Investor behaviour on the stock exchange reflects instant or, at best, short-term sentiment. It is about financial capital changing hands over existing fixed assets. No additions are made to fixed assets. In a developing economy like Pakistan, what is important for jobs, growth and stable supplies is what economists call fixed capital formation — the setting up of new production units or their expansion. The dynamism of the private sector in large-scale manufacturing leads growth in most high growing economies. In Pakistan, however, fixed private investment or capital formation has been falling rapidly since 2006-07. In 2007-08, it decreased by less than one per cent. In 2008-09, private investment declined by 7.3 per cent.
Fiscal year 2009-10 witnessed a double digit fall of 13.7 per cent. The downhill trend picked up even more pace in the last fiscal year, 2010-11, when private investment in large-scale manufacturing fell by as much as 27.2 per cent. Allowance for inflation reduces this growth further. Thus in 2010-11, private investment in large-scale manufacturing plummeted by 32.4 per cent. As a percentage of GDP, private investment in such manufacturing has declined from 3.14 per cent in 2006-07 to less than one per cent in 2010-11.
With this declining trend, the share of private investment in large-scale manufacturing as a part of overall private investment has also become much smaller. It used to be the largest sector of private investment until 2005-06 when it was overtaken by transport and communication. In 2009-10, large-scale manufacturing became the fourth largest contributor to private investment after transport and communication, services, and wholesale and retail trade. Fiscal year 2010-11 had the unique distinction that even the agriculture sector had fixed capital formation higher than that of large-scale manufacturing and private investment in small-scale manufacturing was about to reach the level of private investment in large-scale manufacturing. In 2002-03, private investment in small-scale manufacturing was one-fifth of large-scale manufacturing. In constant prices, a noticeable feature is that private investment in agriculture in 2010-11 was larger in absolute terms than in large and small-scale manufacturing put together.
What are these numbers telling us? First, the numbers confirm that political uncertainty, breakdown of law and order, the unending energy crisis, trade liberalisation, natural disasters, the world financial crisis and recession have played havoc with the large-scale manufacturing sector. Its output growth was negative in May and June of fiscal year 2010-11 and just 1.1 per cent for the year as whole. Second, the news that businesses are relocating to Sri Lanka, Bangladesh and Dubai is not exaggerated. The rising remittances also reflect foreign investment by Pakistanis. Third, and most important, the process of deindustrialisation may have begun, not because the economy has matured and higher productivity in manufacturing is shifting labour to services, but as a result of amateurish economic management. In addition to falling investment, the share of large-scale manufacturing in GDP has declined by 1.3 percentage points in the past four years.
However, labour force surveys show an increasing share of manufacturing in employment. This is because the survey does not make a distinction between large and small-scale manufacturing. In the process of economic development, initially agriculture’s share in GDP declines and that of manufacturing rises up to a point before it reduces. But this only happens at a high level of income per capita. Deindustrialisation in Pakistan may be arriving earlier than it makes economic sense.
Published in The Express Tribune, September 9th, 2011.
COMMENTS (14)
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The reputation of this government for corruption might also be a factor. An Indian American friend told me he was mystified why Pakistani American businessman were wary of investing. I guess the 10% reputation can be off putting
@Abhi:
Manufacturing is not just installing plants to provide employments though it is a very very important aspect. It actually changes the whole information and knowledge systems and moves money for real commodity productions to increases people's choices and well-being. You virtually industrialize everything. Manufacturing of pharmaceuticals and food and clothing and farm equipment and even entertainment whatever is the real economy/development. However, there is always a scope to practice yoga and live a contented life. But the point is that people should not be asked to adjust their preferences at lower levels of possible economic equilibriums.
I stumbled on this article and the most important thing i learnt today: Pakistan has a stock market? Surprising, since all your hear about Pakistan in the west is that it is part of Afpak and it is full of bearded extremist trying to bomb each other daily. It is gratifying to know that Pakistan has modern problems, like the stock market, economic growth, etc. Now, don't tell me Afghanistan has a stock market too?.
Tim
@BruteForce Any rate incrwase was due to interest rate reduction. "This is the slowest pace of economic growth in six financial quarters. Analysts largely attribute the slowdown to recent monetary tightening." http://edition.cnn.com/2011/BUSINESS/08/30/india.gdp/index.html India's economic growth slows
@Meekal Ahmed: I was just noting a fact, not expressing an opinion. You see almost see nothing manufactured in Pakistan in the bazar. Again, 7.5% is the fixed value added number. I was talking about investment,
@Sajida:
Strange how India still managed to become the World's fastest growing economy last year in spite of Industries leaving.
You can find articles praising India and putting it down everyday. Its easy to cherry pick. But, you cant pick on facts. India was the fastest growing nation on Earth last year.
PT,
I am surprised that you use "trade liberalization" as a cause for the decline in private investment. What trade liberalization?
Second, the data on small-scale manufacturing (SSM) are bogus. It is a fixed number put into the National Accounts each year. I think the present growth rate is fixed at 7.5%. We have not up-dated the SSM data in years.
Furthermore, I don't know whether SSM captures the SME sector. No one has been able to give me an answer. Perhaps there isn't one?
The decline is private investment in certainly worrying. It needs to be studied carefully. With public sector investment also constrained, a fall in total investment has ominous implications for growth and jobs going forward. A rather distressing picture.
Pakistan may be ahead of curve. Manufacturing is no more a very profitable business and also more and more manual jobs are replaced by automated systems. most of the large scale manufacturing plant takes up lots of natural resources, real estate and provide meager employment. A plant giving employment to 2000 people will be called a huge plant now a days. So relying on manufacturing is not going to solve any problem it will only increase pollution and consume local resources. Need to think about sustainable life style.
The power shortages are a big reason. In India where there is prolonged power shortages factories are decamping to China! Anecdotal evidence can be found in this Tehelka article: http://www.tehelka.com/story_main34.asp?filename=Bu150907EVERYONEE.asp Everyone Who Can, Is Leaving The retail bustle of Benaras can be misleading. Behind the diesel-fed dazzle, is an economy wheezing to death, says Sankarshan Thakur
This is a very well articulated assessment of declining fortunes of industrial activity in Pakistan. There is no country in the world who could reduce poverty without giving manufacturing sector a labour absorbing growth push. India and China and earlier the East Asian economies went through it. In Pakistan, while the debate has to revolve around industrial policy (which speaks of national systems of innovations, industrial growth observatories etc.) the powers that be talk to absolute liberalization.
While using fancy words (deceptive narrative) the primary promise is something like this: if you want to eradicate poverty, build cities, have creative industries, state of the art economy then 'liberalize' everything - take government out from economic planning/implementation. While some liberalization is always necessary and some competition is indeed helpful, the near-religious belief is dangerous.
What Pakistan's development planning needs is new ideas for growth in the industrial and manufacturing sector. While some basic development economics is really fundamental to steer the ship, the narrative has to be changed.
Just 1 term of a sound and honest government, and this country will see an exponential growth! Despite of all the worst conditions, this country has the potentil of a very rapid growth! Im still hopeful, if parties with educated and honest people come into power (such as PTI and MQM, we will Ishallah see a chnge!! =)
Dr. Sahib: As you mention the political uncertainty coupled with law and order situation is determinant for domestic or foreign private investment in large or medium size production units. I, like you, am concerned for present, but scarier is what will happen down the road if law and order further deteriorates. Once a while I feel it is another Somalia in waiting. All indicators are pointed in that direction.