PDR

THE PAKISTAN DEVELOPMENT REVIEW 

Capacity Utilization in Manufacturing Industries of Pakistan

It is a well-known fact that capital is scarce in most of the developing countries and thus some of the production factors, such as labour, remain unemployed, leading to a lower growth rate of G.N.P. than would be possible under full employment. Additions to the stock of capital not only increase the rate of growth but also provide new job opportunities. However, in many developing countries, capital is utilised less than one-third of the time [10,p.38], The underutilization of capital obviously shrinks the growth rate of less developed countries still further. Capacity underutilization discourages technological progress which leads to an inefficient industrial structure. This presents us with a paradox: if capital is scarce in developing countries, why is it underutilized? A number of hypotheses have been advanced to explain this paradox. Some of these hypotheses relate to oligopolistic structure of the market, deficient demand, non-availability of complementary factors of production (such as skilled labour), imported inputs and government licensing policies. Moreover, when aid is available for specific projects, there is a tendency to build up additional capacity because the recipient countries prefer some aid to no-aid. However, very little has been done so far in building a theoretical framework which could be used in empirical analysis to throw light on the possible causes of capacity underutilization. Marris’s theoretical framework [4] and Winston’s empirical investigation of capacity utilization in Pakistan [10] are exceptions.

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