Developing countries that have managed to move out of backwardness have normally done so in a matter of a few decades. They have usually taken the route to industrialisation in several phases.
It started with the movement of a large number of people from the low productivity and generally stagnant agricultural sector to towns and cities. This demographic push usually was the consequence of a sudden increase in human fertility and, consequently, in the rate of increase in population. Staying on the land meant getting poorer and poorer. Those who were prepared to take the risk moved to towns and cities in search of better earning opportunities.
If industrialisation of the economy coincided with the movement of people from countryside to the urban areas the result was a virtuous cycle. Those who were setting up industries - it could be the state that was being the entrepreneur or individuals with surplus capital to invest - had access to cheap labour. This could be made to work providing the entrepreneur with large profits and the employed workers with better incomes than would have been available had they remained on the land.
This is what happened at the beginning of Pakistan. In its case the move of workers looking for work was initially not the consequence of a sudden increase in population. It was the result of the partition of British India into the independent states of India and Pakistan.
The partition produced a wave of migration that involved 14 million people. Eight million came into Pakistan from India and six million moved in the opposite direction. Most of those who left Pakistan for India were from rural areas; most of those who came from India settled in Pakistan's urban areas. Suddenly, small urban sector became overcrowded. Millions of new Pakistanis were looking for work; some of it became available as the new country began to construct a new capital in the city of Karachi.
But the real expansion in urban workforce began with the push to industrialise in the decade between 1949 and 1959. In 1949, India imposed a trade embargo on Pakistan, starving the new country of basic manufacturers. The government responded by providing rich incentives to the few people who had some money to invest. Most of them had accumulated capital during the Second World War when the government procured the material needed by the Indian troops fighting the Germans and the Italians in Europe and North Africa and the Japanese in Southeast Asia.
Led by the business houses who became industrialists, Pakistan began the first wave of industrialisation. This was aided by the commodity boom associated with the Korean War. Pakistan had large surplus of jute, cotton and leather which were needed to supply the troops from America and those with the countries allied with it as they fought the communists in the Korean Peninsula.
The first phase of industrialisation was essentially factor-driven when cheap labour was combined with surplus capital to create industrial assets. To this early phase of industrialisation, new waves were added. During the 11 years of President Ayub Khan, further industrial expansion took place when foreign savings that came in the form of aid - mostly American - was provided to a new group of entrepreneurs through the state operated development finance corporations.
Three of these - the PICIC, IDBP, and PIDC - received large amounts of money from the World Bank which became actively involved in promoting industrialistion. Ayub Khan added another element to the industrial policy. He used the licensing systems to encourage the establishment of medium-sized industries outside Karachi. Hundreds of licenses were issued to the friends and supporters of the regime to set up small cotton spinning mills in Punjab and NWFP.
The government of Prime Minister Zulfiqar Ali Bhutto that followed the Ayub Khan administration after a brief interregnum during which, the original state of Pakistan was split into two, changed the industrial model followed since 1949. Through nationalisation, the government became the largest owner of industrial and financial assets. It used its strength to move towards the establishment of heavy industries in chemicals (mostly fertilisers), steel and metal-working. The pace of industrial development slowed down, however, as did the rate of economic growth. The governments that followed continued with the old “factor driven” model and the big public sector built during the Bhutto period was gradually downsised.
It was about the time that Bhutto was nationalising industries and financial institutions that the countries that were to succeed in moving out of economic backwardness began to move towards what economists call “efficiency driven” industrialisation. This happened in particular in East Asia, where the “miracle economies” took off with rapid industrialisation contributing to unprecedented rates of economic growth.
The more important elements in this model included market expansion through exports; improvement in technical competence through education and technological development; development of financial institutions in the private sector which equipped themselves to do serious and detailed project analysis; adoption of new technologies to improve the quality of the products and also improve the efficiency of the work place.
Pakistan, however, remained struck in the same place - the factor driven model. While the rapid increase in population continued to supply cheap workforce, the country remained poor since the sector of education failed to provide the skills more advanced industries would have needed.
The market also remained limited as the country failed even to keep its small share as international trade expanded enormously. East Asia, later China, and still later India began to move ahead beyond the “efficiency driven” model of 1975-1990 towards the “innovation driven” model of more recent times. Pakistan remained two steps behind.
This raises the obvious question could the country catch up with its neighbours in Asia? The answer is that it could, provided it leap-frogs towards the application of the combined efficiency and innovation models to the industrial workforce. For that to happen would require a close collaboration and working relationship between the public and private sectors.
This process is sometimes called the PPP, the public private sector partnership. It has many features. Of these the following five need to be emphasised. The first, of course, is the creation of a business and economic environment in which the private sector can flourish. This will require the adoption of appropriate public policies in a number of areas. The second is the development of human resource by creating institutions that can provide appropriate higher education and skills to a growing workforce. The third is the improvement of the economy's technological base. The fourth is to expand the market base for industry by increasing exports. And the fifth is the transformation of the Pakistani firm.
The fifth - introducing dynamism into the firm - has two components. It includes transforming the large enterprises, few in number and employing a small proportion of the workforce, into world class entities that can compete with their peers in the global markets.
For that to happen, the ground will have to be prepared by appropriate development of the first four factors. The second part of the industrial landscape is occupied by small and medium-sized firms that employ more than 90 per cent of the non-agricultural workforce. Their development will also need major improvements in the first four factors. But, in addition, they will have to cultivate business relationships with the larger firms.