1.

Introduction

This very report indicates the impediments and obstruction faced by the Pakistan’s SME
sector. SME sector contributes more than 90% of the economic establishments,
contributing abut nearly 30% of our total GDP and 25 % to export earnings. Bearing in the
mind, that these SME’s have important repercussions for growth and development, so the
Government strategy should focus to build the SME the focal point of our industrial zone.
Pakistan’s growth, particularly targeting the Engineering Products, have been stagnant over
the few decades, but this was not the case earlier before.

i) BRIEF HISTORY OF PAKISTAN’S ECONOMY

Pakistan’s Population has grown rapidly from around 30 million in 1947 to over 220
million in 201, the statistics provided by the Pakistan Bureau of Statistics. Average
Annual real GDP growth rates were 6.8% in the 1960’s, 4.8% in the 1970’s, 6.5% in
the 1980’s. But unfortunately, annual growth fell to 4.6% in the 1990s, which was the
least in the 4 decades.

 INFLATION

As discussed in the Brief history, the era of 1990’s was certainly not the ideal
one, here are some of the reasons, and Inflation was one of the top reasons,
1
Inflation rates from 1991 to 1995 have ranged between 9.25 and 12.9 percent.
The high rates of monetary expansion, low rate of economic growth in three
out of the five years and adjustment in administered prices contributed to the
relatively high rates of inflation. Growth in international prices (in dollar
terms) has been moderate or negative. Except in 1995 when price of tradable
(in rupee terms) increased by 19 percent. Substantial depreciation of the
exchange rate in 1990 and in 1994 also resulted in a relatively sharp increase
in the price of tradable (in rupee terms) in these two years. The pressure on
international reserves and an appreciation of the real exchange rate
necessitated depreciation in 1994.

1
The material has been taken from the article ‘Forecasting Inflation in Developing Nations: The Case of Pakistan’

1
ii) COMPARING PAKISTAN WITH OTHER ASIAN COUNTRIES

Over the period 1960–2012, the country has achieved an annual average GDP growth
rate of only 4.47 percent, with the manufacturing sector having grown at around 6.3
percent. However, over the same period, many regional economies grew far more
rapidly, with China leading with a phenomenal GDP growth rate of 9.1 percent during
the period 1970–2009.

Despite these figures, Pakistan was still ahead of its times, so much so that we helped
building the nations from scratch to the destination where they could become Asian
Tigers, starting off with UAE, a country, which was mainly consisted to desert only,
became a industrial hub just at a blink of eye. And to remember, Pakistan was the front
brother to help reached this destination, Pakistan helped in building Emirates Airline,
and now, it is the world’s most successful airline. There are many other countries, that
include South Korea, Thailand, Malaysia and so forth, but we are not going into these
details.

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2. Research Methodology

Much of the research is based on the barriers to the growth of small firms. The
owners/managers were presented with the list of barriers and a scale on which to rate the
applicability of each barrier to their own firm. However, this certainly doesn’t mean that
this analysis is measured in depth, mainly due to following stated reasons, Firstly, it is
based on perception only and secondly, it provides limited policy implications.

3. Barriers to the Firm Growth

This section largely involves the constraints to industries in Pakistan. There are several
factors which are identified as the main obstacles in Pakistan’s Progress. They include
Electricity, which appears to be the most critical constraint, followed by the corruption and
crime, all three of which were considered more severe in other countries in the region. All
these are discussed below.

i) ELECTRICITY CRISIS

Electricity crisis is one of the most important hindrance in present-day

manufacturing. Due to the electricity crisis, it is reported that most firms in Punjab
lost more than 10% of their annual sales, which is quite shocking for the country
which is already under the category the under-development. This is also
compounded by the shortage of gas, which could otherwise have served as an
alternative source of energy.

Although, Firms have come with some other alternative kind of coping
mechanisms, some include by running their power generation by Diesel-run, but as
a result, these measures have deduced in increasing overheads and worker
payments.

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 Figure 2: The disbalance between the supply chain and the Demand of electricity

ii) CORRUPTION

2
Transparency International’s corruption perception index for 2012 ranks Pakistan
at 139 out of 176 countries, with a corruption control percentile rank of just 12
percent.1 Corruption features heavily in all recent surveys on the barriers to doing
business in Pakistan. It is the second most important constraint identified by the
Enterprise Survey. The ICA confirms that corruption is a severe constraint, with
56.7 percent of firms ranking it a major obstacle in 2007: an increase from 40.3
percent in 2002 (Manes, 2009). However, the World Bank Enterprise Unit surveys
report a decrease over three years, from 27 percent in 2007 to 14 percent in 2010.

Although these studies do not show a respectable nation in the eyes of the world,
but ho the corruption effects the industries, well the bribe payments in Govt. offices
is much high that an average, the industries sector loses three to seven days in
resolving a single issue with Government officials. Labor inspectors are also
considered to be most corrupt. And to add, the electricity officials, too, are apt to
threaten firms with suspension of power and incorrect billing unless side payments
are made.

iii) POLITICAL INSTABILITY

As a matter of fact, if a country is deprived from political stability, that country

certainly cannot excel to its full potential. And this sentence just fits in, as in the
case of Pakistan. It was never an easy to task to run the Government in Pakistan in
the past, as some Marshalls were imposed whenever the Democratic Government
was going to stabilize itself. This brutally impacts the overall economic activities
of a country, thus resulting in the decline of exports, and largely relying on imports,
thus creating a dis-balance and eventually, pushing the new government to beg for

2
This data has been extracted from Transparency International, Pakistan

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 the Loans. And unfortunately, we at the present, still unable to recognize the huge
amount of penalties as a result of political instability.

iv) MACROECONOMIC INSTABILITY

Macroeconomic instability has become more important as a barrier to doing

business. According to a report, which was recently published, most of the firms
identifies microeconomic and political instability as the one of the leading
constraints. Microeconomic Instability is awarded as the top three constraint by
some firms, especially those, which largely depends on imported raw material, as
the depreciation in the rupee increases the cost of production.

4. Highly affected Industries

There are numerous industries, based on producing engineering products, which are locally
manufactured, designed and engineered that are brutally affected by the reasons which are
discussed above. The victim industries are mentioned below

i) THE FAN INDUSTRY

Fan Manufacturing is a light engineering industry and one of the Pakistan’s older
industries (existing at the time of independence). Here, it is examined the possible
remedies of its constraints.

 OVERVIEW

The fan industry is clustered in four major cities: Gujrat, Gujranwala, Lahore,
and Karachi. However, 98 percent of the country’s production is centered in
Gujrat and Gujranwala. The location of this cluster appears to have been
rather arbitrary, born of historic path dependencies. However, with the
development of a vibrant cluster over the years, firms have benefitted from
external economies such as enough access to raw material with over 700
vendors operating in the area.

 CONSTRAINTS

As per the research, that is available on the internet, following barriers have
flagged as the pivotal role in the development of this crucial industry. This
include investment in R&D, the lack of entrepreneurial mindset of cluster
firms, problems of seasonal production, quality constraints and poor
managemental issues all contribute to the environment that impedes growth.

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ii) THE SPORTS GOOD INDUSTRY

The sporting goods industry in Pakistan is clustered mainly around the city of
Sialkot, which accounts nearly 95% of the industry’s total population. Sialkot is
praised as the Centre of Excellence for the production of sporting goods for more
than 100 years. This is attributed as availability of skilled artisans and thinking out
of the box entrepreneurs in the city.

 OVERVIEW

Sporting goods producers in Sialkot are predominantly comprising over

thousands of formal and informal units. The main sporting goods produced
can be divided into five categories: (i) articles and equipment for physical
exercise, gymnastics and athletics; (ii) articles and equipment for shipping;
(iii) sports gloves: (iv) articles and accessories for billiards and (v)articles for
funfair games. Among these, articles for gymnastic and athletics and articles
for funfair games have been the key drivers of the sector’s growth in the
world. Moreover, the country is considered a leading manufacturer of
footballs, cricket balls, hockey sticks, and cricket sticks—products that enjoy
global market recognition.

 CONSTRAINTS

The main reasons which can be cited as the leading reasons for the flourishing
of this industry can be illustrated as the recent energy shortages, weak law
and order situation, increasing security concerns, and general uncertainty
explain why firms are reluctant for going towards huge investment , thus
choosing to remain diversify out of the sector instead; this partially means
why many of the remains small. Very few firms have been reported to
recourse the formal long-term financing to setup their factory or plant.

Sialkot’s strength lies the versatility, dynamism and enterprising nature of its
inhabitants. Relatively better educated than the rest of the country and
exposed to international markets, potential entrepreneurs starts early in life.
And even in the sporting goods sector there wasn’t any dearth of
entrepreneurs, but one thing that leave something to be desired is firm’s
managemental practices. Generally, SME’s are run by the owner themselves.
This limits the expansion beyond a certain point, making it quite sensitive and
vulnerable to the abilities and decisions of an individual. It is also quite
evident that production and management activities of most of the firms is also
quite ill organized.

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5. Recommendations

As per the situation, there are some necessary steps which should be taken with immediate
effect, otherwise it is going to get more deteriorated in the future.

i) INSTITUTIONAL SUPPORT

Firms operate in an environment that provides a little institutional support: they

cannot rely on the court and law enforcement agencies. So, there should be proper
institution which truly represents these firms on a large scale and protects their
rights.

ii) PROBLEM IN REGISTERING A FIRM

The lack of formality in registering the firm is also a main reason, which leads them
to attain the international recognition, though some informalities are also witnessed
from the firms as well, but they are not in large amount.

iii) LABOR MARKET ISSUES

A key labor-related issue raised by the firms was the voluntary signing of
International Labor Organization (ILO) regulations by the Government of Pakistan.
Interestingly, India and China have not signed these regulations and, hence, buyers
do not seek compliance from them. However, exporters from Pakistan are bound to
comply with a host of ILO regulations, which increases their cost of production,
making them relatively less competitive. So, constructive steps should be taken in
order to remove this difference, which may help exporters to some extent.

iv) SUPPLY OF RAW MATERIAL AND ABSENCE OF ANCILLARY INDUSTRY

The quality and the price of the final exportable product hinges completely on the
availability, consistency and quality of the Raw Material. Almost 90% of the firm’s
raw material comes from Japan, China, Taiwan and Europe. The Government
policy has failed to welcome any large investment. Also, the absence of such
primary industries as chemical and latex manufacturers and of design houses and
quality testing and certification industries has seriously hampered the sector’s
overall growth.

v) INNOVATION AND PRODUCT DIVERSIFICATION

There should be a body of strictly monitoring over these firms, as if they are
upgrading themselves according to the new era, and special awards should be
announced for the innovation.

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6. Conclusions

The foremost impediment to growth for SEM’s is their inability to innovate and diversify
their product range in accordance with the changing pattern of world demands. The
availability of raw materials and credit, inadequate human capital and labor rules and
regulations are more of a binding constraint for these SEMs.

Better managerial skills and succession plans is also a major factor distinguishing high
performance firms from low performers. Firms that have been poorly or unprofessionally
managed and fragmented into smaller units over generations have generally stagnated and
eventually gone out of the business. One another reason is that these firms are less
diversified, and they tend in engage in a fiercer competition involving price wars. This
results in low survival rate factor.

Finally, Public sector interventions to promote innovation and technology have been
brutally unsuccessful. Conversely, Sialkot is a good example of coordination and
cooperation by the private sector itself to provide the infrastructure such as the dry port and
the airport. Additionally, the Government’s lack of policy direction and general policy
uncertainty has not only impeded the growth of small firms, but also been a major obstacle
to the growth and development of the overall industry.