Barriers to Growth: The case of small firms in Pakistan

The focus of this report is to explore the impediments faced by the small and medium enterprise (SME) sector. SMEs in Pakistan constitute 90% of the economic establishments and contribute 30% of GDP and 25% of export earnings and 78% of the non-agricultural labour force. Any improvement in this sector can have a multiplier effect on growth and employment. Pakistan’s growth in general and that of the manufacturing sector specifically has remained fairly stagnant in the recent past. During a period spanning the past six decades (1960 – 2012) Pakistan could only achieve an annual average GDP growth of 4.47% with manufacturing sector performance of around 6.3 percent. However, over the same period many regional economies grew much more rapidly, with China leading at phenomenal GDP growth of 9.1 percent during the period 1970-2009. The manufacturing sector in China grew by over 15 percent annually in the last twelve years (CIA World Fact Book).

A second critical feature of the manufacturing sector in Pakistan has been its inability to increase its share over the years. There has been stagnation in the structural composition of Pakistan’s economy. Structural change has been a fundamental characteristic in the growth and development of western economies and the Newly Industrialised Countries (NICs). Structural change entails a gradual shift from low productivity to high productivity activities. In the case of Pakistan, the structural change has been tilted towards the services sector. Pakistan, from being a largely agrarian economy in terms of contribution to GDP, has become a services led economy, with services accounting for more than 50% of the GDP. Manufacturing share, on the other hand, has grown more slowly. Both agriculture and industry have a share of approximately 25 per cent in GDP, with the share of agriculture falling and the share of industry remaining fairly constant over time.

Even though the services sector has become the main driver of growth in Pakistan, its potential contribution to employment is limited as compared to the manufacturing sector. Therefore, the agriculture sector continues to provide employment to a significant proportion of the country’s labour force. This report aims to synthesise available literature explaining key barriers to firm growth and augment this analysis with more insightful evidence built through primary information from two pilot industrial sectors. The report develops case studies on the fan industry and sports goods industries of Pakistan; both of which fall in the light engineering sector. The selection of these industries was based firstly on the critical importance of the light engineering sector in terms of value added and employment generation. Secondly, within these two industries the report is able to cover a spectrum of firm types in terms of those solely reliant on export markets and those that are only supplying to the local market.