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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 comp uted 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 evidence 1 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

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
1955-56
1957-58
1958-59
1959-60
1962-63
1963-64
1964-65
1965-66
1966-67
1969-70
1970-71
1975-76
1976-77
1977-78

Value Added
Index
52.56
63.89
98.92
100.00
261.99
273.40
343.01
365.94
412.62
516.88
533.42
553.53
626.79
733.38

Aggregate
Input Index
73.90
80.16
89.99
100.00
210.99
232.31
259.09
294.26
333.85
462.79
528.44
951.99
1038.49
1040.57
2

Total Factor
Productivity Index
71.72
79.70
109.92
100.00
124.17
117.69
132.39
124.36
123.59
111.69
100.94
58.15
60.36
70.96

1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1990-91

941.04
1095.62
1115.01
1186.01
1324.02
1372.84
1571.43
1605.77
1681.16

1790.48
2141.51
2499.39
2814.47
3203.98
3769.98
4265.64
4612.53
6583.78

53.00
51.16
44.61
42.14
41.32
36.42
36.84
34.81
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
Added
Input
Productivity
Index
Index
Index

PERIOD

1955-56 to 1990-91

13.00

15.60

-2.00

SUB-PERIODS
1955-56 to 1959-60
1959-60 to 1969-70
1969-70 to 1980-81
1980-81 to 1990-91

19.50
26.00
6.40
6.12

7.30
23.00
13.40
13.40

12.30
3.00
-7.30
-6.80

Source: Wizarat (2002)

TABLE 3

The Labour Productivity Index

Year

Labour Productivity
Index

1955 56
1957 58
1958 59
1959 60
1962 63
1963 64
1964 65
1965 66
1966 67
1969 70
1970 71
1975 76
1976 77
1977 78
1980 81
1981 82
1982 83
1983 84
1984 85
1985 86
1986 87
1987 88
1990 91

100.37
89.51
113.64
100.00
135.66
131.12
153.15
169.58
136.01
126.92
113.63
46.85
45.45
46.15
40.56
39.16
32.87
31.12
30.77
27.27
26.22
24.48
15.38

Source: Wizarat (2002)

TABLE 4
Productivity Trends: A Comparison of Countries/Regions
Period

U.K.

Europe

Germany

1960-73
TFP in industry
Mfg. LP

2.3
5.0

3.0
-

2.5
6.1

0.2
2.2

1973-79
TFP in industry
Mfg. LP

0.6
0.7

1.4
-

1.8
3.4

-3.0
0.2

1979-89
TFP in industry
Mfg. LP

1.5
4.2

1.2
-

0.8
2.3

-7.8
-7.8

TFP = Total factor

Pakistan

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

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
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23

Vanapati & Allied


Leather & Leather goods
Tobacco
Synthetic & Rayon
Fuel & Energy
Transport &
Communication
Weaving
Glass & Ceramics
Woolen & Textiles
Chemicals
Food
Engineering
Pharmaceuticals
Cable & Electric Goods
Sugar
Auto & Allied
Textile Spinning
Textile Composite
Cement
Paper & Board
Modarabas
Investment & Banking Cos.
Leasing Cos.

No of
Firms
6
3
4
19
19
6

CR3-92

13
5
3
14
7
6
8
4
16
18
29
13
11
9
37
35
30
6

64.67
100
96.59
72.49
88.24
99.62

No of
Firms
2
3
2
12
19
6

42.22
84.54
100
76.02
86.19
85.63
60.09
96.85
31.74
51.12
21.56
57.34
69.72
58.7
29.28
58.41
41.49

7
4
4
8
9
8
7
4
7
19
28
9
13
8
15
16
15

CR3-2000
100
100
100
59.5
66.7
98.72
74.58
88.74
100
92.35
85.57
78.24
68.71
100
52.26
64.37
30.27
75.66
56.07
89.24
56.5
51.05
66.8

24 Mutual Funds
Total Firms

23

70.45

356

23
248

Source: Wizarat (2003)

65.8

TABLE 6
HI for Financial, Manufacturing and Service Sector Firms 1992-2000

Industry
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

Vanapati & Allied


Leather & Leather goods
Tobacco
Synthetic & Rayon
Fuel & Energy
Transport &
Communication
Weaving
Glass & Ceramics
Woolen & Textiles
Chemicals
Food
Engineering
Pharmaceuticals
Cable & Electric Goods
Sugar
Auto & Allied
Textile Spinning
Textile Composite
Cement
Paper & Board
Modarabas
Investment & Banking Cos.
Leasing Cos.
Mutual Funds
Total Firms
**
+
*

No of
Firms
6
3
4
19
19
6

HI 92
0.1780
0.3355
0.4457
0.2289+
0.2865
0.5605

No of
Firms
2
3
2
12
19
6

13
5
3
14
7
6
8
4
16
18
29
13
11
9
37
35
30
23

0.0997
0.2880
0.3690
0.3310
0.3244**
0.3662
0.1584
0.4610
0.0758**
0.1189
0.0409
0.1603
0.2997
0.1535
0.0531*
0.2372+
0.0981
0.3900*

7
4
4
8
9
8
7
4
7
19
28
9
13
8
15
16
15
23

356

248

1994
1995
1996

Source: Wizarat (2003)

HI 2000
0.7220
0.3640
0.6036
0.1916
0.1857
0.9353
0.2187
0.3240
0.6280
0.4332
0.2847
0.2241
0.2312
0.5126
0.1488
0.1953
0.0860
0.2508
0.1408
0.5649
0.1450
0.1370
0.1710
0.3193

TABLE 7
Aggregate Concentration Estimates for Pakistans Economy

In mn Rs.
1992

2000

Fixed assets Total fixed assets


of top 100 in the financial,
firms
industrial
and
service
sectors
registered on the
KSE

145379.2

Sources:

183667.5

79.2

Fixed assets Total fixed assets in


of top 100 the
financial,
firms
industrial
and
service
sectors
registered on the
KSE

540011.9

564717.5

95.6

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

Source: Wizarat (2003)


Figure 1

2000

1992
20.80%

4.40%
95.60%
79.20%

Top 100

Others

TOP 100

Others

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.
2.

Impact on Research and Development (R&D) and Innovation.


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

10

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

11

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

12

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 conc entration 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 S HARES

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. Othe r sub-sectors in which declines occurred are
food manufacturing; leather and leather products; ginning, pressing and spinning fibers; nonelectric machinery and sports and athletic goods.

13

TABLE 8
Factor Shares in the Large-Scale Manufacturing Sector
Year

Wage Share

Profit Share

195556
195758
195859
195960
196263
196364
196465
196566
196667
196970
197071
197576
197677
197778
198081
198182
198283
198384
198485
198586
198687
198788
198889
199091

37.3
39.1
31.7
34.9
24.4
24.9
21.3
18.3
21.9
20.5
21.6
26.0
23.8
22.7
19.6
19.5
21.2
20.3
20.1
21.9
21.3
21.4
23.6
23.9

62.7
60.9
68.3
65.1
75.6
75.1
78.7
81.7
78.1
79.5
78.4
74.0
76.2
77.3
80.4
80.5
78.8
79.7
79.9
78.1
78.7
78.6
76.4
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:

14

WAGSH = W.L/S
where
WAGSH
W
L
S

=
=
=
=

wage share in manufacturing value-added


average nominal wage
employment
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
Beverage
Tobacco
Textiles
Wearing Apparel
Leather & Leather Products
Footwear
Ginning, Pressing & Spinning
Fibers
Wood & Wood-cork Products
Furniture & Fixtures
Paper & Paper Products
Printing & Publishing
Drugs & Pharmaceuticals
Industrial Chemicals
Other Chemicals
Rubber Products
Plastic Products
Pottery, China & Earthenware
Glass and Glass Products
Other Non-Metallic Mineral
Products
Iron & Steel
Non-ferrous Metal Industries
Fabricated Metal Products
Machinery except Electrical
Electric Machinery, Apparatus
& Appliances
Transport Equipment
Scientific, Precision & Measuring
Equipment
Photographic & Optical goods
Sports & Atheletic goods
Other Industries
Total Manufacturing

33.4
7.7

40.3

30.8

13.6
11.2
6.1
29.7
50.4
17.1
31.6

13.1
11
6.4
43
28.7
14.4
55.7

12.6
10.6
3.6
38.4
23.7
13.4
29.2

21.3
14
3.2
24.1
48
25.5
59.7

39.8

67.2
20.6
29.5
24.6
42.7

48.6*
48.6*

16.5
30.9
58.6
17.2
34.4
17.2
16.3
16.6
23.9
33.6
34.7
49.9

12.5
36.3
44.9
32.5
33.8
28.8
22.4
24.9
46.3
31.6
45.5
49

13.8
23.7
28
30.4
39.5
18.5
19.2
20
24.5
33.9
38.5
35

28.8
29.7
30.7
20.6
15.8
30.1
17
16.4
29.3
32.2
34.9
23.4

42.1**
42.1**
50.4
56.9

14.8
23.5
25.7
38.8
39.3

26.3
36.4
47.2
43.8
32.4

12.1
22.5
50.6
42.3
41

18.2
52.3
67.2
37.4
43.4

52

26
25.8

37.5
26.5

25.6
58.3

20.5
38.2

48.3

56.1
19.3
37.3

69.5
43.8
55.1
9.8
21.4

34.8
30
30.7
7.5
26.1

39.1
21.7
38.2
4.5
19.6

41.1
41.1
40.1
43.5
23.9

15

* 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


1962-63 to 1969-70 2.0
1970-71 to 1980-81 0.8
1981-82 to 1990-91 3.0

3.5
10.3
20.5
13.3

18.7
14.9
22.6
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 deno minator 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
16

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 valueadded 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

17

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 productivityenhancing 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.

18

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)

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.
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
8

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

19

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