THE DEVELOPMENT OF SMES IN PAKISTAN:The Industrial History of Pakistan

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SME Management (MGT-601)

Lesson 6

This lecture is about the history of industrial growth in Pakistan and its related factors; the factors for

adopting an SME based industrial system, the institutional support of government in the shape of long term

and short-term policies.

THE DEVELOPMENT OF SMES IN PAKISTAN

The Industrial History of Pakistan:

Pakistan's industrial history has been dominated by a single-minded emphasis on industry and

that too of large-scale enterprises.

The fall out of that development strategy was formally adopted in the 60's as conscious policy step in the

start of second policy plan period (1960-1965) has been large scale industrial holdings, accounting for much

of the country's assets and capital. The feeling among the masses that a few families control 70 to 80

percent of the country's assets, led to political rebellion. That rebellion also culminated in the

dismemberment of the eastern part of the country. The primary causes for that tragedy, were basically

economic in nature.

The upheaval also generated a parallel economic thought, exclusive to the peculiarities of

Pakistan's economy. That economic thought advocated across the board nationalization of economic assets

as a vehicle for ensuring social justice in the society.

The fall out of that strategy was two pronged:

· Inefficient labor

· Shaken Business Confidence.

The reaction to that policy mix in the early 1980's was a revert back to the Ayubian model of economic

development.

The model was characterized by:

1. Promotion of large-scale units.

2. Expansion of large-scale enterprises.

3. Banking sector turned to cater to large loans.

The IMF conditions and poor recovery rate of huge borrowings played a major role in creating

a negative point for the progress curve. These constraints further pushed the economy towards

recession, industry towards sickness and individual units towards default.

All these factors precipitated the rethinking of a strategy to revive the growth of economy.

It was due to dis-involvement that medium scale and small-scale enterprises has got the

attention of the stakeholders i.e. the economic managers and the private sector. The

development of SMEs suits the current situation on account of the following factors.

1. Low overhead cost, low level of financing.

2. Lesser pressure on the banking system.

3. Employment generation.

4. Entrepreneurial development.

5. Vendor based development.

6. Development of large-scale industry on firm basis.

7. A more just distribution of resources and profits.

The pre-requisites for the development of SME sector rest heavily on an infrastructure

tuned to support such development that includes:

A banking system customized for SME development.

One window operation.

Currently, our banking system continues to be the large sector banker. Despite talk of SME

development under the auspices of SMEDA and development of SME Bank and Khushali Bank, the

financial sector's general response has been influenced by the security issue, i.e. against which asset the bank

would be advancing loans to the small and medium scale business entity. In the absence of a customized

SME Management (MGT-601)

banking setup, the development in the SME sector so far has been evolutionary and not the result of any

conscious activity.

The turning up of the system for development of the SME also includes an enabling

environment. Though the need for an enabling environment is not exclusive to the SMEs and is a pre-

requisite for all types of economic activity. That includes a one-window operation culture, where the

investor does not have to go from pillar to post to get his task done.

A conscious effort by the state to reform the banking setup and the attitude of the

government functionary and the bureaucracy will set into motion the mechanics of change in the

development strategy priorities of our economy.

The development of SME hold within its mechanics of expansion the growth of economy

coupled with a more just distribution of wealth. The social justice aspect of it ensures that the development

will not compromise the distribution of wealth issues.

To begin with, the SME development does not depends upon the expansion of the family

enterprises; rather, it is the outcome of the initiative of the single individual or asset of individual. Unlike the

development of family concerns, where the emphasis on the particular group's interests, the SME never

seeks to totally control the market, rather, it only identifies its place in the market and sustains it. The

modus operandi of most of the vendors in the auto sector is like this. They do not control a major chunk of

the market. What they are doing is to maintain their share as a sustainable vendor. Thus the market is not

blocked for the new entrant unless there is saturation point already experienced by the industry.

The small overheads involved in fixed and running cost structure of a SME unit means that

each unit does not need excessive financing. As a result a large section of society benefits from the available

resources. There is no accumulation of wealth in few hands and the money circulates in a fashion, where

people are able to derive the needed benefit.

The availability of resources for the SME unit means that the opportunity to develop are not

confined to a restricted section of society, rather anyone with a idea and plan can create a place for himself.

The success of venture capital in the United States and the likes of Yahoo and Hotmail are indicative of

the development of SME as a vehicle for equal opportunity, besides technological development.

The other success stories like Microsoft, Linux owe their development to the practical

implementation of the idea, which was presented by individuals or a set of individuals with not so privileged

backgrounds. Yet they made it big. Bill Gates was not a Kennedy scion, but the opportunity to develop

from a SME allowed him enough room. Even today, developers jointly own Microsoft. In the process the

above-mentioned advantage of technological development as also been realized.

A more just distribution of wealth and prospects of technological development set

the pace for the growth of economy. New technologies generate economic activity on industrial scale. That

is not exclusive to developed countries. We have experienced in the context of the Information Technology

that it did generate economic activity in the affiliated sectors and provided employment opportunities to

many hardware engineers and software developers. The development of IT sector had a more egalitarian

character to its credit allowing professionals to prosper, without having to be a large enterprise or scions of

big families.

The recipe of SME development infects does two things. On one hand the processes are

developed at a grass root level. Vendors are identified and the production process takes off. As small-scale

vendors characterize most of the development, the profits are naturally divided according to the

contribution to the process. There are no new big families appearing in the process, rather, it is the matter

of fact stages of production line, which are identified. The Japanese and Italian economies are increasingly

modeled on the basis of SME development.

These societies are characterized by the dignity of work, not for the huge amount of sweat, the

worker sheds, but for the rewards, which are ensured in this setup. The vendor knows the respect he earns

and the rewards he is insured. For that very cause, peace and almost no records of militant trends have

characterized the developed societies like Japan.

The debate in the support of the SME can be unending. The prescriptions for the societies and

economies like Pakistan in the context of the best possible economic solution are simple. There is a need to

SME Management (MGT-601)

retune the priorities of the state, if the results are to be realized, in the absence of which our efforts would

remain devoid of any tangible results.

Reference:

1-Small and Medium enterprises development (A recipe For development and just distribution) A research

paper by SMEDA Research cell

2-The A to Z of healthy small business by Amer Qureshi (international edition Australia)

3-50 years of Pakistans economy (traditional topics and Contemporary Concerns by shahrukh Rafi Khan

(Oxford Press)

Recommended Book

.50 years of Pakistan's economy (traditional topics and Contemporary Concerns by shahrukh Rafi Khan

(Oxford Press)

Key terms

Modus operandi (the way in which something is done)

Overheads (a regular cost of running a business i.e. rent.wages, gas, elecric bill etc)

One window operation (provision of all facilities at one place)

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