Industrial Development in Pakistan

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Industrial Development
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Waste neither time nor money, but make the best use of both. Without industry and frugality,
nothing will do, and with them everything. Benjamin Franklin
May 01, 2012
Author: Asad Mahmood

Committee: Economics
Dossier # 005
Version # 001
Report
Committee on Economics
Industrial Development in Pakistan
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Table of Contents
EXECUTIVE SUMMARY .............................................................................................................................................................. 6
PROJECT APPROACH ................................................................................................................................................................ 7
INTRODUCTION .................................................................................................... ERROR! BOOKMARK NOT DEFINED.
DEFINITION AND CONCEPT OF AN INDUSTRY ............................................................................................................... 8
DIFFERENT TYPES OF INDUSTRIES ...................................................................................................................................... 8
HISTORY OF INDUSTRIAL REVOLUTION ........................................................................................................................... 9
DEVELOPMENT OF DIFFERENT INDUSTRIES OVER THE YEARS .......................................................................................10
DIFFERENCES BETWEEN THE PRIVATE SECTOR AND PUBLIC SECTOR INDUSTRIES ....................................................11
COMPARATIVE EXAMPLES ..................................................................................... ERROR! BOOKMARK NOT DEFINED.
INDIA ...................................................................................................................................................................................12
HISTORY OF THE INDUSTRIAL REVOLUTION IN INDIA .............................................................................................12
MANUFACTURING INDUSTRY .....................................................................................................................................13
AGRICULTURE INDUSTRY ............................................................................................................................................14
TOURISM INDUSTRY.....................................................................................................................................................14
SERVICES INDUSTRY INCLUDE THE ENTERTAINMENT INDUSTRY.........................................................................14
MILITARY AND SPACE INDUSTRY ...............................................................................................................................15
RESEARCH AND DEVELOPMENT, GENETICS, ROBOTS, FUTURE INDUSTRIES.........................................................16
SUMMARY ......................................................................................................................................................................16
TAIWAN ..............................................................................................................................................................................17
HISTORY OF THE INDUSTRIAL REVOLUTION IN TAIWAN .......................................................................................17
SERVICES INDUSTRY - INCLUDE THE ENTERTAINMENT INDUSTRY .........................................................................18
MILITARY AND SPACE INDUSTRY ...............................................................................................................................19
SUMMARY ......................................................................................................................................................................19
MALAYSIA ...........................................................................................................................................................................19
HISTORY OF THE INDUSTRIAL REVOLUTION IN MALAYSIA.....................................................................................20
SERVICES INDUSTRY .....................................................................................................................................................22
SUMMARY ......................................................................................................................................................................23
ANALYSIS OF THE ECONOMIC SYSTEMS...............................................................................................................................25
CAPITALISM.........................................................................................................................................................................25
CONTEXT AND BACKGROUND .................................................................................................................................25
HISTORICAL DEVELOPMENT ....................................................................................................................................... 25
DIFFERENT MODELS OF CAPITALISM ...........................................................................................................................27
BENEFITS AND CRITICISMS ..........................................................................................................................................28
SOCIALIST ...........................................................................................................................................................................29
ISLAMIC................................................................................................................................................................................30
PAKISTAN CENTRAL CASE STUDY .........................................................................................................................................31
WHAT KIND OF ECONOMY IS PAKISTAN? .....................................................................................................................31
MAJOR INDUSTRIES ............................................................................................................................................................33
SERVICES INDUSTRY .....................................................................................................................................................39
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MAJOR ECONOMIC HUBS AND CENTRES WITHIN THE COUNTRY........................................................................42

CONCLUSIONS........................................................................................................................................................................43
BIBLIOGRAPHY.........................................................................................................................................................................44
ABOUT THE AUTHOR ............................................................................................................................................................53
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List of Tables
TABLE 1: INDIAN ECONOMIC DEVELOPMENT 1998-2005 ........................................................................................................ 13

TABLE 2: COST OF WAR ON TERROR TO THE PAKISTANI ECONOMY .................................................................................... 34
TABLE 3: CHANGES IN PRODUCTION FOR LARGE SCALE FIRMS 2009-2011.......................................................................... 34
TABLE 4: CHANGE IN PRODUCTION OF SELECTED INDUSTRIAL ITEMS.................................................................................... 35
TABLE 5: DISTRIBUTION OF INDUSTRIAL INVESTMENT ............................................................................................................... 35
TABLE 6: PAKISTAN TEXTILE AND COTTON EXPORTS ................................................................................................................ 36
TABLE 7: MANUFACTURE OF AUTOMOBILES ............................................................................................................................... 37
TABLE 8: CEMENT PRODUCTION 2006-2011............................................................................................................................. 37
TABLE 9: MINERAL EXTRACTION 2008-20111 ........................................................................................................................... 38
TABLE 10: AGRICULTURAL PRODUCTION 2004-DATE .............................................................................................................. 40
TABLE 11: PAKISTAN AGRICULTURAL PRODUCTION 1960-2010............................................................................................ 42
List of Figures
FIGURE 1: GEOGRAPHY OF MALAYSIA .......................................................................................................................................... 20

FIGURE 2: MALAYSIAN EXPORTS 2009 ......................................................................................................................................... 21
FIGURE 3: STRUCTURE OF THE MALAYSIAN ECONOMY ............................................................................................................. 23
FIGURE 4: RETAIL SECTOR IN PAKISTAN....................................................................................................................................... 39
FIGURE 5: AGRICULTURAL REGIONS OF PAKISTAN ..................................................................................................................... 41
FIGURE 6: INDUSTRIAL AND RESOURCE CENTRES OF PAKISTAN .............................................................................................. 43
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Executive Summary
This report focuses on the industrial development options open to Pakistan. However, these options
need to be placed in context and to this end there are discussions about the industrial economic development
of three other countries that emerged from colonial rule at the end of the Second World War and of various
Industrial policies adopted in other countries. This analysis is supported by first looking at the underlying
concept of an industry and the various phases of the cycle of industrialisation over since the late eighteenth
century.
Three states that also emerged from colonial rule at the end of the Second World War (India, Taiwan
and Malaysia) are studied in detail. The goal is to explore how they shifted their economies from their colonial
role as an exporter of primary products to becoming manufacturing nations in their own rights. It is suggested
that, for slightly different reasons, Taiwan and Malaysia have managed this transition but the Indian economy
has failed to shed its links to primary agriculture and a large portion of the population living in relative poverty.
What this indicates is that the contemporary view that India is an economic success story and Pakistan a failure
is less clear cut. In particular, in Pakistan, manufacturing actually contributes a higher portion of GDP than in
India. Equally both Pakistan and India suffer by allowing foreign investors to export their earnings, something
that is much harder to do in Malaysia and Taiwan.
The final section looks in detail at the economic arrangements of contemporary Pakistan. The most
important industrial sector remains textiles which can make use of the cotton grown domestically. This is a
relatively rare example of Pakistan manufacturing its own raw materials and it is a major source of export
earnings. However, these earnings are depressed by the high tariffs placed on Pakistani textiles in a number of
OECD countries in particular the US. Beyond this, Pakistan has made efforts in recent years to attract foreign
investment but this has been hampered by the problems caused by the War on Terror and by allowing
foreign investors to repatriate their profits.
The US-led War on Terror has caused other problems too and has become the central problem as
it depresses economic activity and has led to a massive refugee crisis. In effect, the costs imposed by the use
of tariffs to exclude Pakistani manufactured goods far outweigh the benefits of any foreign aid. Pakistan is
potentially a rich country with large mineral deposits. If these were exploited as in Malaysia for domestic gain
by transformation of local raw material into industry for instance there is scope for textile/garments sector as
there very low Pakistani contribution in international textile/garments sector.
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Project Approach
This paper has been compiled mostly by drawing on published reports and academic articles.
Particular use has been made of publication of the UN, OECD, UNICEF and the Asian Development Bank
(ADB). In addition, considerable use has been made of the various national statistics published by the various
countries. Where appropriate, material has also been drawn from contemporary news reports and other
websites that draw information from verifiable sources. As far as possible, all such references are cited in the
footnotes with specific page references where available.
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Introduction
This section discusses some of the basic issues in
this paper, in particular what is meant by the
concept of an industry and a broad sweep of the
development of the industrial sector since the early
Nineteenth Century. In turn, the issue of if there is
a substantive difference between private and public
sector provision is explored.
Definition and Concept of an Industry
In theory it should be easy to identify and
categorise what is meant by an industry. In reality,
different states at different times have developed
very different categorisations1. Some of these have
tried to rely on identification by functional area and
others on the type of inputs required and work
involved. Both approaches have practical problems
when dealing with categorisation of particular
activities. One example, that is explored below in
the context of the Indian economy is of food
manufacture2. In some classification systems this is
seen as part of an agricultural sector in others as
manufacturing.
Specifically in India it is
geographically co-located with raw food production
so treating it as manufacturing runs the risk of
over-estimating the spread of manufacturing
industry across the country. A second key issue to
identify is that an industry is no longer synonymous
with the idea of manufacturing. It is any common
field of work, so in terms of classification, media or
education are as much industries as traditional
manufacture. They are a coherent area where
people are employed, goods are consumed and
products are made.
The most common systems rest on identifying
function and attributing various business activities
to these. So the current European Union reporting
structure uses functional classifications such as:3
1 Howard Roepke, David Adams and Robert Wiseman, "A

New Approach to the Identification of Industrial
Complexes Using Input-Output Data," Journal of Regional
Science 14.1 (1974).
2 UNIDO, Indian Manufacturing Industry: Technology
Status and Prospects (Vienna: United Nations Industrial
Development Organisation, 2011).
3 European Union, List of NACE codes, 25 March 2010,
EU, Available:
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Agriculture, Mining, Manufacture, Construction,

Sale and Repair of Vehicles, Financial Services,
Water Transport, Health, Public Administration,
and Education. The US NAICS4 approach uses a
similar approach (i.e. it is based on function) but
uses both a different typology and categorises
particular industrial sectors in different ways (in
part reflecting differences of relative importance
between the US and the EU). This in turn, creates
problems for bodies such as the OECD and UN in
creating globally comparative measures.
Increasingly most contemporary systems of
industrial classification and national income
accounting have adopted certain common
characteristics as above. However, the old Soviet
model used completely different approaches to
industrial classification basing this on an inputoutput approach5 with industries grouped in terms
of a chain of production. This in turn has some
contemporary relevance when industries are
grouped by their point in the production process
such as the extraction of raw materials (primary),
manufacturing (secondary) and services (tertiary).
This distinction is explored in the next section.
Different Types of Industries
In effect, the old Soviet model6 has more in
common with the alternative model of classification
that tries to create a hierarchy of industrial sectors.
At the start of the industrial revolution7 this relied
on a simple binary division.
The first was
concerned with the production of primary raw
materials and captured areas such as agriculture,
fishing and mining. The second then converted
these primary products into finished manufactured
goods. Even so, early capitalism was dependent on
http://ec.europa.eu/competition/mergers/cases/index/nace
_all.html, 29 May 2011.
4 Office of Management and Budget, 2007 North
American Industry Classification System (NAICS)
Updates for 2012 (Washington: 2009).
5 I. S. Koropeckyj, "Methodological Problems of
Calculating National Income for Soviet Republics,"
Journal of Regional Science 12.3 (1972).
6 Koropeckyj, "Methodological Problems of Calculating
National Income for Soviet Republics."
7 Brian R. Mitchell, British Historical Statistics (Cambridge:
Cambridge University Press, 1988).
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both a financial and a transportation sector8, so the

contemporary tertiary sector was important from
the start of the Industrial Revolution. As the
Nineteenth Century developed the relative
profitability of the secondary, manufacturing, sector
fast outstripped that of the primary sector9, and, in
turn, formed the international division of labour of
most the European colonial systems. In effect the
various colonies were expected to undertake
primary production (agricultural and mining),
export these goods to the Imperial power which
would, in turn, produce the manufactured goods
and sell these back to the Colonies.
Even at the start of the industrial area a tertiary
sector quickly grew in importance. This reflected
the growing complexity of financial systems and the
need for integrated transport systems to sustain
the growing globalization of capitalism10. In most
contemporary typographies, industries are now
organised into 4 sectors11 of:
1.
2.
3.
4.
Primary agriculture, mining, fishing

involved in extraction of raw material from
the earth;
Secondary
manufacturing
and
construction, direct production using raw
materials;
Tertiary services such as financial,
entertainment, health care, tourism;
Quaternary intellectual labour such as
research, education, libraries
Some systems now identify a Quaternary sector.

However, this is used in very different ways in
different systems. In some it is held to reflect the
activities at the top of firms and government and in
others it is domestic unpaid labour12 or the
charitable sector. There is a broad consensus
about the definition of the first two sectors, but the
Peter Mathias, The First Industrial Nation (London:

Methuen, 1969).
9 Mathias, The First Industrial Nation.
10 Karl Marx, Capital: Volume 1, trans. Ben Fowkes
(London: Penguin Books, 1976).
11 Zoltan Kenessey, "The Primary, Secondary, Tertiary
and Quaternary Sectors of the Economy," Review of
Income and Wealth 33.4 (1987).
12 Barry O. Jones, "The Challenge of Post Industrialism,"
Asia Pacific Journal of Human Resources 17.1 (1979).
others vary between definitional systems and there

are major overlaps between them.
History of Industrial Revolution
The exact point at which the contemporary
Industrial Revolution can be said to have started is
often disputed13, with, in the UK some claims that a
period of sustained industrial development took
place in the late Sixteenth Century. In part, this
links to the question of the origin and early history
of capitalism (section 5.1 below). Some authors14
argue that it was military developments that drove
the early process of industrialisation.
As
gunpowder (and thus cannons and muskets)
became dominant on the battlefield, there was a
need for an integrated industrial system that
controlled raw material, was responsible for the
production of weapons (especially as cannons
became more sophisticated and powerful) and their
maintenance and distribution. In most European
countries this was primarily a function of the
state15, but the resulting technologies spilled over
into wider use. Overall it is possible to see a slow
process of industrialisation of production in parts of
Europe over the period 1500-1800.
However, the production was still mostly artisanal
and the surrounding legal and social structures
were those of a late feudal/early modern nature.
As is discussed in section 5.1 it took a fundamental
shift in how labour was organised before a
sustained and self-replicating period of industrial
change could start16. On this basis, UK, Belgium
and regions in France and Germany could be said
to be undergoing an Industrial Revolution by the
1820s and this was as much a product of legal,
financial and social changes17 as of industrial
invention. In effect a massive social change enabled
new inventions to be put to use and led to the
elimination of the traditional barriers that had seen
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Mathias, The First Industrial Nation.

William H. McNeill, The Pursuit of Power: Technology,
Armed Force, and Society since A.D. 1000 (Chicago:
University Of Chicago Press, 1984).
15 McNeill, The Pursuit of Power: Technology, Armed
Force, and Society since A.D. 1000.
17 David Harvey, Limits to Capital, 2nd ed. (London:
Verso, 2006).
13
14
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technological and industrial developments proceed

in a stop/start manner18.
This early development was still mostly limited to a
series of national markets and those markets in
turn were fragmented by the high cost of transport
and the existence of local legal systems and
processes19. The application of the steam engine to
produce the first railways and to change the nature
of naval transport overcame these barriers and, in
turn, various national markets, such as Germany,
became unified20. By the 1880s, major industrial
centres existed across North West Europe and the
Eastern regions of North America drawing in raw
materials on a global scale and exporting finished
goods. Smaller clusters were emerging in Central
Europe, the Mediterranean region and parts of
Latin America21 but elsewhere manufacturing
remained localised and artisanal or, as in Russia,
controlled by the state22. These centres of industry
were linked not just by direct trade but by a
financial network23 that saw a truly global and
integrated industrial system. However, production
was still mostly located where either the needed
power sources (so steel manufacturing was located
in the coal producing regions) were or close to
population centres (both as a source of labour and
consumption). This combined with the Imperialist
model that allocated the rest of the world the role
of supplier of primary products and consumer of
manufactured goods meant that by 1945,
industrialisation was still largely confined to
Northern Europe, North America and now the
USSR (what became known as the First and Second
Worlds)24.
Marx, Capital: Volume 1.

Eric Hobsbawm, The Age of Revolution 1789-1848
(London: Sphere Books, 1975).
20 Eric Hobsbawm, Nations and Nationalism Since 1780:
Programme, Myth, Reality (Cambridge: Cambridge
University Press, 1992).
21 Eric Hobsbawm, The Age of Capital 1848-1875
(London: Sphere Books, 1975), Eric Hobsbawm, The Age
of Empire 1875-1914 (London: Sphere Books, 1987).
23 Maurice Obstfeld and Alan M. Taylor, Globalization and
Capital Markets (Massachusets: NBER, 2002).
24 Harvey, Limits to Capital.
18
19
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Development of different Industries

over the years
One of the major characteristics of the Industrial
Revolution was not just that it was sustained, and
that it constantly applied technological solutions to
constraints in the production process, but that it
brought into being new industries. Equally the
process of change was so rapid that obsolescence
was a permanent feature, in turn leading to the
regular crises that accompanied the process25.
Some innovation was the product of applying
technological advances in one sector to another26
but in other cases new industries and/or new
industrial divisions were created.
This was particularly the case in what became
known as the tertiary sector.
New financial
arrangements were needed as the flow of credit
and capital became more complex. Historically this
had been on an annual basis27 with credit used to
ease the agricultural cycle as producers often only
had cash crops for sale once or twice a year but
needed access to cash on a more regular basis. As
the process of production and sale accelerated and
as the cost of new capital increased, there was a
growing need for a finance system that could
absorb these demands28.
Equally as work became more organised and
fragmented, there was a growing need for
procedures to ensure integration and to explore
how to extract greater efficiency from the working
day29. This in turn gave rise to a growing interest in
industrial statistics30 which over time gave rise to
the nascent ICT industry with firms such as IBM
developing card index systems in the 1930s.
More recently, technology has enabled a growth in
new industries broadly grouped around biomedicine and bio-technology 31. In turn this is
spawning a new industrial sector as the applications
Harvey, Limits to Capital.
Hobsbawm, The Age of Capital 1848-1875.
27 David Harvey, A Companion to Marx's Capital (London:
Verso, 2010).
28 Obstfeld and Taylor, Globalization and Capital Markets.
30 Mitchell, British Historical Statistics.
31 Nitin Pangarkar, "Determinants of Alliance Duration in
Uncertain Environments: The Case of the Biotechnology
Sector," Long Range Planning 36.3 (2003).
25
26
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are linked to production, agriculture, health and

pharmaceuticals32.
Up to the 1960s this process of either innovation
within an industry or the creation of new industries
was often referred to as a Product Cycle33. The
basic idea was that as a technology was supplanted
in an advanced economy it would then be exported
to a less technologically advanced country where it
would continue in use. In effect the assumption
was of innovation in the domestic industrial sector
and of exporting such technologies later on to
developing countries34. This may still be true of
certain industries and certain countries, but overall
the contemporary situation is much more nuanced
with innovation becoming more and more widely
spread35.
Differences between the Private sector
and Public sector Industries
The distinction between what should be a private
or public sector provision has shifted substantially
over the period since the Industrial Revolution. In
some countries such as Russia or Prussia, the early
driver to industrialisation was the state36 and in
many places the state either owned or closely
controlled all the industries connected with military
equipment. Equally by the 1880s there was a broad
consensus that the state had a role in terms of
public health37 and some role in terms of education.
With the advent of social security arrangements in
the period before 1914, the concept of public
administration as an industrial sector gradually
developed.
state. Across Western Europe the state either

took direct control of large industrial sectors (in
the UK coal, steel and the railways38) or entered
into close partnerships with the original owners39.
The goal was to avoid the problems of the 1930s
and to ensure the publicly held industrial sector
could play a key element in the process of
economic planning40. By the 1980s, this process
was in full reverse, with not only the direct
industrial and manufacturing sectors being returned
to private ownership but increased private
ownership of sectors such as health and
education41.
Thus the boundaries between private and public
industries have, and continue to, shift over time.
The key difference is that a public industry is
expected to provide a relatively equitable service to
all its recipients. By contrast, a private firm can,
and will, seek to externalise its costs onto
consumers, other suppliers or the environment. In
doing so, it will appear to be more efficient and will
make higher profits42. A public sector organisation
ideally will absorb its costs, making it appear less
efficient in terms of direct profits but this maybe
socially a more desirable structure. The other main
difference lies in the extent that actions are
determined by the pursuit of profit or the need to
carry out a stated function (to the detriment of
profitability).
Peter Hennessy, Never Again: Britain 1945-1951

(London: Penguin, 1992).
39 Rudolf Meidner, "Our Concept of the Third Way: Some
Remarks on the Socio-political Tenets of the Swedish
Labour Movement," Economic and Industrial Democracy
1.3 (1980).
40 George Dalton, Economic Systems and Society:
Capitalism, Communism and the Third World, Penguin
Modern Economic Texts (London: Penguin, 1974).
41 George Monbiot, Captive State: The Corporate
TakeOver of Britain, 1st ed. (London: Pan, 2000), Robert
M. Page, "Without a Song in their Heart: New Labour, the
Welfare State and the Retreat from Democratic
Socialism," Journal of Social Policy 36 (2007), AM
Pollock, J Shaoul and N. Vickers, "Private finance and
"value for money" in NHS hospitals: a policy in search of a
rationale?," BMJ.324 (2002).
42 David Harvey, The Enigma of Capitalism (London:
Profile, 2010).
38
The emergence of the post-1945 welfare state was

allied to a very different idea of the role of the
John van Reenen, "Economic issues for the UK
biotechnology sector," New Genetics and Society 21.2
(2002).
33 Raymond Vernon, "International Investment and
International Trade in the Product Cycle," The Quarterly
Journal of Economics 80.2 (1966).
34 John Cantwell, "The globalisation of technology: what
remains of the product cycle model?," Cambridge Journal
of Economics 19.1 (1995).
35 Cantwell, "The globalisation of technology: what
remains of the product cycle model?."
37 Hobsbawm, The Age of Empire 1875-1914.
32
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Comparative
Examples
This section looks at three models of economic
development in East Asia India, Taiwan and
Korean. Each is placed in its historic context (in
each case of an early economic development
distorted by colonial rule) followed by a review of
the contemporary economic structures. Finally the
political, economical, social and technological
factors (PEST) 43 that affect each are drawn
together.
India
History of the industrial revolution in
India
Indias early industrial development is closely linked
to the consequences of being part of the British
Empire up to 194844. The result was the deliberate
suppression of industrialisation as the role of India
in the Imperial system was to provide raw
materials, labour and capital for use elsewhere and
to provide a market for goods manufactured
elsewhere in the Empire45. This tended to restrict
developments to local artisan based production
leaving the Indian economy largely agricultural
based at independence46. This led to significant
production of items within India, but almost all for
local use, and the overall effect was an economy
designed to have manufactured in the Asian area
the products which Western Europeans wanted47.
In India, the main legacy of the colonial period to
the newly independent state was a large agricultural
Marek Lisiskia and Mark aruckija, "Principles of the

application of strategic planning methods," Journal of
Business Economics and Management 7.2 (2006).
44 Kaname Akamatsu, "A Historical Pattern of Economic
Growth in Developing Countries," The Developing
Economies 1 (1962).
45 Bipan Chandra, "The Colonial Legacy," The Indian
Economy: Problems and Prospects, ed. Bimal Jalan (New
Delhi: Penguin, 2004).
46 Tirthankar Roy, The Economic History of India 18571947, 2nd ed. (Oxford: Oxford University Press, 2007).
47 Akamatsu, "A Historical Pattern of Economic Growth in
Developing Countries.", p.5
43
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sector with near feudal land ownership48. As in

Pakistan (section 6.2 below), the result was a major
hindrance to economic development as both the
capital and labour needed for industrial
development were locked up in an inefficient rural
sector. This legacy has continued to distort the
In 1950,
balance of the Indian economy49.
agriculture contributed 59% of GDP (and 91% of
Indians lived outside rural areas), industry 13% and
services 28%50.
From 1870 to 1947 the Indian economy had grown
at a rate of 0.2% per annum51. At independence
there was a larger debate as to whether the future
lay in emulating the Soviet model of economic
development with an emphasis on the state as a
major economic actor and to build up heavy
industry or to continue to rely on the agricultural
sector. To some, the latter choice was seen to be
closer to what were argued as traditional Indian
values52, with the new state returning to its natural
roots of local production and consumption
combined with trade where needed.
Post-independence, it is feasible to split Indias
economic development into two distinct phases.
From independence to the early 1980s, the ruling
Congress Party followed an essentially socialist
(often explicitly pro-Soviet) economic development
model with state directed development of heavy
industries53, that in turn was funded by depressing
individual incomes and drawing wealth from the
agricultural sector. This is clearly stated in the, still
Abhijit Banerjee and Lakshmi Iyer, "History, Institutions,

and Economic Performance: The Legacy of Colonial Land
Tenure Systems in India," The American Economic
Review 95.4 (2005).
Status and Prospects.
50 Surjit S. Bhalla, Indian Economic Growth 1950-2008:
Facts & Beliefs, Puzzles & Policies (New Delhi: Oxus
Research and Investments, 2009).
51 Chandra, "The Colonial Legacy."
52 Patha Chatterjee, The Nation and Its Fragments:
Colonial and Postcolonial Histories (Princeton: Princeton
53 Dalton, Economic Systems and Society: Capitalism,
Communism and the Third World, David Pearce, Edward
B. Barbier and Anil Markandya, Sustainable
Development: Economics and Environment in the Third
World (London: Earthscan Ltd, 2000).
48
Page 12
current, constitution54 as: a Sovereign Socialist

Secular Democratic Republic with a parliamentary
system of government. Across this period growth
averaged 3.3% per decade in the 1950s, 4.4% in the
1960s and slowed to 3% in the 1970s and
accelerated again to 5.6% in the 1980s55.
high technology ICT based industrial sector61.

Equally, the Indian economy has remained
unbalanced by an over-reliance on services
industries.
Table 1: Indian Economic Development 1998-200562

56
From the 1980s, at first tentatively , India can be

said to have adopted an essentially neo-liberal
model of deregulation, seeking
foreign investment and allowing
income inequality to grow57.
This was codified in a series of
laws passed in the early 1990s58
that reduced import tariffs,
opened up large parts of the
economy to foreign investment
and sold off a portion of the state
held assets. The period 19902001 saw annual growth rates of
5.9%, in effect an increase, but
only just over that achieved by
the state planning model still in
use in the 1980s59.
The result has been a widening
economic gap between town and
country, a growth in urban population as the rural
poor move to the cities and a reliance on service
rather than manufacturing industry60. On the other
side it has seen India investing heavily in a nuclear
and space programme and the development of a
54 Government of India, Constitution of India, 2010,
Available: http://india.gov.in/govt/constitutions_india.php,
20 June 2011.
55 Bhalla, Indian Economic Growth 1950-2008: Facts &
Beliefs, Puzzles & Policies.
56 John Harris, "The State in Retreat? Why has India
experienced such Halfhearted Liberalization in the 80s?,"
IDS Bulletin 18.4 (1987).
57 Tariq Ali, The Clash of Fundamentalisms: Crusades,
Jihads and Modernity (London: Verso, 2002), Pranab
Bardhan, Awakening Giants, Feet of Clay: Assessing the
Economic rise of China and India (New York: Princetown
58 Charan D. Wadhva, "India trying to Liberalise:
Economic Reforms since 1991," The Asia-Pacific: A
Region in Transition, ed. Jim Rolfe (Honolulu: Asia-Pacific
Centre for Security Studies, 2004).
59 Bhalla, Indian Economic Growth 1950-2008: Facts &
Beliefs, Puzzles & Policies.
60 Bardhan, Awakening Giants, Feet of Clay: Assessing
the Economic rise of China and India.
Insaf Research Wing
Manufacturing Industry
Indias manufacturing industry has, as discussed
above, developed in two distinct phases. The first,
saw an emphasis on heavy industry and state
directed (often state financed) growth. The second
saw this infrastructure privatised at little gain to the
Indian state and growth and development following
neo-liberal development doctrine. Given the size
of the country, and the relative importance of state
(regional) governments, some regions (especially in
the North East) persisted with the old approach
until relatively recently.
A recent UN report 63 indicates that manufacturing
contributes 22% of Indias $1.7 Trillion GDP in
2010. Despite this size, a problem with the overall
Indian economy is the relative dominance of
services (4.1.3 below) means that manufacturing is
Bardhan, Awakening Giants, Feet of Clay: Assessing
Status and Prospects., p. 5
61
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both too small and growing too slowly to absorb

the population moving away from agriculture64.
This despite industrial growth rates of around 7%pa
in the 1980s and almost 8% in the first years after
liberalisation in 199165.
In effect, Indian manufacturing industry has
remained fragmented for three related reasons:
1.
2.
3.
Poor quality transport infrastructure

(which combined to the size of India has
led to highly localised markets emerging);
The high cost of power has held back both
energy intensive and other manufacturing
industries; and,
Access to financial capital remains limited
and expensive.
To address the first problem, the Indian

Government has recently announced major plan to
upgrade the road network66, in this case by relying
on cement rather than the traditional asphalt.
Agriculture Industry
By 2005 Agriculture contributed 22% of Indias
GDP67 but continued to employ 60%. This group
has seen their total and relative incomes fall since
liberalisation in the 1990s68. A further 10% of the
workforce is employed in the closely related food
processing industries.
Inefficiency both within
agriculture and in the food processing stage leads to
an estimated 25% waste of all produce69. The old
colonial model of India growing raw materials for
others to process still persists as India is the second
largest producer of fruit and vegetables in the
world but only 2% of this is processed
domestically70. Addressing this weakness would
improve employment prospects and ensure
66 Cement Week, India Cement Business: Sentiment
Survey (New York: Cement Week, 2010).
64
Insaf Research Wing
domestic retention of the value-added elements in

the agricultural food chain.
The other important issue with the agricultural
sector is its volatility. At times it has stagnated, or
even seen negative growth and at others growth
rates of 6-7% per annum.
In effect, this is
translating into fast changing rural incomes and
rural employment and in turn making it hard to
identify long term investment strategies.
Tourism Industry
Compared to the overall GDP, tourism is a
relatively minor sector of just under $9bn in 200571.
However, this has seen steady growth of around
10% per annum since the late 1990s fuelled in part
by the growth of Indias middle classes and in part
by an increase in the number of overseas visitors.
The industry is estimated to employ some 20
million72. In addition to traditional visits to see the
classic sights of the sub-continent, it is estimated
that medical tourism (especially for cosmetic
surgery) was already worth $4bn by 2005 with this
forecast to expand rapidly73.
As with many economies, tourism is both a benefit
and a potential problem. It can bring much needed
foreign earnings, but these tend to be concentrated
in certain areas and professions. The growth in
medical tourism has, in other markets, displaced
local health provision74 as it leads to a shortage of
health professionals working in the state sector.
Services
Industry
entertainment industry
include
the
The Indian film industry, often called Bollywood, is

the largest in the world in terms of output, with
over 1000 films made in 200575 (more than the US)
and overall contributing 27% of the total service
sector revenues (in other words roughly 12% of
Economy Watch, Tourism Industry- A Special Focus on
India (New York: Economy Watch, 2010).
72 Economy Watch, Tourism Industry- A Special Focus on
India.
73 Economy Watch, Tourism Industry- A Special Focus on
India.
74 Laurie Garrett, "The Challenge of Global Health,"
Foreign Affairs 86.1 (2007).
75 Christina Kukenshoner, Meritxell Martinez, Martin
Mbaya and Caroline Schmutte, Bollywood Maharashtra
and Indias Film Cluster (2008).
71
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total GDP76). Bollywood, in Mumbai, produces 40%

of all films made in India (and 90% of those made in
Hindi) and the result has been the creation of a
small integrated sector with firms involved in
technical support, marketing, financing as well as
actual production77. However, this has brought
both advantages and constraints.
The main
constraint is the industry works on its own internal
network of contacts making it nearly impossible for
new firms to enter78. Secondly the domestic film
distribution system is very slow, allowing a large
space for piracy to operate and significantly
reducing revenues. More recently, Bollywood has
started to adopt a more corporate model along US
lines and to form partnerships with US film
companies.
Equally there is a concern that
domestic tastes may shift away from the traditional
Indian film as the Indian film distribution sector is
opened up to foreign competition79.
Overall the service sector in India contributes 56%
of GDP80. Most of this remains low waged and
transitory and some is related to the growth of call
centres serving overseas firms. This is leading to
several problems. One is that labour and capital
are tied up in a sector that is too large in relation
to manufacturing81 and this may limit India to its
traditional economic role of being excluded from
high value economic activity. Equally the relatively
high wages in the Call Centre sector are distorting
the local labour market82 and adding to the growing
social divide between those engaged with the
International economy and those dependent on the
local economy83.
The other potential risk to over-reliance on this

sector is if the current process of Globalisation is
reversed. There is a slowly growing body of
opinion, particularly in the US, that this no longer
serves US interests either in the form of security
concerns84 or the impact on US employment85. In
effect there is a very real risk that many of Indias
brightest young graduates are entering a sector that
contributes little to overall development and may,
in any case, be vulnerable to shifts in industrial
policy in the OECD countries.
Military and Space Industry
India has invested heavily in a space industry, in part
for reasons of prestige but, from the very first,
mainly for military reasons86. In the early stage, it
shared technology with the USSR and used Soviet
supplied equipment. These developments were
mainly aimed at building up the capacity to fight any
future war with China (more than Pakistan) by
producing missiles capable (even without nuclear
warheads) of reaching Chinese cities. Since the fall
of the USSR, the US and Israel87 have become the
major arms suppliers.
However, the current
programme of produced unmanned space-craft
remains focussed on military needs. By 2006, the
Indian Space Research Organisation had a budget of
$1billion88.
More generally, Indias domestic military industry
has been dwarfed by the policy of buying military
Stephen E. Flynn, America the Vulnerable: How our

Government is Failing to Protect us from Terrorism (New
York: Harper Collins, 2004).
85 Paul Krugman, The Forgotten Millions, 2011, New York
Times, Available:
http://www.nytimes.com/2011/03/18/opinion/18krugman.ht
ml?_r=2, 23 May 2011.
86 JF Elkin and B Fredericks, Military Implications of
India's Space Program, 1983, Available:
http://www.airpower.au.af.mil/airchronicles/aureview/1983
/May-Jun/fredericks.htm, 22 May 2011.
87 Global Security, Indias Military Space Program, 9 July
2010 2010, Global Security, Available:
http://www.globalsecurity.org/space/world/india/military.ht
m, 23 May 2010.
88 Scott Carney, India's Cut-Price Space Program, 14
August 2006 2006, Wired, Available:
http://www.wired.com/science/space/news/2006/08/71399
, 23 May 2011.
84
UNIDO, Indian Manufacturing Industry: Technology

77 Kukenshoner, Martinez, Mbaya and Schmutte,
Bollywood Maharashtra and Indias Film Cluster.
82 Phil Taylor and Peter Bain, "India calling to the far
away towns," Work, Employment & Society 19.2 (2005).
76
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Page 15
equipment from overseas89. Up the 1990s, most

equipment was Soviet made, and the recent shift to
buying from the US has led to problems of
integration.
Attempts to encourage domestic
production have failed90 due to the emphasis on
insisting that potential overseas investors work
with one of the existing domestic firms. In effect,
again, this is a sector where India has been left as a
consumer of other states production rather than
engaging in its own high value industrial activities.
Research and Development, Genetics,
Robots, future industries
The problem, already noted, of the Indian economy
not developing high value activity, is reflected in the
approach for research and development. For the
most part, there is an over-reliance of reverse
engineering and technology transfer rather than
developing new lines of research91 which in turn is a
major drag on future growth. Since the mid-1980s,
there have been a range of initiatives designed to
stimulate research and this has led to Indian having
the fourth largest number of engineers and
scientists in the world92. However, this massive
investment has been weakened in part by limited
commitment to ongoing training and education and
a relatively low rate of innovation (not least as
labour is so plentiful and cheap). The consequence
has been emigration of trained staff to OECD
countries.
The low rate of innovation is a major problem as
new technology is often accessed and used, but not
then developed. In effect, the Indian economy
tends to not only buy in technical solutions, it then
tends to continue with them rather than undertake
further innovation.
Summary
Overall India can be described as having a strong
but very fragile economy93. Some of this weakness
is the natural consequence of adopting the neoliberal development model in the 1990s. This has
led to income inequality, a growth in rural poverty
and a distortion of the local economy as the new
educated middle class take up well paid jobs
(usually due to those jobs being connected to the
international economy) rather than jobs that
contribute to the Indian economy. This is shown in
the movement of trained medical staff to work in
the field of health-tourism as well as the CallCentre culture.
These tensions between rich and poor and
between regions are fuelling local resistance
movements94 as well as feeding into intercommunal problems in the north. Equally, as is
conventional under the neo-liberal system, the main
political parties (in this case Congress and the
Hindu Nationalist BJP) increasingly espouse almost
identical policy ideas significantly reducing the scope
and breadth of democratic debate.
Economically, the fundamental problem for India is
it has never managed to transform its economy
from the colonial model. It is still too dependent
on either the production of raw materials (such as
agriculture), offering services to other countries or
the use of imported technologies.
The
consequence is an economy, despite almost 20
years of neo-liberal reforms, that still fails to
address either the direct rewards to Indian
workers (wages) or consumers (price and quality of
goods available)95. This is perhaps best exemplified
in being one of the largest producers of agricultural
products in the world but having a small, inefficient
and labour intensive, food production industry.
Socially, the largest tension lies in rural poverty and
the difficulty in generating employment. This is
partly linked the over-emphasis on the service
89 S.K Singh, Paying for India's Defense Policies, 17

January 2011 2011, Wall Street Journal, Available:
http://online.wsj.com/article/SB100014240527487033966
04576087421090434148.html, 23 May 2011.
90 Singh, Paying for India's Defense Policies.
Insaf Research Wing

95 Wadhva, "India trying to Liberalise: Economic Reforms
since 1991."
93
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sector rather than manufacturing96.

The
consequence is a growth in the urban population
with no equivalent growth in employment
prospects. In terms of technology, India has made
large strides in areas of space exploration and ICT.
The problem remains that consistently this is done
by adopting rather than developing technology. In
turn it has one of the largest trained scientific and
engineering workforces in the world, but fails to
make effective use of this resource97.
Many of these problems predate the adoption of
the neo-liberal model in the 1990s98, and there is
ample evidence that the earlier planned economy
model99 failed to develop domestic high technology
industries and instead remained reliant on
importing technology. On the other hand, as
elsewhere, neo-liberalism has added the strains of
growing health and income inequalities100 and of an
economy distorted by the demands of Globalization
rather than seeking to develop in its own terms101.
Taiwan
Taiwan has had a complex history since the
seventeenth century and this has influenced
economic development. It was briefly controlled by
the Dutch102 and then had a relatively hands-off103
relationship with mainland China till the late
nineteenth century. From the 1890s to 1945 it was
under Japanese rule and by the end of the Chinese
UNIDO, Indian Manufacturing Industry: Technology
99 Banerjee and Iyer, "History, Institutions, and Economic
Performance: The Legacy of Colonial Land Tenure
Systems in India.", Wadhva, "India trying to Liberalise:
Economic Reforms since 1991."
100 Gita Sen, Aditi Ayer and Asha George, "Class, Gender
and Health Equity: Lessons from Liberalizing India,"
Engendering international health: the challenge of equity
eds. Gita Sen, Asha George and Piroska stlin
(Massachusetts: MIT Press, 2002).
102 Tonio Andrade, How Taiwan became Chinese : Dutch,
Spanish, and Han colonization in the seventeenth century
(New York: Columbia University Press, 2008).
103 David Der-Wei Wang, Taiwan Under Japanese
Colonial Rule, 1895-1945: History, Culture, Memory (New
York: Columbia University Press, 2006).
96
Insaf Research Wing
Civil War in 1949, it had become effectively an

independent state104. Key across this entire span
was Taiwans importance as a trading centre105
rather than domestic agriculture or manufacturing
output.
History of the Industrial Revolution in
Taiwan
As with India, Taiwans early economic
development was as part of various Imperial
systems. Unlike India, it had long periods of semiindependence and was never consistently ruled by a
single power. In this case, Dutch rule up to the
1670s106, then integrated into the British Empire
through the Opium Trade from the 1840s, followed
by Japanese occupation until 1945107. From the end
of the Chinese Civil War in 1949, the Nationalist
Kuomintang (KMT) took power on the island and
began a state controlled development model.
Before this, the period of European control had
emphasised Taiwans importance as a trading centre
and the Japanese, largely followed the usual Empire
model of looking at Taiwan to produce raw
materials to be manufactured in Japan.
However, the colonial legacy is more mixed for
Taiwan than it was for India. In part, from 1700 to
1900 it was diluted by a degree of local control108 as
part of the Chinese Empire and the Japanese period
saw significant investment in infrastructure and
some development of manufacturing109. Finally the
arrival of a new government in 1949, combined
with refugees fleeing Maos China, brought large
scale social changes110. However, in 1949, the
104 Murray A. Rubinstein, "Taiwan's Socio-Economic
Modernisation 1971-1996," Taiwan: a new history, ed.
Murray A. Rubinstein (New York: East Gate Books, 2006).
105 Global Edge, Taiwan : Economy, 2011, Michigan State
University, Available:
http://globaledge.msu.edu/countries/taiwan/economy/, 22
May 2011.
106 Andrade, How Taiwan became Chinese : Dutch,
Spanish, and Han colonization in the seventeenth
century.
107 Wang, Taiwan Under Japanese Colonial Rule, 18951945: History, Culture, Memory.
110 Rubinstein, "Taiwan's Socio-Economic Modernisation
1971-1996."
Page 17
domestic economy was largely agricultural and the

bulk of wealth was related to trade rather than
direct manufacture.
The new KMT government111 had two initial
development goals. One was to use education to
improve literacy and productivity and the second
was to invest substantially in creating a domestic
manufacturing industry. This in turn meshed with
the traditional emphasis on trade as the goal was
manufacture for export into the world economy
rather than to meet domestic needs. In the 1950s,
the bulk of exports were agricultural products but
by the 1990s, 98% of all exports were electronic
goods112.
The main trading partners are now China and Hong
Kong but the US remains important113 in 2009 it
took almost 12% of all of Taiwans exports and
provided just over 10% of its imports (mostly raw
materials and machinery). The result was to place
Taiwan in a complex chain where nearly all the fuel
needed for production is imported and then the
manufactured electronic goods are exported
(mostly to mainland China) to be assembled. In
effect, it has found a niche in the international
production chain between demand for electronic
goods from the OECD states and low cost
producers such as China. To put this in context, in
1951, exports made up 10% of GDP and imports
14.5%. By 2009, exports contributed 62.5% and
imports 54%114.However; it also means that
Taiwans manufacturing base is quite narrow,
fundamentally based on the electronics industry.
On the other hand, the original KMT emphasis on
education has been maintained leading to a large
Research and Development effort. Unlike India,
Taiwan is not just reliant on technology adoption; it
is a major source of innovation and development.
Rubinstein, "Taiwan's Socio-Economic Modernisation

1971-1996."
112 Global Edge, Taiwan : Economy.
114 National Statistics, Statistical Series, 2011, Republic of
China (Taiwan), Available:
http://eng.stat.gov.tw/mp.asp?mp=5, 26 May 2011.
111
Insaf Research Wing
In 1949, agriculture was the major industry on
Taiwan, producing over 95% of GDP and employing
the majority of the workforce115. By 2009,116
agriculture was only worth 1.7% of GDP (compared
to Manufacturing with 24%). Some of this change
reflects the growing importance of the
manufacturing sector but it also relates to a major
shift to importing foodstuffs, with the US now
providing 30% of domestic consumption117. Some
of these imports are used in the food chain (in
particular wheat related products for the livestock
industry), and others are for human consumption.
Tourism Industry
Taiwans tourism sector has remained relatively
small118 with, in 2009, 3.85 million visitors,
compared to 6.9 to Korea and 210 million to East
Asia as a whole (of which 130 million went to
Mainland China). These visitors were estimated to
have spent almost $6bn, and a further $6bn was
generated by domestic tourism119. However, the
majority of visitors have some familial connection
with Taiwan, leaving this a relatively minor sector
despite efforts to promote the island more
widely120.
Services
Industry
entertainment industry
include
the
Taiwans service sector mainly consists of tourism

(mostly to and from China) and financial services
(connected to the traditional focus on trade).
Compared to US and Japanese financial services
sectors this remains uncompetitive. This is of some
concern as the overall service sector contributed
69% of GDP by 2009121 and financial services
around 15.5%.
115 Rubinstein, "Taiwan's Socio-Economic Modernisation

1971-1996.", Wang, Taiwan Under Japanese Colonial
Rule, 1895-1945: History, Culture, Memory.
116 National Statistics, Statistical Series.
118 Department of Investment Services, Status of Taiwans
Tourism & Recreation Industry (Taipei: 2009).
Tourism & Recreation Industry.
Tourism & Recreation Industry.
Page 18
Military and Space Industry

Defence spending has remained consistently high at
around 7-8% of GDP122 even since relations with
mainland China started to improve in the early
1980s123. Historically, Taiwan has been completely
dependent on the US for military technology124 but,
in particular in areas connected to electronics,
Taiwan has been trying to develop its own military
industrial capacity125.
Summary
Politically, although tensions with the Peoples
Republic of China (PRC)126 continue, and certainly
influence the enduringly high military spending,
overall the risk of outright conflict has diminished
substantially since the 1980s. Domestically, the
KMT has steadily accepted a plural political
system127 with this in turn leading to the
introduction of a Bismarckian style social welfare
model similar to Korea and Japan128.
Economically, the biggest risk lies in the
concentration on electronics and integration to
world trading system. In effect, Taiwan has found a
niche where it is able to use low cost production
facilities in the PRC so as to export electronic
goods to the OECD. Particularly in the field of
electronic chips129, computer monitors and
Personal Computers, Taiwan is both a major
producer and a major innovator. However, with so
much of its manufacturing now concentrated
around a relatively narrow field it is vulnerable to
National Statistics, Statistical Series.
Global Security, Taiwan: Defense Industry, 20 April
2005, Available:
http://www.globalsecurity.org/military/world/taiwan/industr
y.htm, 26 May 2011.
124 Peng Kuang, Taiwan's military strategy nave and
dangerous 4 February 2010 2010, Global Times,
Available:
http://en.huanqiu.com/opinion/commentary/201002/503614.html, 26 May 2011.
125 Global Security, Taiwan: Defense Industry.
126 Kuang, Taiwan's military strategy nave and dangerous
127 Jesse Yu-Chen Lan, "The Politics of the Taiwanese
Welfare State," International Symposium on Globalization
and the Future of East Asian Welfare Capitalism (2009),
vol.
128 Jin Wook Kim and Young Jun Choi, Private Transfers
and Emerging Welfare States in East Asia: Comparative
Perspectives (2008).
either changing demands or OECD states reversing

their current emphasis on free trade.
Socially the island absorbed a large influx from the
mainland in the 1940s, but is seen as stable. The
recent democratisation and development of a social
welfare model130 has emphasised the relative
maturity of Taiwans social institutions.
Malaysia
Malaysia was briefly controlled by the Portuguese in
the sixteenth and seventeenth century during which
period they emphasised the production of spices
and tin, but effectively the peninsular remained a
central part of the South East Asian Trade
Networks. By the start of the nineteenth century
Portuguese influence was replaced by the British,
but unlike in India, there was no desire to control
the region as long as the key trading ports were
under British administration. By the late nineteenth
century, Malaysia effectively had the status of a
British colony although local rulers retained some
independence.
Economically, the British retained the Portuguese
interest in tin and spices and by 1877 had
introduced rubber plants from Brazil. At the same
time, they brought in indentured workers from
China and India to work the new rubber
This created some inter-ethnic
plantations131.
tensions between ethnic Malays and the Indian and
Chinese migrants132. This spilled over in a Chinese
backed insurgency in the late 1940s and early
122
123
Insaf Research Wing
Hou-sheng Chan and Ying Yang, "The development of

social welfare in Taiwan," Understanding Modern Taiwan:
Essays in economics, politics and social policy, ed.
Christian Aspalter (Aldershot: Ashgate Publishing Ltd,
2001), Lan, "The Politics of the Taiwanese Welfare State,"
vol, Ian Williams, Taiwan gets healthy, 2007, The
Guardian, Available:
http://www.guardian.co.uk/commentisfree/2007/oct/07/tai
wangetshealthy, 14 August 2010.
131 John H Drabble, An economic history of Malaysia, c.
1800-1990: The transition to modern economic growth
(New York: St Martins Press, 2000).
132 James H. Liu, Belinda Lawrence, Colleen Ward and
Sheela Abraham, "Social representations of history in
Malaysia and Singapore: On the relationship between
national and ethnic identity," Asian Journal of Social
Psychology 5.1 (2002).
130
Page 19
1950s133 and left a legacy of different ethnic groups

controlling different areas of the economy or
particular professions134.
Colonial rule formally ended in 1957 and modern
day Malaysia was founded in 1963. Malaysia is in
effect split into two major regions by the South
China Sea with the provinces of Sabah and Sarawak
on the island of Borneo. These divisions are
important in terms of the contemporary
development of both manufacturing and agriculture
as the traditional tin industry is concentrated on
the Malaysian peninsula135, the oil and natural gas
industries are located in the Sarawak and Sabah
regions (both onshore and offshore)136.
of the treaties that allocated Sarawak and Sabah to

Malaysia138. Finally as part of the post-colonial
settlement of the region, the British created
Singapore as an independent city state, depriving
the new country of its traditional trading centre139.
History of the Industrial Revolution in
Malaysia
At the time of independence140, the Malaysian
economy remained dominated by the production of
three primary products of tin, rubber and palm oil
with most of this being exported in its primary
form. To address this, and the inherited problems
of different ethnic groups occupying particular
professions141, the Government commenced a
series of 5-year plans142 (the first in theory was
Figure 1: Geography of Malaysia137
commenced in 1955 when the region was still

Furthermore, ongoing tension exists with both
Indonesia and the Philippines about the legitimacy
Drabble, An economic history of Malaysia, c. 18001990: The transition to modern economic growth.
134 Liu, Lawrence, Ward and Abraham, "Social
representations of history in Malaysia and Singapore: On
the relationship between national and ethnic identity."
135 Drabble, An economic history of Malaysia, c. 18001990: The transition to modern economic growth.
136 Asia Development Bank, Malaysia: Key Economic
Indicators, 2011, Asia Development Bank, Available:
http://www.adb.org/Documents/Books/Key_Indicators/201
0/pdf/MAL.pdf, 8 July 2011.
137 Accessed from the University of Texas map archives,
at:
http://www.lib.utexas.edu/maps/middle_east_and_asia/m
alaysia_adm98.jpg.
133
Insaf Research Wing
under British administration). The goal of the plans

was first to address endemic poverty and then to
develop high tech solutions and economic
142 Department of Statistics, National Accounts (Kuala
Lumpur: Department of Statistics, 2010).
138
Page 20
opportunities143. The emphasis was on developing

the industrial sector and this now
accounts for 43% of GDP144.
The planning process was not just focused
on economic development but also on the
creation of a welfare system. So prices for
consumer staples have remained fixed, and
a wide ranging approach to social welfare
has been implemented.
These direct
subsidies amount to 10-11% of current
The result
government expenditure145.
has been near full employment (currently
3-4%)146 maintained steadily since the late
1960s. On the other hand, the
government has remained authoritarian
allowing a very limited range of political
parties147 in the form of what is described
as a managed democracy. Equally despite progress
and attempts to address discrimination against
other ethnic groups, there remain concerns that
the Malay nature of the state excludes those of
Chinese and Indian ethnicity 148.
The industrial sector has continued to draw on the
traditional primary resources of tin, rubber and
palm oil but an early focus in the five year plans was
to ensure domestic manufacture of these items so
that exports were of manufactured goods rather
than raw materials. From the 1970s onwards, the
emphasis shifted towards light manufacturing (in
particular of aluminium based products) and
electronics. The result is an economy largely
Indicators.
145 Asia Development Bank, Asian Development Outlook:
2011 (2011).
Indicators.
147 Drabble, An economic history of Malaysia, c. 18001990: The transition to modern economic growth, Simon
Tisdall, Malaysia's Najib must abandon the Mubarak
model, 13 July 2011, The Guardian, Available:
http://www.guardian.co.uk/commentisfree/2011/jul/13/mal
aysia-najib-cameron-protesters, 14 July 2011.
143
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sustained by exports of $154bn in 2009, divided
between the sectors as:

Figure 2: Malaysian Exports 2009149
The Rubber Industry is indicative of how successful

Malaysia has been at ensuring it manufactures using
its own raw materials. Total exports are in the
range $1.2-$1.4bn primarily made up of finished
products with Malaysia producing 60% of the
worlds rubber gloves150. This type of market
dominance is typical of the Malaysian economy.
The five year plans have effectively eradicated
poverty and built a strong industrial base151 but the
type of industries may well trap economic
development at the current level.
So this
domination of rubber gloves is a typically stable
market that produces a steady regular return, but is
not particularly value-added nor is it likely to see
further technological innovation.
The same issues arise in other sectors, such as the
automotive industry152, Malaysia has found a niche
Department of Statistics, Statistical Handbook (Kuala
Lampour: Department of Statistics, 2010)., p. 14
150 Busy Times, Rubber Industry in Malaysia, 11 January
2008, Available:
http://times.busytrade.com/1139/18/Rubber_Industry_in_
Malaysia.html, 14 July 2011.
2011.
152 Busy Times, Automotive Industry in Malaysia, 11
January 2008, Available:
http://times.busytrade.com/1133/18/Automotive_Industry_
in_Malaysia.html, 14 July 2011.
149
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in the wider product chain and produces tyres from

its own domestic rubber industries, and also
specific automobile parts and components.
Similarly, the small local manufacturing industry
mainly uses slightly dated technology or produces
motorbikes and similar products. In effect, Malaysia
has been very successful at the production of
second generation technological items or supplying
parts of the manufacturing value chain. It has
remained locked outside the production of high
value goods.
This is most clearly seen in the vital electronics
manufacturing sector153. In this field, Malaysia
covers a wide range of products from relatively low
technology such as electric fans and air conditioning
units to semi-conductors. So far, it has tended to
rely on production of parts for export and has only
recently started to invest significantly in its own
high end Research and Development efforts154.
has become the largest processing country in the

world.
In terms of livestock, Malaysia mostly produces and
exports poultry but is a net importer of pork and
beef. However, it is able to exploit an important
market in the terms of production of Halal meat
based products to other Islamic countries. A
particular strength for Malaysia is its already well
developed food processing and trading patterns.
Thus much of the imported meat is then reexported.
In general, agriculture is now a small but important
sector in the Malaysian economy. Some products
are regional (oil is mostly produced in Sarawak as is
most of the rubber) but in general it is evenly
spread across the country. An unintended benefit
is it remains a sector that can absorb surplus labour
when, as in the late 1990s, manufacturing is
depressed158.
Agriculture continues to be based on palm oil and
rubber together with an important timber industry.
In addition, mining of tin and gold and the
extraction of oil and natural gas remain vital.
Overall agriculture accounts for around 8.6% of
GDP155 with this having fallen from 15% in 1990 and
agriculture contributes 2.5% of all exports156 with
60% exported in a manufactured form. The sector
is dominated by local small and medium enterprises
which have been slow to exploit some emerging
markets. Typical of the slow development was an
unwillingness to develop move from prawn farming
and export of the raw material to higher value
products including food and vitamin supplements157.
In contrast, Malaysia has been able to shift from
primary to manufactured production in Cocoa and
Busy Times, Electronics and Electrical Industry in

Malaysia, 11 January 2008, Available:
http://times.busytrade.com/1136/18/Electronics_and_Elec
trical_Industry_in_Malaysia.html, 14 July 2011.
2011.
155 Department of Statistics, Statistical Handbook.
156 Department of Statistics, Statistical Handbook.
157 Busy Times, Food Industry in Malaysia, 11 January
2008, Available:
http://times.busytrade.com/1130/18/Food_Industry_in_Ma
laysia.html, 14 July 2011.
Tourism Industry
Tourism in Malaysia mostly caters to regional
visitors or those with historic roots to the country.
It is estimated it employs 17% labour force and that
around 8 million visitors, mostly from neighbouring
countries (Singapore, Thailand, and Indonesia) visit
The domestic sector is mostly
each year159.
composed of small family run firms though
increasingly larger multinational firms are entering
the market160.
Services Industry
The service sector accounts for some 47% of
GDP161, but traditionally has been dominated by
small locally based firms. Equally although it retains
some importance in terms of transportation,
banking and insurance the bulk of the income for
these activities is located in neighbouring
153
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Busy Times, Food Industry in Malaysia.

Asia Development Bank, Malaysia: Key Economic
Indicators.
160 Lim Chze Cheen, Malaysia: Strategies for the
Liberalization of the Services Sector, 2007, World Trade
Organization, Available:
http://www.wto.org/english/res_e/booksp_e/casestudies_e
/case25_e.htm, 14 July 2011.
Indicators.
158
159
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Singapore162. A particular weakness has been the

lack of domestic research and marketing, allied to
problems in enforcing international rules around
software piracy and the protection of intellectual
property rights163.
accompanied by a slow, and not always consistently

applied167, liberalisation of local laws to ease
external investment168. This has seen foreign banks
opening as well as foreign retail outlooks (especially
hypermarkets169).
By the late 1990s, Malaysia had a significant balance

of payments deficit in terms of services164. This has
been partly addressed by an increase in the range of
domestic providers, but in addition the Malaysian
government deliberately targeted the development
of service functions within manufacturing (such as
Research and Development and Marketing) in an
attempt to broaden the Malaysian economy away
from its direct reliance on conventional
manufacturing165.
However, in doing so, the country has called into

doubt the traditional model of planned and
controlled development with the benefits flowing to
the local economy. In particular the World Trade
Organisation (WTO) is now pressing for more
liberalisation including ease of repatriating capital
from the country170. In effect, so far Malaysia has
managed to ensure that the profits from economic
activity in the country have been retained
domestically, but this is now under threat.
Summary
In the 20 years after independence Malaysia
constructed a manufacturing industry and economic
system that allowed it to gain the advantages of the
raw materials in its territory. In effect, it was able
to industrialise and enter the global economy on its
own terms. However, it is now facing a series of
related problems.
Figure 3: Structure of the Malaysian Economy166
This has seen a two stage strategy. One is to

encourage Malaysian firms to develop these
attributes and the other is to enter the global
outsourcing process and encourage foreign firms
to relocate such functions to Malaya. This has been
One is that, as with Taiwan, its reliance on

electronics to drive its exports is risky171 and
exposes it to fluctuations in demand in the OECD
countries.
Unlike Taiwan, it has not really
progressed beyond manufacture using supplied
technology and this relative failure has led to the
economy becoming stuck at a mid-income point172.
Part of this problem is that the manufacturing
sector is mostly based around stable goods that are
in demand but are not technologically advanced.
This is amplified as the state driven investment has
led to the relatively low ratio of private investment
Cheen, Malaysia: Strategies for the Liberalization of

the Services Sector.
2011.
169 Economics Division, Economic Review: Services
Sector in Malaysia.
170 Cheen, Malaysia: Strategies for the Liberalization of
the Services Sector.
2011.
2011.
167
2011.
Sector in Malaysia (Kuala Lumpour: Public Bank Berhad,
2005).
Sector in Malaysia.
Sector in Malaysia., p. 3
162
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(30% of GDP) 173, meaning that most domestic firms

are not research intensive.
Domestically, there is some evidence of growing
discontent with the relatively authoritarian
and
residual
ethnic
tensions.
regime174
Internationally, there are disputes with Indonesia
and the Philippines particularly focussed on the oil
fields in the South China Sea175.
On the other hand, unlike either India or Pakistan,
Malaysia has managed the transition from an
agricultural economy exporting primary products
to an industrialised one exporting manufactured
goods. It has also managed to eradicate domestic
poverty and ensure relatively full employment176.
Asia Development Bank, Asian Development Outlook:

2011.
174 Tisdall, Malaysia's Najib must abandon the Mubarak
model.
2011.
Indicators.
173
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Analysis of the
Economic
Systems
Analysis of the Economic Systems
Capitalism
Context and Background
Both contemporary177 and modern178 Economic
Historians are agreed that the economic system
that arose in North West Europe (initially Britain,
France, Belgium, the Netherlands and some regions
of Germany) was in some way critically different to
the early modern/semi-feudal economic system it
started to supplant. However, it proved harder to
define just why it was different and for what
reasons. The use of capital in combination with
labour power was as old as the plough179, and the
use of money as a means of exchange was equally
long lived. Even the idea, though often condemned
by religious authorities, both Christian180 and
Muslim181, as usury, of making money from the
process of exchanging money, had ancient roots.
Theoreticians from Adam Smith182 forward, through
Political Economists such as Ricardo183 identified
the key aspect as a change in the relationship
between labour and production. To Smith, this
took the form of allowing labour specialisation
leading to improvements in productivity184 and to
A Smith, The Wealth of Nations (London: Penguin
Classics, 2003).
178 Mathias, The First Industrial Nation, Mitchell, British
Historical Statistics.
180 RH Tawney, Religion and the Rise of Capitalism
(London: Pelican, 1928).
181 Asad Zaman, Islamic Economics: A Survey of the
Literature (University of Birmingham: Religions and
Development Research Programme, 2008).
182 Smith, The Wealth of Nations.
183 David Ricardo, On the Principles of Political Economy
and Taxation, 1817, Library of Economics and Liberty,
Available: http://www.econlib.org/library/Ricardo/ricP.html,
10 June 2011.
184 Smith, The Wealth of Nations.
177
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his critics such as Ricardo; the key relationship

became one of labour time as the fundamental
source of economic value185. To both it was clear
that what distinguished capitalism from earlier
economic systems was not the increased use of
machinery, not the use of money to mediate
economic exchange (as opposed to barter), nor the
ability to make money merely by controlling the
process of borrowing and lending186, it was
fundamentally about a new relationship between
people and how they worked.
Historical Development
To bring this about was not just a process of
gradual change or slowly increasing the volume of
machinery in the productive process, it took a
major shift in the legal and social relations that
Some theorists have
underpinned society187.
suggested that capitalism first emerged in NorthWestern Europe due to the impact of
Protestantism (in particular the removal of the
constraint on usury made the circulation of capital
so much easier188) or that being relatively well
established nation states they could create the
conditions to protect their domestic economies
while making the needed social changes189. Others
pointed to their early adoption of legal and social
changes that removed workers from the land,
leaving many with no choice but to sell their labour
to the new manufacturing industries190. To others
the key element to early capitalist development and
accumulation was the ability to make profits from
control over key aspects of international trade in
the form of both banking and direct control over
the physical resources191.
In other countries, notably Prussia and Russia, the
state played a major role in the emergence of
Ricardo, On the Principles of Political Economy and
Taxation.
187 Rosa Luxemburg, The Accumulation of Capital, 3rd ed.
(London: Routledge Classics, 2003).
188 Tawney, Religion and the Rise of Capitalism.
189 John Breuilly, "The State and Nationalism,"
Understanding Nationalism, eds. Montserrat Guibernau
and John Hutchinson (Cambridge: Polity Press, 2001),
Anthony Giddens, The Nation-State and Violence
(Cambridge: Polity Press, 1993), Hobsbawm, Nations and
Nationalism Since 1780: Programme, Myth, Reality.
190 Marx, Capital: Volume 1.
191 Luxemburg, The Accumulation of Capital.
185
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capitalism192. In part this was, as elsewhere, by

protecting nascent domestic industries by tariffs
and legislation193, but mainly due to state
sponsorship of armaments production which in
turned spilled over into civil industrial
development194. This had seen the development of
industry almost solely on government orders
the second phase in the industrialization of Russia
was again set in motion and directed by the Tsarist
state, disturbed by lack of industrial infrastructure
for army supplies 195.
Even so, by the 1830s conventional capitalism (ie a
combination of industrial machinery, sold labour
power and the circulation of capital) was a minor
part even of the most advanced economies196. In
1821, 34% of the population of the UK was still
directly employed in primary agriculture or fishing,
by 1851 this had dropped to 20%. Although by
then, manufacturing was producing some 34% of
GNP197, for the most part this was still small scale
and fragmented198. Even as late as the 1880s, the
classic industrial city, such as Manchester199, was in
reality the rarity.
Most cities, even in the
industrialised countries were still relatively small
and relatively dispersed200. Equally although capital
as money had become international, capital as
production was still localised. It was not to the
large scale creation of railways did the various local
markets start to fuse first into national economies
and, more slowly, into international economies201.
By the 1880s, broadly two new trends started to
emerge. First, the capitalist mode of production
started to move outside its European and North
American roots.
This took two forms,
industrialisation in countries that had already freed
themselves from direct colonialism (Argentina or
McNeill, The Pursuit of Power: Technology, Armed
193 Harvey, A Companion to Marx's Capital.
Communism and the Third World., p. 186
197 Mitchell, British Historical Statistics.
198 Harvey, A Companion to Marx's Capital.
199 Friedrich Engels, The Condition of the Working Class
in England (London: Penguin, 1987).
200 Hobsbawm, The Age of Empire 1875-1914.
Brazil) or in countries that were slowly developing

greater independence from their notional colonial
ruler (such as Canada or Australia)202. The second
was the direct traditional colonial relationship
started to change. Not only were the economies of
the colonies distorted to ensure they continued to
supply primary (unmanufactured) products for their
colonial power, they were increasingly expected to
act as markets for those manufactured goods203. A
final element was the expectation that the finance
to buy these goods would be supplied by the
colonial powers, in effect setting up a cycle of debt
and dependence204.
This new stage of capitalism can be characterised as
the export of finished goods on a global scale and
with this came a desire to delineate the global
market in much the same way as the national
markets had been protected at the start of the
nineteenth century. It is debateable as to whether
this new form of Imperialism actually constituted a
new form of capitalism205 or an expansion of its old
form to new territories, with in turn, the capacity
for a new round of primitive accumulation to boost
the profitability of domestic industries206.
From the late 1940s, a new model started to
emerge. In this case, as opposed to domestic
production and export of finished goods,
increasingly large multinational firms sought to
produce where the costs were cheapest207. As
transport costs as a proportion of total costs
dipped, the new model became one of exporting
capital to build industrial capacity where input costs
Equally, as
(mostly labour) were cheapest208.
discussed above, the actual nature of what
constituted work changed. Greater importance fell
on the provision of services rather than the
production of goods and the relative importance of
192
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Hobsbawm, The Age of Empire 1875-1914.

Massimo De Angelis, The Beginning of History: Value
Struggles and Global Capital (London: Pluto Press, 2007).
205 VI Lenin, "Imperialism: The Highest Stage of
Capitalism," Essential Works of Lenin, ed. HM Christman
(New York: Dover Productions, 1916).
206 Luxemburg, The Accumulation of Capital.
207 Cantwell, "The globalisation of technology: what
remains of the product cycle model?."
208 Raghuram G. Rajan, Fault Lines: How Hidden
Fractures Still Threaten the World Economy (New York:
Princeton University Press, 2010).
202
203
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knowledge work as opposed to physical work

steadily increased.
Different models of capitalism
Even on such a quick sketch of the development of
capitalism, it is clear that there have been a variety
of models and that these have changed over time.
However, one thing is clear; none of the early
industrial nations developed their manufacturing
base
under
conditions
of
international
209
competition , instead all looked to their own state
to both protect the domestic market and to open
others to their manufactured goods210. This has a
very direct relevance to the contemporary
development model imposed by bodies such as
World Bank and the IMF211 where the only
permissible approach is to develop while opening
up
domestic
markets
to
international
competition212.
By the early 1950s, three types of capitalist
economic models existed. The main area of debate
between them was the question of the degree of
state involvement in the economy as, to almost all,
it was clear that the unregulated capitalism of the
1920s and 1930s bore a direct responsibility for the
economic slump of that era213. At one end could
be seen as the US-model, with the goal of as little
state control (except in terms of the defence
industries) as possible. The UK and most other
west European states adopted a more mixed model
with state control of particular sectors. The
alternative was the various models of what could be
described as state-capitalism214. This ranged from

the French emphasis on state planning, the
Scandinavian emphasis on social welfare or the
emerging East Asian model215 of the state
supporting key industries and guiding overall
economic development.
By the late 1970s this relative diversity was coming
under sustained criticism mainly from right wing
economists216 who wished to see a return to what
they saw as classical free market economics. This
took the fertile ground of output stagnation,
declining rates of profit and inflation of the early
1970s to forge a systemic critique of all the variants
of what they saw as Keynesian style solutions. A
particular target was the many flaws in state
economic planning217 leading to an argument that
unregulated markets were the best means to
allocate
resources
without
any
residual
inefficiencies. If the state had a role, it was to be
residual, perhaps supplying some common goods
for the whole of society and providing a suitable
legal and economic framework218.
In effect, not only has capitalism changed its form
over time but has also been able to adapt to a
variety of models subsequently. Early capitalism can
be characterised as a series of geographically
spaced monopolies219 with the emphasis on physical
production.
Over time this evolved to an
integrated world economy with an emphasis as
much on the provision of services and knowledge
Dalton, Economic Systems and Society: Capitalism,
Communism and the Third World.
215 John Kie-chiang Oh, Korean politics: the quest for
democratization and economic development (New York:
Cornell University Press, 1999), Rubinstein, "Taiwan's
Socio-Economic Modernisation 1971-1996."
216 Keith Cuthbertson, Macroeconomic Policy: The New
Cambridge, Keynesian and Monetarist Controversies,
MacMillan New Studies in Economics (London:
MacMillan, 1979).
217 Israel M. Kirzner, "Economic planning and the
knowledge problem," The meaning of market process:
essays in the development of modern Austrian
Economics, ed. Israel M. Kirzner (London: Routledge,
1996).
218 Williamson, "The Washington consensus as policy
prescription for development.", World Trade Organisation,
GATS: Fact and Fiction, 2010, WTO, Available:
http://www.wto.org/english/tratop_e/serv_e/gats_factfictio
n_e.htm, 12 August 2010.
214
Harvey, Limits to Capital.

Hobsbawm, Nations and Nationalism Since 1780:
Programme, Myth, Reality.
211 Dani Rodrik, "Goodbye Washington Consensus, Hello
Washington Confusion? A Review of the World Bank's
"Economic Growth in the 1990s: Learning from a Decade
of Reform," Journal of Economic Literature 44.4 (2006),
John Williamson, "The Washington consensus as policy
prescription for development," Development challenges in
the 1990s: leading policymakers speak from expertise,
eds. Timothy Besley and Roberto Zagha (World Bank
Publications, 2005).
212 Karen I. Vaughn, Austrian Economics in America: The
Migration of a Tradition, Historical Perspectives on
Modern Economics (Cambridge: Cambridge University
Press, 1998).
213 John. Maynard Keynes, The General Theory of
Employment, Interest and Money (Cambridge: Royal
Economic Society, 1936).
209
210
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Page 27
as physical manufacture220. In the course of this,

the model of political economy has swung from
free market liberalism, to various levels of state
involvement and back again221. Even in an era,
where many argue there is but one economic
model, in reality capitalism can thrive in the East
Asian directed economies222, Chinas one party
political system223 (increasingly being adopted
across the former Soviet Republics in Central
Asia224) and the residual welfare state model still
present in most of Western Europe225.
Benefits and Criticisms
With the exception of a few who lamented the loss
of feudal relationships or saw a desirable Arcadian
past in the pre-capitalist agricultural economies226,
no-one, supporter or critic of capitalism, suggested
the impact was anything but profound and broadly
positive for humanity. Marx constantly praises the
impact of capitalism across his economic and social
writings227 exemplified by this passage from the
Communist Manifesto228:
The bourgeoisie, during its rule of scarce
one hundred years has created more
massive and more colossal productive
forces than have all preceding generations
together. Subjection of natures forces to
man, machinery, application of chemistry
Rajan, Fault Lines: How Hidden Fractures Still
Threaten the World Economy.
222 Chan and Yang, "The development of social welfare in
Taiwan."
223 Thomas Ambrosio, "Catching the Shanghai Spirit:
How the Shanghai Cooperation Organization Promotes
Authoritarian Norms in Central Asia," Europe-Asia Studies
60.8 (2008).
224 John Anderson, The International Politics of Central
Asia (Manchester: Manchester University Press, 1997).
225 David Arter, Scandinavian politics today (Manchester:
Manchester University Press, 1999).
226 Steven Rose and Hilary Rose, "Less than human
nature: biology and the new right," Race & Class 27.3
(1986).
227 Karl Marx, Grundrisse, trans. Ben Fowkes (London:
Penguin, 1973), Marx, Capital: Volume 1, Tom Rockmore,
Marx after Marxism: The Philosophy of Karl Marx (Oxford:
Blackwell, 2002).
228 Karl Marx and Friedrich Engels, "Manifesto of the
Commnunist Party," The Revolutions of 1848, ed. David
Fernbach (London: Pelican, 1848).
220
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to industry what earlier century had

even a presentiment that such productive
forces slumbered in the lap of social
labour?229
If that passage had meaning in 1848, how much
more true is it today? In effect, there is a broad
consensus that capitalism has broken the old
constraints of subsistence agriculture and allowed
broadly higher living standards than were previously
imaginable. This leaves two areas of debate was
there a more efficient way to achieve the same
outcome, and, related, is it, in any case sustainable?
To its defenders any charge of inefficiency about
capitalism is easily answered by pointing to the
equal, or larger, inefficiencies of state planning230. In
effect, any debate about inefficiency within
capitalism should really be framed in terms of
whether or not it is the least inefficient. Indeed
some of its most committed supporters231 would
argue that the chaotic unstructured element is
critical to its capacity to adapt and overcome
periodic economic crises.
This leads to the second concern about the
sustainability of capitalism. It has a cyclical nature
and has historically been prone to a series of major
depressions such as in the 1840s, 1880s, 1920-30s,
1970s-80s and recently 232. The critics of capitalism
extract two lessons from this. One group then
argues that this is convincing evidence that
capitalism needs to be managed so as minimise the
impact of such periodic depressions233. Another
that it indicates that capitalism is fundamentally
unstable. This, mostly Marxist (or derived from
Marx), critique has often had a millenialist234
229 Marx and Engels, "Manifesto of the Commnunist

Party.", p. 72
230 Kirzner, "Economic planning and the knowledge
problem."
231 Vaughn, Austrian Economics in America: The
Migration of a Tradition.
232 Andrew Tylecote, The long wave in the world
economy: the present crisis in historical perspective
(London: Routledge, 1992).
233 Keynes, The General Theory of Employment, Interest
and Money.
234 Norman Cohn, The Pursuit of the Millenium, 3rd ed.
(London: Paladin, 1970).
Page 28
element to it, with concepts of inevitability235 being

used to constantly predict that this particular crisis
will be the end of capitalism. So far, it has shown
considerable robustness and an ability to reinvent
itself, even if each crisis has brought major costs to
humanity and the natural environment.
Socialist
To many contemporary commentators, a socialist
economic system consists of state control, rigid
economic planning, production quotas and wasteful
targets236. Depending on their overall worldview,
this may be partly mitigated by acknowledging gains
in terms of population health, access to education
and relative income equalities. However, even
within what could be said to be the Soviet model
there was historically considerable divergence.
Cuba237 and Yugoslavia238 adopted variants with far
more independence given to local production units
and China, even under Mao239, operated a far more
decentralised model than was the case in the USSR.
With the collapse of the economic system first in
Eastern Europe and then in the Soviet Union
itself240, it was held that this proved that capitalism
was clearly superior to socialism 241. In so far as a
Socialist model still existed, it was within a handful
of authoritarian regimes all of which had historic
ties back to the USSR including North Korea, Cuba,
Iraq and Syria.
If so, this fails to account neither for the return of
socialist economic models in Latin America242 not
just in Chavezs Venezuela, nor the continuation of
Donald Sassoon, One Hundred Years of Socialism:

The West European Left in the Twentieth Century
(London: Fontana, 1997).
237 D.L. Raby, Democracy and Revolution: Latin America
and Socialism Today (London: Pluto Press, 2006).
239 Martin Jacques, When China Rules the World: The
Rise of the Middle Kingdom and the End of the Western
World (London: Allen Lane, 2009).
240 Stephen Kotkin, Armageddon Averted: The Soviet
Collapse 1970-2000 (Cambridge: Cambridge University
Press, 2001).
241 Michael A Lebowitz, Beyond Capital, 2nd ed.
(Basingstoke: Palgrave, 2003).
242 Raby, Democracy and Revolution: Latin America and
Socialism Today.
235
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mixed economic models in much of Scandinavia243.

Equally it has not settled the historic argument as
to whether a partially socialised economy can exist
within a fundamentally capitalist system244.
Much of the problem in this respect stems from
Marxs lack of analysis as to what a socialist
economy would look like. Most of his major
writings were an analysis of capitalism245 and where
he did discuss a socialist society he tended to
emphasise the political form, inspired by the
example of the 1871 Paris Commune246. This left
the Bolsheviks when they took power in Russia in
1917 with two problems. Not only had they taken
control of a country barely entering modern
capitalism but there was no blueprint for what a
socialist economy should look like. The result was
a fourfold model an emphasis on industrialisation;
an emphasis on the application of scientific
management (almost all contemporary Marxists
were fascinated by the developments of Henry
Ford)247, a reliance on state planning and state
control of the economy. From within the socialist
movement248, the most coherent critique was that
such an ambitious programme would fail to deliver
if the planning model was top down and the real
need was to find some means to reconcile
genuinely competing differences249. To a leadership
first engaged in a Civil War, then a massive
reconstruction, followed by a permanent fear of
attack, this seemed a recipe for chaos not for
efficiency250.
243 Meidner, "Our Concept of the Third Way: Some

Remarks on the Socio-political Tenets of the Swedish
Labour Movement."
244 A Crosland, The Future of Socialism, 2nd ed. (London:
Robinson Publishing, 1956).
245 Lebowitz, Beyond Capital, Marx, Grundrisse, Marx,
Capital: Volume 1, Rockmore, Marx after Marxism: The
Philosophy of Karl Marx.
246 Karl Marx, ed., Surveys from Exile, vol. London
(Penguin, 1973).
247 A Gramsci, "Americanism and Fordism," Selections
from the Prison Notebooks, eds. Q Hoare and GN Smith
(London: Lawrence and Wishart, 1971).
248 Sassoon, One Hundred Years of Socialism: The West
European Left in the Twentieth Century.
249 Gramsci, "Americanism and Fordism."
250 Kotkin, Armageddon Averted: The Soviet Collapse
1970-2000.
Page 29
In effect, the classic Soviet model of a socialist

economy, what later became known of as Actually
Existing Socialism251, emerged pragmatically not as
the implementation of a well defined theoretical
model and as much based in Russian economic
history as anything else252, with an emphasis on a
state directed heavy industrial sector funded by
forced transfers of capital from the rural economy.
Even so, by the end of the post-1945 Colonial
Wars, it became (in different) forms one of the two
dominant economic systems253 across the globe,
adopted by regimes outside direct Soviet control
such as India, Egypt and into sub-saharan Africa as
the last European colonial regimes collapsed.
Given that by 1991, the USSR had disappeared and
that countries as diverse as Egypt and India had
adopted a neo-liberal development model it would
be easy to describe it as a failure. The degree of
waste was substantial254 and by the 1970s Marxist
critiques of the USSR were indicating that it was
economic failings as much as the political system
that would bring the regime down255. On the other
hand, such a system had allowed first the USSR to
develop, survive the economic destruction of the
Second World War, and rebuild again. In other
countries, the result had been sustained economic
development, low prices of key commodities,
relative income equality and an emphasis on health
and social welfare systems.
Islamic
Notionally Islamic countries are home to a range of
economic systems from free market capitalism, to
state managed capitalism to state socialism. The
contemporary norm is one of state managed
capitalism. In this it then becomes important to
distinguish between economic systems in countries
where the bulk of the population happen to be
Muslims from the emerging concept of an Islamic
approach to political economy.
Lebowitz, Beyond Capital, Silvio Pons, Berlinguer e la

fine del comunismo (Turin: Einaudi, 2006).
254 Kotkin, Armageddon Averted: The Soviet Collapse
1970-2000.
255 Pons, Berlinguer e la fine del comunismo.
Fundamental to an Islamic model is the argument

that justice and fairness, with welfare at the core of
the system, are built in due to the religious
constraints. This has a number of implications
including the abolition of interest (to prevent the
wealthy becoming even wealthier), expectations
that wealth should circulate rather than be
accumulated and an idea that there are acceptable
and unacceptable distributions of a societys
wealth256. In religious terms, these expectations are
bound up in the concepts of Sadaqat and Zakat 257.
Sadaqat at its core is the need to ensure that all
have access to food to celebrate the feast of Eid at
Zakat, is the wider
the end of Ramadan.
expectation that all Muslims will make regular
charitable donations. The economic model is
extended through the concept that certain means
to earn money are illegal (gambling, usury, illegal
business practices etc), so not only is wealth to be
shared, it is also only acceptable to gain it in
particular ways258.
This leads to a concept of the welfare state where
charity and wealth sharing are at the core of all
economic activity259. This model of welfare goes
beyond addressing issues of economic need and
social equity, instead it is claimed that an Islamic
state also caters for spiritual and moral welfare. In
effect, the Islamic model can be characterised as a
form of capitalism but with religious constraints260
that prohibit usury, revive the old idea of a fair and
just wage and embed a particular model of social
welfare.
251
Insaf Research Wing
Hartley Dean and Zafar Khan, "Muslim Perspectives

on Welfare," Journal of Social Policy 26.02 (1997).
257 Tariq Ramadan, The Messenger (Oxford: Oxford
258 Zaman, Islamic Economics: A Survey of the Literature.
259 Dean and Khan, "Muslim Perspectives on Welfare."
260 Zaman, Islamic Economics: A Survey of the Literature.
256
Page 30
Analysis of the
Economic
Systems
Pakistan central case study
This section reviews the current legal and
economic structures of Pakistan. As with India, it
inherited certain characteristics from the departing
British Empire261. Some of these were potential
strengths such as a relatively strong state
bureaucracy and legal structures262. On the other
hand, as with India, domestic industry had been
stifled due to its allotted role in the British Imperial
system of being a producer of raw materials (to be
manufactured elsewhere), and a consumer of those
manufactured goods263 as imports.
Perhaps even more than India, a core problem of
the imperial legacy was the unbroken power of the
rural landlords264, which not only led to corruption
of the political system but locked up labour and
talent in semi-feudal agricultural production. Some
of the problems faced by Pakistan are unsolvable (it
is, for example, always likely to be dependent on
imported fuel265), but the lack of compensating
exports is related to how domestic resources have
been developed and the way that corruption
continues to eat away at the countrys wealth266.
261 Banerjee and Iyer, "History, Institutions, and Economic
Performance: The Legacy of Colonial Land Tenure
Systems in India.", Roy, The Economic History of India
1857-1947.
262 Ali Cheema and Asad Sayeed, Bureaucracy and Propoor change (Islamabad: Pakistan Insitute of
Development Economics, 2006).
263 Christophe Jaffrelot, A History of Pakistan and its
origins, trans. Gillian Beaumont (London: Anthem Press,
2004).
264 S. V. R. Nasr, "Pakistan: State, Agrarian Reform and
Islamization," International Journal of Politics, Culture,
and Society 10.2 (1996).
265 Economy Watch, Pakistan Economic Data, 2010,
Economy Watch, Available:
http://www.economywatch.com/economicdata/pakistan.html, 12 November 2010.
266 Associated Press of Pakistan, Power generation
through Thar coal gasification by next year 13 July 2010
Insaf Research Wing
The regions that formed modern day Pakistan at

independence were as rich as those inherited by
India267. In the case of Pakistan, at the moment any
economic development is being held up by the low
levels of education that result from 60% of the
population being effectively locked into poverty by
inherited debts and the need to both provide free
labour, and to hand over a substantial proportion of
their earnings, to their landlords 268. A different
problem is the main manufacturing sector (textile
manufacture)269 is important financially but is not an
area where real growth, along the lines of
electronics in Taiwan, is likely to be found.
What Kind of economy is Pakistan?
Pakistan inherited a largely rural agricultural
economy on independence270. It had potential
advantages in a well developed infrastructure
(outside the mountainous North West), a
functioning state bureaucracy, reasonable transport
infrastructure and a robust legal system271.
Although, politically Pakistan aligned itself with the
US in the Cold War, practically it followed a very
similar economic development model to India. This
saw the use of tariffs to protect domestic industry
and state support and direction for key sectors. In
this, it was a typical state directed controlled
capitalist model that was adopted in many countries
2010, Available:
http://www.app.com.pk/en_/index.php?option=com_conte
nt&task=view&id=109095&Itemid=2, 10 November 2010,
Shaheen Sehbai, $260 billion gold mines going for a
song, behind closed doors, 3 November 2010, The
International News, Available: http://thenews.com.pk/0311-2010/Top-Story/1771.htm, 19 November 2010, S
Akbar Zaidi, Pakistans Roller-Coaster Economy: Tax
Evasion Stifles Growth (Carnegie Endowment for
International Peace, 2010).
267 Tariq Ali, The Duel: Pakistan on the Flight Path of
American Power (London: Verso, 2008).
268 Pakistan Conflict Monitor, Human Development
Reports, July 2010 2009, Human Security Report Project,
Available:
http://hdrstats.undp.org/en/countries/data_sheets/cty_ds_
PAK.html, 12 November 2010.
269 Ministry of Finance, Pakistan Economic Survey 201011 2010, Ministry of Finance, Available:
http://www.finance.gov.pk/survey_1011.html, 23 June
2011.
270 Roy, The Economic History of India 1857-1947.
271 Cheema and Sayeed, Bureaucracy and Pro-poor
change.
Page 31
in the post-colonial era. By the early 1970s272 this

model seemed to be working with a combination of
economic growth and a mild redistribution of the
countrys wealth under the democratic rule of the
Pakistan Peoples Party (PPP). This has been
characterised as273:
contemporary Pakistani economy can be seen as a

mixture of a typical neo-liberal economy (poverty,
high income differentials, corruption and an elite
more in tune with the outside world than their
own people) layered over an unreformed feudal
economy outside the main cities275.
The period of the 1970s, which lasted till

1977, witnessed a return to parliamentary
democracy, an increasing role of the state
in economic development through the
nationalisation of the banking and
insurance sectors, in selected industries,
and in the foreign trade in cotton and rice.
The period was characterised by a
considerable slowing down in economic
growth, to 4.8 percent per annum, as
private sector investment declined sharply
in both industry and agriculture; there was
a high rate of inflation (accentuated by
increases in oil prices) and the start of
large-scale overseas migration to the
Middle-East. However, reforms in the
labour sector increased the strength and
bargaining position of organised labour,
and although land reforms were marginal,
greater protection to tenant-farmers
provided them with greater security of
tenure
In consequence, over 60% of the population live on

less than $2 a day and the levels of state debt, loss
of inward investment and difficulties in accessing
IMF loans all point to an economy that is
stagnating276. In particular, the Pakistani economy
remains too reliant on a highly inefficient
agricultural sector277. In 2008, this made up 20% of
GDP and has remained inefficient as the landlords
have no interest in reforms preferring instead to
maintain the current semi-feudal system based on
peasants tied to the land by inherited debts and
having to offer free labour to the landlord to pay
these off (in effect a form of share cropping). 62%
of the population depends on agriculture for their
living and many of these pay over 50-70% of their
notional earnings to their landlord. This not only
locks up human capital in agriculture, it also ensures
lack of education and investment even in
agricultural sector.
The most recent set of
attempts to break up this form of feudalism and to
both release labour from the land and allow the
small farmers to retain a greater share of their
income now seems doomed to failure278.
This brief success was lost in the period of General

Zias dictatorship up to the late 1980s. This period
saw the use of Islamic concepts to justify social
policy but broadly economic development remained
weak and often state driven. The return of civilian
rule in 1988274 saw a major change in economic
policy. Both the main political parties, and the
subsequent Musharraf military dictatorship, whole
heartedly embraced neo-liberalism. This led to a
worsening of income inequality, the sale of most
state assets and the lifting of price controls on
staples such as food and fuel. In effect, the
272 Rashid Amjad and A. R.Kemal, "Macroeconomic
Policies and their Impact on Poverty Alleviation in
Pakistan," The Pakistan Development Review 36.1
(1997).
273 Amjad and R.Kemal, "Macroeconomic Policies and
their Impact on Poverty Alleviation in Pakistan.", p. 42
274 Mumtaz Ahmad, "The Crescent and the Sword: Islam,
the Military, and Political Legitimacy in Pakistan, 19771985," Middle East Journal 50.3 (1996).
Insaf Research Wing
One vital source of income has come from

remittances sent back by migrant workers. In 2007
Nancy Birdsall, Wren Elhai and Molly Kinder, Beyond

Bullets and Bombs: Fixing the U.S. Approach to
Development in Pakistan (Center for Global Development,
2011).
276 Farhan Sharif, Foreign Direct Investment in Pakistan
Declines 40.7%, 14 July 2010 2010, Bloomberg Business
News, Available:
http://www.businessweek.com/news/2010-07-14/foreigndirect-investment-in-pakistan-declines-40-7-.html 10
November 2010.
277 Ashfaque H Khan, A candid presentation, 13 July 2010
2010, The International News, Available:
http://www.thenews.com.pk/daily_detail.asp?id=250380,
10 November 2010.
278 Reuters, Land reform legislation looks set for failure,
25 October 2010, GulfNews.Com, Available:
http://gulfnews.com/news/world/pakistan/land-reformlegislation-looks-set-for-failure-1.701684, 20 November
2010.
275
Page 32
this amounted to $5,998m279 (45% from the Middle

East). Overall it has been estimated there are some
4.2 million migrant workers in 2010 down from the
6.5 millions in 1990. 1 million of these workers are
based in OECD countries, and of these 1 million,
30% have been educated to tertiary (university)
level and 25% to secondary. In this respect
migration has been a double edged issue for
Pakistan, as the income sent back is crucial to many
households and communities. On the other hand,
given the low overall educational levels in Pakistan,
the loss of so many well educated individuals
represents a further break on the prospects for the
domestic economy280.
The lack of domestic industry shows up in a balance
of payments imbalance of $15bn. Exports, mainly
of agricultural products, accounted for $20bn and
imports, of manufactured goods, and critically for
the poor, fuel, $35bn. This relative exposure to
world fuel prices has badly eroded the living
standards of the poorest in recent years281.
So a final description of the contemporary Pakistani
economic system is of neo-liberalism, allied to
fundamental corruption282 with the majority of the
population trapped in a feudal mode of production.
Overlaying this are the costs and distortions
imposed by the US led war on terror283.
development and Pakistan as a relative failure284 on

a number of key indicators they remain very similar.
In India, manufacturing accounts for 22% of GDP285
and in Pakistan it is 27%286. In India, agriculture
accounts for 22% of GDP and employs 60%287 of
the population and the relative figures for Pakistan
are 20% and 62%288 respectively. In effect, both
states are still seeking to overcome the agricultural
economy they inherited from the British. Where
they are very different, as discussed below, is in
terms of their relative fiscal positions.
The contrast to the East Asian economies is stark.
While, for example, Taiwans manufacturing sector
accounts for 24% of GDP289, it has shrunk its
agricultural sector from 95% in 1948 to under 2%
today. The working population released have
moved partly into manufacture and mainly into a
service sector that is connected to international
trade. On the other hand, both India and Pakistan
have a low value service sector290 that lacks the
capacity to absorb large numbers moving away
from agriculture. For both, the challenge to
improving national wealth is the creation of a
profitable, domestic, industrial sector.
Since 2001, Pakistan has also borne the economic
impact of the War on Terror291 with costs
estimated at $17.8bn in 2010/11 (dwarfing the
$1.5bn of US aid received on annual basis292) having
steadily escalated over the decade.
Major industries
Although it is conventional in many studies to see
India as a relative success in terms of economic
Pakistan Conflict Monitor, Human Development

Reports.
280 Pakistan Conflict Monitor, Human Development
Reports.
281 Cheema and Sayeed, Bureaucracy and Pro-poor
change.
282 Misha Glenny, McMafia: Crime Without Frontiers
(London: Bodley Head, 2008).
283 Ali, The Duel: Pakistan on the Flight Path of American
Power.
279
Insaf Research Wing

286 Economy Watch, Pakistan Economic Data.
291 Ministry of Finance, Pakistan Economic Survey 201011
292 Birdsall, Elhai and Kinder, Beyond Bullets and Bombs:
Fixing the U.S. Approach to Development in Pakistan.
284
Page 33
Table 2: Cost of War on Terror to the Pakistani

Economy293
This differential performance is linked to two major

changes. One is a boost to domestic consumption
following the large pay rises given to public sector
employees and the transfer of resources to the
agricultural sector (in part due to government
policy and in part related to a growth in the price
of agricultural commodities)296. On the other hand,
the wider international depression has adversely
affected those sectors most dependent on exports
and increasing inflation and difficulties in accessing
finance have hindered growth.
The effect has been a major drain on investment

funds, destruction of current capacity and increased
costs due to internal migration and the refugee
crisis as people flee the war in Afghanistan. It is
estimated that there are1.6 million refugees from
Afghanistan of whom 7% find work as day
labourers294 and most of the rest are wholly
dependent on aid.
More generally the manufacturing
sector can be divided into large scale
manufacturing and smaller, often
Over the
artisanal, production295.
period 2009-2011, large scale firms in
most sectors have mostly seen a large
increase in production but there are
important exceptions such as steel
(down 13%), electronics (down 13%)
and non-metallic minerals (down 10%).
By industrial sector, and just reporting
the performance of larger firms, the
changes are shown in Table-3:
Birdsall, Elhai and Kinder, Beyond Bullets and Bombs:

294 Duniya Aslam Khan, UNHCR looks at the economic
contribution of Afghan refugees in Pakistan 10 January
2011, UNHCR, Available:
http://www.unhcr.org/4d2b1dd96.html, 23 June 2011.
293
Insaf Research Wing
Table 3: Changes in Production for Large Scale Firms

2009-2011297
296
Ministry of Finance, Pakistan Economic Survey 2010-
11
Ministry of Finance, Pakistan Economic Survey 201011 , p.36
297
Page 34
Table 5: Distribution of Industrial Investment300
This shows up even more clearly when production

is analysed by item rather than by industrial sector,
as:
Table 4: Change in Production of Selected Industrial

Items298
As indicated above, a major problem for the

manufacturing sector in Pakistan is the decline in
industrial investment299. Some of the reasons for
this are related to the War on Terror (discussed
below) but a fundamental problem is that the size
of the Governments debt is not just reducing
public sector investment, it is also reducing the
In this respect, there is quite a stark difference

between investment into large scale manufacturing
(down 27% from 2007 -2011) and that into small
scale manufacturing which has steadily grown year
on year and overall has increased by 15% from
2007 to 2011.
In combination the
manufacturing sector
contributes 27% of
GDP301 with textile
manufacture
alone
contributing 8-9% of
GDP.
Recent
problems
have
included
energy
shortages, law and
order problems, input
costs and general
so
in
inflation302,
general manufacturing
has had a bad 2 years.
There
have
been
attempts at boosting domestic power production 303
and thus reduce reliance on imported energy, but
these are at an early stage. As discussed above, a
number of factors including the escalating war on
terror and recent flooding have all led to a major
decline in investment. However, different sectors of
the economy have varied in their performance.
Textile production remains by far the largest
sector. It employs 38% of the total manufacturing
labour force304 and remains a key sector in the
economy.
It is seen
as a major
source of
future

303 Associated Press of Pakistan, Power generation
through Thar coal gasification by next year
300
amount of credit available for private sector

investment.
298
Insaf Research Wing
Page 35
growth with 75-80% of production (primary and

secondary) being exported. However, especially in
respect of exporting to the US it is hampered by
very high tariff levels imposed305 of almost 15%.
However, against this export success must be
placed an ongoing need to import the machinery
used in production, amounting to almost $360m in
first six months of 2010-11 alone306.
Table 6: Pakistan textile and cotton exports307
Within the wider textile industry are a number of

important sub-units. These often show a mixture
of large scale organised manufacture and less
organised cottage and small scale operations.
Given the size of domestic cotton production
(discussed below) it is no surprise that the cotton
spinning sector is the largest sub-unit within the
sector. Generally it has been successful in recent
years, able to draw on local supplies and with direct
state support. One problem is relative overcapacity as it is estimated there are 10.1 million
spindles and 114,000 rotors utilised at 89% and 60%
respectively308. Another major industry based on
domestic cotton production is the canvas
production sector.
Due to low cost inputs,
Pakistan is one of the cheapest producers of canvas
(and related products such as tents) and 60% of the
production is exported and most of the balance
bought up by the armed forces309.
The cloth sector is organised on very different lines
to the cotton spinning sector. Despite substantial
Birdsall, Elhai and Kinder, Beyond Bullets and Bombs:
305
Insaf Research Wing
investment (in both large and small scale firms) in

modern looms, production is mostly of low quality
grey cloth, and equally the recent investment has
not addressed long term problems in manufacturing
operation. The sector remains dominated by small
scale firms with 80% of all production outside
organised mills310.
In contrast, the textile made-up sector has been the
most dynamic in the whole textile industry. It is
estimated there are 12,000 knitting machines
(spread across the country and in both large and
small scale
units)
operating at
70%
capacity.
Exports
from
this
portion of
the sector are worth $1.2-1.3bn per annum. The
readymade garment sector is again composed of a
variety of producers (small, medium and large) and
is dominated by firms with under 50 machines.
Despite this, it is a sector that provides high value
added to the overall textile sector and is seeing
both the volume and value of its exports steadily
increase. The smaller towel manufacturing sector
is almost completely orientated to the export
market and consists of 7,500 towel looms again
spread across the informal and large scale sectors.
More recently, several small but important subsectors have developed. The synthetic filament
yarn sector has grown substantially but it is now
facing a complex set of pressures. On the one
hand, the hosiery sector has shifted to using
synthetic yarn boosting demand but the recent
reduction of import tariffs on Chinese fabrics has
led to the market being filled with imports cheaper
than the domestic sector can match311 (and, again,
in this respect, the relative lack of investment
makes it unlikely that domestic manufacturers will
be able to make the needed adjustments). The artsilk and weaving sector exists almost completely
within the small unorganised sector, usually reliant
310
11
311
11
Page 36
on cottage based power looms. As such, the

industry is widely dispersed and includes
production from the troubled north west of the
country.
The Engineering Industry is a sector with potential
for major growth312 but has been hampered by
haphazard development and lack of direct support.
The newly set up Engineering Development Board
(EDB) is trying to draw in manufacturers from
across the main sub-sectors and to identify an
appropriate balance between domestic production,
foreign investment and the type of state support
needed to allow the sector to grow.
The steel industry is trying to both ensure reliable

and local supplies of coal (thus boosting the
domestic mining industry) and is drawing in foreign
investment to build up to 10 new plants. The goal
is to treble the current production of 1.1m tons to
3 million tons over the next few years315.
Table 7: Manufacture of Automobiles313
Typical of the strengths and weaknesses of the
overall engineering sector is the large domestic

vehicle manufacturing sector with its current focus
on production for the local market (2/3 wheel
motorised rickshaws) with very low export
potential so it remains very vulnerable to import
substitution
Some efforts have been made to boost domestic
demand such as offering grants for farmers looking
to buy locally made tractors314. This has stabilised
the demand for domestically produced tractors
compared to the
large
importsubstitution that
has undermined
domestic
production
of
trucks and buses.
312
11
313
The cement
industry has grown mostly by exports since 2006.
This is facilitated by being exempt from sales tax for
all exports while domestic consumption faces a 17%
excise duty316. One problem this sector faces, in
common with similar firms in India317, is of overcapacity:
Table 8: Cement Production 2006-2011
315
11
316
11
11
Ministry of Finance, Year Book 2008-09 (Islamabad:

Ministry of Finance, 2010).
317
314
Insaf Research Wing
Cement Week, India Cement Business: Sentiment

Survey.
Page 37
Another problem facing large scale manufacturing is

a lack of reliable power sources. This also limits
the capacity of the Fertilizer sector to grow.
Typical of these problems was the opening of a
large new plant by Engro Chemicals in March 2011
which then had to be closed due to the shortage in
gas supplies. It is estimated that the agricultural
sector needs an additional 100-150,000 tonnes of
fertilizer per annum, but at the moment this
demand is either unmet or covered through
imports318.
One sector that has the potential to bring in real
new investment in the mining sector which at the
moment accounts for around 1-2% of GDP319.
Recent discoveries of vast gold and copper reserves
in the south320 are such that if Pakistan gets its fair
share from the gold and copper mines, Baluchistan
and Pakistan would become richer than any of the
present oil producing Gulf countries, many times
over321. Overall the sector faces the challenge of
needing further investment in order to maximise
production, as despite, the potential, this has
mostly been static since 2008:
Table 9: Mineral Extraction 2008-20111322
318
The fundamental problem is the main resources are

located in the less stable regions of the country.
For example, Balochistan, where most deposits are
located, is the poorest of the four states within
Pakistan leading to problems of extraction (and
subsequent transportation) and is facing a long
running struggle for greater local autonomy.323
In general, as is clear from the discussion above, the
Pakistan economy is a complex mix of large scale
and small or informal firms. This is particularly the
case within the wider textile industry, but also, as
discussed below, within the services sector. As
such, they are a major source of potential
economic growth and it is estimated that (across
manufacturing, services and agriculture) they form
40% of GDP324. In addition, this sector has seen
faster growth and more sustained investment than
the larger, more organised firms. The problem
though is that they are growing and investing from
a very low baseline, and, until recently, with very
little state support325. To address this funds have
been set aside from the Public Sector Development
Programme (discussed in the budget section below)
to a value of Rs.3bn to improve support and create
clusters of SMEs to ease the process of growth and
investment.
The
other
main
change
to the
nature
of the
Pakistan Manufacturing sector is the continued
privatisation program326. In past periods, there
have been major concerns at corruption and loss of
11
319
11
320
11
Sehbai, $260 billion gold mines going for a song,
behind closed doors.
322 Ministry of Finance, Pakistan Economic Survey 201011 , p.44
321
Insaf Research Wing
Ali, The Clash of Fundamentalisms: Crusades, Jihads

and Modernity.
323
Page 38
key assets from the public finances327, but there is

evidence328 that the planned privatisation of public
utilities, oil, gas, transport companies and
infrastructure providers will be handled more
openly. The state is also exploring whether the
best approach is to directly sell shares or assets or
instead to offer concessions to firms that wish to
operate publicly owned assets. The new schemes
are also seeking to ensure that 12% of the assets
are transferred (free of cost) to the existing
employees329.
Services Industry
The service sector is important and forms 53% of
GDP330 with this split 30% due to wholesale and
retail trade and the balance linked to finance,
insurance and transportation. A problem in some
sectors such as IT is that foreign investment has led
to jobs being created but with little or no
technology transfer. Even worse, current laws
allow for 100% foreign equity ownership and 100%
repatriation of profits, so the current domestic
sector is neither able to grow nor retain the capital
to allow it to develop331. In consequence, if India is
having problems converting foreign investment into
domestic wealth, the issues are worse for Pakistan
which has become little but a recipient of foreign
capital and a supplier of labour332.
business on a regular basis. There is an interest in

adapting Islamic concepts from elsewhere (such as
in the GCC states) and the need to improve
balance of risk between clients and companies334,
especially in case of default where the company can
use clients assets to clear their own debts.
The retail sector accounts for some 17% of GDP335
and has been slowly changing since the 1990s336 as a
number of the traditional family run specialist
stores were replaced by general food stores and
retail chains. Some foreign firms such as Carrefour
(which has also been active in developing its stores
in China) have recently entered the market in the
more affluent districts of the major cities337.
However, by 2010, there was little evidence that
non-domestic firms were able to enter the
domestic retail market and it was estimated that
95% of all businesses remained in family
Nonetheless, the small foreign
ownership338.
owned sector was creating a market for imports of
high value US agricultural produce339.
Figure 4: Retail Sector in Pakistan
In effect, the foreign owned large retail markets are

still a very small part of the sector but almost 6% of
their produce is imported rather than 1% in the
Typical of the problems is the current small

Insurance sector333 worth only 0.7% of GDP with
43 domestic firms, many of which go out of
Ali, The Duel: Pakistan on the Flight Path of American
Power, Muneer M Qureshi, Appraising the Pakistan Tax
System, 2008, Available:
http://www.scribd.com/doc/18625986/Appraising-thePakistan-Tax-System, 15 December 2010, Reuters, IMF
likely to delay next Pakistan loan tranche-source, 1
December 2010, dawn.com, Available:
http://www.dawn.com/2010/12/01/imf-likely-to-delay-nextpakistan-loan-tranche-source.html, 7 December 2010,
Sehbai, $260 billion gold mines going for a song, behind
closed doors, Zaidi, Pakistans Roller-Coaster Economy:
Tax Evasion Stifles Growth.
331 Qureshi, Appraising the Pakistan Tax System.
333 Ministry of Finance, Year Book 2008-09.
327
Insaf Research Wing
Ministry of Finance, Year Book 2008-09.

Rashid Y. Raja, The Retail Food Sector: Pakistan
(Islamabad: USDA Foreign Agricultural Service, 2011).
336 Jawaid Abdul Ghani, "Consolidation In Pakistan's
Retail Sector*," Asian Journal of Management Cases 2.2
(2005).
337 Ghani, "Consolidation In Pakistan's Retail Sector*."
338 Raja, The Retail Food Sector: Pakistan.
339 Raja, The Retail Food Sector: Pakistan.
334
335
Page 39
traditional retail sector. Combined with the ability

to repatriate their capital, in effect these operations
are adding to Pakistans balance of payments
problems while offering little in terms of economic
development.
As discussed above, Agriculture remains a major
part of Pakistans economy accounting for 20% of
the GDP of $160.9bn in 2008 and employing 62% of
the population340. Many countries have extracted a
surplus from their agricultural sector so as to fund
early industrialisation341, but in the case of Pakistan,
this money is then held by a small elite and not
invested in domestic industry.
Agriculture
remains
dominated
by
cotton
production
which in turn
sustains
the
large textile manufacturing industry342. This is a
relatively rare case where Pakistan is successful in
converting its own primary production to domestic
secondary production (and contributes nearly 9%
to total GDP343). Pakistan expects to produce
almost 2bn tons of cotton in 2010 making it the
fifth largest producer in the world344.
Beyond this, rice and wheat remain critical food
crops for both domestic consumption and export,
however, as in India345, an enduring weakness lies in
the domestic food manufacturing sector. In effect,
most of Pakistans agricultural production is for
immediate domestic consumption or is exported in
an unrefined form. However, wheat production
has increased steadily from 14 million tons in 1990
Reuters, Land reform legislation looks set for failure.

Dalton, Economic Systems and Society: Capitalism,
340
341
Insaf Research Wing
to 24 million in 2010346 as fresh regions were

developed and more advanced agricultural practices
introduced. On the other hand, rice production
has remained relatively stable, contributing 1.6% of
GDP347 with overall production of 6 million tons of
which 2 million tons is retained for domestic
consumption348.
Issues remain around lack of investment as well as
the destruction caused by the 2009 floods 349, and
relative growth has recently stalled.
Table 10: Agricultural Production 2004-date350
Two major emerging problems are the lack of

mechanisation, thus lowering productivity and
increasing water shortages351. In an attempt to
overcome the reluctance of the landlords to invest,
the state is distributing 10,000 tractors a year at
subsidised prices. Water security is fast becoming a
major problem and this is worsened by the poor
efficiency of use of the water currently being
extracted352 with over 60% being wasted. The
result is an annual investment of around 180m
IndexMundi, Pakistan Wheat Production, 2011,

Available:
http://www.indexmundi.com/agriculture/?country=pk&com
modity=wheat&graph=production, 15 July 2011.
347 Agricultural Corner, Pakistan to export rice worth $2
billion this year, 2010, Available:
http://www.agricorner.com/pakistan-to-export-rice-worth2-billion-this-year/, 15 July 2011.
348 Agricultural Corner, Pakistan to export rice worth $2
billion this year.
346
Page 40
rupees in a variety of water management schemes

across central Pakistan353.
Broadly, the agricultural regions of Pakistan follow
the line of the Indus valley with almost no
commercial agriculture viable in the North West or
the south west of the country.
Figure 5: Agricultural regions of Pakistan354
Overall, since the 1960s agricultural production has

steadily increased, as:
353
11
354 Map accessed from the University of Texas archives
at: http://www.lib.utexas.edu/maps/pakistan.html.
Insaf Research Wing
Page 41
Table 11: Pakistan Agricultural Production 19602010355356
Year
Crop
1960
1980
2000
2010
Barley
139
118
118
265
Beef
n/a
n/a
886
1486
Corn
439
946
1643
3000
Cottonseed
1609
2137
5369
5898
Millet
306
214
199
230
Peanut Oilseed
n/a
57
91
95
Rapeseed
n/a
482
784
1464
1030
3123
4802
4700
Rice (milled)
357
Sorghum
220
230
219
145
Sugar
141
609
2595
3420
Tobacco
(cigarettes)358
9946
3500
0
4848
9
63090
Tobacco
(unmanufactured
)
8209
7
6607
5
9483
7
84420
Wheat
3909
1085
7
2107
9
23900
Given the emerging water shortage, it is not clear if

the recent production growth can be sustained
without improvements in productivity per acre and
per working hour.
IndexMundi, Pakistan Wheat Production.

All measures are 1000MT
357 Depressed by the flooding, 6800 in 2009 and 2011
358 Units of millions individual cigarettes
355
356
Insaf Research Wing
Major Economic Hubs and Centers

within the country.
Page 42
Karachi has long been a large manufacturing and

trading centre within Pakistan. More recently, it
has seen substantial Chinese investment to improve
the port and as a trading hub359.
Figure 6: Industrial and Resource Centres of

Pakistan360
In effect, industry is concentrated in the north in a

belt from Rawalpindi to Islamabad stretching to
Lahore.
As with agriculture, the Indus river
Pakistan Today, Pakistan to facilitate Chinese

investment in all sectors: PM, 9 July 2011, Available:
http://www.pakistantoday.com.pk/2011/06/pakistan-tofacilitate-chinese-investment-in-all-sectors-pm/, 9 July
2011.
360 Map accessed from the University of Texas archive at:
http://www.lib.utexas.edu/maps/middle_east_and_asia/pa
kistan_ind_1973.jpg.
359
Insaf Research Wing
effectively defines the industrial profile of the

country leaving little or no activity in the north or
south-west.
Islamabad, although notionally the capital city is an
almost purely administrative centre with limited
manufacturing industry. Instead, in the north,
industry is concentrated in the old centres of
Lahore and Rawalpindi and around the Mangla oil
and gas fields. In the south, Hyderabad remains an

important industrial centre but the region is
dominated by the port and city of Karachi.
Conclusions
Page 43
In this report, a comparative analysis of Pakistani

industrial sector has been made with three other
counties. The lack of purchasing power of
consumer discourages domestic economic activity.
Since 2001, all this has been worsened by the high
cost that Pakistan has paid for the US War on
Terror and the military activity in neighbouring
Afghanistan. Despite all this, Pakistans economic
performance is not significantly worse than that of
India. This contradicts current assumptions of
seeing the latter as an economic success361, but it
also indicates the potential strength of Pakistan.
Despite all too many assumptions to the contrary,
it is potentially a wealthy country with large mineral
reserves and a rich agricultural strip following the
line of the Indus. At the moment this wealth is
mostly lost in corruption and to elite that look
externally rather than to Pakistan as their focus.
It is suggest that Pakistan should shift its economy
in a way similar to Taiwan and Malaysia as an
exporter of primary products to becoming
manufacturing nations in its own rights. Though,
among under analysis economies, Taiwan and
Malaysia have managed this transition but the Indian
economy has failed to shed its links to primary
agriculture and a large portion of the population
living in relative poverty. What this indicates is that
the contemporary view that India is an economic
success story and Pakistan a failure is less clear cut.
In particular, in Pakistan, manufacturing actually
contributes a higher portion of GDP than in India.
Equally both Pakistan and India suffer by allowing
foreign investors to export their earnings,
something that is much harder to do in Malaysia
and Taiwan. Therefore, Pakistani ought to facilitate
and attract foreign investment in fixed assets and
projects which have long term impact on economy.
In effect, reforming the Industrial sector will lead to
reductions in poverty and to increase the welfare
and agricultural consumption. As long as the
industrial sector remains highly regressive and
mired in corruption, it will sustain poverty and in
turn restrain any economic growth. When this
scenario is added to the human and financial costs
of the War on Terror, the scope for the effective
collapse of the Pakistani state becomes all too real.
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About the Author

The author is a former investment banker. He is a
post graduate of Brunel University (London, UK).
[E-mail: asad_muk@yahoo.co.uk]
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May 01, 2012

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