1950’s Trade Policies of Pakistan

Period II:  The Golden Sixties, 1958 to 19695 Ayub Khan, the first military dictator of Pakistan, assumed complete control of the state in October 1958 and reigned over the golden period of Pakistan’s economic history. With the help of Harvard advisors, Khan vigorously implemented the Planning Commission on Economic Management and Reforms with impressive results. 6 GDP growth in this decade jumped to an average annual rate of 6 percent from 3 percent in the 1950s. The manufacturing sector expanded by 9 percent annually and various new industries were set up. Agriculture grew at a respectable rate of 4 percent with the introduction of Green Revolution technology. Governance improved with a major expansion in the government’s capacity for policy analysis, design and implementation, as well as the far-reaching process of institution building. 7 The Pakistani polity evolved from what political scientists called a â€Å"soft state† to a â€Å"developmental† one that had acquired the semblance of political legitimacy The Flat Fifties, 1947 to 1958 The main features of the 1950s was the establishment and expansion of thelarge scale manufacturing sector, which ranged from a high annual growthrate of 28. 7% in 1953/4 to a low 4. 9% in 1957/8. With industry growing athigh rates, there was reverse picture in the agriculture sector, which onlyonce in this period achieved double digit growth rates. Agriculture stagnated to the extent that its growth was not even enough to cope with the growth inpopulation, resulting in a fall in per capita consumption of food grain and theneed to import food as well. A stagnant agriculture in a predominantlyagricultural economy meant a slowly growing economy. The major impact of  economic policy in the 1950s was to transfer income away from agricultureand from urban consumers and to the new and rapidly growingmanufacturing sector 7. 2. 1 The Trade Regime: 1950-60 The major instrument of protection to import-substituting industries during the 1950-60 period was the system of import licensing. The value of import licenses issued and the distribution of these licenses across import categories were determined by the chief comptroller of imports and exports. Both the level and the product composition of import licenses changed from year to year, but in all years demand for imports exceeded the controlled supply, creating a gap between importers’ costs (c. i. f. prices plus duties and sales taxes) and market prices. The margin above importers’ costs represented a windfall profit for those fortunate enough to have the import licenses. Also, domestic manufacturing firms were able to sell their products at prices well above importers’ costs because of the scarcity markups created by restrictive licensing. Tariff protection was, in most product lines, a far less significant factor in overall protection than the licensing of imports. The structure of nominal and effective tariff protection, therefore, provides little indication of the production incentives created by the trade-control system during this period. A study by Lewis (1970, p. 69) suggests that the scarcity markup-the percentage increase of the wholesale price above the importer’s cost-was 67 percent. Lewis also found that, for his sample, nominal rates of protection across the three major subcategories of manufacturing- consumer, The Export Bonus Voucher Scheme During the 1950s it became clear that exporters were caught in a continually worsening cost-price squeeze. The maintenance of an overvalued exchange rate through restrictive import controls implied (1 ) a constant rupee return per dollar of goods exported; but (2) production costs that had a tendency to escalate when foreign exchange became scarce and the scarcity premium on imported raw materials rose. To offset this disadvantage, the export bonus voucher scheme was introduced in 1959. For every Rs 100 of foreign exchange earned, the exporter received a voucher for either Rs 20 or Rs 40, depending on the type of product, that effectively became a license to import goods up to the face value of the voucher. The bonus vouchers were licenses to import only goods from a list of importable items, but the list was quite broad and encompassed consumer, intermediate, and investment goods. Exporters had considerable freedom in deploying their vouchers. They could be used to import raw materials for processing into export or import-competing goods. They could be used for personal imports of luxury items, such as automobiles. Or they could be sold on the open market, commanding a price well in excess of their face value. This latter alternative was extremely popular, and bonus vouchers were traded on the Karachi stock exchange with the premium-that is, the price expressed as a percentage of its face value-quoted daily. Importers purchasing the vouchers could then import any item on the bonus list. If the premium was 150 percent and the c. i. f. value of the imported item was $1, or Rs 4. 6 at the official rate of exchange, and the duty 50 percent, the total cost to the importer was: Rs 4. 76 + 1. 5 (Rs 4. 76) + 0. 5 (Rs. 4. 76) = Rs 14. 28. Since many items were purchased with bonus voucher premiums and customs duties of these same levels, it is clear that the marginal EER for exports exceeded the official exchange rate by a substantial amount. For the exporter, the bonus voucher scheme offered a differentiated and variable EER. Agricultural goods carried a bonus rate-the share of foreign exchange earned returned in the form of vouchers-of zero while manufactured goods carried rates . f 20 or 40 percent initially. The bonus rate structure, the number of rate categories, and the commodities assigned to the various categories were changed from time to time. Also, the premium fluctuated between 100 and 200 percent, though an attempt was made to stabilize the bonus premium at about 150 per cent. The EER for exports ranged, therefore, from Rs 4. 76 to Rs 7. 61 (Rs 4. 76 + 1. 5 x 0. 4 x Rs 4. 76). INDUSTRIALIZATION: Ayub Khan's era is known for the industrialization in the country. The new regime of Ayub Khandisbanded many of the controls that had been imposed following the post-korean war recessionin 1952. He created an environment where the private sector was encouraged to establishmedium and small-scale industries in Pakistan. This opened up avenues for new jobopportunities and thus the economic graph of the country started rising. In 1959 there was afundamental reordering and change in the method of directing industrialization through trade  policy and a series of liberal policies were introduced which remained in effect till 1965. Themain emphasis of the new rade policy in 1959 shifted away from direst controls and towardsindirest controls on imports, and on domestic prices of other goods. It was the export bonus scheme launched in 1959 that was considered to be the key to the importliberalization process in Pakistan. The scheme allowed a free market in the bonus vouchers for  certain commodities. The Export Bonus Vouchers Scheme (1959) and tax incenti ves stimulatednew industrial entrepreneurs and exporters. Bonus vouchers facilitated access to foreignexchange for imports of industrial machinery and raw materials. Tax concessions were offeredfor investment in less-developed areas. These measures had important consequences in bringingindustry to Punjab and gave rise to a new class of small industrialists. In addition the earlier closed and selective import licensing scheme of the 1950s, which was  based on the importers ability to importduring the Korean boom of 1950-2, was replaced in 1961 HISTORICAL DEVELOPMENT PAKISTANECONOMICPOLICY by the open General license(OGL), which allowed newcomers to enter the trading sector. Thenew traders made substantial profits and gains from processing import licenses. The most marketfriendly change was the introduction of the Free List†, which permitted the import of certaingoods without any license. The free List was extended over time from 4 items to 50 in 1964. Thetariff structure continued to be used as a signaling device, as it had been in the 1950s. the biasagainst producing machinery and equipment locally continued, as the import duty on these itemswas still the lowest, thus making it easier to import these goods rather than produce them athome. The main reason why the government could be so generous in its import policy in the firsthalf of 1960s was critically linked to the availability of foreign aid, which increased from 2. 5  percent of GNP in mid 1950s to 7 percent of GNP in mid 1960s. In 1965 the Free List suffered serious setbacks as foreign aid was curtailed, and due to theresulting foreign exchange squeeze, the import liberalization policies were abandoned and manynew import controls were introduced. The governments import licensing scheme was to suppose to encourage the private sector toinvest, just as the EBS was a means for exporters to acquire additional foreign exchange byexporting more. The exchange rate had been over valued in the 1950s, but the EBS compensatedfor that and boosted exports, especially of manufactured goods. The scheme transferred asubsidy to exports, and the export of raw jute fell from 60 percent of total exports in 1958 to 20%in 1968, while exports of cotton and jute textiles increased from 8. 3% to 35% in this period, andexports of other manufacturers increased tenfold from 2 to 20 %. The EBS also had a positiveimpact on imports making raw materials and machinery easier and cheaper. This resulted in low  prices for agricultural inputs, while EBS transferred subsidies to manufactured exports. Due toEBS and import licensing and liberalization strategy large-scale manufacturing increased from8% per annum between 1955 and 1960 to 17% between 1960 an 1965 in the second five year  Ã‚  plan the controls reimposed following the foreign exchange and aid curtailment caused thisgrowth to fall to about 10% in the second half of the 1960s. None of the growth in industry during the period of second five year plan was due to the importsubstitution, instead domestic demand and absorption rate were the dominant factors. As foreignaid had increased so had imports and even though manufacturing output grew to impressive ratesdue to the import policies and foreign resources, imports increased at a faster pace. Growth ininvestment goods was by far the fastest of all sectors during the early 1960s.. he reasonaccording to Asian bank was that since this sector was most dependent on imported rawmaterials, it benefitted most from import liberalization. Another reason why import substitutionslowed down was the EBS, which encouraged the export of manufactured goods. Pakistan’s growth rate of 5. 065 was far higher than many comparable countries, indicating bothtechnological dynamism and dynamic allocative efficiency in a comparative perspective