SME Development in Pakistan Analyzing the Constraints to Growth

Abstract

The Government of Pakistan's commitment to liberalization and structural adjustment policies over the last decade and a half is a major policy break in the country's economic evolution. However, evidence suggests that this shift in policy, which produced growth dividends in other South Asian economies, failed to bring with it the expected growth dividend in Pakistan. From being the fastest grower in South Asia, Pakistan became the slowest-growing economy in this region during the last decade (Bari and Cheema 2002). Large-scale manufacturing (LSM) has recovered significantly in the last couple of years, but there are still concerns about its sustainability, spread, and robustness. Small- and medium-scale industry have not made a corresponding recovery yet. The pronounced slowdown in growth in the manufacturing, retail, and wholesale sectors, in particular, is largely explained by the fact that their growth rate of gross fixed capital formation (GFCF) has halved. The trend slowdown in the GFCF growth rate is equally apparent in small- and large- scale enterprises. This suggests that the sustainable, robust, and widespread revival of investment and output growth are policy imperatives that the Government needs to address with great urgency. This study takes up these concerns by providing a broad, strategic direction for a growth and investment revival strategy for the industrial sector, based on a rigorous analysis of the factors constraining firm-level growth and investment in Pakistan. The study places special emphasis on removing the constraints on small and medium enterprise (SME) growth and investment. The Pakistan Economic Survey 2001-02 justifies this emphasis on the following grounds: first, SMEs contribute significantly to Pakistan's economy in terms of both value-added (30%) and employment (80%); second, the growth potential of labor-using SMEs needs to be maximized; they are likely to proliferate in line with comparative advantage in the liberal and open economy the Government is committed to.