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Qadir, Usman (2015) Political economy of technology acquisition in Pakistan : policy and constraints in the automotive industry. PhD Thesis. SOAS, University of London. http://eprints.soas.ac.uk/id/eprint/20394 Copyright © and Moral Rights for this PhD Thesis are retained by the author and/or other copyright owners. A copy can be downloaded for personal non‐commercial research or study, without prior permission or charge. This PhD Thesis cannot be reproduced or quoted extensively from without first obtaining permission in writing from the copyright holder/s. The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the copyright holders. When referring to this PhD Thesis, full bibliographic details including the author, title, awarding institution and date of the PhD Thesis must be given e.g. AUTHOR (year of submission) "Full PhD Thesis title", name of the School or Department, PhD PhD Thesis, pagination. POLITICAL ECONOMY OF TECHNOLOGY ACQUISITION IN PAKISTAN: POLICY AND CONSTRAINTS IN THE AUTOMOTIVE INDUSTRY USMAN QADIR Thesis submitted for the degree of PhD in Economics 2014 Department of Economics School of Oriental and African Studies University of London 1 Declaration for SOAS PhD thesis I have read and understood regulation 17.9 of the Regulations for students of the School of Oriental and African Studies, University of London concerning plagiarism. I undertake that all the material presented for examination is my own work and has not been written for me, in whole or in part, by any other person. I also undertake that any quotation or paraphrase from the published or unpublished work of another person has been duly acknowledged in the work which I present for examination. Signed: ____________________________ Date: February 20, 2015 2 Abstract This thesis examines Pakistan’s success in technological and organizational capability development for enhancing competitiveness in its industrial sector, focusing on the automotive industry as a case study, under several policy regimes. Pakistan has had to face many adverse conditions since it gained independence and as a result its growth has been sporadic, with periods of growth spurts followed by periods of slow growth. Successful interventions supporting capability development have happened in other developing countries without ‘good governance’ and with rent-seeking so a deeper analysis of the institutional failures in Pakistan is required. The thesis locates Pakistan’s institutional choices and performance in the context of changes in its political settlement to explain why performance was weak at key points in the automotive industry’s history. The analysis focuses on the contests over potentially growth-enhancing rents in the context of the distribution of power between the groups and organizations affected by these policies. Policy had to be implemented in the context of extensive political clientelism that was increasing in its fragmentation with low levels of political stability and frequent changes in government. The proliferation of clientelist groups resulted in the state compromising on long term economic growth in an effort to ensure its short-term political sustainability. Production in the automotive industry has also become increasingly globalized in recent years and Pakistan has found it hard to break into global value chains on account of the weak technological capabilities that it could develop. Two case studies of relatively more successful instances of technology acquisition within the automotive industry of Pakistan show that even in this adverse policy environment, intervention can still assist some capability enhancement. The policy challenge is to develop instruments that can enable capability development on a broader level in the context of the clientelist processes that characterize the political settlement. 3 Table of Contents List of Tables 7 List of Figures 10 Acknowledgements 12 Acronyms and Abbreviations 13 CHAPTER 1. TECHNOLOGY ACQUISITION, CATCHING UP AND COMPETITIVENESS IN THE AUTOMOTIVE INDUSTRY 16 1.1. INTRODUCTION 16 1.2. THEORETICAL CONSIDERATIONS 19 1.3. PAKISTAN’S ECONOMY AT THE CROSSROADS 28 1.3.1. ECONOMIC PERFORMANCE 28 1.3.2. ECONOMIC CHALLENGES FACING THE ECONOMY 43 1.3.3. THE CHANGING POLITICAL LANDSCAPE 45 1.4. FRAMEWORK OF ANALYSIS 50 1.5. CONCLUSION 58 CHAPTER 2. POLITICAL SETTLEMENTS AND RENT-SEEKING IN PAKISTAN’S DEVELOPMENT: AYUB’S GROWTH TAKEOFF AND POST-ZIA DEMOCRACY PERIODS 61 2.1. INTRODUCTION 61 2.2. EVOLUTION OF POLITICAL SETTLEMENTS 62 2.2.1. IMPORT SUBSTITUTION DRIVEN INDUSTRIALIZATION (1947 – 1958) 62 2.2.2. MILITARY TAKEOVER AND DEVELOPMENT (1958 – 1971) 68 2.2.3. DEMOCRATIC RULE (1972-1977) 78 2.2.4. MILITARY REGIME (1977-1988) 85 2.3. CONCLUSION 95 CHAPTER 3. TECHNOLOGY ACQUISITION, CATCHING UP INDUSTRIALIZATION AND RENTS 97 3.1. INTRODUCTION 97 3.2. TECHNOLOGY ACQUISITION 98 3.2.1. COMPETITIVENESS AND CATCHING UP 98 3.2.2. CONCEPT OF TECHNOLOGICAL AND ORGANIZATIONAL CAPABILITIES 106 3.2.3. MEASURES OF CAPABILITIES 111 3.3. MARKET FAILURES IN TECHNOLOGY ACQUISITION 114 3.3.1. LEARNING RENTS AND RENT SEEKING 114 3.3.2. STATE FAILURES 121 3.3.3. LEARNING RENTS 128 3.4. POLITICAL SETTLEMENTS 130 3.5. PRICE MARK UP MODEL 136 3.6. CONCLUSION 141 4 CHAPTER 4. CHANGING GEARS: AUTOMOBILE INDUSTRY AND ECONOMIC DEVELOPMENT 144 4.1. INTRODUCTION 144 4.2. KEY DEVELOPMENTS IN THE GLOBAL AUTOMOBILE INDUSTRY 146 4.2.1. HISTORY/EVOLUTION OF THE INDUSTRY OF ALL INDUSTRIES 146 4.2.2. TECHNOLOGY AND THE AUTOMOBILE INDUSTRY SUPPLY CHAIN 154 4.3. TRENDS IN THE AUTOMOBILE INDUSTRY 162 4.4. AUTOMOBILE INDUSTRY DEVELOPMENT POLICIES 169 4.4.1. BRAZIL 171 4.4.2. MALAYSIA AND THAILAND 172 4.4.3. SOUTH AFRICA 174 4.4.4. PAKISTAN 175 4.5. CONCLUSION 179 CHAPTER 5. PAKISTAN’S AUTOMOBILE INDUSTRY: A CASE OF STALLED DEVELOPMENT 181 5.1. INTRODUCTION 181 5.2. STRUCTURE OF THE INDUSTRY 182 5.3. KEY CHARACTERISTICS OF THE DOMESTIC AUTOMOTIVE MARKET 190 5.3.1. SKEWED MARKET SHARE 190 5.3.2. DEMAND PREFERENCES OF DOMESTIC CONSUMERS 191 5.3.3. POPULARITY OF SPECIFIC BRANDS 191 5.4. HISTORY OF THE DOMESTIC AUTOMOTIVE INDUSTRY 191 5.4.1. THE POST-INDEPENDENCE PERIOD (1947 - 1972) 194 5.4.2. PERIOD OF PROGRESSIVE MANUFACTURING (1964-72) 195 5.4.3. NATIONALIZATION OF INDUSTRIES (1973-87) 196 5.4.4. PRIVATIZATION OF INDUSTRIES (1987-95) 197 5.5. INSTITUTIONAL FRAMEWORK 197 5.5.1. INDUSTRY ASSOCIATIONS 197 5.5.2. STATE INSTITUTIONS 199 5.6. POLICY FRAMEWORK 201 5.7. TRENDS IN THE AUTOMOTIVE INDUSTRY 204 5.8. STATE OF AUTOMOTIVE PARTS MANUFACTURERS IN PAKISTAN 206 5.9. TECHNOLOGICAL CAPABILITIES DEVELOPMENT OF AUTOMOTIVE PARTS MANUFACTURERS 221 5.10. FINANCING OF TECHNOLOGY ACQUISITION 223 5.11. CONCLUSION 224 CHAPTER 6. TECHNOLOGICAL PROGRESS AND MATURITY WITH GROWTH – THE CASE OF MILLAT TRACTORS 228 6.1. INTRODUCTION 228 5 6.2. FIRM LEVEL TECHNOLOGICAL DEVELOPMENT AND LEARNING AT MILLAT TRACTORS 229 6.2.1. FOUNDATION 230 6.2.2. STAGE I – IMPLEMENTATION 235 6.2.3. STAGE II – ASSIMILATION 239 6.2.4. STAGE III - IMPROVEMENT 245 6.3. GROWTH TRENDS AND CURRENT STATUS 249 6.4. CONSTRAINTS FACED 255 6.5. FIRM COMPETITIVENESS 257 6.6. CONCLUSION 264 CHAPTER 7. ATLAS HONDA MOTORCYCLES: ORGANIZATION DEVELOPMENT THROUGH SELF DEVELOPMENT 267 7.1. INTRODUCTION 267 7.2. FIRM LEVEL TECHNOLOGICAL CAPABILITIES DEVELOPMENT AT ATLAS HONDA LIMITED 268 7.2.1. FOUNDATION 269 7.2.2. IMPLEMENTATION, ASSIMILATION, AND IMPROVEMENT 270 7.3. TRENDS IN THE MOTORCYCLE INDUSTRY 273 7.4. CONSTRAINTS FACED 279 7.5. FIRM COMPETITIVENESS 281 7.6. CONCLUSION 285 CHAPTER 8. CONCLUSION 288 8.1. INTRODUCTION 288 8.2. MAIN FINDINGS 289 8.3. POLICY IMPLICATIONS 293 8.4. AREAS FOR FUTURE RESEARCH 294 BIBLIOGRAPHY 295 APPENDICES 311 6 List of Tables Table 1.1: Technological Capabilities Development Effort Requiring Investment ..... 26 Table 1.2: Decade-wise Annual Average GDP and GDP Per Capita Growth Rates ...... 28 Table 1.3: Decade-wise Public Expenditure on Education in Selected Countries ....... 29 Table 1.4: Major Social Sector Expenditure versus Military Expenditure Shares in Pakistan (1995-2011) .......................................................................................................................... 29 Table 1.5: Sectoral Contribution to GDP Value Added ............................................................ 31 Table 1.6: Export Performance Licensing versus Export Bonus Schemes - Key Highlights................................................................................................................................................... 35 Table 1.7: Disaggregated Industrial Output by Decade (1960 – 2000) ........................... 38 Table 1.8: Disaggregated Export Data by Period ...................................................................... 39 Table 1.9: Growth Rate of Installed Capacity and Generation of Electricity .................. 41 Table 1.10: Population Growth Rates by Decade ...................................................................... 42 Table 1.11: Cross Country Comparison of TFR by Decade .................................................... 42 Table 1.12: Infant Mortality Rates ................................................................................................... 43 Table 2.1: GDP and Sectoral Growth Rates - (1950 – 1959)................................................. 66 Table 2.2: Sectoral Shares in GDP (1950 – 1959) ..................................................................... 67 Table 2.3: Exports, Imports and Trade Balance (1950 – 1959)