellaneous

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group, both of which were not included in the computation of market concentration presented earlier. From these sub-sectors top 100 firms in terms of fixed assets were identified and the gross value of their fixed assets added together in 1992. These come to Rs.145379.2mn which is 79.2 percent of the total fixed assets of the financial, manufacturing, service and miscellaneous sub-sectors at Rs.183667.5mn. The estimates on aggregate concentration are contained in Table 7 and displayed in Figure I. Eight years later the total fixed assets of top 100 firms increased to Rs.540011.9mn which is 95.6 percent of the total fixed assets of the financial, manufacturing, service and miscellaneous sub-sectors at Rs.564717.2mn in 2000 . This is a phenomenal increase in a short span of eight years and brings to the fore the increase in the skewness in the distribution of income and wealth of the publicly incorporated sector that has come about during the first decade of the liberalization era. TABLE 5 Three Firm Concentration Ratio for Financial, Manufacturing and Service Sector Firms 1992-2000

Industry No of

Firms CR3-92 No of

Firms CR3-2000

1 Vanapati & Allied 6 64.67 2 100 2 Leather & Leather goods 3 100 3 100 3 Tobacco 4 96.59 2 100 4 Synthetic & Rayon 19 72.49 12 59.5 5 Fuel & Energy 19 88.24 19 66.7 6 Transport &

Communication 6 99.62 6 98.72

7 Weaving 13 42.22 7 74.58 8 Glass & Ceramics 5 84.54 4 88.74 9 Woolen & Textiles 3 100 4 100 10 Chemicals 14 76.02 8 92.35 11 Food 7 86.19 9 85.57 12 Engineering 6 85.63 8 78.24 13 Pharmaceuticals 8 60.09 7 68.71 14 Cable & Electric Goods 4 96.85 4 100 15 Sugar 16 31.74 7 52.26 16 Auto & Allied 18 51.12 19 64.37 17 Textile Spinning 29 21.56 28 30.27 18 Textile Composite 13 57.34 9 75.66 19 Cement 11 69.72 13 56.07 20 Paper & Board 9 58.7 8 89.24 21 Modarabas 37 29.28 15 56.5 22 Investment & Banking Cos. 35 58.41 16 51.05 23 Leasing Cos. 30 41.49 15 66.8

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24 Mutual Funds 23 70.45 23 65.8 Total Firms 356 248

Source: Wizarat (2003)

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TABLE 6

HI for Financial, Manufacturing and Service Sector Firms 1992-2000

Industry No of

Firms HI 92 No of

Firms HI 2000

1 Vanapati & Allied 6 0.1780 2 0.7220 2 Leather & Leather goods 3 0.3355 3 0.3640 3 Tobacco 4 0.4457 2 0.6036 4 Synthetic & Rayon 19 0.2289+ 12 0.1916 5 Fuel & Energy 19 0.2865 19 0.1857 6 Transport &

Communication 6 0.5605 6 0.9353

7 Weaving 13 0.0997 7 0.2187 8 Glass & Ceramics 5 0.2880 4 0.3240 9 Woolen & Textiles 3 0.3690 4 0.6280 10 Chemicals 14 0.3310 8 0.4332 11 Food 7 0.3244** 9 0.2847 12 Engineering 6 0.3662 8 0.2241 13 Pharmaceuticals 8 0.1584 7 0.2312 14 Cable & Electric Goods 4 0.4610 4 0.5126 15 Sugar 16 0.0758** 7 0.1488 16 Auto & Allied 18 0.1189 19 0.1953 17 Textile Spinning 29 0.0409 28 0.0860 18 Textile Composite 13 0.1603 9 0.2508 19 Cement 11 0.2997 13 0.1408 20 Paper & Board 9 0.1535 8 0.5649 21 Modarabas 37 0.0531* 15 0.1450 22 Investment & Banking Cos. 35 0.2372+ 16 0.1370 23 Leasing Cos. 30 0.0981 15 0.1710 24 Mutual Funds 23 0.3900* 23 0.3193 Total Firms 356 248

** 1994 + 1995 * 1996

Source: Wizarat (2003)

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TABLE 7

Aggregate Concentration Estimates for Pakistans Economy

In mn Rs.

1992 2000 Fixed assets of top 100 firms

Total fixed assets in the financial, industrial and service sectors registered on the KSE

% Fixed assets of top 100 firms

Total fixed assets in the financial, industrial and service sectors registered on the KSE

%

145379.2 183667.5 79.2 540011.9 564717.5 95.6

Sources: Balance Sheet Analysis of cos. listed on the Karachi Stock Exchange

Source: Wizarat (2003)

Figure 1

1992

79.20%

20.80%

Top 100 Others

2000

4.40%

95.60%

TOP 100 Others

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It is also interesting to note that out of the top ten firms in 1992 only one firm i.e. ICI Pakistan was a multinational firm, but eight years later in 2000 out of the top ten firms three are multinationals. These are Hub Power Company, Engro Chemicals Pakistan and Maple Leaf Cement. This is symptomatic of the opening up of the economy as a results of liberalization policies of the 1990s.

It is interesting and useful to look back at the concentration of economic power in

Pakistan during the 1960s. White (1974) stated that 43 industrial families controlled 98 listed non-financial companies with total assets worth Rs.5165.7mn which comes to 53.1 percent of the total assets of non-financial companies listed on the Karachi Stock Exchange. His estimates on aggregate manufacturing concentration reveals that ten leading private companies controlled 29.7% of manufacturing in 1968, 20 leading private organizations raise aggregate manufacturing concentration to 42.1 percent, while 50 companies raise aggregate manufacturing concentration to 58.1 percent. For banking, White reported that the four largest banks had over 75 percent of total deposits and just under 66 percent of earning assets. Similarly, the four largest insurance companies controlled 53 percent of all assets in the insurance industry.

My estimates on aggregate concentration are not strictly comparable with Whites.

This is because I have derived estimates on aggregates concentration by taking the percentage of top 100 firms fixed assets in total fixed assets in the manufacturing, finance and service sectors and a miscellaneous group of firms. On the other hand, White has given separate estimates on aggregate industrial concentration, aggregate manufacturing concentration, aggregate banking concentration and aggregate insurance concentration. His major focus is on the percentage of total assets in manufacturing, industry, banks and insurance companies controlled by the 43 Pakistani business families. Impact of Concentration on Performance

Market power affects performance and thus gives rise to social effects which can be categories into the following:-

1. Impact on Research and Development (R&D) and Innovation. 2. Impact on Efficiency, Profits and Prices

I would like to explore how the market power prevailing in Pakistan is likely to

impact on the performance indicators mentioned above.

1. Impact on Research and Development (R&D) and Innovations. In order to gauge the impact of market power on (R&D) and innovation, it is pertinent to pose the question whether competition or monopoly is more condusive to technological progress. This has been the subject of a wide body of literature, for example, Kamien and Schwartz (1975), Mansfield et al (1971), Jewkes et al (1968), Scherer and Ross (1991), etc. The general consensus seems to be that by and large, competition generates more R&D, as it confers higher rewards as well as forces firms to

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innovate. However, there might be two exceptions. First, if there are large economies of scale in R&D. And second, the free rider problem might discourage induced innovation. (Shephard 1997). Shephard (1997) states that though the replacement effect of innovations, through destroying the value of existing products and capital goods operates on all firms, but for a monopolist the effect falls entirely on its own products. On account of this, a monopolist will bring new products and processes more slowly than the socially optimal rate. For a competitive firm on the other hand, the replacement effect of innovations falls on products and processes which are shared by many producers. So innovations take market share from other firms and not just from the innovative competitive firm itself. Such a firm is therefore likely to innovate at maximum speed in order to capture maximum profits before the competitors do so. The replacement effect thus reduces monopolists net gains which will be smaller than the competitive firms net gains. Innovations therefore tend to be led by smaller firms in a market. The dominant firms invent actively, but delay the innovation phase, letting smaller firms take the lead and the associated risks that are entailed. If the innovation proves to be successful, the dominant firms will then try to catch up and imitate.3 Moreover, since the innovation occurs more slowly under monopoly conditions, consumers continue to pay more than they would have paid after technological change had brought the prices down. The adverse impact of market power on technological progress is not likely to afflict Pakistans manufacturing sector. This is because most of the domestic companies do not engage in meaningful R&D activities and the subsidiaries of transnational corporations undertake R&D at their home offices abroad. 2. 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 and / or higher profitability. X-inefficiency is closely related to market power. Oligopolies, dominant firms and monopolies develop X-inefficiency as there is no compulsion on them to keep costs down. Shephard (1997) reports that X-inefficiency often raises costs by more than 10 percent. Research relating profit margins to concentration was pioneered by Bain (1951) and focused on relating price-cost margins to concentration ratios at the industry level. The studies by Weiss (1971), Hart and Morgan (1975), Cowling et. al (1975), Cowling and Waterson (1976), Nickle and Metcalf (1978), Hirch (1990), Bennenbrock and Haris (1995) found concentration to be an important determinant of profitability for the USA and the UK.4 The concentration profitability relationship is reinforced by a strong correlation between profit rates and market share at the firm level in studies using this approach. The interpretation of a positive concentration coefficient in the profitability equation reflects market power according to Cowling (1982) and luck according to Mancke (1974). But the new-Chicago school attributes it to efficiency. The Efficient

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Structure Hypothesis states that the higher rates of return of large firms reflects greater efficiency (Demsetz 1973).5 Using a partial equilibrium approach Harberger estimated dead weight loss due to deviation of monopoly price from the competitive price for 73 US manufacturing industries. Translating these deviations into dollars of excess profit as a proportion of total sales, Harbergers estimates quantify the maximum welfare loss equal to 0.1% of US GNP. But Harbergers estimates have been criticized by Stigler (1956)6 and others7. Cowling and Mueller (1978) object to the use of unity price elasticity in the Harberger study. They assume that price cost margin is the inverse of the price elasticity of demand.8 Using firm level data for the USA and UK, Cowling and Muellers estimate of welfare loss from monopoly power range between 4 13 percent of corporate output.

For Pakistan, White (1974), Sharwani (1976), Amjad (1977) and Wizarat (1992 and 2002) found concentration to be a significant determinant of profitability for Pakistans large-scale manufacturing sector. These studies extend over four decades i.e. 1960s, 1970s, 1980s and the 1990s. The high profitability results in transferring income from a large segment of society to a few. In the Kalecki model9 (1954) wage share is an inverse of the degree of monopoly / profit margins. Ahmed (1980) and Wizarat (1989 and 2002) therefore attributed the decline in the wage share of income to high profit margins for the period 19551991. The wage share of income in Pakistans large-scale manufacturing sector declined from 37.3 percent in 1955-56 to 23.9 percent in 1990-91. There is, therefore, a causal link running from concentration to profit margin to wage share of income. High concentration levels causing high profitability are worsening the skewness in the distribution of income in Pakistan.

The skewness in the distribution of income is being worsened also on account of downward price rigidity that results from an oligopolistic market structure. In such a market structure, increase in productivity on account of technological change does not lead to a proportionate decline in prices, thus causing an increase in profit margins. Sylos Labini (1969), Baran and Sweezy (1966) and Sutton (1975) have examined such behaviour, while Ahmed (1980) and Wizarat (1988 and 2002) find the theory relevant for Pakistans large-scale manufacturing sector. The latter examined the nexus between productivity, price, demand, output and employment and reported the absence of the virtuous circle between productivity, price, demand, output and employment in Pakistan. The analysis, therefore, reveals that when productivity increases, the inability of prices to decline proportionately prevents the consumers from sharing the fruits of productivity increase. So the adverse consequences of concentration on income distribution are on two accounts. First, causation from concentration to profitability to wage share of income. And second, causation from concentration to productivity to price. Public policy that tries to reduce concentration levels in the manufacturing sector will promote

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social benefits both on account of increase in the labour share of income as well as consumer surplus and welfare growth.

The overall impact of concentration on the socio-economic-political fabric of the society are for more expansive but not amenable to as precise a measurement as the impact on technological progress, profits, price, efficiency, etc. These arise on account of the impact of shifting wealth, income and opportunities from the many to a few monopolists and have been recognized by Shephard (1997). He goes on to note that competition fosters belief in ..diversity, tolerance and individual iniative which are blocked by monopoly. And that competition . becomes the basis for an open, flexible society in which merit and personal values take primacy over control from the top. Also pertinent is the thought provoking warning of Simmons, a Chicago school economist, that monopoly will destroy democracy (Simmons, 1949). The benefits from promoting competition through the enforcement and effective implementation of an anti-trust policy are, therefore, more profound than is commonly perceived. 1V. Distribution of Income ANALYSIS OF WAGE AND PROFIT SHARES There has been a persistent decline in the wage share and a continuous increase in the profit share during the period 1955-56 to 1990-91, except for a few years which did nothing to alter the trend (Table 8). The behaviour of wage and profit shares can be divided into three distinct phases. The first phase covers the period of the 1950s, during which there was a slight increase in the wage share from 37.3 per cent in 1955-56 to 39.1 per cent in 1957-58, after which it declined again, and increased again in the following year. The behaviour of the profit share was converse to that of the wage share. On the whole, the extent of the decline in the wage share and increase in the profit share during the 1950s was modest. The advent of the industrialization era in the 1960s was accompanied by a continuous decline in the wage share, which was at an all time low at 18.3 per cent in 1965-66. (The corresponding figure for the profit share being 81.7 per cent). There was a slight increase thereafter, with the wage share standing at 20.5 per cent at the end of the 1960s. During the first half of the 1970s the wage share increased to 26 per cent, but on account of the persistent decline during the latter half of the 1970s, the wage share was 19.6 per cent in 1980-81. The recovery during the 1980s was quite modest, with the wage share standing at 23.9 per cent and the profit share at 76.1 per cent in 1990-91. There is a decline not only in the aggregate wage share, but also in the wage shares of individual industries during 1955 to 1991 as shown in Table 9. The decline in labour intensive sub-sectors such as textiles, furniture and fixtures, printing and publishing, rubber products, glass and products is astonishing. Other sub-sectors in which declines occurred are food manufacturing; leather and leather products; ginning, pressing and spinning fibers; non-electric machinery and sports and athletic goods.

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TABLE 8 Factor Shares in the Large-Scale Manufacturing Sector Year Wage Share Profit Share 195556 37.3 62.7 195758 39.1 60.9 195859 31.7 68.3 195960 34.9 65.1 196263 24.4 75.6 196364 24.9 75.1 196465 21.3 78.7 196566 18.3 81.7 196667 21.9 78.1 196970 20.5 79.5 197071 21.6 78.4 197576 26.0 74.0 197677 23.8 76.2 197778 22.7 77.3 198081 19.6 80.4 198182 19.5 80.5 198283 21.2 78.8 198384 20.3 79.7 198485 20.1 79.9 198586 21.9 78.1 198687 21.3 78.7 198788 21.4 78.6 198889 23.6 76.4 199091 23.9 76.1 Source: Computed from the CMIs, various issues. (Wizarat (2002) The sectors in which there was a noticeable increase in the wage share are footwear, drugs and pharmaceuticals, iron and steel and non-ferrous metal industries. The foregoing analysis, therefore, does seem to suggest that the decline in the aggregate wage share can be explained by the decline in labours share in the constituent industries. Ahmed (1980) using Thirlwallss methodology tried to decompose the decline in the aggregate wage share into two components, i.e., the effects of shifts in the industrial structure and change in the wage and salary component within constituent industries. His result suggesting that the decline in the wage share is dominated by the decline in labours share in the constituent industries (except where base year weights are employed which results in a large residual term) is consistent with my analysis. Impact of Growth on Key Economic Variables The labour share of income is defined as:

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WAGSH = W.L/S where WAGSH = wage share in manufacturing value-added W = average nominal wage L = employment S = manufacturing value-added In order to study the impact of growth in the large-scale manufacturing sector on wages share, it is of interest to know how growth has affected wages (W), employment (L) and value added (S). Table 10 shows the growth of these variables during the four sub-periods, 1955-56 to 1959-60, 1962-63 to 1969-70, 1970-71 to 1980-81 and 1981-82 to 1990-91. There is a three fold impact of growth in the manufacturing sector on wage share:

TABLE 9

Share of Wages and Salaries in Net Output Industries 1955 1965-66 1975-76 1980-81 1990-91 Food Manufacturing 33.4 13.6 13.1 12.6 21.3 Beverage 7.7 11.2 11 10.6 14 Tobacco 6.1 6.4 3.6 3.2 Textiles 40.3 29.7 43 38.4 24.1 Wearing Apparel 50.4 28.7 23.7 48 Leather & Leather Products 30.8 17.1 14.4 13.4 25.5 Footwear 31.6 55.7 29.2 59.7 Ginning, Pressing & Spinning Fibers 39.8 16.5 12.5 13.8 28.8 Wood & Wood-cork Products 30.9 36.3 23.7 29.7 Furniture & Fixtures 58.6 44.9 28 30.7 Paper & Paper Products 17.2 32.5 30.4 20.6 Printing & Publishing 67.2 34.4 33.8 39.5 15.8 Drugs & Pharmaceuticals 20.6 17.2 28.8 18.5 30.1 Industrial Chemicals 29.5 16.3 22.4 19.2 17 Other Chemicals 24.6 16.6 24.9 20 16.4 Rubber Products 42.7 23.9 46.3 24.5 29.3 Plastic Products 33.6 31.6 33.9 32.2 Pottery, China & Earthenware 48.6* 34.7 45.5 38.5 34.9 Glass and Glass Products 48.6* 49.9 49 35 23.4 Other Non-Metallic Mineral Products 14.8 26.3 12.1 18.2 Iron & Steel 42.1** 23.5 36.4 22.5 52.3 Non-ferrous Metal Industries 42.1** 25.7 47.2 50.6 67.2 Fabricated Metal Products 50.4 38.8 43.8 42.3 37.4 Machinery except Electrical 56.9 39.3 32.4 41 43.4 Electric Machinery, Apparatus & Appliances 26 37.5 25.6 20.5 Transport Equipment 52 25.8 26.5 58.3 38.2 Scientific, Precision & Measuring Equipment 48.3 69.5 34.8 39.1 41.1 Photographic & Optical goods 43.8 30 21.7 41.1 Sports & Atheletic goods 56.1 55.1 30.7 38.2 40.1 Other Industries 19.3 9.8 7.5 4.5 43.5 Total Manufacturing 37.3 21.4 26.1 19.6 23.9

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* In 1955 pottery, china, earthenware, glass and glass products were grouped under one heading. ** In 1955 iron and steel and non-ferrous metal industries were grouped under one heading.

The data have not been shown to avoid disclosure of information. Source: Wizarat (2002)

There is no empirical support for the neo-classical argument that wage increases are constraining the level of employment in the large-scale manufacturing sector. The limited expansion of employment is better explained by the adoption of capital intensive techniques of production. So when the government is formulating a policy aimed at increasing the level of employment, this objective does not have to be achieved by reducing the wage rate. Second, workers have been at a disadvantage on two counts. First, increase in prices is causing a decline in real wages, Second, productivity increases are not passed on to the workers. This has ominous consequences for the distribution of income between labour and capital.

TABLE 10 Average Annual Rates of Growth of Employment,

Wages and Value-Added in Large-Scale Manufacturing Year EmploymentAverage NominalValue-Added (L) Wage (W) (S) 1955-56 to 1959-60 11.7 3.5 18.7 1962-63 to 1969-70 2.0 10.3 14.9 1970-71 to 1980-81 0.8 20.5 22.6 1981-82 to 1990-91 3.0 13.3 14.6 Source: Wizarat (2002) 1. Rapid growth accompanied by increase in productivity means decline in labour cost per

unit of output, i.e., the labour coefficient (L/S) which would lead to a decline in the wage share (WAGSH), unless real wages (W/P) are increasing as rapidly as productivity. Table 10 shows that the average annual growth of employment (L) has declined sharply and continuously during the period 1955-56 to 1980-81, but increased somewhat during 1981-82 to 1990-91. This, coupled with a high rate of value-added growth would lead to a rapid decline in the labour coefficient during the period under review. Moreover, the empirical evidence in the previous chapter reflects that when productivity increases by 1 per cent, real wages (W/P) increase by .75 per cent only. On both accounts, therefore, the labour share of income might be declining.

2. A rapid increase in value-added (S) (Table 10) causing the denominator in the ratio W.L/S to increase more rapidly than the numerator will cause the ratio to decline. The table shows that the growth of employment was rapid during the latter part of the 1950s, but rapid industrialization caused the growth of employment to decline. The very high rate of growth of value-added during the sub-period 1955-56 to 1959-60 may be on account of starting from scratch, while the spectacular growth of value-added during the

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sub-period 19703.Moreover, we find that the negative relationship between productivity and prices is non-existent. On account of this, profitability would be higher, and the denominator would not decline as it would if prices were flexible.-71 to 1980-81 might be due to very rapid growth of manufacturing prices during this sub-period (at the rate of 14.9 per cent per annum). It, therefore, appears that the growth of manufacturing value-added i.e., the denominator was higher than the rate of growth of variables which form the numerator, due to which the ratio might be declining.

V. Industrial Policy A common feature of import substitution (ISI) policies has been the production of a wide range of products manufactured, rather than specialization in a selected range. The adoption of such policies in the 1960s gave rise to industries with low productivity growth. This, however, is not a reflection on the inefficacy of the ISI strategy, but is due to the fact that most of the LDCs that used this model tried to domestically produce almost every good that was imported. This led to the production of a wide range of goods at volumes less than the minimum efficient scale, with the resultant high cost of production. Adoption of the ISI model, however, need not produce a wide range of manufactured products. Greater specialization in the production of a selected range of products for a group of countries through an industrial programming type of approach would have been the correct approach. This way the pitfalls of the ISI model on account of lack of specialization and high cost due to limited market size could have been avoided. Moreover, policies towards industry have been a major factor affecting productivity in Pakistans manufacturing sector. For example, the positive impact emanating from policies favourable to manufacturing during the 1960s is discernible in the high rate of growth of productivity during that period. However, nationalization of industries during the early 1970s set a secular decline in the industrial sector, which was accentuated by the neo- liberal policies introduced in the late 1980s. The major thrust of these policies, however, came after 1990-91. Further research, therefore, needs to be conducted to capture the devastation these might have caused to the manufacturing sector in the post-1991 scenario. Policies play a pivotal role in economic development and two things need to be borne in mind. First, consistency in policy towards industry is very important, since it is inconsistency in the policy environment that turns away the investor. Second, policies towards industry have become very unfavourable with the advent of the liberalization era in the late 1980s. As a result of increase in tariffs on utilities and the markup on lending, the cost of production of domestic manufacturing has increased rapidly, causing increase in the prices of domestically manufactured goods. This, along with reduction in maximum tariff levels, is rendering manufacturing non-viable in this country. These policies need to be eva luated, and reversed, if the manufacturing sector has to be revived and allowed to play its due role in the economic development of the country. It also needs to be borne in mind, that, growth in the agricultural and service sectors cannot be sustained without a vibrant and growing manufacturing sector. Enhancing the productivity of the manufacturing sector with a view towards making it more competitive so as to withstand competition from competing imports is to be emphasized. The most important sources of productivity growth would be improvement in

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efficiency and technological change. The increase on account of the latter would come about as the government starts subsidizing R&D as WTO regime allows governments to give subsidies to industries undertaking Research and Development Formulation of industrial policy with the following major characteristics:

(a) Provision of incentives that are industry-cum-area specific, i.e. only a particular industry locating in a specific area will be entitled to the incentive. If the same industry were to locate in some other area it will not be eligible for the incentive.

(b) The eligibility of industry to receive the incentive to be determined by the availability of raw material, minerals or other important inputs.

(c) Using static comparative advantage for the industrial development of the under developed and remote areas and a nurturing a dynamic comparative advantage for the industrial development of the cities.

This decline in the labour share of income has ominous consequences for the growth of productivity in the manufacturing sector, in view of my finding that wages are an important determinant of intra-sectoral productivity differential. This is on account of improvements in nutrition, health and housing standards that become affordable with higher wages. This calls for productivity enhancing egalitarian policies, that would not only provide basic amenities of life to the working people, but also enhance the level of productivity in the manufacturing sector. This is why Keynesians treat egalitarian policy interventions as welfare enhancing, for on the one hand, they meet the needs of the less well off segments of the society, while on the other, they increase the level of productivity. Bowles and Gintis (1995), therefore, rightly recommend that policy should aim at altering the constraints and incentives that govern the pace of productivity growth. They state that inequality impedes economic performance by obstructing the evolution of productivity enhancing governance structures. Bowles and Gintis recommend that the objective should be to design incentive compatible policies for productivity enhancement through egalitarian redistribution. The notion of productivity-enhancing asset redistribution suggests a level playing field by redistributing wealth and enhancing productivity through a more appropriate alignment of incentive and fostering competition. Such productivity enhancing egalitarian policies will go a long way in increasing the level of productivity in industry and other sectors of the economy. More than that, it will have a soothing and harmonious impact on the strife torn and turbulent situation prevailing in the country at present. Other policies that can be used for ensuring better distribution of income and assets will be land reforms, growth of industrial and service sector employment opportunities, provision of health and education services to the lower income groups, micro finance availability, etc The analysis on concentration underscores the importance of fostering competition in the economy through an active competition policy, which has become dormant over the last several years. It is only through fostering competition that some of the fruits of productivity growth in the future may be enjoyed by the consumers. Hopefully the newly renamed Competition Commission will play a role in fostering such a competition.

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Notes 1 Inter industry productivity differentials study in Wizarat (2002) 2 For some industries the data are not available for 1992, but for a latter year. Where ever this is the case, it has been indicated in the table. 3 This strategy is referred to as the fast-second strategy. See Sherphard (1997) 4 Holterman (1973), Khalilzadeh Shirazi (1974), Attaran and Saghafi (1998) however do not find concentration to be a significant determinant of profitability for the UK. 5 But Shephard (1997) states that the same reflects greater market power by firms with higher

market shares and rejects the Efficient Structure Hypothesis

6 Stiglers criticisms relate to the following aspect of Harbergers study: One, Harbergers use of elasticity of demand equal to unity leads to under-estimating the effect of monopoly. Second, Harberger estimated deviations of industry profit rates from the average for all manufacturing. But since industry profit rates are higher than that in the economy as a whole, the effect of monopoly is under estimated. Third, monopoly profits might be absorbed by payment to other factors. And finally, Harberger made insufficient allowance for capitalization of monopoly profits in reported asset value. The observed rates of return on assets thus tended to be unduly equal. 7 Posner (1975) states that costs incurred in acquiring a monopoly like bribes to government officials, advertising etc. should be added when computing the cost of monopoly. Posner thus reports a much larger estimate of welfare loss due to monopoly power. 8 In the Cowling and Mueller model ? = 1/E E = 1 /(?P/P) Where ? = price cost margin E = price elasticity of demand

P = price ?P = change in price

9 Also see Weintrab (1958) and Moroney and Allen (1969)

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