1950’s Trade Policies of Pakistan

Period IIThe 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 finale of Pakistans economic history. With the help of Harvard advisors, Khan vigorously implemented the Planning Commission on Economic Management and Re fashions with stately results. 6 GDP maturation in this decade jumped to an average annual enjoin of 6 percent from 3 percent in the 1950s. The manufacturing sector spread out by 9 percent annually and different new industries were set up. gardening grew at a respectable rate of 4 percent with the approach of Green Revolution technology. Governance improved with a major expansion in the governments capacity for polity analysis, design and implementation, as closely as the far-reaching process of institution building. 7 The Pakistani polity evolved from what governmental scientists called a soft state to a developmental one that had acquired the sem blance of political legitimacy The Flat Fifties, 1947 to 1958The 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 down in the mouth 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 egest in per capita consumption of food grain and theneed to minute food as head.A stagnant agriculture in a predominantlyagricultural economy meant a slowly growing economy. The major impact ofeconomic 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 indu stries 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 write up 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 marge 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 about product lines, a far less significant element in overall protection than the licensing of imports. The structure of nominal and effective tariff protection, therefore, provides littl e 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 importers cost-was 67 percent. Lewis withal found that, for his sample, nominal rates of protection across the deuce-ace major subcategories of manufacturing- consumer,The Export Bonus Voucher system During the 1950s it became clear that exporters were caught in a continually worsening cost-price squeeze. The maintenance of an overvalued give-and-take 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 distant exchange became scarce and the scarcity aid on imported raw materials rose. To offset this disadvantage, the export bonus voucher intent was introduced in 1959.For every Rs 100 of unlike exchange earned, the exporter received a voucher f or either Rs 20 or Rs 40, depending on the type of product, that effectively became a license to import goods up to the show 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 apply 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 interchange 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 lineage 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 straightforward amount. For the exporter, the bonus voucher plan 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 r anged, therefore, from Rs 4. 76 to Rs 7. 61 (Rs 4. 76 + 1. 5 x 0. 4 x Rs 4. 76). INDUSTRIALIZATION Ayub Khans era is known for the industrialization in the country.The new regime of Ayub Khandisbanded many of the controls that had been compel 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 chart of the country started rising. In 1959 there was afundamental reordering and change in the method of directing industrialization through tradepolicy and a series of cock-a-hoop 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 importliberal ization process in Pakistan. The scheme allowed a free market in the bonus vouchers forcertain commodities. The Export Bonus Vouchers Scheme (1959) and tax incentives 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 syllabus of small industrialists. In addition the earlier closed and selective import licensing scheme of the 1950s, which wasbased on the importers ability to importduring the Korean boom of 1950-2, was replaced in 1961 historic 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 light 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 earlier 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 joined to the availability of foreign aid, which increased from 2. 5percent 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(p) 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 lowprices for agricultural inputs, while EBS transferred subsidies to manufactured exports. Due toEBS and import licensing and liberalization strategy large manufacturing increased from8% per annum between 1955 and 1960 to 17% between 1960 an 1965 in the second five yearplan the controls reimposed following the foreign exchange and aid curtailment cause d 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. Pakistans growth rate of 5. 065 was far higher than many comparable countries, indicating bothtechnological dynamism and dynamic allocative efficiency in a comparative perspective