Economic Crises and Reforming Karachi’s Informal Textile Industry

This post extracts the key points of an important impact assessment in relation to reforming Karachi’s informal textile sector.

It has recently been reported that Pakistan is the eighth largest exporter of textile and related products in Asia and that Pakistan’s textile industry accounts for 9.5 percent of the country’s GDP and provides employment to about 15 million people or roughly 30 percent of the country’s 49 million strong workforce. Arguably, Pakistan is the fourth largest producer of cotton in the world. Contributing 5 percent to global spinning capacity, Pakistan possesses the third largest spinning capacity in Asia after China and India. Equally, The textile industry in Pakistan accounts for more than 60 per cent (US$9.6 billion) of total exports. Indeed, the industry forms the spine of Pakistan’s economy. To date, no empirical research has examined the local impacts of economic crises and reform on cities in Pakistan, including Karachi.

This study by Arif Hasan, Mansoor Raza and IIED addresses this gap by examining how the textile industry – as one of Pakistan’s most productive economic sectors – has been impacted, with a focus on the informal power loom sub-sector. The factors that have contributed to the decline of the textile industry and the repercussions for this sub-sector, including one of the settlements in which it operates, are discussed. The conclusions contemplate the challenges of formulating urban policy responses to an economic problem that is shaped simultaneously by local, regional and global pressures. This study examines the local impacts of economic crises and reform on the textile industry in Karachi, with a focus on the informal power loom sub-sector and the low-income settlement (Dibba Colony) where it operates. Conventional development theory initially viewed the informal sector as a marginal and transitory phenomenon that would eventually be absorbed by the modernising urban industrial sector.

In reality, however, the inverse scenario has taken place in many low and middle income countries where economic growth has not kept pace with urbanisation and overall population growth, and where macroeconomic crises and reforms have led to rising unemployment in the formal sector (for an overview of informalisation trends see Brown et al. (2014: 11)). This scenario has accelerated rapidly in Pakistan: in 2010, it was estimated that 73 per cent of the country’s non-agricultural employment was concentrated in the informal sector (per Government of Pakistan 2010).

Impact Issues

A number of undocumented issues about these impacts have emerged, and are summarised below:

  • Pakistan’s evolving political landscape has had a major influence on industries and businesses and on people’s livelihoods and property values. The country’s flirtation with socialism in the 1970s led to the nationalisation of large industrial units and to the development of active trade unionism.
  • To overcome the resulting economic repercussions and fear of nationalisation, many large industrial units were broken up into smaller units by the seths (local entrepreneurs) and relocated from formal industrial areas to low-income residential settlements or their officially designated commercial areas (commercial areas are not meant for industry).
  • Although the government made available cottage industry estates, these remained mostly unoccupied because working from low-income settlements and through informal arrangements of production enabled the seths to lower production costs, make the development of trade unionism difficult and overcome their fear of being nationalised. This research found that similar processes had also been followed in other industries and settlements, some of which have been identified.
  • Liberalisation in the 1990s made possible the importation of cheaper Chinese and Indian silk. This had an adverse effect on the silk industry in Pakistan, mainly because of the higher labour and energy costs in Pakistan and a more liberal investment regime in other countries. Liberalisation made it possible for Pakistani industries to relocate to other countries, notably Bangladesh; also, retailers and wholesalers make greater profits and face fewer problems when dealing with imported silk textiles than with the local industry.
  • Regional conflicts have closed borders, making trade difficult and often erratic. This has discouraged production, severely disrupted tourism (and hence the demand for manufactured items, such as silk and leather) and has led to the development of illegal trade, adversely affecting the functioning of the country’s political and bureaucratic establishments. However, no in-depth studies on this subject exist.
  • The absence of a political consensus in Karachi between the Sindhi, Urdu and Pushto speakers has led to a turf battle. Disagreement over the nature of local government has led to a breakdown of governance and to violence and strikes. Furthermore, Islamic militancy has led to a rise in targeted killings of its opponents and to protests, causing the city to sometimes close down. Protagonists in these conflicts have sought the support of ’criminal elements’, who extort protection money from traders and businesses. The breakdown in law and order results in strikes and demonstrations, hence markets are often closed; even when they are open, business is slow. Retail markets in the residential areas are not directly affected by these conditions but prices have risen as a result.
  • When silk production was no longer profitable, due to high energy costs, liberalisation and regional and provincial conflicts, the seths sold their looms to their workers and left the industry. The new owners then shifted the businesses from the commercial ’mill area’ to their residential areas in Dibba Colony for three reasons. First, energy charges in residential areas (especially low-income areas) are much lower than in commercial areas. Second, rents for premises in Dibba Colony are much lower than in the mill area. Third, premises are on non-commercial small plots meant for low income groups, which are exempted from property taxes, and Karachi Water and Sewage Board (KWSB) charges are also much lower.
  • Energy outages have reduced production by 30 per cent. Unlike in formally designated industrial areas, the new owners’ premises do not qualify for a continuous electricity supply, but they lack the economic capacity to relocate to formally designated areas.
  • There is general consensus that working conditions were better and pay more regular under the seths than under the present system. The ‘class war’ was better managed because the seths had better financial and managerial capacity than the present owners, who belong to the same class as the karigars and their helpers.

Study Conclusions

  • This paper has shown that the causes behind the ongoing decline of power loom units in Dibba Colony are primarily related to liberalisation, domestic and regional conflict, the declining law and order situation, and power outages. These factors appear to be creating the conditions for further informalisation as loom units in both the informal non-mill sector and the formal mill sector continue to close down, and as workers seek out other livelihoods that appear to be increasingly marginal (for example scrap recyclers).
  • While neoclassical economists claim that liberalisation will foster more efficient and inclusive markets, it is difficult to see how this could be achieved in a city like Karachi, where existing markets are inefficient, inequitable and highly distressed by local, regional and global pressures. It is also difficult to see how free markets would lead to tangible improvements in the livelihoods of the working poor, particularly in the urban informal sector where labour protection and representation are widely lacking.
  • This working paper has offered some solutions, but they have clear limitations. For example, reforming zoning byelaws and regulations to permit mixed uses would allow low-income groups to live and work in the same area while supporting broader city planning objectives (for example reduced traffic congestion), but these reforms are unlikely to be supported until the informal manufacturing sector is made an urban policy priority.
  • Exempting residential areas where the sector is located from power outages would increase the productivity of power loom units, but this would not resolve the problem of declining demand. Also, allowing owners to informally add floors to existing buildings would likely boost property values; however, this is not possible because of the existence of a nearby airport.
  • Furthermore, the macroeconomic factors at play present clear limitations to what any of these reforms could possibly achieve at the local level. Even solutions proposed to protect Pakistan’s textile industry by banning cheap Chinese and Indian textile imports would not be possible in the context of free trade. nor would such solutions position Pakistan to better compete with more liberal investment regimes in other countries, not least Bangladesh.
  • Overall, the economic crisis facing Dibba Colony is tremendously complicated, with no clear or easy solutions. What is clear is that the informalisation of industrial activities and their spread into low-income settlements is likely to continue as the crisis unfolds, representing a clear priority area for urban policy.
  • To inform such policy, further research is required on a number of key issues, including the different informal activities that are emerging; their linkages with the formal sector (through relations of labour and production); their potential to support the livelihoods of the working poor (and the policies required to protect labour); their potential to contribute to employment and economic growth in the transition to a more inclusive and sustainable economy; and their implications for devising formal regulations that promote the potential contributions that informal enterprises and their workers can make in this transition.

Please read the Full Report (Impacts of economic crises and reform on the informal textile industry in Karachi) which was funded by the International Institute for Environment and Development (IIED)

Authors: Arif Hasan and Mansoor Raza, links by Editor

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Filed under Discussion, Energy, India, Karachi, Pakistan, Trade

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