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Foreign economic aid is at the cross-roads. There is an
atmosphere of gloom and disenchantment surrounding international aid in
both the developed and developing countries — more so in the former than
in the latter. Doubts have grown in the developed countries, especially
among the conservatives in these countries, as to the effectiveness of
aid in promoting economic development, the wastes and inefficiency
involved in the use of aid, the adequacy of self-help on the part of the
recipient countries in husbanding and mobilising their own resources for
development and the dangers of getting involved, through ex¬tensive
foreign-aid operations, in military or diplomatic conflicts. The waning
of confidence on the part of the donors in the rationale of foreign aid
has been accentuated by an increasing concern with their domestic
problems as well as by the occurrence of armed conflicts among the poor,
aid-recipient countries strengthened by substantial defence expenditure
that diverts resources away from development. The disenchantment on the
part of the recipient countries is, on the other hand, associated with
the inadequacy of aid, the stop-go nature of its flow in many cases, and
the intrusion of noneconomic considerations governing the allocation of
aid amongst the recipient countries. There is a reaction in the
developing countries against the dependence, political and eco¬nomic,
which heavy reliance on foreign aid generates. The threat of the
in¬creasing burden of debt-service charge haunts the developing world
and brings them back to the donors for renewed assistance and/or debt
rescheduling.

The choice of technology in the developing countries has been
a subject matter of considerable theoretical and empirical
investigation. That labour-abundant economy like Pakistan should opt for
labour-intensive technology in order to maximise income and employment
has been widely recommended. There has, however, been long-standing
controversy as to whether, and how far, the choice of labour-intensive
technology slows down the rate of growth of income as against the
maximisation of current income by increasing the share of wages in
income which are assumed to be wholly or mostly consumed and by
correspondingly reducing the share of profits which are assumed to add
mainly to the invisible surplus and thus to increase the rate of capital
accumulation. This line of reasoning postulates that a developing
economy has more or less free choice between alternative techniques,
embodying different degrees of labour intensity and has, in addition,
adequate instruments of policy at its disposal to regulate the choice of
technology in the public and private sectors of the economy; it further
seems to imply that it has very inadequate or ineffective instruments of
policy at its disposal to alter the disposition of income between
savings and investment, once the technology and its attendant
distribution of income between wages and profits are given. The
feasibility or the effectiveness of the various fiscal instruments for
increasing the rate of saving in a developing economy has often been
discussed, however, there is very little empirical analysis of the
existing pattern of technology as well as of the limitations on the
choice of technology in a country like Pakistan which imports technology
mainly under foreign aid tied to the purchases in the individual
aid-giving countries which happen to grant loan for individual,
particular capital projects.

Pakistan has experienced in the last decade a significant rate
of growth of exports, especially of the manufactured exports. The
manufactured exports have grown at an annual compound rate of 15 per
cent during the period 1960-67. This significant rate of growth of
exports has been associated with a large number of export-promotion
measures which have ranged from a wide variety of fiscal concessions to
such export-incentive schemes as the export bonus and export performance
licensing as well as the fixation of compulsory export quotas for the
individual manufactured exports. The question has been raised from time
to time as to the efficacy of the export-promotion measures in terms of
the net foreign-exchange earnings, denned as the actual increase in
export earnings from a unit of export minus the direct and indirect
requirements of imports necessary for the production of the unit of
export. Since one of the important criteria for the determination of the
investment priorities in the field of industry in Pakistan has been the
foreign-exchange saving or earning capacity of a particular industrial
project [9, p.51], it is important to quantify the contributions to the
net foreign exchange earnings made by the exports of the different
manufactured goods. Moreover, it is possible to judge how the existing
structure of the export incentives is related to the net
exchange-earning capacity of the different industries.

Pakistan's industrial achievement in a relatively short span
of time and in the light of the experience of the similarly placed
countries has been favourably commented upon by the observers and
analysts, both at home and abroad. Dr. M. N. Huda, in his Conference
Address, refers to this impressive record of Pakistan's progress in the
course of which many industries have grown from the state of infancy and
that of teething troubles to a state of viability and adult¬hood [2, Pp.
10-11]. Indeed, the rapid growth of the manufactured exports from
Pakistan in recent years may be considered as an indication of the
extent to which the industrial progress in Pakistan has been successful.
For the future, he rightly advocates an aggressive but selective
industrialization based on both the home and export markets. Moreover,
his observations do em¬phasize the need for increasing the productivity
of the existing industries as well as for a careful application of the
criterion of efficiency in the selection of the future pattern of
industrialization. This note seeks to indicate the inter¬relationship
between the industrial efficiency and the export performance; it draws
attention to a few neglected aspects of the recent studies on
indust¬rial efficiency in Pakistan such as the intra-firm differences in
efficiency. It explores the rationale and the implications of
'infant-industry" protection for industrialization in
Pakistan.

The paper presents, in Section I, new and additional evidence
on the comparative costs of manufacturing industries in Pakistan.
Furthermore, the findings of the present study are compared with those
of earlier studies. Comparative costs in this context are defined as the
ratios of ex-factory prices of specific domestic products to CJ/prices
of closely competing imports. In Section II, it examines whether the
tariff rates are an adequate index of the comparative cost ratios i.e.,
in other words, whether the differences in the tariff rates reflect the
differential cost structure of Pakistani industries? We also examine, in
Section III, whether the available data provide any evidence on the
relationship between the magnitude of cost disabilities of the Pakistani
industries and their stage of infancy, i.e., whether and to what extent
cost ratios decline with the growing up of infant industries. This paper
also analyses in Sections IV and V how far comparative cost ratios can
be used as a measure of the relative inefficiency of industries in
Pakistan? How far, for example, the high cost ratios of domestic
industries merely indicate that the Pakistani rupee is overvalued? How
far the cost ratios are affected by or represent high profits of
industries? An attempt is made to adjust for both the overvaluation of
foreign exchange and the prevalence of abnormally high profits. Finally,
in Section VI, we relate the comparative cost ratios of the
manufacturing industries to their factor intensities or their factor
proportions in an attempt to explore whether relative efficiency is
correlated with the relative intensity of use of the different factors
such as capital, labour, and skill.