Industrial Development and Poverty Reduction. A Case Study of Pakistan

Chapter # 1

Introduction

Industrial Development and Poverty reduction (A case study of Pakistan)

Introduction:

Rising inflation and great surge in unemployment are causing poverty in Pakistan. The development in the industrial sector has been very minor. That is the reason that this sector is employing less labor, increasing unemployment and ultimately causing poverty. Economic growth is a major determinant in reducing poverty as it increases employment. In Pakistan, almost 40% of the people are living under the poverty line. That is the clear evidence that Pakistan’s industrial sector is not growing. The studies have shown the relationship between growth and poverty reduction. By Oxfam, one percent increase in the economic growth decreases the poverty by 3% in the East Asian countries, the figure is 2% for Africa and 1% for the Latin American countries.

In 1959, there was a great poverty in Singapore, people used to have gambling and had have opium. But within the period of three decades Singapore has industrialized itself and it is one of the major economic powers of the East Asian countries {Zaherddin, 1998}. Industrial revolution is a dramatic change in the nature of production in which machines replaced tools, steam and other energy resources replaced human and animal power. Industrial revolution was first observed in England. It developed in 1740, mainly concentrated on textile units. The 1stly industrialized countries are UK, France and USA.

Over the last decades, the economy of Pakistan has seen significant changes. The share of industrial sector in the years of 1960-61 was 15.1% in GDP, which has increased to 25.2% of GDP in 2009-10. Coming to the agriculture sector, the contribution of agriculture sector in GDP in years 1960-61 was 43.6%, which has decreased to 21.5% of GDP in 2009-10. Coming to the largest contributor of GDP of Pakistan, the services sector, this has increased from 39% of GDP in 1960-61 to 53.3% of GDP in 2009-10. The stats show that industrial sector is the second largest contributor to the GDP of Pakistan. In Pakistan, small and medium enterprises have a very significant share in the GDP. By, economic surveys and SMEDA, the share in GDP is 40% with SMEs generating a number of employment opportunities for skilled labor and entrepreneurs. Small and Medium Enterprises represents nearly 90% of all the enterprises in the country and it employs more than 80% of the non agri. labor of the country.

The 1st reason for the sick industrial units is the use of out dated technology, they can produce up to a very low limit, unable to get deals, have to shut down the unit, causing unemployment that leads to poverty. Lack of investment and non-provision of financial assistance, high tax rates, unskilled workers, black marketing, labor unrest and political instability, shortage of electricity and marketing problems for the local produced goods are the main reasons for the sick industrial units, which in turn is a main reason for unemployment and poverty.

Industrialization helps to raise the general level of education for the masses, which increases the skilled labor force {Kerr, 1962}. Maizels (1963) found that industrialization plays an important role in raising the income of the labor, by generating employment opportunities, by increasing trade and commerce, surge in capital formation and the technology changes.

The figure 1.1 shows the literacy rate of Pakistan

The Figure 1.1: Literacy rate of Pakistan

Abbildung in dieser Leseprobe nicht enthalten

Source, Index Mundi 2010

The process of industrialization in a region not only affects the economic sphere of human beings by increasing employment opportunities and income, but it also affects the social and cultural life with increased opportunities for housing, education and infrastructural facilities {Sherma, 2008}. All of these studies show that employment opportunities raise the income level of the workers, which ultimately reduces the poverty. I will show the effect of industrial development on GDP and employment generation in the next pages.

The economy of Pakistan can survive with the performance of industrial sector and its forward backward linkages. In the past years, there has been low economic activity in the country due to stagnation in the manufacturing sector. It is fact that potential growth and development of a country depends upon development in Investment, urbanization and industrialization, but the continuing bad performance of the industrial sector of Pakistan does not auger good for future.

One most important thing for low industrial and low economic growth in Pakistan is the low labor productivity. Pakistan is facing this problem not only in the industrial sector but in agri. and sectors as well. It is the most crucial problem for an economy having least labor productivity. The total factor productivity growth in Pakistan was 0.78% during 1981-2007, while for china the TFP growth was 4.07% and for India the growth was 1.34%. During this period the CPL average growth stood at 7.38% in china, 3.78% in India and only 1.29% in Pakistan. The GDP per labor grew by 7.73% in China, 3.35% in India and only 1.84% in Pakistan during 1981-2007.

Pakistan being the recourse constraint country needs to fill these productivity gaps. Citing APO data book 2010, the agri. labor productivity stands at 0.2% in Pakistan and 1.4% in Bangladesh. In mining sector the labor productivity is 6.6% in Pakistan, 20.1% in Bangladesh and 2.3% in India.

There is another view given by Kashif and Samina. They say that financial development is a process of improving quantity, quality and efficiency of the financial intermediately sources. The most important thing in economics is that how these institutions fund their operations. The well developed institutions provide loans for industrial growth, employment opportunities in the economy. In a weak financial market people cannot have growth opportunities in physical and human capital.

The people mostly caused by the market failure are poor, so more the numbers of poor in the economy, the lower the rate of growth. When this financial system will be matured the transactional cost of using financial services is lowered. Thus the number of people who use these services will increase which in turn reduce the poverty. By providing credit to the businesses the financial intermediates can reduce poverty level in the economy, through the creation of new jobs via industrial growth. Provision of loans to industrial sector will boast the industry and hence there will be new job creation, increase in per capita consumption which leads to less poverty.

The figure 1.2 shows the GDP per capita of Pakistan

The figure 1.2: GDP per capita (PPP) (US$) of Pakistan

Abbildung in dieser Leseprobe nicht enthalten

Source, Index Mundi 2010

In 1990-91 the industrial growth was 6.42% and GDP decreased to 4.42%, the industrial growth gradually decreased to 4.14% in 1995-96 with GDP growth 5%. In 2000-01 the industrial growth decreased to 1.27% with GDP growth decreased to 4.26%. In the early years of this century, the figures were very impressive, the industrial growth, GDP growth and the employment rate increased to great extent. The industrial growth in 2005-06 was 12.1% while the GDP growth was 7.66%. But, unfortunately with the change of government, the industrial growth was negative in 2009 and this phenomenon is still in view. As for as these results are concerned, Pakistan’s industrial sector is facing many challenges regarding input material, costly machinery, heavy taxes, low labor productivity, unskilled labor and high risks are the main factors disturbing the economy of Pakistan.

The trend in the unemployment rate can be had from the table given below. In 1980-81 the unemployment rate was 3.7%, in 1985-86 the rate decreased to 3.59%, in 1990-91 it was 2.59%, but in 1995-96 the unemployment rate increased to 5%. In the year 2000-01 the unemployment rate increased to 7% and in 2005-06 the unemployment rate increased to 7.59%, which by the government estimations is decreasing but the market stats show that it is increasing. Pakistan can have the example of the East Asian nations. Before 3 decades these countries were very poor, but with the rapid growth in the industrial sector, they have developed. Industrial development played an important role in the economic development of China, Indonesia, Malaysia, India and Singapore. With industrial development their poverty rates have also reduced to much extent.

The figure 1.3 shows the unemployment rate of Pakistan

The figure 1.3: The unemployment rate of Pakistan

Abbildung in dieser Leseprobe nicht enthalten

Source, Index Mundi 2010

1.1-Organization of study:

The study deals with the relationship between industrial development and poverty reduction in case of Pakistan. Chapter 1 is meant for brief statement of problem which covers introduction and objectives of the study. Chapter 2 consists of reviews of existing literature and earlier empirical work on the subject. Chapter 3 deals with the overview of the industrial development and poverty all over the world and in Pakistan. Chapter 4 is reserved for methodology and hypothesis and at the end chapter 5 discusses policy implications and conclusion. Appendixes and references are given at the end.

1.2-Objectives of the Study:

The general objective of this study is to analyze the impact of industrial development poverty reduction in Pakistan. While the specific objectives of the thesis are:

1. To examine the effect of industrial development on poverty in Pakistan.
2. Providing policy analysis and pointing right mix of policies for industrial development in Pakistan.

1.3 - Research question:

My study discusses the relationship between industrial development and poverty reduction in case of Pakistan. I want to find out that, whether, industrial development can create enough job opportunities and increase per capita income, that poverty is reduced?

Chapter # 2

Literature Review

Industrial Development and Poverty Reduction (A case study of Pakistan)

Literature Review:

J. Sentsho (2003) tried to find the relationship between industrial development and poverty reduction in Botswana. He used economic linkage model to find whether Botswana can development by creating employment and as a result decrease in the poverty. He supported his conclusion by taking examples from the East Asian countries like, Singapore, Indonesia and China. He divided the industrial sector of Botswana into two sectors. 1st one is the enclave development, which means employment creation and industrial development and hence the poverty reduction to some extent. 2nd is the Integrated development, which means employment creation and industrial development and hence the poverty reduction at the macro level. Botswana, he says, is a mineral based economy and taking share of minerals as %age of real GDP, %age of government revenue, %age of employment and %age of total employment. He finds out that by increasing the share of minerals in the economy Botswana can increase its employment by industrial development that will reduce poverty ultimately. At the end he suggests that employment generation by industrial development is necessary that will lead to poverty reduction, and there is a need of growth in the industrial sector as public sector has limited number of employment opportunities.

MS Quibria (2006) purposed at explaining the Millennium Development Goals and their role in alleviating poverty in the developing countries. She sums up the estimates for global poverty, problems and solutions. She exampled Bhalla’s incidence of poverty which shows that the poverty incidence has decreased from 25% to 13% from 1990 to 2000 n the developing world. The Chan Ravallian estimates show that the poverty incidence has decreased from 28% to 23%,Sala-i-Martin estimates show that it has decreased from 9.7% to 7.7%. At the end she suggests that measuring the poverty at the world level is not an easy phenomenon. The phenomenon is more conceptual than the statistical that’s why they are of little importance policies cannot be made on their basis. But they can be useful in guiding, measuring and monitoring the international poverty.

In UNIDO report (2006) the issue discussed is the role of industrial development and trade and their impact on reducing poverty in the south. The report is divided into six main headings discussing matters relating to challenges in the development of south, dynamics of the manufacturing industry, export, technology, trade liberalization and at the end the role of UNIDO in industrial development and poverty reduction in south. The report discussed the matter of grouping of countries e.g. Group 77, which has supported much in bringing boom in the export and manufacturing sectors, implementation of Millennium Development Goals and ultimately poverty reduction in the south countries. In the next section, the report says that south covered the 30% of the manufacturing sector. These countries of south are much ahead than the other countries of the region. Like China, India, Malaysia and Singapore, as information, communication and technology play vital role in development. The increase in trade of manufacturing has risen to 7%. In the next sections the report has brought into consideration technology, R&D, in which the south countries has progressed much. In the next section the report discusses matters pertaining to trade liberalization and industrial development and poverty reduction and at the end the role of UNIDO is evaluated.

Kannan (2004) purposed at interpreting and explaining the poverty in all dimensions, sharing the development experience of state of Kerala in India. He argued that political freedom and public participation is necessary for development. He takes poverty as violation of the basic human rights and a restriction in the development process. He has ranked the states in India on the basis of human development index (HDI). The data has been taken from 1981-2001. Among the fifteen states of India, the HDI of Kerala is 0.5, exceeding the rest of India, the HDI of India as a whole is 0.302. This is due to decreasing poverty through political freedom and public participation in the decision making. The HPI index also shows that the poverty in Kerala is less than the rest of the India, ranking Kerala on number 6 with Human poverty Index value 32.1 from 1987-2000. The people below poverty line in Kerala have decreased from 29.1% to 12.7%. At the end, he suggests that poverty is a violation to human rights. For economy to grow there must be public participation in the decision making.

Gillani et al (2009) found the relationship between unemployment, poverty, inflation and crime nexus in Pakistan. The period of study is 1975-2007. The data used is time series which is examined by augmented dicky fuller test. The GCT and TYP are also employed. The research showed that the crime growth has increases from 6.02% to 18.71% from 1958-2007. Which are mostly done by the unemployed people? The variables used in this paper are, crime, unemployment, poverty, inflation and they are all stationary at the 1st difference. The empirical findings of the research show that as the unemployment increases poverty increases due to which people do crime. The poor people have limited income which leads to low savings and low living standard. At the end they recommend that there should be economic justice for reducing poverty. The issues discussed need to be addressed. The loan which is dispersed by the financial institutions must be increased yearly.

Briguglio (1998) discussed matters relating to small country size, restrictions and return to scale in manufacturing. Using the production function approach, he takes the data of 43 countries having variable sizes. The main focus of the study are the disadvantages form the small country size due to which low manufacturing, leads to low employment that increases poverty. The approach used in this study is the production function that uses capital and technology. The variables included in this study are, the Human Development Index, a year of schooling index, and GNP per capita index. The empirical results of one of the equations used show that the developed countries tend to use more technology and R&D than the capital to grow in the manufacturing sector. At the end the findings of the study show that that the countries with small size have more per unit cost than the large size countries and they have more restrains to develop. The other disadvantage of the small size country is that they have a very large foreign sector, having disadvantages in the international competitiveness in manufacturing sector.

In the ILO report (2012) the issue under consideration is the global employment rends2012, preventing deeper job crises. The report having four main headings, throws light on the global economy, global labor market, labor market development, regional economies and growth in jobs. According to the report the world has been facing recession since the Second World War, the recovery has been short lived and hollow only recovering the small financial crises. Due to low recovery almost 27 million newly educated job seekers have been added in the already unemployed 171 million. The report is of the view that in 2002, 185 million people were unemployed at the world level in 2007, 170 million people were unemployed. And in 2011, the figure raised to 195 million unemployed educated job seekers, and it is expected that by the end of 2016, the figure will raise to 216 million. In the next section the report throws light on the global labor market. Low wage growth, unemployment and low productivity growth are the main reasons of unemployment. In the OECD countries from 2008-2012has been same 60% almost the unemployment rate from 2008-2012 have increased from 6.1% to and the employment annual growth has decreased from 0, 6% to 0.4% in 2102. At the end the report says that the youth unemployment rate has increased from 11.7% to 12.7% from 2007 to 2011.

In the industrial development report (2009) the issue focused is the new industrial challenges for the bottom line and the middle income countries. The report is divided into three sections. In the first section the report discusses the structural change in the industry and the global economy. The second section deals with the implications for the industrial development and the third section deals with the suggestions and the policy implications. The past thirty years have been exemplary in the industrial development of the developing countries, e.g. the East Asian nations like, South Korea, Malaysia, Indonesia, Singapore, India and China, the manufacturing growth has been great. Due to which their employment percentage is increasing at a great pace than the other countries of the region. The section two throws light on the structural change in industry. The research shows that none of the countries have developed without industrialization. From 1975-2005 the manufacturing value added has been 19 in 1975 and in 2005 the value was 27. In the year 1965, the manufacturing sector of the East Asia and the Latin America was of similar size. The manufacturing share in the GDP of the East Asian countries rises to 35% where as Latin America stooped at 25%. The report is not of the criticizing nature but it wants to assist the policy makers to make such policies to grow industry, employment and ultimately reducing poverty.

Mekosh and Sturm (2011) checked whether the European Monitory Union succeeded in lowering wage growth and unemployment. They used Gruner’s model to check the relationship. They talked about the monitory centralization and the business cycle fluctuations. They emphasize on a monitory union as it decreases the wage growth rate, unemployment and inflation. Using difference-in-difference approach they tried to trace wage growth and unemployment. The regression results they found out are positive but they are not statistically significant. The variable they used are GDP growth rate, wage rate, inflation rate and the unemployment. The results show that from 1984-1998, the wage growth rose up, that’s why the results are not statistically significant. As for as unemployment is concerned, it has decreased in the years from 19984-1998.

Azan at el (2009) checked out industrial development in the KPK province of Pakistan. The economic survey results 2008-2009 show that the industrial share in GDP from 2002-09 has decreased from 1% to 0.9%. The services sector has also decreased from 2.7% to 1.9%. The empirical results show that the number of the industrial units in KPK in 1977-78 were 260,this number raised to 1964 in 2003-04, and by the end of the financial year 2007-08 the number raised to 2254. There is an increase in it but not sufficient as population is increasing at the faster rate than the industrial growth. At the end they conclude their study with these recommendations that, electricity should be regulated, taxes should be decreased for healthy growth of industry.

Kaplinsky (1995) worked on capital intensity in South African manufacturing and unemployment for the years from 1972-1990. The main idea of the paper is that the capital intensive technique is having bad effect on the employment on the employment structure of the country. The above hypothesis is rejected on the basis that the political factors that have pushed the private sector not to invest in the labor intensive sectors, rather investing in the capital intensive sectors lowering the manufacturing growth and ultimately low employment that leads to poverty. It is believed that South African economy is capital intensive due to which there is much more unemployment. The capital labor ratios of five countries are compared, Brazil having 10.6% from 1981-85, Mexico having 18.4%, Korea 11.8%, Malaysia 12.1% and South Africa having 27% for the years from 1981-85. The primary objective of this paper is to show the employment performance of the South Africa economy. The lowering manufacturing growth rate has been due to static labor force in the economy. The empirical results show that labor intensive manufacturing sector is not grown.

Pierre and Philippe (1996) focused on minimum wage employment growth. They are of the view that the low wage legislations can have positive impact on the human capital accumulation. The low wage will force the workers to get more education to increase their human capital. In developed societies minimum wages are considered as a cause of unemployment. They are of the view that rise in minimum wage causes other wages to rise due to which it throws negative impact on employment by Haufman 1989. They argument that different studies are on their side e.g. Galor 1986, that minimum wage can increase the skilled to unskilled ratios in the labor force. The paper is divided into 6 sections.

Arthur and Derick (2003) showed that how citizens participate in the macroeconomic policies, having international experience and implications for poverty reduction. The developing countries are facing problems regarding the macroeconomic policy. The international donors force the policy makers of these countries to work on finance and budget according to the planted policies made by these donor countries. This is the reason that poor people does not believe in Government. The paper throws light on who participates in policy making, 2nd the context of macroeconomic policy and dynamics of participation and the process by which people participate. At the end they say that if a country or a foundation wants to have development in these countries they must have the participation of the masses not the policies of the donors as they do not know the ground realities of the given country.

Steven et al (2010) worked on rural non-farm economy, looking into the prospects for growth and poverty reduction. The paper throws light on the fact that the policy makers have very high expectations from the RNFE as it requires low capital share, high income shares and high employment rate. They are of the view that the policy makers should accelerate the static rural economy as to increase their employment and labor productivity and important of all access to market for all. They found that 35-50% of the rural families depend upon non-farm economy, whether they have landlord or landless. In Africa 19% of the rural employment is related to manufacturing, 31% to trade and transport, 15% to construction and utility services and 35% to personal services. In case of Asia the figure are 22% of manufacturing, 29% for trade and transport, 31 % for finance, 14% for construction and utility and etc. The empirical results show that rural non formal growth played an important role in eradicating poverty and unemployment. The policy makers have very high hopes that non formal rural economy will do best for the rise in employment and reducing poverty.

Mary et al (2011) focused on humanitarian work psychology. They discuss crucial issue of achieving MDGs decreasing poverty by 50% by the end of 2015, requiring serious efforts from all stakeholders. The organizational psychology has not played its role in reducing poverty as it should. They say that with the establishment of global task force for humanitarian work psychology positive steps have been seen towards the issue. They are of the view that organizational psychology can play an important role in reducing poverty and increasing employment, capacity building and developing stakeholder’s participation. The background of poverty is very severe. More than 2 billion people live than 2$ a day, almost 30000 thousand children die each day. The poorest 40% have only 5% of the world’s income. Therefore, there is a need of humanitarian work psychology for MDGs to reduce poverty by 50% by the end of 2015. They say that the task is facing some hurdles, when they try to impose the task; the perception of psychology is that, it is a western subject and the firms are hesitant to adopt it.

Manfred (2009) worked on skills development for poverty reduction, the case of Tajikistan. Manfred is of the view that vocational education and training is very 6important for a worker to be skilled that will raise the productivity, quality of product and income of the workers as well. He found that Tajikistan is a low income economy and it has struggled much after separation from Russia. By 1998 to now, the GDP is 9% almost for the last five years. Food items and the other necessities of life are very expensive. He found that almost 70% of the population is still working in the agriculture sector. The unemployed new job seekers were 2.5 million in 1991 rising to 3.9 million in 2006 and 6.9 million by the end of 2006. This is due to the fact that people are not convince in getting vocational training and education, by which there is low skilled labor, expensive items, low wages for the workers that leads to poverty. The findings of the study show that people now to some extent are convincing towards VET. The beneficiaries of VET criticized the limited training period and facilities. They say that it has increased their product, quality and income and access to market that needs to be improved.

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