AN EMPIRICAL ANALYSIS OFEXPORT PROMOTION IN PAKISTAN, 1959-77byKHAYRAT MOHAMMADPh.D.Department of Economics,University of Edinburgh,November 1980TOMONII declare that the work in this thesis has been composedby myself.I wish to express my sincere gratitude to my twosupervisors, Professor J.N.Wolfe and Dr. Gavin C. Reid,who have generously given me the benefit of their time,advice and encouragement in the writing of this thesis.I am thankful to Mr. C.J.Roberts, Mr. L.Oxley and othermembers of staff and friends for their helpful suggestionsand constructive criticism on many matters - both generaland specific. Thanks are also due to Mr. R. E. Day forhis assistance and advice on computational matters, and tothe Edinburgh Regional Computing Centre for the computingfacilities provided to me. I am grateful to the staff ofthe Edinburgh University Library, particularly of theInter-Library Loan Service, for getting me essentialmaterials from outside Edinburgh. I also owe thanks toMrs. Finlay and Miss Bentley for their cordiality, and forthe correspondence they have undertaken on my behalf. Myspecial thanks are due to Mrs. Collier for her experttyping of this thesis. The award of a Scholarship by theGovernment of Pakistan, which made my research possible,is gratefully acknowledged. Finally, even though I alreadyowe so much and am thankful to Fatima, my wife, in manyaspects of my life, I wish to record my deepest thanks forher patient endurance of hours of loneliness and herunending encouragement throughout the preparation of thisthesis.Edinburgh, November 1980. K.M.abstractThe present study provides an empirical analysis ofexport promotion in Pakistan over the period 1959-60 to1976-77, developing and extending the methods used forother countries by the NBER. The Export Bonus Scheme andthe Export Performance Licensing Scheme are discussed inrespect of their institutional framework, rate structure,scope and coverage, premia and other important features.The rebates of import duties paid on inputs used in theproduction of exports and the exemption of exports fromindirect taxes are also discussed. The Effective ExchangeRates (EERs) for exports taking into account the export sub¬sidies involved in these Schemes and the export taxes whereapplicable, are calculated for a large number of commoditygroups as well as for the manufacturing and primary sectors.Both nominal and real EERs are examined in detail. Theextent of discrimination against the exports of the primarysector implied by the lower EERs afforded to them is deter¬mined, and its effects on the growth of the economy and onexport performance are outlined. It is found that this dis¬crimination has fallen, on average, by about 23 per centduring the period after the devaluation of 1972 comparedwith that during the pre-devaluation period. The price-level-deflated-EERs (PLD-EERs) in Pakistan are compared withthe PLD-EERs in some other developing countries for the period1960-61 to 1970-71.A statistical analysis of the exports of the manufac¬turing and primary sectors as well as of a wide range ofcommodity groups is undertaken to determine the relationshipbetween export performance and the EERs. On the premise ofthe relative unimportance of Pakistan's exports in totalworld exports, a single-equation model is estimated. Thepartial adjustment model is also estimated to take accountof the lag structure. It is found that the EERs have beena significant determinant of exports, particularly of manu¬factures, from Pakistan during the period studied. Moreover,during this period, the growth of the manufacturing sectorhas been export-biased, while the growth of the primarysector has been biased against exports.- ii -TABLE OF CONTENTSACKNOWLEDGEMENTSABSTRACTPage No.iiiCHAPTERI INTRODUCTION 1II THE ECONOMY OF PAKISTAN AND ITS GROWTH. 52.1 Major Structural Changes in theEconomy of Pakistan 1949-50 to1978-79. 52.2 Investment and Savings. 182.3 Balance of Payments. 202.3.1 Merchandise account. 262.3.2 Invisible account. 272.3.3 Capital Account. 292.4 External Finance in Development Plans. 302.4.1 Debt servicing. 352.5 The Need to Expand Exports. 382.6 Behaviour and Structure of Exports. 422.6.1 Composition of exports. 452.6.2 Geographic distributionof exports. 49III EVOLUTION AND STRUCTURE OF PROTECTIONIN PAKISTAN. 553.1 Free Trade vs. Protection. 563.1.1 The infant-industry argument. 573.1.2 Arguments arising from imper¬fections in wage structure. 633.1.3 Protection and economic growth. 673.1.4 Some other arguments. 713.2 Evolution of Pakistan's CommercialPolicy. 733.2.1 Foreign exchange budget. 783.2.2 Import licensing. 793.2.3 Tariff policy. 853.3 The Structure of Protection. 86CHAPTER Page No.IV EXPORT PROMOTION SCHEMES OF PAKISTAN 924.1 Export Promotion Attempts Before 1959. 974.2 Export Incentives Since 1959 - ExportBonus Scheme. 994.2.1 Rate structure. 1014.2.2 Coverage. 1044.2.3 Some other features of the Scheme. 1074.3 Export Performance Licensing Scheme. 1134.3.1 Evolution of the scheme. 1144.3.2 Scope and coverage. 1164.3.3 Rate structure. 1174.3.4 Some other aspects. 1194.4 Tax Exemptions and Tax Rebates. 122V THE EFFECTIVE EXCHANGE RATES FOR EXPORTS. 1265.1 Data and Sources. 1275.2 The Estimates of the EERs. 1365.3 The EERs for Primary vs. ManufacturedExports. 1455.4 The Real Effective Exchange Rates. 1525.5 Comparison with Some Other Countries. 167VI THE RESPONSE OF EXPORTS TO THE EERs. 1706.1 Variables in a Trade Model and theAnalytical Framework. 1706.2 Functional Form of the Model 1796.3 Some Statistical Problems. 183(1) Identification of the relation. 183(2) Shifts in the function. 1856.4 Estimation Results. 1876.4.1 Regression results formanufactured exports. 1896.4.2 Regression results forprimary exports. 1986.4.3 Regression results for'disaggregated' exports. 203CHAPTER Page No.VII SUMMARY AND CONCLUSIONS. 219APPENDICES.A: Exports of Commodities from Pakistan(value in thousand Rupees) (a-k) 227-237B: List of Items with Bonus RatesAdmissible Under the Export BonusScheme. 240-252C: (i) List of Industries with 100%of FOB value of exports addi¬tional licensing under the ExportPerformance Licensing Scheme.(January - June 1962 Import Policy) 254(ii) List of Industries with percen¬tages of additional licensingunder the Export PerformanceLicensing Scheme.(July - December 1964 Import Policy) 255D: (i) Weighted bonus rates as percen¬tage of FOB value of exportsapplicable to commodities at PSTC3-digit level under the ExportBonus Scheme. 258-261(ii) Weighted performance licensingrates as percentage of FOB valueof exports applicable to commodi¬ties at PSTC 3-digit level underthe Export Performance LicensingScheme. 263-265(iii) Weighted export duty rates aspercentage of FOB value ofexports applicable to commoditiesat PSTC 3-digit level, followed 267-268by Weighted Sales Tax.REFERENCES. 269LIST OF TABLESTable Page No.2.1 Distribution of GNP at Constant FactorCost of 1959-60 (Million Rs) 72.2 Annual Compound Growth Rates of GNP andDifferent Sectors (Percentage). 82.3 Summary sources ofoutput Growth by Sub-Groups of Industries (Percentage). 162.4 Investment and Savings as Percentage ofGNP. 182.5 Balance of Payments Position in Pakistan(Million U.S. $). 22-252.6 Value of Commodity Imports & Exports(Million Rupees). 262.7 Indices of Unit Value of Imports & Exportsand Terms of Trade. 282.8 Total Capital Inflow (Million US $)1955-78. 292.9 The Role of Foreign Assistance (percentage) 322.10 Commitments of External Assistance(Millions U.S. $). 342.11 Debt Service Ratio. 362.12 Value of Exports in Some Selected yearsand the rates of Growth of Exports. 422.13 Pakistan's Exports as a Share of GDPand World Exports. 442.14 Economic Classification of Exports. 462.15 Percentage Shares of Some Commodities inTotal Export Earnings. 482.16 Geographic Distribution of Pakistan'sExports (Value in Million Rs. andPercentages of Total Exports). 50-53Table Page No.3.1 The Composition of Indo-Pakistan Tradein 1949 (Value in Million Rs). 753.2 Average Rate of Import Duty by Typesof Commodity (1955/56 - 1965/66) 873.3 Average Level of Tariff on Major Groupsof Manufacturing Industries (1954-55 and1963-64). 893.4 Average Percentage Mark-ups on ImportedCommodities in Pakistan. 914.1 Percentage Share of Bonus Exports inTotal Exports. 1064.2 Annual Averages of Month-end PremiumQuotations on Bonus Vouchers. 1124.3 Industries Receiving Special LicensingTreatment during 1961. 1154.4 Share of Exports Associated with the EPLScheme (Percentage). 1185.1 Ratio of Commodities Studied to TotalExports . (Percent ages).. 1305.2 Estimates of the Commodity-Specific EERsfor the period 1959-60 to 1976-77 (Rs perdollar). 139-1425.3 Percentage Increase in EERs over 1960-61and the Distribution of Exports Benefittingfrom that Increase. 1445.4 The EERs for Primary vs. ManufacturedExports (Rs. per $). 1475.5 Indices of the EERs for the Primary andthe Manufactured Exports (1960-61=100). 1495.6 Indices of Domestic and Foreign Prices(1960-61 = 100). 155-1565.7A1 Nominal vs. Real EERs for PrimaryExports (Rs. per U.S.$). 158Table Page No.5.7 A2 Nominal vs. Real EERs for ManufacturedExports (Rs per US $). 1595.7 B1 Indices of Nominal and Real EERs forPrimary Exports (1960-61 = 100). 1605.7 B2 Indices of Nominal and Real EERs forManufactured Exports (1960-61 = 100). 1615.8 Indices of PLD-EERs for Non-TraditionalExports in Some Developing Countries.(1960-61 = 100). 1686.1 Regression Results for Pakistan'sManufactured Exports (1960-61 to 1976-77) 1906.2 Regression Results of Pakistan'sManufactured Exports 1961-62 to 1976-77) 1976.3 Regression Results for Pakistan'sPrimary Exports (1960-61 to 1976-77) 1996.4 Regression Results on some 'Disaggregated'at 3-digit level commodity exports fromPakistan (1960-61 to 1976-77) 205-2086.5 Production, acreage and yield per acreof cotton compared with some other crops. 212-213DIAGRAMSNumber. Page No.3.1 Short-run vs. Long-run Effectsof Protection on Welfare. 613.2 Effects of Changes in Relativeprices on Investment and Consumption. 696.1 Equilibrium Conditions of a ProducerSelling in the Domestic and ForeignMarkets. 177CHAPTER IIntroductionPakistan ^ like many other developing countries haspursued a policy of export promotion since the late fifties.This was done within the context of an over-valued officialrate of exchange. Various export promotion schemes such asthe Export Bonus Scheme, the Export Performance LicensingScheme and a number of other monetary and fiscal incentiveswere adopted in order to promote exports from the country.As a result, Pakistan's exports have increased at an annualrate of about 15.5 per cent during the period of 1960-61 to(2)1977-78 v (though substantial year-to-year variations in therate of growth of exports were also observable during thisperiod). These schemes, in essence, provided a mechanismthrough which the domestic currency earnings of exporters(especially of manufactured commodities) could be enhanced atan unchanged official rate of exchange, and the exporterscould be compensated for the high costs of production ofexportables incurred by them due to protection. The generalaim of the present study is to evaluate the effectiveness ofthese schemes in expanding exports from the country duringthe period 1959-60 to 1976-77. Some other effects of theschemes like sectoral discrimination and its impact on theeconomy and on export performance will also be examined. Morespecifically, the purpose of the study is:-(i) to describe and analyse the main features of the exportpromotion schemes of Pakistan, and the export duties,sales tax etc., where applicable;(ii) to express incentives (or disincentives) involved inthese schemes quantitatively in a measure of theEffective Exchange Rate (EER), and to analyse thebehaviour of the nominal, as well as the real EERs;(1) Pakistan in this study refers to former West Pakistan only.(2) Pakistan's Trade/Fiscal/Agriculture Year is from July 1st to June30th. For example, the year 1960-61 means from July 1st 1960 toJune 30th 1961.- 1 -iii) to determine quantitatively the responsiveness ofexports of the Manufacturing and Primary sectors aswell as for some disaggregated commodities to EERsor a relative price index.From the very beginning, the export promotion schemesof Pakistan, especially the Export Bonus Scheme, haveattracted the attention of economists. Bruton and Bose(1963), Hussain (1964), Ahmad (1966),- Mallon 1966), Soligoand Stern (1966), Islam (1968, 1969), Hecox (1969,1970),Hufbauer (1971), Husain (1974) and Guisinger (1977) have allexamined one or other aspect of the schemes. Bruton and Bose(1963) investigated the 'net' effects of the Export BonusScheme on increasing the export earnings from some majorcommodities for the three-year period of 1959 through 1961.They concluded that the scheme had resulted in a significantincrease in Pakistan's foreign-exchange earnings over thethree-year period. Ahmad (1966) extended their study in res¬pect of cotton and cotton manufactures to the period of1964. Mallon (1966) considered the relative advantages ofexporting raw cotton as compared with exporting its manu¬factures. He concluded that in 1959-60 the price situation inthe foreign market for raw cotton was such that foreign-exchange earnings would have been higher from exporting rawcotton than they were from exporting cotton yarn. The reasonfor that was said to be a relatively low value-added in theproduction of yarn and a relatively high (20%) bonus on theexport of yarn during that year. In the mid-sixties, it wasalleged that the export promotion system of Pakistan couldresult in a loss of foreign exchange in a much more directsense. It was conjectured that the foreign exchange paid onthe total imported inputs embodied in exported goods couldexceed the foreign exchange earnings from them, while theexporter could still make profit in domestic currency.Soligo and Stern (1966), Islam (1968) and Hecox (1969) inves¬tigated this hypothesis. They concluded that it was unfounded,and among the industries studied, they found no industry whichhad a negative net foreign exchange earning. All these studieswere short-run in character.- 2 -The analysis of Pakistan's export promotion schemesover time has been relatively limited. Hus:-ain (1974)has investigated the response of exports to the EERs for alimited number of commodities during the period of 1959-60to 1967-68. The calculation of the EERs in his studyincluded only the Export Bonus Scheme. Since other exportpromotional schemes were also operating during the period,the EERs taking into account only the Export Bonus Scheme, wouldbe an under-estimate of the true EERs. This, in turn, wouldover-estimate the response of exports. The NBER project'Foreign Trade Regimes and Economic Development' co-directedby Professors Bhagwati and Krueger had included Pakistanamong the project countries. Due to the events of 1971 (i.e.the separation of former East Pakistan from the rest of thecountry), the study on Pakistan was not carried through. Thepresent study, which accepts the framework established by theNBER as a starting point, may, therefore, be regarded ascorrecting this omission. Two qualifications should be madeto this:-Firstly, this being a one-man study rather than a team study,as in the NBER case, it concentrates on one aspect, namelythe calculation of the EERs and the responsiveness of exportsto the EERs.Secondly, in view of the events of 1971, the study concentratesonly on what was formerly West Pakistan (now the IslamicRepublic of Pakistan).Although the present study draws upon the concepts andmethods of the NBER project, it is hoped that the way inwhich it adapts and extends them to the unique situation ofPakistan will provide material which might be of interest toscholars currently active in this field, and will make avail¬able empirical estimates which might be useful to policy¬makers. The study goes beyond the NBER methods in that itdeals with two schemes, that is, the Export Bonus Scheme andthe Export Performance Licensing Scheme, which were unique toPakistani economy. The computation of the EERs in thepresent study involves not only the fiscal incentives, but italso involves these two schemes. Furthermore, at present the- 3 -work on this area in Pakistan is limited, both in extentand scope. The present study examines almost all the impor¬tant export promotion schemes for about 27 commodity groupsand covers the period from 1959-60 to 1976-77. The exportscovered in the study have ranged from about 69 to 88 percent of the total exports of Pakistan in different years,and have included important primary commodities, raw mater¬ials and manufactured commodities. Thus, the present studyis considerably broader in scope, and considerably extends(both in terms of commodities and time-period covered) theexisting body of analysis.The scheme of the study, in brief, is as follows:-Chapters 2 and 3 provide the necessary background tothe remainder of the thesis. Chapter 2 considers the generalfeatures of the growth of the Pakistan economy for the periodof 1949-50 to 1978-79. This chapter begins with discussingthe major structural changes in the economy during thisperiod, which is followed by a detailed examination of theproblem of balance of payments and the problem of debtservicing in Pakistan. After that, main features of Pakistan'scommodity exports such as their composition, growth ratesand geographic distribution etc. are discussed. In Chapter 3the focus is narrowed and the evolution of the protectivestructure of the Pakistan economy is examined. In Chapter4, measures taken by the Government to overcome some of theeffects of protection, in particular those concerned withexport promotion, are discussed. The institutional frame¬work, rate structure and scope and coverage etc. of the ExportBonus Scheme and the Export Performance Licensing Scheme aswell as the fiscal incentives given to exporters are dis¬cussed in Chapter 4. To express the export promotion schemesquantitatively, Chapter 5 undertakes the calculations neces¬sary for determing the EERs and presents a detailed analysisof the EERs. In Chapter 6 a statistical analysis is under¬taken of the relationship between the EERs and the exports ofa wide range of commodity groups over the period of 1960-61 to1976-77. Finally, Chapter 7 concludes the study by giving asummary of main findings of the preceding chapters._ 4 _CHAPTER IITHE ECONOMY OF PAKISTAN AND ITS GROWTH.The importance and achievement of any economic policyis determined by the overall picture of a developing economy.It is easier to focus on the specific problem at hand, oncethis broader context is summarised and the specific problemis put in proper perspective. The perspective would contri¬bute to a better understanding and appreciation of the problem.The primary purpose of this study is to evaluate the exportpromotion schemes of Pakistan and their role in achievingthe expansion of exports from the country. It is, therefore,useful to review the actual growth experience of the economyfrom 1949 - 50 to 1978 - 79. This will provide a foundationupon which the discussion of specific aspects of exportpromotional policies can be carried out.2.1 Major Structural Changes in the Economy of Pakistan1949 - 50 to 1978 - 79.At the time of Independence in 1947, the economy ofPakistan was primarily agricultural; agriculture contributingnearly 60 per cent to G.N.P., 75 per cent to employment and90 per cent to foreign exchange earnings.* * Pakistan hadalmost no known natural resources except agricultural landand practically no industry. Her manufacturing capacity waslimited to a few textile mills, cement factories and an oilrefinery. The reasons for this relative backwardness of themanufacturing sector go back into the past century. Theyinclude the lack of conditions necessary for the developmentof industry in the areas now in Pakistan, like lack of coal,iron and other minerals, lack of developed port facilities,lack of entrepreneurial class etc., and perhaps some elementof official neglect, because the then government policy wascontent to develop these areas as a supplier of agricultural(2)products and a recruiting ground for the armed forces.(1) The First Five Year Plan. p.213.(2) For details see Andrus & Mohammad (1958). pp.166-169.- 5 -Since then, major structural changes have taken placein the economy of Pakistan which can be seen from Table 2.1.Data on GNP at constant factor costs in Table 2.1 giveclear evidence of the changes in the composition of GNP, whichhave characterised the Pakistan economy. The agriculturalsector which contributed more than 50 per cent to GNP in 1949-50 has shrunken to about 30 per cent in 1978-79. This isbecause other sectors of the economy have grown relativelyfaster than agriculture. The manufacturing sector has almostdoubled its share from 7.8% to about 15% of the GNP during thesame period. Notable in this sector has been the growth of/ 3 \large-scale manufacturing, which increased its share from2.2 per cent of GNP in 1949-50 to 12.5 per cent of GNP in1969-70, although it decreased somewhat in later years. Theannual compound growth rates of different sectors, GNP andincome per capita are given in Table 2.2.It can be seen from Table 2.2 that over the entireperiod from 1949-50 to 1978-79 the GNP increased at an annualcompound rate of 4.95 per cent and the per capita incomerose at an annual rate of 2.13 per cent in real terms.However, during this period, there have been substantialvariations in the growth rates. In the 1950's, GNP increasedat a low rate of 3.1 per cent per annum. The high rate ofpopulation growth swallowed almost all of this increase andthere was hardly any rise in per capita income. The rateof increase, and to some extent the pattern of growth, changedaround 1959-60. During the 1960's the rate of increase ofGNP averaged around 6.8 per cent per annum, which was signifi¬cantly higher than the rate of population growth. As a resultper capita income increased at the rate of about 3.8 percent annually. The 1970's again witnessed a down-turn inthe growth rates. Whereas the major growth impetus in the1950's came from the rapidly growing industrial sector, since1959-60 both agriculture and industry have contributed todevelopment.During the 1950's, the agricultural sector grew veryslowly - at a rate below that of the population. The reasons(3) Large-scale manufacturing covers all factories and plantsemploying twenty or more persons and using power.- 6 -TABLE2.1:DistributionofGNPatConstantFac orst1959-60(MilliR .) Year Sector1949-501954-551959-601964-651969-701974-751978-79 (provisional)(1)Agriculture6595694877119276125741307414948(53.27)(48.04)(45.89)(39.81)(38.88)(32.97)(29.72)(2)Manufacturing961156920183514518661367160(7.76)(10.85)(12.01)(15.08)(16.04)(15.48)(14.23)(a)Large-scale27780211592523404245095003(2.24)(5.54)(6.90)(10.83)(12.50)(11.37)(9.95)(b)Small-scale684767859991114416272157(5.5?)(5.30)(5.11)(4.25)(3.54)(4.10)(4.29)(3)Mining&quarrying274570122157181217(0.22)(0.31)(0.42)(0.52)(0.49)(0.46)(0.43)(4)Construction1792834271029135717542452(1.45)(1.96)(2.54)(4.42)(4.20)(4.42)(4.87)(5)Electricity&Gas2737871726399491346(0.22)(0.25)(0.52)(0.74)(1.98)(2.39)(2.68)(6)Allothers,n.e.s.4591558264909186124251755724181(37.08)(38.59)(38.62)(39.43)(38.42)(44.28)(48.07)GNP12380144641680323299323383965150304Population(Millions)35.3139.8745.0351.7659.7069.2177.90Percapitain ome(Rs)351363373450542573646Figuresinparenth sespercentagesharofeachctorGNP.SOURCE:PakistanEconomicurvey(1978-79)t tisticalectionT bleN .2.1pp.9-11.TABLE2.2:AnnualCompoundGrowthRatesfGNPnDifferentSectors(P rnt). Period Sector—1949-50 to 1954-551954-55 to 1959-601959-60 to 1964-651964-65 to 1969-701969-70 to 1974-751974-75 to 1978-791949-50 to 1959-60195*9-^0 to 196^-701969-70 to 1978-791959-60 to 1978-791949-50 to 1978-79(1)Agriculture1.052.113.776.270.783.411.585.011.943.552.86(2)Manufacturing10.305.1611.738.093.423.937.709.903.656.897.17(a)Large-scale23.697.6416.839.882.212.6315.3913.312.408.0010.49(b)Small-scale2.322.292.902.917.307.302.302.917.304.974.04(3)Mining&quarrying10.769.2411.755.172.894.649.998.413.666.147.45(4)Construction9.598.5819.235.695.278.749.0812.266.799.649.45(5)Electricity&Gas6.5018.6514.6130.028.239.1312.4122.078.6315.5114.43(6)Allother,n.e.s.3.993.067.196.237.168.333.526.717.687.175.90GNP3.163.046.766.784.166.133.106.775.035.944.95Population2.462.462.832.893.003.002.462.863.002.932.77Percapitain ome0.680.553.833.791.123.040.613.811.972.932.13SOURCE:ComputedfromdatainT ble2.1,usingco poundinterestf r la(i. .=R(l+i)t)for that perhaps were reliance on age-old agriculturaltechnology and acceptance of constraints on key agricul¬tural inputs such as fertilizer and water. During the1960's, the situation changed dramatically and the rateof agricultural growth roughly tripled. This change duringthe 1960's, as argued by Stern and Falcon (1970) came primar¬ily from a strategy involving the following assumptions:-(a) that the farmers would respond to economic stimuli;(b) that one of the most important actions that governmentcould take would be to create a favourable economicclimate for the farmers;(c) that sound economic policy would be fruitless unlessmajor efforts were made to supply modern agriculturalinputs at the right place and time.In implementing this incentive/technology strategy, a numberof policy decisions were significant. Major subsidies wereprovided for fertilizer and plant protection materials. Totake the case of fertilizer, the subsidy averaged about 50per cent for much of the early 1960's. The situation hasnot changed much since then. The government have all alongbeen subsidizing the sale of fertilizers. In addition,irrigation and use of improved seed were also responsible foragricultural break-through. The surge in private tube-welldevelopment was indeed one of the most spectacular elements in( 4)Pakistan's agricultural modernization. The governmenthave been providing large amounts of subsidy for encouragingthe installation of private tube-wells. The tube-wellsexpanded irrigation water supplies and permitted highercropping intensities, greater flexibility with regard to cropsthat could be grown and higher yields per acre.(4) Annual rate of installation of private tube-wells in Pakistanin some selected years.Year. Tube-wells1. 1959 - 602. 1963 - 643. 1968 - 694. 1973 - 745. 1978 - 79130066009500103639320SOURCE: For 1,2,3 Stern & Falcon (1970) p.42.For 4,5 Pakistan Economic Survey (1978-79)Statistical Table 3.7, p.33.- 9 -In the mid-sixties wheat-seed developments in Mexicoand rice-seed improvements at the International Rice ResearchInstitute (IRRI) in the Phillipines provided the means toincrease food production in Pakistan. Since then, rathersuccessful efforts have been made to bring more and moreareas under high yielding varieties of seed. Starting with12,000 acres under high yielding varieties of wheat seedin 1965-66, the area under these varieties had reachedmore than 11 million acres in 1977-78. Starting a yearlater, the situation for rice has been roughly similar.Due to these developments Pakistan in 1968-69, founditself in a new situation. The problems of deficits hadgiven way to surpluses in food grains. However, thissuccess story could not be carried on into the 1970's.There had been a serious set-back to agriculture in theearly 1970's. Short-fall in investment in the economy coupledwith a series of bad weather years slowed down the agricul¬tural growth rate. After the severe droughts of a number ofyears, 1973-74 was marred by the worst floods in the historyof the country. The growth rate of agriculture during 1969-70 to 1974-75 had been less than 1 per cent, which afterstrenuous efforts of the government, picked up somewhat inlater years to become 3.4 per cent per annum during 1974-75to 1978-79.The process of industrialization started from a verylow base, but has shown a remarkably high rate of growthof more than 10 per cent per annum for the large-scale manu¬facturing sector during the period 1949-50 to 1978-79.This rate of increase has not remained steady over time, buthas shown considerable variations during different sub-periods.The highest growth rate of 23.7% was observed during theearly fifties, which slowed down in the latter half of thefifties. During 1959-60 to 1964-65 it accelerated to 16.8%per annum, but declined again to 9.9 per cent in the secondhalf of the sixties. Finally, after 1969-70 the rate of growth(5) We concentrate on the discussion of large-scale manufacturingsector instead of the manufacturing sector including both largeand small scale, because growth rates of the small scale manu¬facturing sector, as reported in the national accounts up to1969-70, are assumed to be equal to the growth rates of population,which is not a very plausible assumption.- 10 -of the large-scale manufacturing sector fell drasticallyand for the first time, it fell below the growth rate ofGNP. It has often been alleged that the high growth ratein large-scale manufacturing during the early fifties wasmore a statistical than a real phenomenon. Given theextremely small base from which Pakistan's industrial out¬put was measured, the argument runs, large rates of increasewere to be expected. Yet during the 1960's, when the manu¬facturing sector was clearly no longer an insignificantpart of the economic structure of Pakistan, the annualgrowth rate of more than 13 per cent was one of the highestobserved in the developing countries.A number of factors contributed to the impressiveperformance of the manufacturing sector during the firsttwo decades. After Independence, a drive for industriali¬zation started in Pakistan. Recognizing the deficienciesin the industrial sector and the predominantly agriculturalcharacter of the economy, the government announced in the'Statement of Industrial Policy' of April 2, 1948, that"Pakistan would seek to manufacture in its own territories, the productsof its raw materials in particular cotton, hides and skins etc.for which there is an assured market whether at home or abroad. At thesame time, to meet the requirements of the home market, efforts willbe made to develop consumer goods industries for which Pakistan isat present dependent on outside sources Some of the heavyindustries might have to come at a later stage of the industrial pro¬gramme, but no opportunity should be lost to develop any heavy industrywhich is considered essential for the speedy achievement of a strong(6)and balanced economy".Muslims who emigrated from India and Burma had broughtwith them small amounts of capital, as well as a limitedfund of technical and entrepreneurial skills. They tookadvantage of the opportunity. Initial investments were madein factories that could provide the goods and services pre¬viously purchased from plants which were located in nowindependent India.(6) Report of the Economic Appraisal Committee, Karachi 1953,Appendix No. 16.- 11 -The outbreak of the Korean war in 1950 raised theprices of Pakistan's exports of primary commodities to anunprecedented level. This allowed the government to adopta policy of import liberalization, which after the 1949decision of non-devaluation of Pakistan's Rupee had beencautious. During the Korean boom period from 1950 to1952, exports and imports rose rapidly. The resultingprosperity further stimulated investment, but perhaps moreimportant, it led to the development of a class of traderswho gained considerable business acumen and were able toaccumulate large cash reserves. With the end of the Koreanwar and collapse of the raw materials boom, the governmentfound it necessary to curtail imports sharply. The controlof imports through quantitative restrictions led to a highlyprotected market for consumer goods. At the same time,imports of capital goods remained relatively cheap as Pakistanmaintained its over-valued exchange rate and relatively lowtariffs on machinery.From the outset, the government policies providedthe incentives necessary for rapid industrial growth. Asearly as 1948-49, the government announced certain measuresdesigned to stimulate investment in industry, which includedamong others the provision for allowing depreciation atenhanced rates, and exemption of profits of new undertakingsfrom direct taxes for a numer of years and up to a certain(7)proportion of profits earned. Although Pakistan's indus¬trial sector has been largely in private hands, its successduring the early fifties was clearly not due to privateinitiative alone. The government provided the necessaryinfrastructure, credit facilities and other incentives con¬ducive to rapid private investment. In addition to these,the government had, through the Pakistan Industrial Develop¬ment Corporation (PIDC) established in 1950, itself under¬taken some industrial investment. The primary purpose ofthe PIDC was to venture into those areas where privateinvestors were reluctant to go, either because of the extremerisks involved, or because they required a level of invest-(7) For details, see Andrus & Mohammad (1958). pp.168-169, 326-27.- 12 -ment beyond the resources of the private entrepreneurs.Lewis (1969) has observed that high growth ratesof the manufacturing sector in the earlier years werelargely the result of an adjustment in the structure ofproduction following the partition of the sub-Continentinto two independent states of Pakistan and India. Evenif economic policy had been scrupulously neutral, it waslikely that industrial growth would have been relativelyfaster simply because of Partition which destroyed the/o\Customs Union. Government policy was not neutral,however, but decidedly favoured industrialization.The growth of the manufacturing sector slowed downin the latter half of the fifties mainly because of thelimited availability of finances and severe controls onimports, investment and prices. After the initial favour¬able effects of the 1955 Rupee devaluation, export receiptsfell drastically The main causes of this decline in exportswere the internal inflation generated by deficit financingand food shortages, the fall in the exportable surplus ofraw cotton brought about by its increased domestic absorp¬tion, the lack of a corresponding increase in exports of(9)cotton manufactures and the decline in the export prices.The import controls adopted in late 1952 were made morestringent and the private sector investment goods importswere squeezed. The shortages of imported raw materials andspare parts remained serious and continued to hamper fullutilization of industrial capacity. In 1958, the Martial LawGovernment imposed price controls covering a large number(88 articles originally) of consumer goods and industrialraw materials, in order to check the rising spiral of prices.All these factors resulted in slowing down the industrialexpansion during 1954-55 to 1959-60.(8) Lewis, (1969) p.13.(9) The money supply expanded by 37 per cent over the three-year periodfrom mid-1955 to middle-1958; domestic consumption of raw cottonincreased from 810,000 bales in 1955-56 to 1,125,000 bales in 1957-8;exports of raw cotton dropped from 948,000 bales to 447,000 balesduring the same period; and the index of export prices (Base March1948 to April 1949= 100) fell from 91.00 in 1956-57 to 81.5 in1959-60. Source: Hasan, (1961) pp. 32-33.- 13 -During the period from 1959-60 to 1964-65, the massivecapital inflow permitted the government to liberalize theforeign exchange market. The total inflow of grants andloans during the Second Five Year Plan (1960-65) was 2757million dollars, compared to 1073 million dollars during theFirst Five Year Plan (1955-60). Besides the policiesof import liberalization, the government took variousmeasures such as the granting of tax holidays, accelerateddepreciation allowances and subsidies to the exports ofmanufactured commodities in order to promote manufacturingactivities during this period. All these factors played amajor role in accelerating the growth rate from 7.64 percent during the 1954-55 to 1959-60 period to 16.83 per centper annum in the 1959-60 to 1964-65 period. The war withIndia in September 1965 and following the war the suspensionof 'Aid' put a great strain on the availability of resourcesfor the growth. The domestic resources were diverted fromdevelopment to defence, and the disruption of foreign assist¬ance put heavy constraints on the raw material imports. Theprocess of liberalizing the foreign exchange market wasreversed and the expansion of consumer goods industries wasdeliberately slowed-down. All these factors coupled withthe labour unrest of the late sixties, caused the growth rateof the manufacturing sector during the period of 1964-65 to1969-70 to fall to 9.88 per cent per annum.A notable feature of industrial development in Pakistanwas the important qualitative difference which marked theinvestment process in the 1950's as compared to the 1960's.Whereas the initial impetus for investment was found in thedevelopment of consumer goods industries and other manufac¬turing processes based on a relatively simple technology,the later pattern of investment was concentrated more heavilyin less traditional sectors such as fertilizer plants, elec¬trical machinery and other capital goods industries. Thismade the growth of industrial output broadly based and morediversified.(10) Pakistan Economic Survey (1978-79). p.146.- 14 -Another difference between the two periods was broughtout in a study of the sources of growth of large-scale manu¬facturing by Lewis and Soligo (1965). They found that whilein the period from 1954-55 to 1959-60 the process of importsubstitution had provided a major impetus to growth, in theearly sixties the growth of domestic demand became a majormotive force. This can be seen from Table 2.3. After 1969-70the manufacturing sector in Pakistan suffered from seriousset-backs. Many factors working simultaneously led to adecline in the growth rate of the large-scale manufacturingsector. The crisis in East Pakistan (now Bangladesh) andthe war with India in 1971 resulted in the loss of marketof the eastern wing. The economy which had been developedon complementary basis over the past two decades was forcedto rationalise its production structure in accordance withthe new situation. The haphazard nationalisation policiesof the Government in addition to the labour unrest of theearly seventies created a considerable amount of uncertainty,which led to a sharp fall in private investment. In 1972,the Government started the process of nationalization, bytaking control of 32 industrial units in 10 categories ofbasic industries, and this process continued intermittantlyuntil 1976. <'11^ The oil price rises since 1973 and the inter¬national recession have also adversely affected manufacturingactivities in Pakistan. As a result of all these factors,during the period of 1969-70 to 1978-79, the rate of growthof the large-scale manufacturing sector fell drastically toa low level of 2.4 per cent per annum, which was even belowthe population growth rate of 3 per cent per annum during(11) The industries nationalised in January, 1972 were:1. Iron and steel industries. 2. Heavy Engineering Industries.3. Heavy Electrical industries. 4. Basic Metal Industries.5. Assembly & Manufacture of 6. Tractor Plants - assembly &Motor Vehicles. manufacture.7. Heavy & Basic Chemicals. 8. Petro-chemical industries.9. Cement Industries. 10. Public utilities, i.e.(a) electricity generation, transmission and distribution;(b) gas and (c) oil refineries.In March, 1972 Life Insurance business was nationalised.In Sept. 1973 26 industrial units producing vegetable gheewere nationalised.In 1974 Pakistani Banks, Shipping industry, Petroleum marketingdistribution, andIn 1976: Rice-husking mills were nationalized.- 15 -TABLE 2.3Summary sources of output growth by sub-groups of industries. (Per cent)Growth due toDomesticDemand ExportsImportSubstitution1954-55 to 1959-60Consumption goods 55.7 16.5 27.8Intermediate goods 34.0 57.9 8.1Investment & related goods 71.8 1.0 27.2Total 53.1 24.0 29.91959-60 to 1963-64Consumption goods 110.0 -1.1 -8.9Intermediate goods 47.6 21.8 30.6Investment & related goods 108.5 1.2 -9.6Total 95.7 4.6 -0.3SOURCE: Lewis & Soligo (1965) p.106.- 16 -C12)the same period. It may also be seen from Table 2.2that during the period of 1949-50 to 1978-79 the growthrates for construction and electricity and gas sectorswere quite high, i.e. on average 9.45 per cent per annumfor construction and 14.43 per cent per annum for elec¬tricity and gas. However, during this period of threedecades the growth rates for these sectors showed widefluctuations and ranged between 5.27 to 19.23 per centannually for construction and between 6.5 to 30.02 percent annually for electricity and gas. Due to the highgrowth rates the contribution of these sectors to theGNP increased considerably. The share of constructionincreased from 1.45% of GNP in 1949-50 to 4.87 per centof GNP in 1978-79, and for the electricity and gas sectorit increased from 0.22 per cent to 2.68 per cent of GNPduring the same period.(12) In fact, the large-scale manufacturing sector experienced forthe first time in the history of Pakistan, negative growth ofthe order of -6.8, -1.7, -0.5, -2.3 in the years 1971-2,1974-5, 1975-6 and 1976-77 respectively. Source: Computedfrom data in Pakistan Economic Survey, (1978-79), StatisticalTables 4.1, 4.2, p.45.- 17 -2.2 Investment and Savings.Many economists [Arthur Lewis (1954), Rostow (1960)etc.] have emphasized the role of capital accumulation asthe major factor governing the rate of development. Capitalaccumulation depends upon investment and more investmentnecessitates more savings or foreign assistance. Foreignassistance if not in the form of grants, means some burden inthe future. Domestic savings are, therefore, the morereliable source of investment to break the vicious circle ofpoverty and under-development.The investment and savings performance of Pakistan hasbeen quite encouraging,as can be seen from Table 2.4.TABLE 2.4Investment and Savings as per cent of GNP.1949-50 1959-60 1964-65 1969-70Gross InvestmentsGross Savings3.52.28.96.118.311.713.59.7SOURCE: The Fourth Five Year Plan, p.8.Gross investment as a proportion of GNP rose from 3.5per cent in 1949-50 to 8.9 per cent in 1959-60 and 18.3 percent in 1964-65, though it fell to 13.5 per cent in 1969-70.This escalation of investment ratios has, to a considerableextent, been due to the large aid inflows. After 1964-65,when the aid inflows decreased, the investment ratio fellsharply.The movement of savings paralleled that of investment.While gross savings were only 2.2 per cent of GNP in 1949-50,they increased to 6.1 per cent in 1959-60 and to 11.7 percent in 1964-65, however falling back to 9.7 per cent in1969-70. This might suggest a positive correlation betweendomestic savings and external resources inflow - a hypothesiswhich needs empirical verification. Moreover, during the1950s and 1960s higher domestic savings were sought through- 18 -(13)the promotion of inequalities of income distribution.Relentless pursuit of economic growth and the distributionof additional output in favour of the saving sectorsresulted in wide-spread social unrest in early 1969. Sincethen the development strategy has been changed and attemptsto achieve greater social justice have been made.(13) Based on the "Quarterly Surveys of Current Economic Conditions"conducted by the C.S.O. during the fiscal year 1963-64. Bergan(1972) estimated the following distribution of Personal Incomein Pakistan:-Income Shares of Ordinal GroupsCumulated percentage of households. Cumulated percentage of(in terms of income per household) total Personal Income(1963-64)Lowest 5 per cent get 0.81* 11 11 11 2.3ii 20 " " " 6.5it 30 ii ii ti 11.5ii 40 " " " 17.5ii 5o ii ii it 24.5ii go ii it it 33.0it 7Q ii ii ii 43.0ii go ii ii ii 54.5ii go ii ii ii 69.5it 95 ii ii it 80.0ii 10Q » » » 100.0SOURCE: Bergan: "Personal Income Distribution and PersonalSavings", in Griffin & Khan (1972), Table 8.4, p.214.- 19 -2.3 Balance of Payments.The balance of payments of a country is 'a systematicrecord of all economic transactions during the periodbetween residents of the reporting country and the residentsof other countries'. As in normal accounting practice, thebalance of payments is shown in terms of debit and creditentries. All international transactions which give riseto foreigners' money claims on the home country are debitentries; all those giving rise to domestic money claimson foreigners are credit entries. The main items in thestatement of the balance of payments include:-1. Visible imports and exports (i.e. imports and exportsof goods).2. Invisible imports and exports (i.e. payments or receiptsin respect of services like shipping freight, touristexpenditures, payments for financial and insuranceservices, and interest payments in respect of outstand¬ing loans etc.)3. Unrequited transfers (i.e. gifts, emigrants' remittances,governmental grants etc. - payments and receipts whichare not matched by simultaneous flows of goods and ser¬vices in the other direction)4. Capital payments and receipts (i.e. loans, capitalrepayments, purchase or sale of assets etc.)In an accounting sense the balance of payments alwaysbalances since, as in all double-entry accounts, totalreceipts must equal total payments if all transactions areincluded. Wherein then may we derive the meaning for theterms 'surplus' and 'deficit' in the balance of payments?(14)For this purpose, using the terminology of Meade wemay divide the items included in the balance of payments intoAutonomous items and Accommodating items. The autonomousitems consist of commercial imports and exports, unrequitedtransfers and all foreign capital investments undertaken forprofit by private enterprise, while accommodating itemsshould include gold and currency transfers by central mone¬tary authorities, short-term balance adjustments and loans.(14) Meade (1951, Vol.1, Ch.l).- 20 -A deficit or surplus then is measured by the actual amount ofaccommodating finance required over a given period of time.Pakistan's balance of payments experience has inseveral ways been typical of a developing economy attemptingto achieve rapid economic progress. Deficits in her balanceof payments have been almost a permanent feature from thevery outset. While Pakistan has been heavily dependent onthe export of a few primary commodities like cotton, ricehides and skins etc., markets for which show a great deal ofinstability, her import needs have been increasing due tothe import of development goods like machinery, equipmentand raw materials and spare parts. The prices of primarycommodities, due to inelasticities of supply and demand, tendto show extreme fluctuations. Unavoidable and unforeseeablefactors such as natural calamities, droughts, floods andpest attack, can result in crop harvest failure, on whoseexport the country depends.Then there are the more 'fundamental' causes like thesecular deterioration in the terms of trade and structuralchanges at home or abroad. The loss of export markets, mone¬tary imbalance in the domestic market or increased importintensity of domestic production might result in the worsen¬ing of the balance of payments position. Since 1973, theoil price rises have caused serious problems of balance ofpayments for the developing countries.The balance of payments position of Pakistan for somerecent years is shown in Table 2.5. It may be seen from thetable that for all these years the current account has beenin deficit, and the deficit has varied from year-to-year.Although exports have been rising, the import bill has beenrising even faster, thus widening the trade gap. But forthe unrequited transfers, the deficit in the current accountwould have been much higher. The unrequited transfers, par¬ticularly home remittances on the private account from peopleworking abroad, have increased very rapidly in recent years,e.g. private remittances increased from $106.7 million in1969-70 to $229.9 million in 1974-75, and to $1226.2 millionin 1977-78. However, if capital transactions are taken intoaccount, the overall deficit is reduced.- 21 -TABLE2.5(a)BALANCEOFP YMENTSOSITIONKISTA (MillionU.S.$)ITEMS1965-661969-701970-71CreditDebitNetcreditCreditDebitNetcreditCreditDebitNetcr ditA.Goods&Service .672.41156.7-484.3828.61398.6-570.0846.51573.6-727.11.Merchandise564.4917.2-352.8660.21050.2-390.0683.41186.9-503.52.Non-monetarygold0.1-+0.131.6-+31.625.9-+25.93.Services107.9239.5-131.6136.8348.4-211.6137.2386.7-249.5B.UnrequitedTransfers.229.16.8+222.3176.914.0+162.9141.610.9+130.71.Private44.96.6+38.3106.75.8+100.968.95.0+63.92.Government184.20.2+184.070.18.2+61.972.75.9+66.8C.AllocationfSDRs.---------TotalCurrentAccount (A+BC)901.51163.5-262.01005.51412.6-407.1988.11584.5-596.4D.Capital&MonetaryGold.398.2139.3+258.9492.895.3+397.5661.758.3+603.4(a)CapitalTransactions.290.112.9+277.2414.214.6+399.6539.90.8+539.11.Private40.7-+40.777.92.5+75.492.90.8+92.12.Government249.412.9+236.5336.312.1+324.2447.0-+447.0(b)Monetaryovem nts.108.1126.4-17.378.680.7-2.1121.857.5+64.3E.rrorsandOmission .3.1-+3.111.7-+11.7-7.0-7.0(b)BALANCEOFPAYMENTSPOSITIONP KISTAN(contd.) (MillionU.S.$)ITEMS1971-721972-731973-4CreditDebitNetCr ditCreditDebitNetCr ditCreditDebitNetCr ditA.GoodsandServices.722.81258.5-535.6919.71195.8-276.11238.11936.9-698.81.Merchandise.619.5946.3-326.7766.7891.2-124.51019.71493.4-473.72.Non-monetarygold.0.2-+0.2------3.Services.103.1312.2-209.1153.0304.6-151.6218.4443.5-225.1B.UnrequitedTransfers.179i36.3+173.0181.16.1+175.0222.75.1+217.61.Private96.33.3+93.0146.31.3+145.0151.20.9+150.32.Government.83.03.0+80.034.84.8+30.071.54.2+67.3C.AllocationfSDRs.27.0-+27.0------TotalCurrentAccount (A+gC)929.11264.8-335.71100.81201.9-101.11460.81942.0-481.2D.Capital&MonetaryGold.454.0156.9+297.1378.8286.0+92.8635.7149.2+486.5(a)CapitalTr nsactions.331.113.9+317.2355.6102.8+252.8451.8113.0+338.81.Private.71.4-+71.459.845.9+13.8101.043.4+57.62.Government.259.713.9+245.8295.956.9+239.0350.869.6+281.2(b)Monetaryovements.122.9143.0-20.123.3183.2-159.9183.936.2+147.7E.ErrorsandOmissions.38.5-+38.58.1-+8.1-5.3-5.3BALANCEOFP YMENTSOSITIONPAK STA(contd) (MillionU.S.$)(c)I IITEMS1974-751975-761976-77CreditDebitNetCr ditCreditDebitNetCr ditCreditDebitNetCr ditA.GoodsandServices1289.02686.1-1397.11460.52760.1-1299.61437.23078.9-1641.61.Merchandise997.62114.2-1136.61162.12139.4-977.31131.72417.7-1286.02.Non-MonetaryGold---1.3-+1.3---3.Services311.4571.9-260.5297.1620.7-323.6305.5661.2-355.7B.UnrequitedTransfers.338.55.1+333.4491.418.6+472.8743.84.7+739.11.Private.229.90.5+229.4353.40.4+353.0590.80.4+590.42.Government.108.64.6+104.0138.018.2+119.8152.94.2+148.7C.AllocationfSDRs.---------TotalCurrentAccount (A+BC)1627.52691.2T1063.71951.92778.7-826.82181.03083.6-902.6D.CapitalandMo etaryGol1295.1246.1+1049.01267.4431.9+835.51259.4413.9+845.5(a)CapitalTr nsactions.1062.2152.8+909.41066.7251.5+815.21007.1413.9+593.21.Private.145.049.2+95.8261.167.5+193.6306.4146.0+160.02.Government.917.2103.6+813.6805.6184.0+621.6700.8267.9+432.9(b)Monetaryovements.232.993.4+139.5200.7180.4+20.3252.2-+252.2E.ErrorsandOmissions.14.7-+14.7-8.88.857.0-+57.0BALANCEOFPAYMENTSOSITIONPKIS AN(contd) (MillionU.S.$)(d)ITEMS1977-78CreditDebitNetCreditA.Goods,andServices1685.53511.8-1826.31.Merchandise1282.52751.4-1468.92.Non-MonetaryGold4.2-+to3.Services398.8760.4-361.6B.UnrequitedTransfers.13521214.51337.61.Private1226.20.4+1225.82.Government.126.014.1+111.8C.AllocationfSDRs.---TotalCurrentAccou t (A+BC)3037.73526.3-488.6D.CapitalndMonetaryG l1159.9644.5+512.5(a)CapitalTransactions.1133.5306.0+827.61.Private.312.4184.1+128.32.Government.821.1121.9+699.3(b)Monetaryovem nts.23.4338.5-315.1E.rrorsandOmission .-23.8-23.8SOURCE:(i)1965-66basedonTableNo.34P kistanEconomicSurvey(1977-78)Statisticalect onpp.96-97. (ii)Restoftheablebas dontdatainPakistanEconomicSurvey(1978-79)Sta isticalS c ion Table9.10,pp.120-127.A brief review of the component parts of the Balanceof Payments of Pakistan is given below:-2.3.1 Merchandise AccountThe position for the imports and exports of goods,which is the major factor in the balance of payments isgiven in Table 2.6.TABLE 2.6: Value of Commodity Imports and Exports (Million Rupees)(July-June) IMPORTS EXPORTS BALANCE EXPORTS AS %OF IMPORTS1948-49 1176.8 542.4 - 634.4 46.11949-50 912.2 535.1 - 377.1 58.71950-51 1167.1 1342.5 + 175.4 115.01951-52 1473.9 921.9 - 552.0 62.51952-53 1017.3 867.4 - 149.9 85.31953-54 824.3 641.0 - 183.3 77.81954-55 783.0 491.4 - 291.6 62.81955-56 964.5 742.4 - 221.1 77.01956-57 1516 .0 698.2 - 817.8 46.11957-58 1314.3 433.6 - 880.7 33.01958-59 1024.6 444.4 - 580.2 43.41959-60 1805.7 763.1 -1042.6 42.31960-61 2173.2 540.2 -1633.0 24.91961-62 2236.3 542.9 -1693.4 24.31962-63 2800.1 998.1 -1802.0 35.61963-64 2981.6 1075.0 -1906.1 36.11964-65 3672.4 1139.6 -2532.8 31.01965-66 2880.3 1203.6 -1676.7 41.81966-67 3625.7 1297.3 -2328.4 35.81967-68 3327.2 1644.8 -1682.4 49.41968-69 3046.6 1699.9 -1346.7 55.81969-70 3285.1 1608.6 -1676.5 49.01970-71 3602.4 1998.4 -1604.0 55.51971-72 3495.4 3371.4 - 124.0 96.51972-73 8398.3 8551.2 + 152.9 101.81973-74 13479.2 10161.2 -3318.0 75.41974-75 20925.0 10286 .3 -10638.7 49.21975-76 20465.3 11252.9 -9212.4 55.01976-77 23012.2 11293.9 -11718.3 49.11977-78 27814.7 12980.4 -14834.3 46.7Note: (1) Figures are unadjusted for the devaluation of rupee in May1972, when par value of the rupee was changed fromRs 4.76 = $1 to Rs 11 = $1, and the revaluation in February1973 when the par value became Rs 9.9 = $1.(2) Data on exports do not include re-exports from 1967-68onwards.SOURCE: Pakistan Economic Survey (1978-79) StatisticalSection, Table 9.1, p.99.Pakistan has experienced a negative balance on themerchandise account for almost all the years since Independence.- 26 -The only exceptions have been the years 1950-51 and 1972-73.In 1950-51 the unprecedented rise in export prices of primarycommodities due to the Korean war resulted in Pakistan'shigh earnings. The surplus of 1972-73 was achieved partlybecause of the sharp increase in the volume of exports dueto the diversion of exports from former East Pakistan toforeign countries, and the devaluation of the rupee in 1972,and partly because of a slower increase in imports due touncertain internal conditions. In all the other years importshave exceeded exports both because of internal and externalfactors. Higher imports during the sixties and seventies wereallowed by the increased flow of foreign assistance mainly inthe form of long-term loans. The imports have been growingprimarily because of the development needs of the country.Liberal imports of machinery and spare parts, agriculturalinputs and industrial raw material have been allowed, whilesome imports of consumers' goods, mainly food items, areneeded to meet the minimum consumption needs of the country.The exports have failed to match the growth of imports becauseof a number of factors like bad weather conditions, lack ofavailability of surplus for exports and lack of competitivenessetc. On the external front a notable factor has been thesecular deterioration of the terms of trade for Pakistan'sexports which can be seen from Table 2.7.Table 2.7 gives indices of unit values of imports,exports and terms of trade from 1960-61 to 1977-78 with differ¬ent base periods. They are not directly comparable, but onecan see the trends in each. The import prices have been risingfaster than the export prices, making the terms of tradeunfavourable. During the period 1960-61 to 1977-78 there hasbeen a deterioration of nearly 30% in terms of trade, whichhas accentuated the already unfavourable position of thebalance of payments.2.3.2 Invisible Account.The Invisible account has two broad segments, viz.(i) Services, and (ii) Unrequited transfers. Under theServices Sector, payments and receipts have both been increasingbut the payments have always exceeded the receipts. The mainreason for that is Pakistan's heavy dependence on foreign- 27 -TABLE2.7INDICESofUnitValueImpor s&Ex rtandTermsfrade.1960-61=01969-70=100YearImportsExportsTermsofYearImportsExportsTermsof(General)(General)Trade(General)(General)Trade1960-61100.0100.0100.01969-70100.0100.0100.01961-62110.4102.592.41970-71119.7106.989.3(92.8)1962-63114.1100.588.21971-72155.9129.182.81963-64118.5100.585.31972-73285.2272.695.6(84!8)1964-65116.1104.590.01973-74412.6439.0106.41965-66113.0108.596.31974-75614.5409.766.7(96.0)1966-67117.0105.190.51975-76582.6410.870.5(89.8)1967-68115.2108.694.21976-77585.4488.583.41968-69114.5107.693.91977-78628.1508.581.01969-70122.2106.186.8mExportIndexTermsofrade=—x100ImportndexSOURCE:PakistanEconomicSurvey1973-74 StatisticalT ble35pp.76-77 (Correctedwhereronglycal ulatedint originalandputiparenthesis).SOURCE:PakistanEconomicSurvey1978-79 StatisticalTableNo.9.2,p.100.services like shipping and insurance etc. The frequentincreases in the international freight and insurance rateshave resulted in heavy payments under this heading.The other important component of invisibles isthose unrequited transfers which consist of two parts,namely, private transactions and official grants. Whileofficial donations are on the decline, as mentionedabove, private remittances are increasing. In recent yearshome remittances from workers abroad have increased veryrapidly. The sizeable increase in the private remittanceshas made the invisible account show a surplus, and reducedslightly the deficit on the current account.2.3.3 Capital Account.Heavy deficits on the current account necessitatethe finding of means to bridge the gap between paymentsand receipts. Some deficits might have been deliberatelycreated for the purpose of achieving rapid economic growth.Pakistan's deficits, particularly during the 1960's, werepart of the policy of financing development through foreignassistance. In recent years the situation has become severeboth because of internal and external factors. Oil pricerises and depressed conditions for Pakistan's exports havemade larger capital inflow necessary in order to strengthenthe balance of payments position. The following table showsthe amount of capital inflow into Pakistan mostly in the formof loans repayable in foreign exchange.TABLE 2.8: Total Capital Inflow (Million US $) 1955-78.PERIODTOTAL CAPITAL INFLOW(Million U.S. $)Five years (1955-56 to 1959-60) 1073Five years (1960-61 to 1964-65) 2757Five years (1965-66 to 1969-70) 2746Five years (1970-71 to 1974-75) 39941975-76 9221976-77 11141977-78 979SOURCE: Pakistan Economic Survey (1978-79) Table 10.1, p.146.- 29 -2.4 External Finance in Development Plans.Economic policy in Pakistan has been concernedprimarily with the difficult task of developing a back¬ward economy. The start of planned development was madein 1951 with the Colombo Plan (1951-57), which was hardlya Plan in the scientific sense of the word. "The six-yearPlan was prepared in the absence of much essential information andmany basic statistics. So it could not be based on a proper assess-(15)ment of the national resources - human, physical and financial".Scientific planning began in Pakistan with the First FiveYear Plan (1955-60). Since 1955 three medium-term plans,each spreading over five years, had been launched when thecountry underwent some fundamental changes. The FourthFive Year Plan (1970-75) had to be scrapped due to theseparation of the former East Pakistan (now Bangladesh).The country then resorted to ad-hoc planning on an annualbasis, which continued till 1978. Since July 1, 1978 thecountry has again returned to medium-term planning with thelaunching of the Fifth Five Year Plan (1978-83). The basicaim among other objectives of the whole planning processhas been the acceleration of the rate of growth of grossnational product. It is widely believed that any increasein income hinges upon capital accumulation, although otherfactors such as entrepreneurship and training of workersalso play an important role. The resources for capitalaccumulation and development expenditures come from internaland/or external sources. In view of the inadequacy ofinternal finance, a significant proportion of the develop¬ment plans in Pakistan has been financed through externalresources. Foreign resources financed 34 per cent of theThird Plan (1965-70) development expenditure as against 40per cent in the Second Plan (1960-65The familiar two-gapanalysis provides the rationale for this. Developing coun¬tries in the task of raising the level of investment sufferfrom deficiency of domestic savings as well as from that of(15) The First Five Year Plan. p.9.(16) The Fourth Five Year Plan. p.40.(17) For further discussion of two-gap analysis, see McKinnon,R.(1964),Chenery & Strout (1966) and Islam (1970).- 30 -foreign exchange. Domestic savings, even if they areadequate for meeting the demands of the target investmentrate, cannot always be converted into foreign exchange.An expansion of domestic output requires fixed inputs offoreign imported capital equipment and, in many cases,imported raw materials; the exports which are predomin¬antly agricultural and primary commodities cannot beexpanded to meet the growing import needs. Foreign aidmeets both deficiencies and thus, contributes to growthby enabling the recipient country to overcome the criticalbottlenecks, i.e.inadequacy of savings and of foreignexchange. The extent to which foreign assistance has con¬tributed to accelerating the rate of investment and thusthe rate of growth in Pakistan, can be seen in Table 2.9.The increase in domestic savings has not kept pacewith the increase in investment: the need for foreignassistance has consequently been increasing over time. Itmay be seen from Table 2.9, that the share of foreignassistance, which made a small contribution till 1955 inthe financing of total investment, rose sharply from about14 per cent in 1954-55 to about 46 per cent in 1959-60, fellto about 28 per cent in 1969-70 but increased again to about46 per cent in 1974-75. The main reason for the decline inthe share of foreign assistance in the total investment inthe late 1960's was the curtailment of foreign aid inflowsfrom donor countries after the 1965 Indo-Pakistan.. con¬flict. The 1970's have witnessed events of an exceptionalnature, both domestic and international. Among the domesticfactors, weather conditions, combined with the need forrestructuring of the economy, and on the international side,the energy crisis and the stagflation of the developedeconomies, have all contributed to Pakistan's increaseddependence on foreign assistance.The panacea for all development problems in Pakistanhas been 'more aid', as remarked by Keith Griffin (1972,p.57).Up to the end of December 1978, foreign economic assistanceworth $14.68 billion had been contracted - $3.95 billion inthe form of grants and grant-like assistance, and the balanceof $10.73 billion in the form of loans and credits repayablein foreign exchange. Disbursements of loans and credits up- 31 -TABLE2.9TheRolfForeignAssistance(Perce tages) 1949-50 (1)1954-55 (2)1959-60 (3)1964-65 (4)1969-70 (5)1974-75 (6)Asapercentageof Grossinvestment. (i)DomesticResources.100.086.453.964.171.853.6(ii)ExternalResources.0.013.646.135.928.246.4SOURCES:Cols.(1),(2),(3)fr mThirdFiveYearPl n,able8p.8. Cols.(4)&5fr mF urthiveYearPl n,Table2p.42. Col.(6)calculatedfr md tinT bl10.3,p.148 andstatisticalT ble2.4,pp.15-17,P k t n EconomicSurvey(1978-79)(19)to the end of December, 1978 amounted to $9.2 billion.Pakistan had repaid $1.8 billion leaving a net debt(disbursed and outstanding) of $7.4 billion. This consti¬tuted nearly 40 per cent of Pakistan's GNP and is generallyrecognised to be a heavy debt liability.^20'The increase in the volume of foreign assistance hasbeen accompanied by a continuing shift in the compositionof aid from grants and grant-like assistance to loans andcredits repayable in foreign exchange, as shown in Table2.10.Table 2.10 shows the distribution of foreign assist¬ance between grants and grant-like assistance and the loansrepayable in foreign exchange. Grants and grant-likeassistance, which constituted 70 per cent of the totalaid during 1950 to 1955, and about 79 per cent during theFirst Plan Period (1955-60), declined to about 43 per centduring the Second Plan period (1960-65), to about 26 percent during the Third Plan Period (1965-70) and to onlyabout 9 per cent during the five year period of 1970 to 1975.It has varied from 11 to 17 per cent of the total foreignassistance in the subsequent years. Over the years, theproportion of grants has been declining, while that of loanshas been rising. Keith Griffin (1965) suspected that oncePakistan's alignment with the West, in acceptance of U.S.military aid and its membership in SEATO and CENTO wereassured, the composition of foreign assistance changed, i.e.the proportion of loans in total foreign assistance increasedand that of grants decreased. Whether this suspicion isjustified or not, the fact remains that the terms and con¬ditions of loans for Pakistan have been hardening since theearly sixties, and the proportion of 'tied aid' has been anincreasing part of the total foreign assistance. Aid may betied by both source and end-use: the recipient country maynot have the freedom to apply the aid to import from sourcesother than the donor country, and the use of aid may be(19) Inclusive of debt disbursed (but not repaid) in former EastPakistan (now Bangladesh) amounting to $64.5 million, whichhas been/likely to be taken off.(20) Pakistan Economic Survey (1978-79), p.145.- 33 -TABLE2.10CommitmentsfExternalAssis ance(M llion,U.S.$)PERIODTOTALASSIS ANCEGRANTS&aRANT-LIKEASSIST NCLOANSREP YABLEIN FOREIGNEXCHANGEAmountAmountPerc ntofT talAmountPercentofT tal(1)(2)(3)(4)(5)(6)Pre-lstlan(1950-55)33723670.010130.0FirstPlan(1955-60)107385279.422120.6SecondPla(1960-65)2757119843.5155956.5ThirdPlan(1965-70)274670425.6204274.4FiveYears(1970-75)39943759.4361990.61975-7692210211.182088.91976-77111418716.892783.21977-7897915115.482884.6GRANDTOTAL14680395126.91073073.1SOURCE;BasedonTable10.1,P kistanEconomicSurvey(1978-79),p.146.restricted via specification of commodities or projects.Aid-tying reduces its real value to the recipient country.The direct costs of tying aid can be estimated as the differ¬ence between the cost of importing from the tied source andthe cost of importing the same commodities from the cheapestsource. Mahbu3»-ul-Haq (1967) estimated that purchasing allUnited States aid financed commodities in the United Statesresulted in a 17 per cent excess cost to Pakistan, as com¬pared to world market prices for the year 1965. In additionto the direct costs incurred, tying of aid may have signifi¬cant indirect costs for the recipient country by causing adistortion of development priorities. The distortion inthe allocation of investment resources may be caused bybiasing the recipient's development programme toward thoseprojects that have a high component of the special importcontent allowed-for under the conditions of the tied aid.' The import-intensive industrialization of the borrowingcountry may become permanently dependent upon a high-costsupplier for spare parts, replacements and ancillary equip¬ment'. Tied loans, furthermore, lead to higher debt repaymentobligations and a greater debt burden.2.4.1 Debt servicing.Foreign economic assistance to Pakistan started in1950. Initially the burden of debt servicing was relativelysmall because of the grace periods of a number of loans.As the grace periods of loans and credits contracted earlierexpired, the debt service liability increased sharply after1965. The ratio of debt service payments to the country'sforeign exchange earnings for some selected years is shownin Table 2.11.It may be seen from Table 2.11 that debt servicing asa ratio of Pakistan's foreign exchange earnings, which was3.6 per cent in 1960-61, rose sharply to 9.9 per cent in1964-65, and from then on by an average of 20 per cent duringthe seventies. In relation to the country's export earnings,debt servicing on external debts is very high from all inter¬national standards. Expressed as a ratio to export earningsthe debt burden stood at 4.2, 11.9, 25.8 and 23.1 per cent- 35 -TABLE 2.11Debt Service RatioYEAR Foreign ExchangeEarnings(Million U.S $)Debt Service(Million US$)Debt Service Ratioto Foreign ExchangeEarnings = [ (3)v(2)xl00](1) (2) (3) (4)1960-61 476 17 3.61964-65 629 62 9.91969-70 901 176 19.51974-75 1519 259 17.11975-76 1813 407 22.41976-77 2028 420 20.7NOTES(i) Debt service figures are net of debt relief/rescheduling, andinclude debt servicing of short-term credits of less than oneyear's maturity.(ii) Figures from 1960-61 to 1969-70 are for all Pakistan, includingformer East Pakistan (now Bangladesh).SOURCES: (i) 1960-61 to 1969-70 from Pakistan Economic Survey (1970-71)Table 74, p.138.(ii) 1974-75 and onwards from Pakistan Economic Survey (1978-79)Table 10.2, p.148.- 36 -in the years 1960-61, 1964-65, 1969-70 and 1974-75 res-( 2 1pectively. With limited debt relief provided duringthe year 1978-79, this ratio was expected to go up to40 per cent. ^22^The rapid increase in debt service obligations hasprincipally resulted from two basic factors:(i) a sharp and continuing shift in the composition offoreign assistance from grants and grant-type assist¬ance to loans and credits requiring service inforeign currency, and(ii) A decline in the share of loans carrying concessionalterms and as a result contracting of loans and creditson hard terms, particularly after 1965.Such a sharp increase in debt service payments adverselyaffected net aid inflows to Pakistan. An increasinglyhigher percentage of gross aid had to be returned to thelending countries/agencies in the form of repayment ofprincipal and interest dues. Net transfer of resourcesfrom abroad which constituted 91 per cent of gross dis¬bursements in 1964-65 dropped to 69 per cent in 1969-70and to 60 per cent in 1973-74. ^23^It may be noted here that the increase of the debtservice ratio to foreign exchange earnings or to exportearnings is related not only to the terms and conditionsof borrowing, but also to the performance of the exportsector of the country. The rapid increase in debt serviceratios has occurred in spite of the comparatively rapidrate of growth of Pakistan's exports and the considerabledebt rescheduling arrangements made since 1971. The debtrelief agreements were made with Consortium^24^and non-Consortium countries after the separation of former EastPakistan (now Bangladesh). These agreements rescheduledthe debt servicing ranging between 55 to 71 per cent fallingdue during the period of 1971 to 1978.(21) Pakistan Economic Survey (1974-75), p.132.(22) Pakistan Economic Survey (1978-79), p.148.(23) Pakistan Economic Survey (1974-75), p.133.(24) The Aid-to-Pakistan Consortium includes Belgium, Canada, France,Germany,Italy,Japan, the Netherlands, Norway, Sweden, U.K., U.S.A.,I.B.R.D. and I.D.A.- 37 -2.5 The Need to Expand Exports.The discussion above regarding the performance of thePakistani economy indicates that in an effort to achievehigher growth rates the country has evolved a system, whichhas become heavily dependent on foreign assistance. Ingeneral, the deficits in the balance of payments have beenincreasing and the gap between exports and imports has beenwidening over time. The persistent deficits in the balanceof payments means that the country has been living beyondits means, which is a danger signal. Continued reliance onforeign borrowing has resulted in heavy debts servicingobligations, which are growing at a rate faster than therate of growth of exports. This means that a growing propor¬tion of current earnings of foreign exchange will be requiredto service foreign debts or more loans will have to be con¬tracted merely to meet the debt repayment obligations. Theimplication is that an economic system which has been createdand sustained with the help of foreign assistance is notviable. The adverse effects of this situation on the economycan only be avoided if:—(i) more foreign assistance is available and the trend inforeign assistance is reversed in favour of more grants,and(ii) export earnings and/or import substitution grow at aphenomenal rate.As regards (i), the whole issue of foreign assistance is atthe cross-roads. Both developed and developing countries aregetting frustrated by the consequences of aid to the LDC's.Doubts have grown in the developed countries, as to theeffectiveness of aid in promoting economic development, thewastes and inefficiencies involved in the use of aid, and thedangers of getting involved, through extensive foreign-aidoperations, in military or diplomatic conflicts. Foreign aidis under attack on the grounds that it strengthens the handsof the political groups who are in power in the poor countriesand who often inhibit the socio-political changes in attitudesand institutions necessary for economic development. The dis-- 38 -enchantment on the part of the recipient countries is, onthe other hand, associated with the inadequacy of aid, thestop-go nature of its flow in many cases, and the intrusionof non-economic considerations governing the allocation ofaid amongst the recipient countries. Now that most of thedonor countries are increasingly concerned with their domesticproblems, the chances of the avilability of foreign assist¬ance in the form of grants are very limited.As regards (ii), import substitution (i.e. domesticproduction of those goods which would otherwise have beenimported) was a popular strategy of economic development inthe 1950's. By the mid-sixties the developing countriesbecame increasingly disenchanted with those policies as theyexacerbated the problems (particularly that of the balanceof payments) which they were designed to cure. The evidenceof the historical path of industrialization indicates that inthe developing countries import substitution initially takesplace in the consumer goods'industries. This is because inthe early stages of development most of the imports consistof consumer goods, technology required for many consumer goodsis relatively simple, capital requirements are not large andexisting domestic demand is adequate relative to the economicsize of an industry. The instruments, like tariffs and importlicensing etc. used to implement this policy, are usually suchthat they impose higher restrictions on the imports of consumergoods than on those of raw materials and capital goods. Easierimports of capital goods and raw materials give rise to capitalintensive processes of production using imported raw materials.Paradoxically enough, the development of this sort of productionstructure increases the economy's dependence on imports of rawmaterials, parts and components. In addition, if the policiesof import substitution succeed in raising real incomes, theywould tend to increase the demand for other consumer goods.However, an import-substitution policy, directed primarilytowards consumer goods industries, quickly reaches its limitas set by the protected domestic market. It then graduallyextends in successive steps to intermediate and capital goodsfor which the newly developed domestic consumer goods industriesprovide a market. As the size of the domestic market isfrequently inadequate for the production of intermediate andcapital goods on an efficient scale, the need for finding- 39 -export markets arises. Moreover, excessive import-substitution is likely to result in a misallocation ofresources and technical inefficiencies. High rates ofprotection might encourage the setting-up of those indus¬tries which lack comparative advantage. Import-substitutionwithout corresponding export promotion may prove unsuccessfulin terms of sustained growth or the removal of severe balanceof payments constraints.Many economists believe that there is a significantrelationship between a country's exports and its economicgrowth, and have viewed the growth of exports as a catalystfor economic development. There are logical grounds forbelieving that a rise in exports stimulates an increase inaggregate economic growth, but essentially the relationshipis one of interdependence. There are many direct andindirect benefits from a high rate of export growth, whichhelp in promoting general economic growth(i) An increasing level of exports provides a country withthe wherewithal to step up its level of imports,especially of capital goods, which are important incontributing to economic growth. The country isenabled to take greater advantage of the internationaldivision of labour, procuring desired goods from abroadat considerable savings in terms of inputs of productivefactors.(ii) Export development tends to concentrate investment inthe most efficient sectors of the economy - those inwhich the country enjoys a comparative advantage.Specialization in the products in which the countryhas a comparative advantage increases productivityand results in the more efficient utilization of pro¬ductive factors.(iii)The country gains from economies of scale, since theinternational market added to the domestic marketobviously permits larger-scale operations than doesthe domestic market alone.(25) For further discussion of import sub. vs. export promotion, seePower (1966); Schydlowsky (1967); Hirschman (1968), Streeten(1973). Two standard works in this area are the studies madeby the O.E.C.D. (1970) and the N.B.E.R. (1978).- 40 -(iv) The necessity of remaining competitive in internationalmarkets tends to maintain pressure on the exportindustries to keep costs low and encourages them con¬stantly to strive for more efficient methods of pro¬duction. The competitive pressures also tend to leadto improvements in the quality of the export product,and, in general to inhibit the establishment ofinefficient industries.A growing export sector also encourages an increasedflow of technological and market innovations as wellas managerial skills. Under the pressure of competi¬tion and the desire to continue expanding foreign sales,suitable foreign techniques and methods are importedto further improve productivity and quality.(v) Expanding exports encourage investment in ancillaryindustries which would supply and service the operationsof the main export industry.(vi) Lastly, a growing export sector serves as an indirectstimulus to increased consumption. As consumers becomegradually aware of the foreign consumer products thatthey can obtain because of expanded export earnings,there is an increased desire to acquire these products.Thus there is a kind of 'Demonstration Effect'.All these factors tend to reinforce each other stimula¬ting further expansion of exports, investment and consumption.The result is a substantial rate of growth in real grossnational product. Emery (1967) and Oyejide (1975) have triedto estimate quantitatively the causal relationship betweenexport growth and the growth of GNP, and have found a signi-/Ofi\ficant positive relationship between the two variables.Pakistan needs to expand its exports in order to overcome thedifficulties of the balance of payments, to fulfil the debtrepayment obligations and to achieve a rapid rate of growthin GNP.(26) Emergy, (1967), using the average of annual rates of change in realper capita GNP and average rates of export growth for the period of1953-63 generally, in respect of 50 countries, concluded that acountry increases its per capita real GNP about 1 per cent for every2i per cent boost in its exports, p.478.Oyejide, (1975), using average growth rates of GDP and the averageof exports as proportion of GDP over the period of 1960 to 1969 for43 African countries concluded that a unit change in exports leadsto 0.13 change in GDP. p.185.- 41 -2.6 Behaviour and Structure of Exports.A brief description of the behaviour of Pakistan'sexports during the period of 1960-61 to 1977-78 is givenbelow and the structure of export earnings is also examined.TABLE 2.12Value of exports in some selected years and the rates of growth ofexports.YEAR VALUE OF EXPORTS (Million Rs) .Unadjusted Adjusted1960-61 540.2 1123.51965-66 1203.6 2503.31970-71 1998.4 4156.41973-74 10161.2 10161.21975-76 11252.9 11252.91977-78 12980.4 12980.4Annual compound rates of growth of exports (Percentages)PERIOD For unadjusted data. For adjusted data1960-61 to 1965-66 17.38 17.381965-66 to 1970-71 10.67 10.671970-71 to 1975-76 41.29 22.041970-71 to 1973-74 71.96 34.711973-74 to 1977-78 6.31 6.311960-61 to 1970-71 13.98 13.981970-71 to 1977-78 30.64 17.671960-61 to 1977-78 20.57 15.48NOTE: (a) Pakistan's rate of exchange has been:-Prior to May, 1972 One U.S. $ = Rs 4.76From May '72 to Feb.'73 One U.S. $ = Rs 11.00After Feb. 1973 One U.S. $ = Rs 9.90After the change in par value of the rupee from May, 1972 onwards, thevalue of exports expressed in rupees, would be inflated by the extent ofchange in the currency equivalent, even if it would have remained thesame in dollar terms. To make the figures comparable, the value of exportsprior to 1972 have been adjusted upwards to the extent of change in thecurrency equivalent, i.e. adjusted value = unadjusted valueofficial exch.ratex 9.90, or540 2as an example for the year 1960-61 adjusted value = " x 9.90.4 . 76Otherwise, the value of exports expressed in dollars for the whole period,would also become comparable. However, these adjustments do not take intoaccount any changes in per value of the dollar itself.SOURCE: As for Table 2.6- 42 -Table 2.12 presents data on the value of exports for someselected years, from which it may be seen that the exportearnings were almost 4 times higher in 1970-71 compared tothose in 1960-61, while between 1970-71 and 1977-78 theincrease was nearly three-fold. Pakistan's earnings fromcommodity exports have increased at a compound rate ofabout 15.5 per cent per annum during the period of 1960-61to 1977-78. During the decade of the sixties the rate ofgrowth of exports had been consistently above 10 per centper annum, although it was higher during the first fiveyears compared to the last five years. More precisely,exports grew at about 17.4 per cent annually during 1960-61to 1965-66, while during the later five years of 1965-66to 1970-71 this rate fell to about 10.7 per cent. Thepattern of export growth during the seventies has beenhaphazard. The rate of expansion of exports was phenomen¬ally high during 1970-71 to 1973-74, being about 34.7 per centannually, while from 1973-74 to 1977-78 they rose at a modestrate of about 6.3 per cent per annum. The extraordinarilyhigh rate of export growth during the early seventies may beexplained by two factors. Firstly, the separation of formerEast Pakistan (now Bangladesh) from the rest of the countrymade available the exportable surplus, which was diverted tothe international markets. Secondly, the develuation ofthe Pakistani rupee in May, 1972 by more than 57 per centfacilitated the disposal of this exportable surplus in theforeign markets. However, the favourable effects of thedevaluation were short-lived. The oil price hike of 1973 andthe resulting recessionary conditions in the developedeconomies have affected the exports from Pakistan adverselyin recent years.Another feature of Pakistan's exports may be seen fromTable 2.13, which presents annual data on the rupee and dollarvalue of Pakistan's exports, Pakistan's share of worldexports and the share of Pakistan's exports in GDP for theperiod of 1960-61 to 1977-78. Pakistan's share of the worldmarket rose from less than 0.1 per cent in 1960-61 to about0.17 per cent in 1962-63. Although there had been year-to-year fluctuations in the share of Pakistan's exports toworld exports after 1962-63, on the average, this shareincreased from 0.136 per cent for the 1960-61 to 1964-65- 43 -TABLE2.13Pakistan'sexportssh reofGDPandw ldexports.YEARPakistan'sexportPakistan'sGDPatExportsasPakistan'sexportWorldExportsPakistan'sexport(MillionRs)currentfactorpercentage(MillionU.S.$)(MillionU.S.aspercentageof(CurrentPrices)costs.(MillionR )ofGDPdollars)worldexports(1)(2)(3)(4)(5)(6)(7)1960-61540.2183592.94113.51146000.09961-62542.9191391.84114.11198000.09562-63998.1204894.87209.71252000.16763-641075.0229454.69225.81374000.16464-651139.6262024.35239.41540000.15565-661203.6289694.15252.91671000.15166-671297.3326223.98272.51836000.14867-681644.8355424.63345.61927000.17968-691699.9379854.48357.12152000.16669-701608.6433453.71337.92466000.13770-711998.4457024.37419.82837000.14871-723371.4491606.86608.63174000.19272-738551.26079514.07807.53768000.21473-7410161.28044112.631026.45242000.19674-7510286.31046409.831039.07733000.13475-7611252.91214239.271136.77965000.14376-7711293.91356868.321140.89068000.12677-7812980.41565628.291311.210299000.127SOURCE:Col.2PakistanEconomicSurvey(1978-79),tatisticalTable9.1p.9 . Col.3:PakistanEconomicSurvey(1978-79),tatisticalTable2.2pp.1 -13. Col.5:alculatedfromC l.2bydividingthrupeefig r srel vantatofxchange, i.e.upto1970-71neU.S.$=Rs4 6,f r1971-72,oneU. $=Rs5 54;f r 1972-73,oneU.S.$=Rs.10.59,andfrom1973-74o wardsneU S.$=Rs90. Col.6:IMF,"InternationalFinanci lS atistics"var ousssues. (a):Dataonworldexportsisfcalen ery ars,i. .thiblw rldexpo ts for1960-61standfexportsin19 0.period to 0.156 per cent for the period of 1965-66 to1969-70 - an increase of nearly 15 per cent. This may beregarded as an indication of the success of Pakistan'sefforts to break through the world market. Pakistan'sshare of world exports increased rapidly in the earlyseventies for the reasons mentioned above and reached anall-time high of 0.214 per cent in 1972-73. Since thenit has constantly been on the decline and plunged to0.126 per cent in 1976-77, an all-time low after 1962-63.An almost similar pattern is discernable forPakistan's exports as a percentage of her GDP. The shareof exports to the GDP rose from 2.94 per cent in 1960-61to 4.87 per cent in 1962-63, which was never reattaineduntil 1971-72. However, on average, the ratio of exportsto GDP increased from 3.94 per cent in the 1960-61 to1964-65 period to 4.19 per cent for the period 1965-66 to1969-70 - an increase of about 6.4 per cent. The highestratio of exports to GDP, 14.07 per cent, was achieved in1972-73, since when it has been declining continuouslyreaching 8.29 per cent in 1977-78.2.6.1 Composition of exportsThe structure of Pakistan's exports by broad economiccategories, i.e. primary vs. manufactured commodities isgiven in Table 2.14. This table gives evidence of thechanges in the composition of Pakistan's exports. Whereasmost of the foreign exchange earnings came from the exportof primary commodities in the fifties, the share of thiscategory in total exports has been diminishing over time.The share of primary commodities in total foreign exchangeearnings decreased from about 91 per cent in 1955 to about41 per cent in 1969-70. This has been primarily because ofthe expansion of the manufacturing sector within the countryand concerted efforts of the government through differentexport incentive schemes for the expansion of manufacturedexports. While on the one hand, expanding manufacturingindustries consumed an increasing proportion of primarycommodities within the country leaving less of those avail¬able for export, on the other hand, the subsidies to theexports of manufactured products led to an increase in theshare of manufactured goods in the total exports.- 45 -TABLE2.14EconomicClassificationfExportsYEARTotalexports (MillionRs)PRIMARYCOM ODITIESMANUFACTURES " pf E , > 1 for the items that benefitted fromf dexport promotion schemes. It is reasonable because thoseitems, offered by a Pakistani exporter, constitute only avery small part of the total supply in the export market;and therefore, changes in the quantity of his export of theseitems are unlikely to affect export prices very much. On theother hand, the proportion of the protected domestic marketsupplied by the producer is likely to be much greater thanthat for the world market. If this inequality holds, thenP > Pd f •In the preceding paragraphs the equilibrium conditionsof a producer, selling in the domestic market and abroad,have been outlined. Now the question is what happens whenthe export promotion schemes are initiated, or the effectiveexchange rate for exports increases? With the introductionof these schemes, the effective exchange rate for exportsincreases. The exporter receives higher domestic currencyearnings for any given quantity exported. If we denote theincrease in the effective exchange rate by (AEER), he nowreceives a price equal to [ P^ + (AEER)P^] in rupees for anygiven quantity exported. The demand curve from abroad,expressed in domestic currency (which is fixed in foreigncurrency), shifts upwards in the proportion of AEER, and themarginal revenue in the export market will also rise. Theproducer is encouraged to shift his sales from the domesticmarket to the export market. This can be shown with the helpof diagram No. 6.1In diagram No.6.1 the domestic demand curve is lesselastic at a given price compared to the foreign market. Theequilibrium output of the producer is at the intersection ofthe marginal cost curve with the combined marginal revenuecurves. Before the introduction of export promotion schemes,a quantity q^ is produced, and allocated to the two markets(5) is the price which the foreign importer pays to the Pakistaniexporter, converted in rupees at the official exchange rate.- 176 -DIAGRAM6.1:EquilibriumConditionsfaProd cerSellingthDome tica dFor ignMarkets.PriceD,DomesticMarketA.ForeignMarket\\Price DiquantityMarginal Revenue and Marginal costCombinedMark tquantityquantityin such a way that marginal revenue is equal for each market,i.e. q^ in the domestic market and q^ in the foreignmarket. After the introduction of the schemes, when theeffective exchange rate for exports increases, the exportergets more in domestic currency for a given quantity of thecommodity. The demand curve in the foreign market, expressedin domestic currency units, shifts upwards and so does themarginal revenue. Now the exporter produces qand allo¬cates it in the two markets (qh2 ^-n domestic market, andq_£2 in the foreign market) in order to equate marginalrevenues from each market, and to be in equilibrium again.Since the foreign market becomes more profitable, theexporter shifts some quantity :from "the domesticmarket to the foreign market. These results would hold evenif the foreign demand curve were downward-sloping.The increase in exports will be greater, the moreelastic is the marginal cost curve, the domestic demand curveand the foreign demand curve, and the more slowly theseelasticities fall as the quantities produced and sold in eachmarket, change. If output cannot be increased, then allincrements in exports would be at the expense of the domesticuse of the commodity. On the other hand, if domestic demandwere completely inelastic over the relevant range, and theoutput could not be increased, no increase in exports wouldtake place, no matter how great was the elasticity of foreigndemand. If the elasticity of domestic demand was low, themarginal revenue in the two markets would be equated withonly a small increase in exports. But if a small price risein the domestic market releases relatively large quantitiesfrom the domestic use, i.e. the elasticity of domestic demandis h igh, then it will be possible to increase exports bysubstantially more. Similarly the elasticity of foreigndemand plays an important role in determining the level ofexports. Given the domestic demand curve, the marginalrevenue of the export market will fall more slowly, the moreelastic is the foreign curve and it will take larger increasein exports to re-equate the marginal revenues. In the extremecase of perfectly elastic foreign demand curve, the foreign- 178 -market will absorb any quantity of the product that can besupplied.The above argument is in terms of price elasticities,but over several periods there is also an income effect atwork. Therefore, income changes at home and abroad, andincome elasticities in the two markets should also be takeninto account. The demand curves will tend to move to theright as incomes rise. If the domestic income elasticity ofdemand is high relative to the foreign income elasticity,then for an equal proportional rise in incomes, it will makethe foreign market less attractive. So in the long-run, bothforeign and domestic income elasticities become importantfor the analysis of exports.The preceding discussion was couched in terms of anindividual producing firm. Data are not available for singleproducing units, so all producers in an industry are lumpedtogether as a giant firm. This introduces some degree oferror, but it is thought not to be significant. All producersface approximately the same foreign demand curve. Differentproducers may have different cost and individual domesticdemand curves. These differences, however, would not be sogreat as to violate the logic of the argument.6.2 Functional Form of the Model.We have tried to examine the question whether the exportperformance, particularly of manufactures, was responsive tothe Government's export promotional efforts during the period1959-60 to 1976-77. Making the 'small country' assumptionthat the country faces a perfectly elastic demand for itsexports in the world market, the so-called 'export function'was estimated.A number of other studies in recent years have usedsimilar specification of the models to analyse export perfor¬mance in the developing countries. These studies includeamong others, Halevi (1972), Tyler (1973), Teiigeiro and Elson(1973), Pomfret (1975), Donges and Reidel (1977), Yang (1978),and the NBER Project Country Studies summarised in theSynthesis Volumes by Bhagwati (1978) and Krueger (1978).- 17 9 -The basic model estimated was of the form:-ln (X ) = a + b(In EERt> + c(ln Qt) + etwhere:X^. = Export variable, annual observations on quantityor value of exports,EERtEffective Exchange Rate or some other variableof export prices,Q.tIndex of production, relevant for the categoryof exports considered, e.g. Index of Manufac¬turing production for manufactured exports orindex of agricultural production for primaryexports, anderror term.In considering the effects of policy variables on theexport performance, the export variable should actually bethe physical quantities of exports. Data on physicalquantities of exports were not available. Therefore, thevalue of exports (FOB), expressed in U.S. dollars, data weretaken as the dependent variable.The Foreign Trade Statistics of Pakistan have generallyreported the value of exports FOB in rupees: their value indollars was obtained by dividing the value in rupees by theofficial exchange rate in different years. This transforma¬tion was considered necessary because after the devaluationin 1972, the value of exports recorded in current rupeeswas inflated merely because of the change in the par value ofthe rupee. However, value data are the product of quantityand price. Changes in value over time may not accuratelyrepresent changes in the quantity of exports. Therefore, toremove the effect of price changes, value of exports datawere deflated, where possible, by the unit value index ofexports, and these deflated data as well were used as thedependent variable.EER , the explanatory variable, was the effectiveexchange rate, i.e. what exporters actually received indomestic currency for each unit of foreign exchange earned.Since the regression results using the deflated value data, or wherepossible the actual physical quantity of exports data, were generally similarto those obtained by using the dollar value of exports as the dependentvariable, the former were not reported in the study.180Various concepts of EERs and their estimates are explainedin the previous chapter. However, the choice before theexporters is between producing for exports, or for somedomestic use. Therefore a relative price variable was alsotried. The relative price variable was obtained by multiply¬ing the index of export prices by the EER and dividing it byPf x EERan index of domestic prices, i.e. = . Indices of exportdunit values, expressed in dollars, were taken as indicators of/e\foreign prices. The domestic price index to use dependsupon the type of situation being examined. For the exportsof manufactured commodities, the index of wholesale pricesof manufactures in the domestic market was used. In the caseof specific commodities, an index of their wholesale pricesin the domestic market can be used. The coefficient ofrelative price thus specified can be considered a price sub¬stitution parameter indicating the price elasticity of export¬ing vs. supplying to the domestic market. A significantpositive estimated coefficient implies that producers areresponsive to marginal financial incentives to export.Learner and Stern (1970) and Murray and Ginman (1976)among others, have argued however, that the use of relativeprice variable in the mathematical specification constrainsthe influence of the two price variables to be equal inmagnitude, and opposite in sign. This constraint is suspectand should be tested for the equality of elasticities ofexport with respect to foreign and domestic prices.The constraint is suspect on the following grounds:-(6) Learner and Stern (1970) and Kravis and Lipsey (1971) have stressedthat one must exercise great care in the use and interpretation ofunit value indices. They have pointed out that a unit value indexis not a true price index, and there is never any certainty that achange in unit value index represents a change in price. Unitvalues are values per unit of quantity within detailed exportclassifications. They cannot be narrowly specified unless theirnumber is increased beyond practical limits. So they are calculatedfor particular commodity classes of exports by dividing the valueof exports of that class by the quantity exported. The unit valueindex is a weighted average of such unit values. It may changebecause of the commodity composition or any of the commodity classesquite independently of any price change. Moreover, for many commodi¬ties, the quantities are not reported at all, and their unit valuesare not available. Therefore, only a small percentage of exports iscovered in unit value index calculations.- 181 -1. If the investigation is limited to manufactured goods orto some more narrowly defined, but still hetrogeneouscommodity groups, any individual commodity price islikely to be weighted in the export price index differ¬ently than it is in the domestic price index. In manycases, a more general price index for domestic pricessuch as the wholesale price index, the consumer priceindex, the GNP deflator etc. is used, in which case therange of goods covered in the domestic price index coulddiffer substantially from those covered in the exportprice index.2. Even if it were possible to correctly include only theprices of exportables in the domestic price index, it ispossible that the domestic producers hold a preferencefor domestic over the foreign market in view of therelative ease in selling to the protected domestic marketrather than selling in the foreign market, where thecompetition is tough and a number of other factors makeselling in the foreign market more difficult., the second explanatory variable, is the index ofproduction - index of industrial production in thecase of manufactured exports; index of agriculturalproduction in the case of agricultural exports, andthe index of production of specific commodities inthe case of specific commodities. In a developingeconomy, the transformation curve is expected toshift outwards. was used as a proxy for the out¬ward shift in the transformation curve.Besides effective exchange rates, prices in the domesticand foreign markets, and the level of production etc. there area number of other factors which determine the export performanceof a country. Such factors include confidence in the exportmarket, entrepreneurial talent and commercial expertise, trans¬portation infra-structure and the like, and they play animportant role in determining export behaviour. In Pakistan,the Government pursued a policy of persuasion, exhortation andpressure in order to encourage the export of manufactures.- 182 -Entry into the export market was one of the most effectiveways of winning the favour of the government, which exercisesconsiderable direct and indirect control over private enter¬prises. Compulsory fixation of export quotas, non-fulfilmentof which incurred the displeasure of the government, was not(7)uncommon. Unfortunately these factors defy measurement;so it was difficult to capture quantitatively their influenceon export performance.6.3 Some Statistical Problems.(1) Indentification of the relation.The above specification of the model resembles an exportsupply function, in which EER measures movements along thefunction and Q accounts for shifts in the function. Onlyunder special circumstances would the points obtained fromtime series of EERs (price) and quantity data fall along thesupply curve. This is so becuase there is not only a supplyrelation, but also a relation between price and quantitydemanded. We are using annual EERs (price or relative price)and value as a proxy for quantity of exports historical data,in order to obtain quantitative estimates of the way in whichexports of manufactures (or primary products or particularproducts at a more disaggregated level) responded to EERs.The price and quantity sold each year might be represented asa single point on a diagram, having price measured along oneaxis, and quantity along the other. The historical data mightthen be represented as a set of points on a scatter diagram.A line would then be fitted through these points in such a way( 8^as to obtain the best fit in some sense. The question is:Can we identify this relation to be the supply relation, andnot the demand or some other relation?If the quantity demanded and supplied depended exclusivelyon the price, and the rate of exchange were fixed, the point ofintersection of the demand and supply curves would be the onlypoint at which they would match. We would be able to observe(7) Islam (1969, p.178).(8) The usual criterion by which a line of best fit is chosen is that ofminimizing the sum of squared residuals from the line in a directionparallel to the axis along which the dependent variable is measured.- 183 -only this point. Any line passing through this one pointwould fit perfectly well. We would not be able to deter¬mine whether it is the supply relation, or the demandrelation, which is the classical problem of identification.However, in our case, the EER is not fixed, but is changing.The change in the EER in itself does not affect the short-runsupply curve. The supply of exports from Pakistan is deter¬mined by the production function and the under-lying costsof production, technology etc., which would not change rapidly.Industries do not grow up or fade-away in six months or a year.The short-run supply schedule of exports may, therefore, betaken as given. On the other hand, the demand for Pakistan'sexports in the importing countries is determined by the importprices, incomes in those countries, tastes and habits and otherfactors affecting demand. Any positive change in the EERswould shift upwards, in terms of rupees, the demand schedule,which is given and fixed in foreign currency. If the demandcurve is infinitely elastic (in the case of the small countryassumption), it will shift upwards, parallel to the originaldemand curve, in proportion to the increase in EER. Ifthe demand curve is less than infinitely elastic (in the caseof downward sloping demand curve) it will pivot upwards aboutthe intersection point with the quantity axis in proportionto the increase in the EER. Then the historical pointsgenerated by the intersection of the shifting demand scheduleand fixed supply schedule would be scattered along the supplycurve. In this case, the supply surve will be identified.Particularly with the small country assumption, the points ofintersection would all fall along the supply curve, and a truesupply relation would be identified. Assuming random variationaround the true supply curve, we can still hope to be able toidentify the supply curve.Given that we have some confidence that the supply curvehas been identified, it remains to consider what sort ofsupply function has been identified. We, therefore, concludethis section by considering long-term and short-term effectson supply.Although the short-run supply curve is not affected by- 184 -changes in EERs, the same cannot be assumed over severalperiods. The working of export promotion schemes in Pakistanallowed for more imports of raw materials and capital goods.This would result in fuller utilization of the existingcapacity and/or creation of new capacity. As the Government'sannounced policy was to continue the export incentive schemesfor a number of years, the producers could expect a permanentrise (in terms of rupees) in the foreign demand curve. Ifthe prices of exportables in the domestic market equal thosein the export market, they would rise after the introduc¬tion of export promotion schemes. The increase in EERs andthe resultant shift of quantity from the domestic market tothe foreign market will also increase the prices in thedomestic market. The higher domestic prices encourage expan¬sion of capacity by the existing firms and/or entry of newfirms. Over several periods, therefore, fuller utilizationof the existing capacity and/or creation of new capcity wouldmake the supply curve more elastic or would shift it towardsthe right. If the shift in the supply curve is substantiallyless than the shift in the demand curve, we can still hopeto identify the supply curve. In this case, however, theregression coefficients will estimate neither short-run norlong-run supply response to EERs, but will estimate some com¬bination of the two.(2 ) Shifts in the Function.The trade between former East and West Pakistan, whichhad been built over nearly a quarter-of-a-century, was dis¬rupted in 1971. After delinking of the Eastern wing fromthe rest of the country, the exports going to that part werediverted to the international market. This diversion of tradecomplicates the analysis. One of the objectives among others,of the devaluation of the Pakistani Rupee in May, 1972, was todispose of this surplus created by the cessation of trade.The discontinuation of trade between the two wings would havecaused an upward shift in the export (supply) function fromPakistan. The problem of shift in the function can possiblybe dealt with in two ways:-- 185 -(i) by the introduction of a dummy variable,(ii) by treating the exports, expressed at world prices,going to former East Pakistan as international trade,adding them to exports going to the internationalmarket for the period before 1971, and thus makingthe exports time-series 'consistent'.Both these methods were tried. The data for (ii) on exportsgoing to former East Pakistan, in terms of world prices, weretaken from Radhu (1973, p.153). Radhu had estimated thevalue of inter-wing trade at world prices in the following way:-1. For those commodities which one region exported to theother region as well as to foreign countries, and couldbe easily identified, FOB unit values were used toarrive at their value at world prices.2. For those primary commodities which were not given anyexport subsidy, their domestic prices were assumed toequal their world prices except for the difference offreight and insurance etc.3. For the remaining commodities, which were given exportsubsidy, the differential between the domestic priceand world price was approximated by the amount of subsidyoriginating from the Export Bonus Scheme. To arrive atworld prices, their domestic prices were deflated in thefollowing way:-P .w (1 + bp)where:Pw = world price (FOB)P^ = domestic price,b = bonus rate, andp = rate of premium on the bonus.However, deflating the domestic price by the amount of exportbonus alone would over-state the world price, because:-(i) In addition to the export bonus scheme, there were otherexport incentive schemes as well, like the export per-- 186 -formance licensing scheme, exemption from indirect taxesand tax rebates etc.(ii) Many commodities entering the inter-wing trade involveddomestic prices substantially above the world pricesdue to import restrictions.Nevertheless, it is believed that the over-statement of worldprices for some of the manufactured goods is not largeenough to influence the regression coefficients in any signi¬ficant manner and make them biased.6.4 Estimation ResultsBoth linear and log-linear forms of the regression wereestimated. The logarithmic form differed very little fromthe arithmetic form, and in some cases gave a better fit. Inaddition, the coefficients of the logarithmic function areeasier to interpret. It assumes a constant elasticity betweenthe dependent and the independent variable at all points onthe same curve, and the coefficients of explanatory variables(9)can directly be interpret ed as estimates of the elasticity.We have, therefore, reported below only the results of logar¬ithmic estimation.Some problems in the estimation and interpretation ofthe results must be spelled out at the outset. First, thereis the problem of multi-collinearity. Least squares estima¬tion assumes that there is no linear dependence between theX dy(9) The elasticity of Y with respect to X is defined as (— x —*-) .6In the function Y = Ax or In Y = In A + 3 In X. To get elasticityX dyof Y with respect to X, substitute for Y in the expression (— x ——) ,V V, • X d /Awhich gives —5- x —(Ax ) ,AxP dxor —-5— x A$x^ 1 = 0Ax.". 6 is the estimate of elasticity of Y with respect to X.(Johnston (1972,p.52)) .- 187 -explanatory variables. Whilst there are few economicvariables which exhibit perfect collinearity, it is notuncommon for them to be almost collinear. We should knowwhat consequences to expect if this is the case. If theexplanatory variables are highly but not perfectly collinear,the main consequences are:-i) The precision of estimation falls so that it becomesdifficult to disentagle the relative influence ofvarious explanatory variables.ii) Regression parameters have very high standard errorsand we cannot reject the null-hypothesis that thecoefficients are not significantly different fromzero. The true situation may be not that a variablehas no effect but simply that the set of sample datahas not enabled us to pick it up.iii) If the estimated coefficient of one explanatory variableunder-estimates its true value, then the estimatedcoefficient of the other is likely to over-estimate itstrue value and vice versa. There is a possibility ofone explanatory variable being 'robbed of its influence'by the other collinear explanatory variable.Secondly, in time-series analysis, there is often theproblem of serial correlation. Least squares estimationassumes that errors corresponding to different observationsare uncorrelated. The assumption of serial independence forthe disturbance terms may not be satisfied in time-seriesstudies because of either the high degrees of correlationover time present in the cumulative effects of the omittedvariables in the regression model, or because of correlationin the measurement error component of the error term. In thepresence of serial correlation, in general, we shall obtainunbiased estimates of the regression coefficients, but theordinary least squares formulae will give estimates of thestandard errors (of the regression coefficients as well asof the regression) smaller than the true standard errors.(10) With perfect collinearity, we cannot calculate the least-squareparameter estimates.- 188 -This will lead to the conclusion that the parameter esti¬mates are more precise than they actually are. There willbe a tendency to reject the null hypothesis that the coeffi¬cients are not significantly different from zero, when infact, it should not be rejected. Therefore care must beexercised in interpretting the results.6.4.1 Regression Results for Manufactured Exports.Regression results for Pakistan's manufactured exportsare given in Table 6.1. Data used are annual observationson both the dependent and the explanatory variables. Regres¬sions 1 through 6 relate the FOB dollar value of manufacturedexports (X) to the effective exchange rates for exports (EER),a relative price index (RP), an index of export pricesactually received (indomestic currency) by the exporter (PF),an index of domestic wholesale prices of manufactures (PH) andthe index of manufacturing production in the country (Q). Adummy variable for the period 1971-2 to 1973-74 was also usedto take account of the separation of former East Pakistan*■from the rest of the country. Cessation of trade between thetwo wings of the country was expected to have shifted upwardsthe export supply function from former West Pakistan. However,given the chaotic situation in the country during the earlyseventies, some very rapid and perhaps unexpected changes likethe nationalization of a number of industries and social andeconomic reforms establishing new management-employee rela¬tions etc. made by the Government would have speeded upre-structuring of the manufacturing sector. The process ofre-structuring was reinforced by oil price rises since 1973.In addition, trade with former East Pakistan, thoughon a limited scale, was resumed in 1974-75. Later, a generalgood-will trade agreement was concluded between the twocountries in April 1976. The agreement provided for freetrade in all items of imports and exports subject to the rulesand regulations of each country. As a result, the upward* Later, it was recognised that in the treatment of the dummy variablean error had been made. The dummy variable of 1 should have beenused for the whole period after the separation of former East Pakistan.Therefore, only the results of regressions for the alternative methodof dealing with the separation of former East Pakistan are satisfactory.(10) Pakistan Economic Survey (1975-76), p.133.- 189 -TABLE6.1:RegressionesultsforPaki ta 'sManufac uredExp rts.(1960-61t76-77) Dependent VariableEXPLANATORYVARI BLES. InterceptInEER VinRPtinPFInPH XinQtDR2F-StatisticDWSEE1.inX"9-37** (-10.55)1.78 (1.57)ai.98„ (4.33)0.94135.831.440.242.InX-8.86.**(-9.55)1.23 (1.06)2-10** (4.68)0.24 (1.43)0.9598.031.290.243.inX**(-5.26)0.62 (1.31)2.61 (15.52)**0.94129.391.250.254.inX-9.30**(-3.15)0■15 (0-2,6)2.55**(14.71)*0.27 (1.26)0.9490.401.070.245.inX-9.08 (-12.34)**0.64 (1.67)-0.05 (-0.12)2.09 (9.03)**0.96131.961.800.206.inX-8.60 (-13.08)**0.001 (0.002)0.67 (1.42)1.92 (9.23)**0.37 (2.43)*0.97137.881.860.177.inXAt-7.43 (-9.37)**1.78 (1.76)*1.65 (4.03)**0.94130.161.280.228.inXA-9.75 (4.83)**0.60 (1.40)2.28 (14.99)**0.94121.330.970.229.inXA-7.15 (-12.08)**0.62 (2.01)*-0.007 (-0.02)1.73 (9.29)**0.97156.781.700.16Notes:FiguresinParenth sesathvaluoft-s ti tic.S bscriptsign fiestim - eridataed. In=Naturallogarithmsofthevari bles.X=FOBv ueofm nufacturedxpo ts( . . PSTC5+67+8),expressedinUSDollars. XA=theaboveFOBvaluofm nufacturedexportsm dc nsist ntyaddingthv luefman factured commoditiesexp rtedtfor rEastPakistandu i gtheriodf1960-617 7 .Thev lue ofexportstformerEastPaki tan,expr ssedworlp ic sadiscu sednthtext,wt k n fromRadhu(1973,p.15 ),tr nsformedi toUSdollars,anthenddedtvaluefm nufactured productsexportedthinternationalmarket.continued.Table6.1continued Notescontd. EER-Effectivexchangerati.e.unitsofdom sticcurrencynexporteractuallyr ceivedf oned llarearned. p3C£]|jJRP=Relativepr cindexsdefin dith t,i. .-fpH— PF=Indexofexportunitvaluesft rtakingin oacc untvariousexportpr m ionmeasures includednthEffectiveExchangeRa es. PH=Indexofwholesalepricesf rmanuf cturesithd me ticarket. Q=Indexofmanu acturingprodu ioniP kista . D=ummyvariable;1for1971-72to1973-74,0f rloth ryears. *,Significantlydifferefromz roathe5p rentl vel. **,Significantlydifferefromz roathe1p rntl vel, a,Significantlydifferefromz roathe7p rentl vel.shift in the export supply function would not have lastedlong. In view of this, the dummy variable was includedonly up to 1973-74. In all the regressions, the interceptterm and the coefficient of the index of manufacturingproduction were highly significant, but the coefficientsof EER or other price variables, though of expected signsexcept in 6, were not statistically significant. In viewof the great importance attached to export promotion schemesin Pakistan and the generally held view that Pakistan'sexport promotion schemes, particularly with regard toexchange rate policy, have been successful in expandingexports from the country, this result needs to be examinedcarefully. Examination of the data revealed that the EERhad remained relatively stable during the period (with mean,2.17 and standard deviation, 0.15). This relative stabilitywas the result of the Government's deliberate policy toarrest fluctuations in the EERs within narrow limits. Thiswas achieved through changes in rate structure of the ExportBonus Scheme, changes in the bonus import list and allocationof cash foreign exchange resources for direct import licen¬sing etc. Such lack of variation in an explanatory variablepresents problems in statistical estimation, of which themost serious was the problem of multi-collinearity betweenthe EER and Q. When the effective exchange rate for manu¬factured exports increased, their production became moreprofitable. Resource allocation moved towards manufacturingproduction. It is not possible to say how much of this pro¬duction increased due to favourable EERs, and how much of itincreased because of other growth factors. There was a veryhigh positive correlation between the EER and Q. Consequently,it is probable that the coefficient of Q included part ofthe effect of EER on exports. The exact magnitude of thispart is not known. Therefore, it may be argued that thestatistically non-significant coefficient of the EER or theRP was obtained, not because the export promotion policieswere unimportant, but because there was multi-collinearitybetween the EER and Q, and because changes in the EER over- 192 -time were relatively small. Given the small year to yearchanges in EER, the EER could still significantly affect(not statistically) exporting of manufactures by making itprofitable if it was sufficiently higher than the officialexchange rate. This most probably was the case.The dummy variable was of the expected sign suggestingthat the delinking of former East Pakistan might haveshifted upwards the export supply function from former WestPakistan. In general, the coefficient of the dummy variablewas not significantly different from zero and changed theother coefficients. Moreover, in view of the very fewdegrees of freedom on the dummy variable, we cannot placemuch confidence on it. Therefore, the dependent variablewas adjusted to take account of the exports going to formerEast Pakistan during the period of 1960-61 to 1970-71. Thiswas done by taking export data on the inter-wing trade,expressed at world prices, from Rahdu (1973), converting itinto U.S. dollars and then adding it to exports from formerWast Pakistan to the international market. This would makethe export time-series 'consistent' for the period of 1960-61to 1976-77. This adjustment may be justified on the groundsthata) former East and West Pakistan were separated from eachother by more than 1000 miles of Indian territory orabout 3000 miles of sea-voyage;b) presumably, the exporters from former West Pakistanwould not be selling their products to former EastPakistan at prices below what they could get fromselling them in the international market (i.e. pricespaid by the importers plus export subsidies impliedby the export promotion schemes).Therefore, exports to former East Pakistan, expressed atworld prices, may be regarded as exports to the world marketfor present purposes. Regressions on 'consistent' exporttime-series were run, the results of which are given inrelations 7 to 9 in Table 6.1. These results are consistentwith a priori beliefs. While the intercept term and the- 193 -coefficient of the index of manufacturing production remainhighly significant, the coefficient of the EER in 7 alsobecomes significantly different from zero at the 5 per centlevel. This supports the hypothesis that the exchange ratepolicy did matter in expanding exports from Pakistan. Theestimates of parameters in relation 7 mean that for a 1 percent increase in the EER,there was a 1.78 per cent increasein the FOB value of exports, level of production being heldconstant; whereas for a given level of the EER, a 1 percent increase in the index of manufacturing production ledto a 1.65 per cent increase in exports. While the numericalprecision of these elasticities may be questionable, theseresults do suggest that both the EER and Q were importantin expanding exports from Pakistan. Regressions 8 and 9produce correct signs for all the coefficients, but thecoefficient of the relative price index (RP) in 8 is signif¬icant only at the 10 per cent level of significance, and theDurbin-Watson statistic is very low. The presence of serialcorrelation makes the tests of significance on estimates ofparameters doubtful. Therefore, in regression 9 we intro¬duced separate price variables (i.e. PF and PH) for theexport market and the domestic market along with Q. Theresults are quite satisfactory. There is no serious serialcorrelation as can be seen from the Durbin-Watson statisticof 1.70. The DW lies above the (for k = 3 and n = 17) of1.58, and is less than 2. R2 and F-statistic both are veryhigh. The significant coefficient of PF suggests that inspite of a generally falling unit value for manufacturedexports/10^ the high EERs made the export market profitable.(10) Unit values for Manufactured exports of Pakistan (1960-61= 100)1960-61 100.0 1965-66 105.5 1970-71 97.2 1975-76 387.661-62 100.462-63 95.763-64 95.064-65 100.666-67 99.567-68 98.468-69 99.669-70 103.471-72 121.572-73 307.473-74 481.774-75 396.476-77 495.4SOURCE: Up to 1973-74 Pakistan Economic Survey (1974-75), Table38, pp.98-99; for the rest, Statistical Yearbook (1977-78)p.260, which were changed to base 1960-61 = 100.The coefficient of PH not being different from zero may betaken to mean that the rise in domestic prices for manu¬factures relative to the subsidies involved in the exportpromotion schemes was not high enough to make the exportmarket unfavourable. The coefficient of Q is highly signi¬ficant as usual. However, it must be noted that all theseresults are in the face of multi-collinearity, which wouldbe quite high between PF and PH, and also between theseprice variables and Q.So far in all regressions, the exports in period thave been regressed on the EER or the other price variablesand Q in period t. The exporters may not have been able torespond fully to the increased EER or RP in the currentperiod. Time is required for production and delivery; orthe exporters may have had contractual obligations in thedomestic market. Again some time may be needed before theyhave confidence in export promotion measures as policieswhich are going to last. The process of adjustment cannotbe measured fully by using current data variables alone;lags need to be taken into account. Omission of lags exag¬gerates the immediate effect of a given year's price varia¬bles and under-states their cumulative effect. Therefore,a partial adjustment model^^was employed so as to intro¬duce a lagged adjustment of exports to changes in theindependent variables.*Let X^_ be the optimal (expected) value of exports whenthe EER and other independent variables of period t have hadsufficient time to operate, i.e.X* = a + b(EERt) + C(Qt) + e . . . (I)The adjustment function may be postulated such that thecurrent exports (X ) adjust from the starting position (X. .. )sjc L— -Lto the optimal level (Xt) by 6 100 per cent, with 0 < 5 < 1:Then Xt = Xt_j + « (X*t -^)(11) For details see Johnston (1972, pp.300 - 320) and the referencescited there.- 195 -OR Xt = 6 X* + (l-6)Xt_1 ..(II)substituting I into II gives:Xt = 6[a + b(EERt) + C(Qt) + et] + (l-5)Xt_1OR X = 6a + 6b(EERt) + Sc(Qt) + (1 - 6)Xt_1 + 6et . .(Ill)The Constant 6 is to be interpreted as a coefficientof adjustment and should fall between zero and one. Itsvalue can be obtained by substracting the coefficient ofX^_^ in III from one. The closer 6 is to unity, the greateris the adjustment made in the current period, and the closerit is to zero the slower the adjustment process will be.The long-run coefficients a, b and c can be calculated bydividing the regression coefficients by one minus thecoefficient of X^_^.The relation of type III for Pakistan's manufacturedexports for the period of 1961-62 to 1976-77 was estimatedand the results (of log-linear form) are reported in Table6.2. The results of this exercise look generally betterthan those without the lag-structure. This means thatthe introduction of lag-structure was probably important,and the exporters responded to export incentives only partlywithin the current period. However, in regressions 1 through4, in which the unadjusted export variable was used as thedependent variable, the coefficient of the lagged dependentvariable was not found to be significant except in 4. Thedummy variable was also of expected sign but not significant.Therefore relations 5 and 6 were estimated using the 'Consis¬tent' export time-series as the dependent variable. Inregression 5 all the coefficients were significant - theintercept term at the 1 per cent level and all other coeffi¬cients at the 5 per cent level of significance. Thecoefficient of the lagged dependent variable suggests thatnearly two-thirds adjustment took place in the current period.The long-run elasticity of exports with respect to the effec¬tive exchange rate was about 2.51, and that with respect tothe index of manufacturing production was about 1.6.- 196 -TABLE6.2:RegressionesultsofPaki ta 'sM nufacturedExp ts(1961-62t76-77) DEPENDENTEXPLANATORYVARI BLES VARIABLEInterceptInEER^inRPtinQtlnVllnXA_t-1DR2F-StatisticSEEi.InX-7.68 (-3.18)**1.84 (2.10)1.37 (2.41)*0.29 (1.43)0.97163.260.172.InX-7.18skic(-3.19)1.40 (1.59)1.44 (2.66)*0.29 (1.52)0.18 (1.50)0.97135.860.163.InX-9.18 (-2.84)*0.59 (1.65)a1.82 (2.93)**0.36 (1.73)0.97146.150.184.InX-7.05 (-1.92)*0.25 (0.55)1.69 (2.72)**0.38 (1.85)*0.18 (1.16)0.97113.190.185.InXA-5.50 (-2.89)**1.58 (2.04)*1.01 (2.23)*0.37 (1.88)*0.97179.080.146.InXAI-6.65 (-2.74)**0.53 (1.82)*1.31 (2.71)*0.47 (2.54)**0.97169.170.15Notes:-(i)Allvariablesndym olsrhs meexplain diT6.1,except =Xlaggedoneyear. XA^_=Alaggedoneyear. (ii)a,significantlydifferentfromzeroatapproximately6rc tlevefs gnificanc . (iii)TheDWStatisticinotrep rtedh ,becauseDurb n-Watsont stoapplicablen equationcontai inglaggedv luesfthdepend tvariablemongthxpla atoryv ri bles.Similarly, in regression 6, the coefficient of the laggeddependent variable is significant at the 1 level andsuggests an even slower process of adjustment. It suggeststhat only about 53 per cent of adjustment was taking placein the current period. This may be plausible in view ofthe price variable used in this regression, which is therelative price variable. The exporters might need moretime to fully appreciate movements of actual prices in boththe foreign and the domestic markets. The significantcoefficient of RP in regression 6 implies that exportersdid respond to export incentives, and the price elasticityof substitution of exporting versus supplying to thedomestic market was significant. The significant coefficientof Q implies that the expansion of manufacturing productionwas export-biased. Whatever questions exist about thenumerical precision of these elasticities, the results ofregressions 5 and 6 strongly suggest that the elasticity ofexports with respect to export incentives was greater thanunity. This view is supported by the formulation of themodel in 5 and 6 which contains a lagged dependent variableon the right-hand side. Such a model under-estimates thecoefficients of explanatory variables. Johnston (1972,pp.304 - 7) has proved that even if disturbances are seri¬ally uncorrelated, the presence of a lagged dependent variableamong the explanatory variables, and the consequent correla¬tion of the disturbance term with the explanatory variables,will produce biased estimates in small samples. The biaswill be downwards and the coefficients will be under-estimated.6.4.2 Regression results for primary exports.Similar regressions were performed for the exports ofprimary commodities; the results are given in Table 6.3.The FOB value of primary exports, expressed in U.S. dollars,was regressed on the effective exchange rate for primaryexports (EER), their relative price index defined as theratio of export prices actually received by the exportersafter taking into account the export taxes or subsidiesincluded in the effective exchange rate to their domestic- 198 -(c)TABLE6.3:RegressionsultsforPaki tan'r maryExpor(1960-61t76-77) DEPENDENTEXPLANATORYVARIABLES VARIABLE InterceptInEERtinRPtmQtlnXt-1lnXAXAt-l.R2F-statisticDWSEE1.In0.092.090.300.8754.071.490.21t(0.05)(4.76)**(0.69)2.InX-8.23..**(-3.57)1 •14+1.63_**(4.05)0.7322.241.100.31t(1.89)3.InXA-0.04i-75** (4.52)0.460.8858.681.490.19t(-0.03)(1.20)4.InXA-6.99̂**(-3.54)0.95.i-58** (4.56)0.7626.121.110.26t(1.84)1961-62toL976-775.InX1.551-60̂**(2.99)-0.18°-35*0.8941.640.18t(0.99)(-0.42)(1.84)6.InX-3.050.740.290-66 (3.77)c0.8427.520.22t(-1.44)(1.57)(0.65)7.InXA.1.271.32̂**(2.84)-0.020.36.0.9044.370.16(0.92)(-0.06)(1.86)8.InXA-2.630.650.31°-65** (3.76)0.8631.180.19t(-1.47)(1.61)(0.76)Notes:(i)cPrimaryexportsaSTC0+123. (ii)Allvariab esandsym olrthemsforTab s6.12,exc ptt tinley refertoprimarycommodities.wholesale price index (RP), and the index of agriculturalproduction in Pakistan (Q). Both actual exports to therest of the world and the 'consistent' exports time-serieswere used as the dependent variable. The dummy variablefor the period of 1971-72 to 1973-74 was also tried. Thecoefficient of the dummy variable was generally of thecorrect sign, but in no case was it significant. We have,therefore, not reported the results of relations with thedummy variable. The correct sign of the dummy variablemight suggest that the disruption of trade with formerEast Pakistan caused an upward shift in the exports fromPakistan to the rest of the world, but statistically theshift was not significant. The reasons for that might havebeen, among other things, the bad weather conditions duringthe early seventies - drought in 1971-72 followed by heavyfloods in 1973-74^12^ - which badly affected the productionof agriculture and reduced the exportable surplus of thissector.The results in relations 1, 3, 5 and 7 all suggestthat the effective exchange rate significantly affected theexport performance of the primary sector. The exportersresponded to changes in the effective exchange rate. Theelasticity of primary exports with respect to the EER wasmore than unity in all cases. In relations 1 and 3, wherethe current exports were regressed on the current explana¬tory variables, it ranged from 1.75 to 2.09. This meansthat for a 1 per cent increase in the EER, the exportsincreased by 1.75 to 2.09 per cent. The adjustment processwas introduced in relations 5 and 7 in the same manner asfor manufactured exports. The coefficient of the laggeddependent variable suggests that nearly two-thirds of theadjustment took place within one year. The long-runelasticity of primary exports with respect to the EER givenby relations 5 and 7 ranged between 2.06 to 2.46. Thenumerical precision of these elasticities may be questionable,(12) The Pakistan Economic Survey (1973-74), p.33.- 200 -but they strongly suggest that the elasticity of primaryexports with respect to EER was greater than unity. Theexporters of primary commodities, like those of manufac-tued goods, responded significantly to changes in the EER.In none of these relations was the coefficient ofthe index of primary production (Q) found to be significant.Rather in relations 5 and 7, though not different from zero,it had a negative sign. There could be a number of reasonsfor that:-i) The level of the EERs for primary exports relative tothe EERs for manufactured exports had always been low,as analysed in the previous Chapter. This would havemade the production of primary commodities relativelyless profitable. The resources would have moved outof this sector into the comparatively more profitablemanufacturing sector and/or the production of non-exportable primary commodities might have increased,making the production of the primary sector biasedagainst exports.ii) Since manufactured exports enjoyed a more favourableeffective exchange rate, it was natural to export,whenever possible, the primary commodities in theirtransformed manufactured form, rather than in theunprocessed form. Raw cottom, raw hides and skins andraw wool etc., the major primary exportable commoditiesof Pakistan were being used in increasing quantitiesat home instead of being exported in raw form. Evenif their production had increased, in the face ofincreasing domestic demand, their quantity could failto affect primary exports.iii) Institutional arrangements as well played an importantrole in determining the export performance of primarycommodities from Pakistan. Compulsory fixation ofexport targets in respect of cotton and rice, amongother commodities, was not uncommon. The procurementof rice on a monopoly basis by the Government hadgenerally allowed 10 per cent of superior varieties of- 201 -rice for domestic consumption . The TradingCorporation of Pakistan, established in July 1967to act as a counterpart of the State Trading Organi¬sations of the Socialist countries for the imple¬mentation of barter trade agreements, was graduallyentrusted with additional responsibilities of exporttrade. Rice and cotton became two important items of(14)export by the Corporation. In 1973, the CottonExport Corporation, and later the Rice Export Corpor¬ation, were made responsible for the export of cottonand rice respectively. The Government, after consid¬ering the domestic demand and supply situation for rawmaterials, could instruct these Corporations whetherto enter, or not to enter into any new export contracts.Under these circumstances, the Government calculationswould play a greater role than the production indexof primary commodities.However, the negative sign for the coefficient of Qin relations 5 and 7 arouses the suspicion that in the long-run perhaps the resources were transferred from the produc¬tion of primary exports to other activites.In relations 2 and 4, the exports were regressed onthe index of relative prices for primary commodities andtheir index of production. The intercept term and thecoefficient of Q were found to be highly significant, whilethe coefficient of RP was significant at the 5 per centlevel. This means that given the level of production ofprimary commodities when the prices in the export market(after taking account of the EERs) were more favourablerelative to their prices in the domestic market, the expor¬ters tended to shift some of the commodity from the domesticmarket to the export market; and given the level of relativeprices, when the production of primary commodities increased,their exports were increased also. This may suggest thatexporters were responsive to EER variations, which in thepresent context were included in the export price index.(13) The Pakistan Economic Survey (1973-74), p.27.(14) Government of Pakistan "Government Sponsored Corporations"(1973-74)p.170.- 202 -Similarly, whenever the production of primary commoditiesincreased,probably due to favourable weather conditions,the surplus, after having met the domestic requirements,was sold into the foreign market. These relationshipswere found only when the current values of all the variableswere used in the regressions. When the lagged dependentvariable was included among the explanatory variables,all the coefficients except the one for the lagged depend¬ent variable became non-significant. This may be because,over time, the index of unit values for primary exportshad exhibited a rising-falling pattern, and the EERs as wellhad not been high enough to make the exporting of primarycommodities profitable in the long-run. Similarly, the pro¬duction of the primary sector was probably biased againstexports in the long-run.From the discussion of the regression results forthe manufacturing and the primary sectors and other evidenceanalysed so far, it may be concluded that the exporters bothof manufactured goods and of primary commodities respondedsignificantly to the effective exchange rates. The exchangerate policy played an important role in expanding exportsfrom Pakistan. Since the export promotion schemes affordedfavourable treatment to the manufactured exports, theirEERs were more favourable. Consequently the growth of themanufacturing sector was biased towards exports. On theother hand, the primary sector was given less favourabletreatment and the EERs assigned to this sector were compara¬tively lower. As a result, the growth of the primary sectorover time turned out to be biased against exports.6.4.3 Regression results for 'diaggregated' exports.After having analysed the relation of exports to theEERs and Q for the manufacturing and primary sectors, itseems pertinent to analyse a similar relation in respect ofsome 'disaggregated' commodities. For this purpose, theFOB value of exports, expressed in U.S. dollars, for somecommodities at PSTC 3-digit level,was regressed on the EERs- 203 -and Q for the commodity in question; when Q was not avail¬able, time was used as a proxy. The results are given inTable 6.4. Relations 1 through 4 and 8 in Table 6.4present regression results for a major export of Pakistan,i.e. raw cotton and cotton manufactures. The coefficientof the EER for raw cotton was not different from zero, whileQ was found to affect its exports significantly. TheGovernment policy towards exports of raw cotton, and perhapsweather conditions,may have been the reason for this. Formost of the period under consideration, the export of rawcotton had been subject to export duty, which meant anunfavourable rate of exchange for the export of raw cotton.Given the generally less profitable exports of raw cotton,the Government, after taking into account the domesticdemand for, and supply of raw cotton situation, would fixexport targets for raw cotton. The years in which favour¬able weather conditions resulted in a bumper crop or inwhich the domestic activity in textile industry was low,were characterised by mounting surpluses of raw cotton.This surplus was then likely to be disposed of in the exportmarket. This is perhaps why only Q has affected the exportsof raw cotton significantly, and the EER has had no effecton its exports. The Government policy, throughout the periodof 1960-61 to 1976-77 has aimed at increasing the exports ofmanufactures. All the export promotion schemes were directedtowards this objective. The regression results for yarnand thread, cotton fabrics, clothing and made-up articlesof textiles are generally consistent with the a priori beliefthat the EERs for these commodities significantly affectedtheir exports, and that their domestic production wasexport-oriented. However, the Export Bonus Scheme foryarn and thread had been less certain in its effect in theearlier years. The rate of bonus vouchers allowed to cottonyarn and thread was reduced from 20 per cent to 10 per centw.e.f. 22nd January, 1960. Later, their exports weretotally excluded from the purview of the scheme from 30thJanuary 1961, and were not allowed a bonus of 10 per centuntil 21st August 1962. Even after that there had beenminor changes in the bonus rate allowed to cotton yarn and- 204 -TABLE6.4:Regressionsultsonsome'Disaggregated' t3-digilevCommodityexp rtsfrPakistan(1960-61t197 77)I to0Ul1No.DependentVariabl .EXPLANATORYVARI BLESandPSTCCodeInterceptInEERXmQtTimeInEERt_xInQ^t-1-zRF-StatisticDWSEE(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)1.Rawcotton.-4.18-0.61i.53„ (2.97)0.345.042.150.43(263)(-1.58)(-0.86)2A.TextileYarn&hread.3.6.28.**(-4.53)1.163-17̂**(2.62)0.8135.141.530.55(651)(0.67)2BTextileYarn&hread.-13.45..**(-5.06)1*73*3.67̂**(2.78)0.8756.411.230.45(651)(1.97)3A.CottonFabrics (652)-9.34 (-1.92)*4.98 (12.02)**0.38 (0.52)0.9072.470.970.313B.CottonFabrics (652)-22.76 (-4.53)**4.56 (11.64)**2.66 (3.20)**0.93101.051.210.274.Clothing(exceptfur)-10.284.000.25(14.39)**0.97309.071.720.25(841)(-5.42)**(4.64)**5.TextileFabrics(not cottonfabrics)(653)-17.51 (-7.81)**7.07**(7.84)0.88**(4.28)0.8033.981.430.696.Tulle,Lacend embroidery.(654)-14.48 (-2.90)**5.04 (1.79)*0.16 (1.67)0.8962.591.480.617.SpecialTextilefabrics (655)-1.95 (-1.84)*0.05 (0.09)0.10 (4.13)**0.6917.361.280.318AMade-uprticlesof Textiles(notclothes) (656)-3.94 (-2.03)*1.29 (1.25)0.30 (9.90)**0.97308.201.890.28contdTABLE6.4:Regressionsultsonsome'Disaggregated' t3-digilev lCommodityexportsfrPakista(1960-61t1976 77)I too 01No.DependentVariabl .EXPLANATORYVARIABLESandPSTCCodeInterceptInEER1/mQtTimeInEERL""XlnVl-zRF-StatisticDWSEE(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)8BMade-upArticlesof Textiles(notcl thes) (656)-5.63 (-3.26)**0.27 (9.23)**2.25 (2.38)*0.98391.692.200.249A.Carpets,floorcoverinj;-0.380.250.23tapestriesetc.(657)(-0.15)(0.18)(6.69)**0.95169.220.890.269B.Carpets,floorcov ing tapestriesetc.(657)-3.69 (-1.76)*0.19 (6.96)**1.98 (1.79)0.96209.221.080.2310.Hidesandskin .-4.554.40-0.19**[-2.76)0.355.371.700.72(211)(-0.98)(1.41)11.TannedLeather (611)-4.39 (-2.31)*2.27 (2.66)**0.23 (13.12)**0.9291.270.890.3312.Manfrs.ofle ther (notfootwear)n.e.s (612)-7.31 (-1.54)0.98 (0.51)0.37 (5.13)**0.7323.040.391.0213.Footwear(851)-2.04 (-0.95)0.66 (0.73)0.19 (6.79)i0.8135.641.140.4314,Rice(042)2.15 (0.37)6.12 (2.99)**-1.37 (-1.09)0.7019.450.740.5615.Unmanufactured tobacco.(121)-32.05 (-8.04)**11.05 (10.74)**2.03 (2.92)**0.8858.901.480.8116.Manufacturedtob co.-39.16**(-9.71)3.735.370.8544.961.591.02(122)(1.29)(4.84)*j*contdTABLE6.4:Regressionsultsonsome'Disaggregated' t3-digilev lCommodityexpor sfrPakistan(1960-61t1976 77)Ito0•o1No.DependentVariabl .EXPLANATORYVARIABLESandPSTCCodeInterceptInEERLmQtTimelnEERt_1lnVi—z RF-StatisticDWSEE(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)17.Fish,freandsimply1.59**(3.64)-Q.170.11preserved.(031)(-0.55)(9.78)**0.8756.291.910.2018.Fish,canneddfi preparations.(032)-2.86 (-1.30)0.16 (0.17)0.26 (11.86)**0.9070.441.830.4419.Organicchemials. (512)16.97 (4.15)**-10.13 (-4.93)**0.45 (8.44)**0.8547.221.680.5420.Paints&Varnishes. (533)3.05 (1.19)-2.29 (-1.94)*0.15 (4.06)**0.488.290.730.6721A.Medicinal&Pharmaceu¬ ticalproducts(541)-1.22 (-0.48)0.12 (0.11)0.09 (3.55)**0.416.601.020.502IB.Medicinal&Pharmaceu¬ ticalproducts(541)-6.85 (-3.88)**0.07 (3.66)**2-65 , (3.38)*0.6817.661.030.3722.Perfumery&cosmetics"6*22**1.170.3.8..**(8.08)0.8236.440.490.45(553)(-2.77)(1.19)23.Soaps,cleansingand-H.26#4.200.18̂ (3.05)0.324.701.031.05polishingprep .(554)(-2.01)(1.71)24.Non-electricma h nery (71)13.17 (3.04)**-6.31 (-3.01)**0.18 (3.45)**0.385.971.940.4925.ElectricMachinery. (72)-5.80 (-0.92)2.18 (0.76)0.09 (1.76)*0.385.841.370.73contd..../Table6.4(Contd)DependentvariableFOBvalueofexportsfthcommodityconc rnedi illionU.S.d l ars.EERTheeffectiveexchangeratsrupe sp roU.S.dollarapplicablet commodityinquestion.QThephysicalquantityofproductiont ecommodityas:- Cotton:Thousandt nsakenfr mPakistanEc nomicSurvey(1977-78),StatisticalTable1pp.24-25.Yarn&Thread:MillionKGt kef omPa istanEc nomicSurvey(1978-79),StatisticalTable4.3,pp.48-50 Cottonfabric:Millionsq.metres"""IIIIItArtSilk&RayonCloth:Mi li nmetres""" UnmanufacturedToba co:Thousandtonn sakenfromP istanEcon micSurvey(1978-79),StatisticalT ble3.3pp.26-27. ManufacturedTob cco:I dexofcigaretteproduc ionwith1959-60=0 ,b sedanP kistanE n mic Survey(1978-79),StatisticalT ble4.3pp.48-50. TIME=From1960-61t1976-77as2,...8 AllothersymbolsarethsamesinT6.1.thread. Perhaps due to these reasons the coefficient ofthe current EERs for yarn and thread was not found to besignificant, but the EER, a year-lagged, turned out to behighly significant. In relation 3A for cotton fabrics,the coefficient of the EER was highly significant, butthe coefficient of Q was not found to be significantlydifferent from zero, and the Durbin-Watson (DW) statisticwas also quite low. The low DW statistic suggests positiveserial correlation/15^ The non-significant coefficient of Q,which means that the production of cotton fabrics was notexport-biased, was against all expectations. The Governmentpolicies throughout have encouraged the production of cottoncloth for the purposes of export. In view of the fact thatPakistan faces a good deal of competition in the exportmarket for cotton cloth and the markets of the developedcountries are not easily accessible to Pakistani exportersbecuase of tariffs, and in some cases even country quotas,more effort and time might have been needed to export thiscommodity. We tried the EER and Q, both lagged one period,the coefficients for which turned out to be highly signifi¬cant, and the DW statistic also improved. All other statis¬tics of goodness of fit in 3B were better than those in 3A,(15) The relation was also estimated by the Hildreth-Lu procedure.In the Hildreth-Lu scanning procedure a set of 'grid' valuesfor p are specified. For each value of p, the transformedequation(yt - = a<1 - p) + b,Driedfruit1524555022782465386551432716OS'Fruitpreservedlpr p.31<51711652876225210499OS/.Vegetables,fresh,frozen31#!t6148712848397213707040orpreservedn.s.0S3Vegetables,preserv d1.10tc11221441154897317883191preparations.Of1Sugarkhoney.175/Kb4o3»106364964448210850564733000'«•«.Foodprep,n. .s.6634S71311111061207551652587111Non-alcoholicbeverages.(!0004016552561964IVAlcoholicbeverages.u161478290681936145739912Tobaccounafrd.42403792119182162828951236615505Mr.Tobacco.Manufactured.•1u22406152531030869246?1HidesASkin(exc pt27230357530991250981651613656634850853820fursklns)undressed.211Furskins,undressed.7228C298627963526136612399Oilseeds,oilnutsA147c763iiOl871324971518655805137oilkernels.«'i1Cruder bb r(lncl.0n35000010synthetic)241FuelwoodAcharcoal.0ii000230151w4fWood(rollerr ughly0002007124squared)?4'Woodshapedralaplyi000416085256squaredwork .?44Cork,rawAwaste.0000000032'j1Pulporwastep per2000000I)00.V.1Silk000000000"eii'tWoolAotheraniaalh ir.761837592294490872396123371821417824284147524V.:Cotton1497C4145683396814362463316173298529305243457943364200cI'•Jute1i006752812929291.tcVegetablefibres,exc pt14219003473081146cottonAJu e.Lt<:Syntheticfibr s.0011111n57033.o7WasteMaterialsfrotexI"I13P91140189300231582tilefabricslncl.rag .81Silverfcplatinumor s.G0000003540.V1Crudeanimalmateri ls64788185604712018716811148146731245611187Inediblen.e.s. Crudevegetablemats.116157946149869980218432449420001207625972Inediblen.e.s.321Coal,cokeftbriquett s.<1007000771773i1PetroleumcrudeItpartly000200000refined.332Petroleumprod cts.552640572853152719297102503091439617341Qasn turallimfrd.010000000411AnimalkVeg.oilsft;atsn0>0864523.50136421Fixedvegetableoils.soft.201281357421788120133431Oil&fatsprocesscwaxe0000000125142ofanimalIveg.or gin.c.1?Organicchemicals.205531275344623137375165298740631?Inorganicchemicals.419130926512942V600909928521Mineraltarkcrudechems.0000034090013fromcoal,petrolknat.g a531Syntheticorganid e-stuffs(j233801971170053?DyeingIttanninex racts03001774346053:Pigments,paintvarnishes343270790304531982738218453677005lirelatedmaterials.541Medicinal&pharmaceutical13478232581559249285814561656725129products.531Essentialoils,perfumek5614612355625626911074otherflavourmaterials.553Perfumerylicosmetics.7212h304535797802848126311875'.Soaps,cleansingand76?157215410757627171814196427955polishingpreparations. Fertilizers,manufactured.u29544K700035118913MPlasticmater als.01ir1101200625135WMisc.chemi almaterials21V33t175393817621539532625663863audproducts.ContGAPPENDIXA.Contd.exportsfCOMMODITIESfronpakistan(VALUEinthousandrupees)rclout176r..61176mJ21967.6?1963.641964.651965.66196d.671967.681968.69<11Leather6c70114Cv148603075045920748987626483787113847M?Manufrsole therfartl-J52/49130361400120526567003flclal/reconst.leatherae.a.o17Ironandsteel4t3?1151201917923189185or1Steel&platlnuagroup0250000297001metale.«.8?Copper6213248337813071921*8?Nickel■*2000050nContci..APPENDIX.Contdexportsecommoditiese mPakistan( ) (valueinthousandrupees)Itroof:19tf.61961.621962.631963.6A1966.651965.661966.671967.681968.694Aluminium6112655973862686333(HbLead08162129U609Zinc.0000026600(t7Tinc00321791100flb111so.non-ferrousbaseu2A1000300metals.LV1Finishedstructuralparts412181671036217711andstructures.cVMetalcontainersf rst r¬0n1111)3760268176038106agektransport.(.ViWireproductsftifencing00027562121656grills..VtCutlery.011J186221802136299129828856M7Householdequlpaentf0•00276719661680156918871658basemetals.f.VPManufacturesofmetals,2/5114252V9?1763136615261650688576/1n.e.s. Powergenerating(n n¬1931402459098833752123361313061615electric)machinery.71vAgrl.machineryor287128635123658710711256827lmplements.714Officema hinery659U911631560571SMetalworkingmachinery.121721065171660790620356227717Textile&leathermachineryP0027719066378818317377UMachinesforspeciallnds.0001016926635133652797671VMachinerylipplia cenu016162620188673511082952andpartsn.s.7??Electricmachineryand000213862183261925731532swltchgear.7^:^Equipmentfordlst.f00I)7076081088622063661165electricity./?4Telecommunicationappar tus.00(I61627627125676896697?iDomesticelectricalqulpaent.41(J11215230051996326620609867ographic whether expor- excl. hockey blades. 40ted on outright sale orental basis, or exporrBags - Cricket, Golf. 40ted through agency Balls, all srots. 40arrangements. 40 Baseball bats. 40Furniture & other mfrsof cane and ratten. 40Bladders. 40Furniture wooden. 40Boards - all sorts. 40Glass bangles, beadsand mina 40Carom-men and Strikercases. 40Glass hollow-ware. 40 E.P.N.S.sports goods,all sorts. 40Glass mirror 40Fishing lines. 40Glass sheet 40Gloves, all sorts,usedGlassware, all sorts. 40 in sports. 40Gramophone records 40 Golf mitts. 40Holdalls & Wallets. 40 Golf head covers. 40Matches 40 Grips, all sorts for -Mats, n.o.s. 20Tennis,badminton,squashockey,cricket & polo,a,Matts, Furra. 20 made of -Musical instruments andequipment. 40(i) Leather,sheepskinor rubber. 40Muskpod. 20(ii) towel & tape. 20- 250 -Description of GoodsBonusPercentageAdmissibleDescription of GoodsBonusPercentageAdmissibleGun covers. 40 Sports wear (incl. capsGuts & strings all sortsused in sports goods. 40jerseys, hoses &stockings. 40Gymnastic requisitesall sorts incl. hori¬Sticks -Golf, Hockey, Polo. 40zontal & parallel bars Shuttle cocks. 40chiefly made of wood. 40 Tables all sorts reqrd.Ice Hockey accessories. 40 for sports purposes. 40Indoor games requisites Tennikoit rings. 40all sorts. 40Tennis net stretchers. 40Inflaters required forsports purposes 40Tennis sheep guts. 40Lacing awls. 40Whistles. 40Lace pusher & puller. 40Stationery articles, allsorts (other than sil¬Lace used in sports ver, gold or othergoods. 20 precious metals. 40Net required in sports. 40 Tiles, cement & Mosaic. 40Nylon monofilament, Toys, all sorts - 40all sorts. 40 Celluloid, Plastic,Pads. 40rubber & wodden.Ping-pong bats, poles Tongas40and sets. 40 Umbrellas 40Polo requisites - Wax candles. 40Polo handles.Polo heads.4040Waste products, - 20Polo helmets. 40 Artsilk yarn waste.Polo saddles. 40 Battery waste.Playing cards, all sorts 40Cotton linters & yellowpickings.Presses. 40 Cotton seed hull fibre •Punching gloves. 40Cotton seed hull shav¬ing fibre.Rackets all sorts reqrd Cotton pads.for sports purposes. 40 Cotton waste hard -Rackets and frames -tennis, badminton,squash 40Cuts, Oily, Piecerclean or dirty, etc.Ski gloves 40Cotton waste, soft, -Bondas, card fly, comberSki leather bags. 40 fly, cylinder fly, drop>-Skipping ropes. 40 pings etc.Cotton wicks caulking.Sports cups. 40Cotton-Yarn waste.Sports Medals & Shields 40Fishing nets used (old)- 25l ~Description of GoodsBonusPercentageAdmissibleDescription of GoodsBonusPercentageAdmissibleHide & skins, fleshingscuttings & trimmings,chrome shavings, pic¬ker waste dry piecesin hair.Iron & steel scrapJute-bag cuttings.Jute waste, all types.Leather cut-pieces.Milk waste (in solidform)Paper waste.Raw silk waste (unpro¬cessed) .Tea waste.Tin-plate clippings.Waste clippings, cuttingsor rags of hosiery or |cloth other than woollenand worsted.Optical Anti-glare lenses.Sunglasses.Woollen & worsted rags.Wheels, grinding.Wheels, Persian.Wooden battery separators,404020204040Wooden and plywoodmanufactures, thefollowing:BlackboardsDoors and windowsPlywood sheets,laminated.Plywood manufactures,others.Tent-poles4040404020Note:- Rates shown in the Appendix were amended with effect from June 12,1964. All rates at 20 per cent or less were made 20 per cent.All other rates were made 30 per cent.SOURCE: Government of Pakistan, Office of the C.C.I & E., "Manual ofImports and Exports Control", Rawalpindi, 1964, Appendix 17,pp.313 - 343.- 252 -APPENDIX C,- 253 -APPENDIX C(i) LIST OF INDUSTRIES WITH 100 PER CENT OF F.O.B. VALUE OF EXPORTSADDITIONAL LICENSING UNDER THE EXPORT PERFORMANCE LICENSING SCHEME.(In the January - June 1962 Import Policy)Absorbent cotton Boot polish.Brass Water fitting Biscuits and confectioneryCosmetics Cutlery.Centrifugal pumps Diesel EnginesElectric fans Fountain pens.Fruit and fish canning Hosiery (yarn restricted) includingand preservation. Handkerchief manufacturing.Leather goods (excluding Gramophone records.leather and fabrics)OpticalNylon gut and monafilament Pencil (paint restricted)Paints and varnishesLeather footwear (excld. Leather)Plywood Rubber goodsPharmaceut icalRubber footwearRubber tyres and tubes.Soap (tallow restricted)Sheet Glass and glass-ware Typewriter carbons and ribbonsThread spooling (yarnrestricted.Tooth Paste.Tufting (excl. yarn)Watch straps and Bracelets.SOURCE:- Board of Trade Journal, dated 26th January, 1962, p.185.- 254 -APPENDIX C.(ii) LIST OF INDUSTRIES WITH PERCENTAGES OF ADDITIONAL LICENSINGUNDER THE EXPORT PERFORMANCE LICENSING SCHEME.(In the July - December 1964 Import Policy)Name of IndustryPercentage ofadditionalLicensingagainst FOBvalue of exports.Name of IndustryPercentage ofadditionalLicensingAgainst FOBvalue of exportsAbsorbent cotton 10% Domestic sewingAccumulators andmachines. 50%batteries. 50% Dry cells 50%Arts and handicrafts 50% Electric appliances 50%Artsilk fabrics (incl Electric cables andcotton-cum-synthetic wi res 50%fabrics) 50%Electric fans 50%Artificial fabrics 50%Electric lamps andAsbestos cement sheets 40% fluorescent tubes 10%Beer 40% Electric meters 50%Biscuits & confec¬ Electric motors 50%tionery. 50%Electric switchgearsBonemeal 10% and transformers. 50%Boot polish 10% Enamelled ware 10%Brass water fittings 20% Fish canned 50%Brushes 50% Footwear -Caps incl.Karakuli caps 50% (a) Leather shoes 50%Carpet 15% (b) Rubber shoes 25%Cattle feed. 10% Fountain-pens 50%Centrifugal pumps 50% Fruit canned/bottled 50%Cereal manufactures 10% Gas mantles. 50%Cigars 50% Clycerine 50%Cigarettes 50% Gramophone records. 50%Collapsible tubes 50% Grinding wheels 30%Cosmetics 50% Guar gum 10%Cotton waste 10% Handloom fabrics, allCutlery 50% sorts, incl.Banarsigoods. 50%Cycles and parts 50%Hand tools. 30%Dawakhana (Unanimedicines) 50%Hand torches 20%Diesel engines 50% Hosiery 50%- 255 -Name of IndustryPercentage ofadditionalLicensingagainst FOBvalue ofexportsName of Industry Percentage ofadditionalLicensingagainst FOBvalue ofexportsHospital equipment 10% Rubber tyres & tubes 25%Hurricane lanterns 10% Sheet glass 50%Kapok 10% Soap 50%Lace, braid & tape. 25% Sports goods 10%Leather board 25% Stoves and pressureLeather goods otherlamps. 50%than footwear. 50% Surgical instruments 20%Manilla hemp and coir Tanned leather 10%ropes. 50% Thread spooling 50%Matches 20%Tooth paste 50%Mathematical instru¬ments 25%Tufting 25%Motion pictures. 50%Typewriter carbonand ribbons 50%Musical instruments 10%Utensils (Metals) 20%Novelties and toys 50% Watch straps andNylon gut and mono¬ bracelets. 40%filament 50%Waterproofing textiles 25%Optical frames 50% Woollen shawls. 40%Paints 10%Woollen yarn/woollenPencils 50% piecegoods. 50%Pharmaceuticals 50% Zari and embroidery. 50%Plastic goods 50%Plywood 25%Porcelain earthenware 50%Radio sets 50%Razor blades 50%Readymade garments 50%Rubber goods (excl.foot¬wear and tyres and tube 3) 20%SOURCE: - Government of Pakistan, Office of the CCI&E, "Manual of Importand Exports Control", Rawalpindi, 1964. Appendix 23, pp.358-361.- 256 -APPENDIX D.Weighted Bonus Rates as Percentage of FOB Value ofExports Applicable to Commodities at PSTC 3-digitLevel under the Export Bonus Scheme.- 257 -(a)APPENDIXD.(i)WeightedBonusRatesPercentagefFOBV l eExportsApplic bletC mmoditi sSTC 3-digitlevelunderthExporBo usScheme. YEARRaw Cotton (PSTC263)Textile Yarnnd Thread (PSTC651)Cotton Fabrics (PSTC652)Synthetic Fabrics (PSTC653)Tulle, Laceand Embroidery (PSTC654)Special Textile Fabrics (PSTC655)Made-up ArticlesofTextiles (PSTC656)FloorCoverings Tapestries,etc. (PSTC657)1959-60-16.2520.0020.8020.0020.0021.6039.3060-61-6.7120.0020.3620.0020.0021.6039.3961-62-4.7520.0021.0520.0020.0024.3839.2062-63-14.1621.3021.2530.0020.0033.6039.5763-64-16.7924.6420.6530.0020.0030.5334.3164-65-20.6624.2821.6830.0020.0027.1529.7365-66-21.0124.5825.4530.0020.0027.0729.8066-67-21.0024.8929.2330.0020.0026.9929.8867-68-24.8630.6035.2536.0026.0032.7935.8268-69-30.6634.3339.3240.0030.0036.0739.7569-70-30.4733.9836.6840.0030.0037.4939.4270-7110.0034.3939.1941.1845.0035.0043.1644.3771-723.1526.4732.0235.0938.8430.2137.0038.61ContdAPPENDIXD.(Contd..)(b(i)WeightedBonusRatesPercen agefFOBV lExportsApplic bletCommoditi sSTC 3-digitlevelunderthExportBo usScheme. YEARClothing Exceptfur Clothing (PSTC841)Fresh Fish (PSTC031)Fish,canned andfish Preparations (PSTC032)Rice (PSTC042)Non-Alcoholic Beverages (PSTC111)Alcoholic Beverages (PSTC112)Unmanufactured Tobacco (PSTC121)Manufactured Tobacco (PSTC122)1959-6040.0011.3240.0011.1640.0040.0020.0040.0060-6140.0013.1340.0010.8440.0040.0020.0040.0061-6240.0013.9840.0010.8440.0040.0020.0040.0062-6340.0014.0140.0010.8440.0040.0020.0040.0063-6439.4814.3740.0010.8439.4839.4827.0839.4864-6530.0010.8530.009.7930.0030.0030.0030.0065-6630.00-30.0014.6530.0030.0030.0030.0066-6730.00-30.0019.4930.0030.0030.0030.0067-6835.83-35.8325.1635.8335.8336.6535.8368-6940.00-40.0027.1440.0040.0040.0040.0069-7040.00-40.0029.2340.0040.0040.0040.0070-7144.8610.0045.0033.5944.8644.8644.8644.8671-7238.846.5838.8430.1738.8438.8438.8438.84. iContdAPPENDIXD.(contd...)( )(i)WeightedBonusRatesPercentagefFOBV luExpor sApplicabltCommoditiePSTC 3-digitlevelunderthExportBo usSchem . YEARHides and Skins (PSTC211)Leather (PSTC611)Manufactures of Leather (PSTC612)Footwear (PSTC851)Organic Chemicals (PSTC512)Paints and Varnishes {PSTC533)Medicinaland Pharmaceutical products (PSTC541)Perfumery and Cosmetics (PSTC553)1959-60-40.0040.0040.0040.0040.0040.0040.0060-61-40.0040.0040.0040.0040.0040.0040.0061-62-40.0040.0040.0040.0040.0040.0040.0062-63-40.0040.0040.0040.0040.0040.0040.0063-640.0939.4839.4839.4839.4839.4839.4839.4864-651.9330.0030.0030.0030.0030.0030.0030.0065-662.4230.0030.0030.0030.0030.0030.0030.0066-675.4030.0030.0030.0030.0030.0030.0030.0067-68-35.8335.8335.8335.8335.8335.8335.8368-69-40.0040.0040.0040.0040.0040.0040.0069-70-40.0040.0040.0040.0040.0040.0040.0070-7110.0044.8644.8644.8644.8644.8644.8644.8671-723.1538.8438.8438.8438.8438.8438.8438.84ContdAPPENDIXD.(contd...)d)(i)WeightedBonusRatesPerce tagefFOBV luExpor sApplicabltCommoditiePSTC 3-digitlevelunderthExportBo usSchem . YEARSoaps,cleansing andpolishing preparations (PSTC554)Non-Electric Machinery (PSTC71)Electric Machinery (PSTC72) 1959-6040.0040.0040.00 60-6140.0040.0040.00 61-6240.0040.0040.00 62-6340.0040.0040.00 63-6439.4839.4839.48 64-6530.0030.0030.00 65-6630.0030.0030.00 66-6730.0030.0030.00 67-6835.8335.8335.83 68-6940.0040.0040.00 69-7040.0040.0040.oa 70-7144.8644.8644.86 71-7238.8438.8438.84 SOURCE:Computedasex laineinthxt.APPENDIX D(ii) Weighted Performance Licensing Rates as Percentageof FOB Value of Exports Applicable to Commoditiesat PSTC 3-digit Level Under the Export PerformanceLicensing Scheme.- 262 -(a)APPENDIXD(ii)WeightedPerformanceLicensingRat sPercentagefFOBValuExportsApplic bletCo moditi s atPSTC3-digitLevelUnd rthExpo tPerformanceLicencingh m . YearTextileYarn andthread (PSTC651)Cotton Fabrics (PSTC652)Synthetic Fabrics (PSTC653)Tulle,lac& Emboidery. (PSTC654)SpecialTextile Fabrics (SPTC655)Made-upArticles oftextiles (SPTC656)FloorCovering& Tapestriestc. (PSTC657)1961-62.5.94---20.589.70-62-6313.37---73.8523.90-63-647.010.691.6810.473.7319.0714.9664-653.280.288.3711.183.2620.7214.7565-665.101.2512.6910.024.7220.8513.5566-674.982.2216.758.826.2218.2412.3667-683.102.0414.333.362.1513.9314.8468-691.982.0126.173.923.6312.8014.8069-700.720.668.560.371.018.976.19continuedAPPENDIXD(contd....)(b)(ii)WeightedPerformanceLicensingRat sP rce tagefFOBV luExportsApplic bletCo moditi s atPSTC3-digitLevelUnd rthExpo tPerformanceLicen inghem . YearClothing(except furclothing) (PSTC841)Fish,cannedd fishpreparations (PSTC032)Alcoholic Beverages (PSTC112)Manufactured tobacco (PSTC122)Leather (PSTC611)Manufactures ofleather (PSTC612)Footwear (PSTC851)1961-629.2750.00---50.0038.0962-6313.90100.00--100.0077.7763-6450.0050.006.1510.6625.0050.0027.2364-6550.0050.001.335.7725.0050.0026.6665-6650.0050.002.825.6625.0050.0033.7766-6750.0050.000.380.2425.0050.0040.8867-6830.0030.003.031.3820.0020.0017.1768-6930.0030.000.101.5420.0020.0014.9069-7015.0015.000.200.1410.0010.005.54Contd(C)APPENDIXD(contd..)(ii)WeightedPerformanceLicensingRatesPerce agefFOBV luExportsApplicabltCom di s atPSTC3-digitLevelUnd rthExportPerformanceicencingScheme. YearOrganic Chemicals (PSTC512)Paints& Varnishes (PSTC533)Medicinaland Pharmaceutical Prod.(PSTC541)Perfumery& Cosmetics (PSTC553)Soaps,cleansing& Polishingreps. (PSTC554)Non-Electric machinery (PSTC71)Electric Machinery (PSTC72)1961-62-50.0050.0050.006.371.4322.5062-63-100.00100.00100.003.763.7532.5763-6410.9010.0050.0050.0048.0415.4034.5464-6530.7410.0050.0050.0046.6122.1743.2965-6615.6210.0050.0050.0045.1810.6039.4366-670.5610.0050.0050.0044.138.1533.8367-680.1010.0020.0020.0018.8113.6425.0068-690.1710.0020.0020.0018.5021.3022.6069-700.605.0010.0010.009.3010.515.74SOURCE:Computedasexplainedinthee t.APPENDIX D,(iii) Weighted Export Duty Rates as Percentage of FOBValue of Exports Applicable to Commodities atPSTC 3-digit Level, followed by Weighted SalesTax (as above).- 266 -APPENDIXDK'(iii)WeightedExportDutyRat ssPercentagefFOBValufExportsAp licabletC mmodities atPSTC3-digitlevel. YEARTextileYarn andThread (PSTC561)Cotton Fabrics (PSTC652)Rice (PSTC042)Hidesand skins (PSTC211)Leather (PSTC611)Manufactures Leather (PSTC612)Footwear (PSTC851)Fresh Fish (PSTC031)Fish,Canned andfish Preparations (PSTC032)1972-7312.567.7914.7540.0015.0015.0015.0015.0015.0073-7410.924.409.8840.0015.0015.0015.0015.0015.0074-753.240.456.9840.002.502.502.5015.00-75-76--11.0140.00---15.00-76-77--5.8640.00-----SOURCE:-Computedasexplainedinthxt.ContdAPPENDIXD.Contd...(b)(iii)WeightedExportDutyRat ssPercentageof( i)WeightedSalesTaxP rcentagef PercentageofFOBValuExportsApplicableP rcen agefFOBValuExportsAp licable toCommoditiesaPSTC3-digitLevel.tCommod tiesaPSTC3- igitLev l.its305oo IYEARRaw Cotton (PSTC263)1959-6016.5760-6112.7861-6211.6162-635.6163-645.2064-652.3365-662.2466-672.4767-681.1068-69-69-70-70-71-71-72-72-7340.0073-7440.0074-7535.0075-7635.0076-7717.50YEARFreshis (PSTC031)1959-6010.0060-6112.5061-6212.5062-6312.5063-6412.5064-6516.8765-6618.7566-6718.7567-6818.7568-6918 .7569-7018.7570-7125.0071-7225.0072-7328.7573-7428.7574-7528.7575-7628.7575-7625.00SOURCE:Computedasexplaininthee t.REFERENCESAHMAD,Q.K., (1966): "The Operation of the Export BonusScheme in Pakistan's Jute and Cotton Industries",Pakistan Development Review, Vol.6, No.1, pp.1-37.ALAMGIR,M., (1968): "The Domestic Prices of ImportedCommodities in Pakistan - A further Study",Pakistan Development Review, Vol.8, No.l, pp.35-73.ANDRUS,J.R., and MOHAMMED,A.F., (1958): The Economy ofPakistan, London: Oxford University Press.., (1966): Trade, Finance andDevelopment in Pakistan, Stanford University Press,Stanford, California.ASKARI,H., and CUMMINGS, J.T., (1977): "Estimating Agri¬cultural Supply Response with the Nerlove Model -A Survey", International Economic Review, Vol.18,No.2, pp.257-292.BALASSA,B., (1971): "Trade Policies in Developing Countries",American Economic Review, Vol.61, No.2, pp.178-187.., (1978): "Export Incentives and Export Perfor¬mance in Developing Countries - A Comparative Analysis",Weltwirtschaftliches Archiv., Band 114, pp.24-61.BALL,R.J., EATON,J.R., and STEUER.M.D., (1966): "The Relation¬ship Between United Kingdom Export Performance inManufactures and the Internal Pressure of Demand",Economic Journal, Vol.76, pp.501-518.BASEVI,G., (1973): "Commodity Trade Equations in ProjectLINK", in R.J.Ball, (ed.): The International Linkageof National Economic Models, Amsterdam: North HollandPublishing Company, Ch.8, pp.227-281.BERGAN,A., (1972): "Personal Income Distribution andPersonal Savings in Pakistan". 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case study of Pakistan

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case study of Pakistan

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