The History of Entrepreneurship Policy in Pakistan 1947 - 2019

What is Entrepreneurship?

There is no universally agreed upon definition for Entrepreneurship. There has been a lot of debate among scholars and experts about how to define it in the best possible manner. The classical definition of “undertaking innovation and bearing risk” has evolved with time and now we can find several definitions for Entrepreneurship in the literature. Some of these definitions have been listed below.
  • Transformation of demand into supply for profits (Smith 1776)
  • Bringing together factors of production (Say 1803)
  • Founding private enterprise (Mill 1848) 
  • Bearing uncertainty (Knight 1921)
  • Innovation through the process of 'creative destruction', old being washed away by the new (Schumpeter 1934)
  • Exploration of opportunities — being an arbitrageur and an equilibrating agent (Kirzner 1973)
  • Creation of organisations (Gartner 1988)
  • Any attempt at business or new venture creation, such as self-employment, a new business organization, or the expansion of an existing business, by an individual, a team of individuals or an established business. (GEM Manual 2012).

Entrepreneurship is regarded as a combination of innovation and risk taking by the economists (Haque 2007). When Entrepreneurship flourishes, the economy grows at a high rate and people from all segments of the society get equal opportunities to improve their quality of life. The poor get the benefits of this economic growth by finding greater employment opportunities and a better chance of starting their own successful entrepreneurship.

An entrepreneur is known for his ability to take risks where others lack the vision to take such a decision. Naturally, it is the entrepreneur who either reaps the benefits or suffers the consequences of the risks he had taken. This risk could be in the form of fulfilling a vision, finding a new opportunity, or coming up with a new and improved method of doing something. Therefore, the entrepreneurs are considered as the pioneers who pursue creative and innovative ideas, turn these ideas into profitable business while bearing all the risks associated with this pursuit.

Entrepreneurs play a vital role in creating employment, generating a change in the market and revolutionizing the economy. Therefore, it is extremely important for any government to provide the right environment, solid legal framework and friendly policies for the entrepreneurs of its country. Generally, the entrepreneurs begin their business at a small scale operation funded by themselves. This is because banks and investors in general, do not fund an uncertain and risky business. The entrepreneurs have to demonstrate a certain level a success for a while before they could successfully obtain funds from them. In developed countries, the institution of venture capitalism comes forward to discover promising nascent entrepreneurship and help them in getting on their feet. In return, they receive a negotiated portion of their profits. But venture capitalism is almost non-existent in developing countries like Pakistan where the institutional infrastructure is still not very conducive for entrepreneurship.

Entrepreneurship is not always carried out with the aim of wealth creation and inducing growth. In fact, it can be used to accumulate wealth by using unproductive enterprise (Tullock 1989, Krueger 1974). A situation may arrive where an individual or a company generates wealth not by manufacturing good or providing services, but by manipulating the economic environment in its favor. This phenomenon is called rent-seeking. This can happen through government issued licences, titles and incentives that disrupt free market trade. The government policies can either advance healthy and genuine entrepreneurship that generates wealth and results in economic prosperity, or they could encourage rent-seeking behavior that hampers growth and the country gets trapped in a low poverty-low growth snares. Unfortunately for Pakistan, its entrepreneurs has exhibited rent-seeking behavior for the majority of its history.

Entrepreneurship in Pakistan: 

Historically, entrepreneurship has remained very limited in Pakistan. Annual firm entry rate in Pakistan has always been lower than the averages of most regions of the world. However, the data for such firms cannot be trusted completely since most of the new firm entries remain unregistered in Pakistan. The Small and Medium Enterprise Development Authority (SMEDA) has estimated that the Small and Medium Enterprises (SMEs) in Pakistan make up about 90% of the 3.5 million private enterprises that employ 80% of the non-agricultural labor force of Pakistan (GEM Pakistan 2010)

A review of the history of Pakistan reveals that entrepreneurship has never been the focus of the government’s economic and development policy. The government has always shown a clear bias towards large scale industry and has always ignored the small enterprises and entrepreneurs. When one talks about industrialization in Pakistan, most people assume that the implication is large industrial complexes and factories that employ hundreds of workers. People are surprised to learn that actually, it is the informal and small scale sector that employees the majority of the work force and historically, this sector has always been ignored by the policy makers in the government.

The public policy for Entrepreneurship can generally move towards two extremes. Either it generates high opportunity cost when it gives a lot of support to the entrepreneurship which results is a large number of entrepreneurs in the given region, or it lowers the opportunity cost and gives minimal support to entrepreneurs which results in a small number of startups in the region. The former leads to a fiercely competitive market with a greater emphasis on innovation, whereas the latter leads to lesser competition but the entrepreneurs will not be as driven by their ambition. In any case, it is crucial for entrepreneurs to have an in-depth knowledge about the expected life cycle of their product, the level of competition in the market, internal management requirements and the R&D needed to minimize the difference between the predicted and the actual growth of their business. (Kreuger 2000, Dutta 2008).

The Genesis of Pakistan (1940-1947)

Pakistan is a country of 200 million people situated in South Asia. It came into being on 14th August 1947 when the Indian subcontinent gained its independence from the British Empire and was partitioned into a Muslim majority state called Pakistan, and a Hindu majority state called India. 

Pakistan is an ideological state formed on the basis of two-nation theory. The Muslims of subcontinent feared that in a purely democratic system of one man one vote, they will become a perpetual minority dominated by the Hindu majority. Muslims, being one-third of the population, will always be ruled by the other two-thirds of the population, the Hindus. And under the Hindu government, they will be unable to safeguard their rights, ensure their safety, and get equal opportunities in business, education and employment. Independence from the British Empire alone would have only meant a change of masters for the Muslims. That is why, the Muslim leaders of the time presented the two-nation theory, which said that Muslims are not just a minority in the Indian subcontinent, they are a separate nation from the Hindus. And as a separate nation, they deserve a separate homeland for themselves called Pakistan. On the basis of two-nation theory, the Muslims of subcontinent started Pakistan movement in 1940. After years of political struggle, the British Empire finally relented and agreed to partition the Indian subcontinent into two countries. The Muslims achieved freedom not only from the colonial British rule, but also from the domination of the Hindu majority. 

Both the British and the Hindus were against the creation of Pakistan and both of them did everything possible to weaken the nascent state of Pakistan. In the partition plan, many Muslim majority areas were unjustly given to India along with the only Arsenal that was supposed to be given to Pakistan, India also got the headworks of Sutlej and Bayaas rivers at Firozpur and in the shape of Gurdaspur, the land route to Kashmir. Pakistan had no arsenal, its army was scattered, there was no money to even pay the salaries of its civil servants. Since many Muslim majority areas were given to India, therefore millions of Muslims from those areas had to migrate to Pakistan leaving behind all their businesses and properties. During this migration, more than one million Muslims were systematically slain in the fields of Punjab. In the end, more than 10 million Muslims migrated to Pakistan, this is one of the biggest migrations in recorded history. The treatment and rehabilitation of these emigrants was an enormous challenge. Then on 27th October 1947, India invaded and captured the state of Kashmir. This led to the first war between India and Pakistan. The war was inconclusive, the Kashmir issue is still unresolved and it continues to be a bone of contention and a big reason for the hostility between the two countries. 

Pakistan faced enormous problems from the day it was created. In the light of all these enormous challenges, the Indian leaders, like Nehru and Patel, claimed that Pakistan will soon crumble and will beg to rejoin India (Wolpert 2006). Thankfully, this did not happen and Pakistan survived the initial onslaught. However, tackling such enormous economic and military crises left a deep impression on the civil and military establishment of this infant state which defined its character and dictated its policies for decades to come. 

The Early Days (1947-1958)

The state of Pakistan had inherited an established feudal elite, colonial bureaucratic and military structures, and a working class which comprised mostly of migrants. Pakistan did not have any industry to speak of. Its population mostly comprised of farmers and traders. 

Pakistan followed the trend of the time and opted for a planned and closed economy for itself that was aimed for a big push towards industrialization in its early years (Khan 2004). Central economic planning soon took the shape of “government knows best” approach which resulted is a variety of legislation to ensure a fully government directed economy. Instead of fair competition in an open market, protection policies and subsidies determined the success of entrepreneurs. Hence, the entrepreneurs focused their attention towards obtaining favors from the government instead of innovation and quality control. This was the beginning of rent-seeking behavior in Pakistan. 

This initial period of 1947-1958 of Pakistan was the time of emerging exchange rate, developing trade policies and import substitution industrialization. Despite having a non-existent base, the country experienced an astounding growth rate. The large scale industrial sector grew at a rate of 20 percent during 1950-1955. Virtually all imports into Pakistan in that era were being regulated by using some form of government control. With such measures on imports, the prices of commodities, especially consumer good, rose sharply which resulted in an increase of productivity in the industrial sector. This led the wealthy traders and feudal lords to establish their own industrial complexes. And this is how the process of industrialization began in Pakistan.

It is pertinent to note that since the time of independence, the government viewed “enterprise” only as large industry. The Pakistan government adopted tariff protection as the means to stimulate industrialization with a particular emphasis on the large scale sector. These tariffs did not benefit the lower and the middle class, they only benefited the favored few (White 1974). All the policy measures, such as tariff protection, import licenses etc., were directed at the elite class that owned large industry. These measures did not encourage entrepreneurship, neither did it enhance productivity. It just created a new class of industrialists from the existing rich and powerful elite. The policies of the government were never neutral, rather they favored the large industry, hampered fair competition and established the rent-seeking behavior in Pakistan. (Lewis 1969)

The Decade of Development (1958-1968)

This is the era of the first marshal law in Pakistan, the Ayub Khan regime. This era is popularly known as the decade of development because the economy, especially the industrial sector, experienced a high growth rate of about 8% (Fayyaz 2009). 

Initially, the Ayub government continued the trend of focusing on large scale industry and favoring the elite. The rent seeking behavior also continued in this era. In 1959, the 9 biggest industrial groups contributed 50 percent of total industrial production in Pakistan, the 5 biggest alone accounted for 37.3 percent (Haque 2007). The policies of capital intensive, import substitution and labor displacing industrialization, were marred by the low productivity and production efficiency in Pakistan. But in the early 1960s, the priorities of the government changed. The bias towards large industrial complexes started to dilute and the policy makers started to pay attention towards the agricultural sector as well. Moreover, the private the private sector was encouraged to start medium and small-scale industries in Pakistan. (Toor 2011)

The outcome of these policies was a rapid growth, both in the industrial as well as the agricultural sector. The economy boomed and the per capita income increased significantly. This was the period of prosperity for Pakistan which was the result of solid policies and smart economic management. Proper planning and sound policy-making machinery led to the establishment of formal institutions of economic planning. 

However, even the agricultural reforms of Ayub mostly benefited the rich elite and they could not vitalize the potential of the lower and middle classes of the society. These reforms, that were part of the green revolution, had three main elements: (a) Tube wells, (b) Tractorization and (c) High Yield Varieties (HVD). All three elements of the green revolution became an instrument for rent seeking (Haque 2007). 

Firstly, the incentive for using tube wells was given to farmers using subsidies on fuel, installation charges and maintenance charges. Similarly, the procurement and utilization of tractors was induced through cheap availability. Tractors could be bought at below the world market price in Pakistan (Zaidi 2005). Thirdly the seeds of High Yield Varieties (HVD) food grains were given to the farmers at cheap prices. Due to the high capital cost, even the mid-level farmers could not afford tube wells. Hence, an overwhelming majority of the tube wells were installed by those who owned more than 25 acres of land, i.e. the elite. Similarly, tractors were not practical for small farmers either and since the HYP varieties required a lot of water for their cultivation, their benefits were also mostly reaped by the farmers who were enjoying an excess of water because of recently installed tube wells. Thus it can be seen that the benefits of green revolution were restricted mostly to the rich farmer class and the poor could not climb out of their poverty because of these measures. 

The development pattern in the 1950s and 60s led to a high degree of concentration in the Pakistani society. The gap between the haves and the have-nots continued to grow wider and wider. In a public press conference in 1965, Dr Mahbub Ul Haq claimed that “22 industrial family groups had come to dominate the economic and financial life-cycle of Pakistan and that they controlled about two-thirds of industrial assets, 80% of banking and 79% of insurance assets in the industrial domain.”

Nationalization (1971-1977)

The early 1970s brought great upheaval and crisis in Pakistan. A third war was fought with India, and as a result of that war, Pakistan lost its eastern half which became the new state of Bangladesh. The decade long marshal law came to an end and democracy was finally restored. The populist leader Zulfiqar Ali Bhutto became the prime minister of Pakistan. 

Bhutto introduced the policy of nationalization of all large scale industrial manufacturing centers, insurance companies and banks (Fayyaz 2009). Bhutto was a socialist and his policies were aimed at restoring the balance, pruning the power enjoyed by the elite and ensuring a better distribution of wealth and resources in all classes of the society. However, these policies were a massive failure and they could not deliver the promised results. Rather, they hampered the economic growth and the economy came to a standstill (Mahmood 2006). 

Interestingly, state owned manufacturing plants, stand owned development projects and state owned land development all turned out to be excellent devices for rent-seeking. The excessive enlargement of the powers of the state, its constant insistence on micro-managing, controlling and regulating the industry even at the smallest level went far beyond any rational or logical necessity of economic growth and wealth distribution. The government involved itself in so many low level things, that it could not do many of those things right. Whatever the original intentions behind nationalization policy were, it ended up as a massive failure on the part of the government. 

De-Nationalization (1977-1988)

Bhutto was removed from power in 1977 as a result of another military coup d’état. Zia ul Haq became the martial law administrator, later he went on to become the President. Zia reversed the nationalization policy of Bhutto and the economy started to recover. However, the defining issue of Zia era was the Russian invasion of Afghanistan. Pakistan hosted millions of Afghan refugees, supported and trained Afghan mujahideen and this war culminated with the Russian defeat and the dissolution of the Soviet Union. 

The policy of de-nationalization and guarantees against future nationalization restored confidence in the private sector. The boundary between the activities of the public and the private sector was clearly marked and large scale industry recovered thanks to tax holidays (Ahmed 2014). The economy enjoyed a period of sustained growth at 6.6% per annum. Wages continued to increase and poverty began to decline (Hassan 1998). 

This was the decade of Small and Medium Enterprises (SME). For the first time in the history of Pakistan a comprehensive and detailed policy about SME was developed. The government of Pakistan acknowledged that SME are part of the industrial mainstream and tried to address their issues and challenges for the first time (Fayyaz 2009)

Widespread Corruption (1988-1999)

Zia died in a plane crash in 1988. Democracy returned again and the next decade saw the yo-yo of power struggle between Benazir Bhutto, the daughter of Zulfiqar Ali Bhutto, and Nawaz Sharif. Both of them became prime ministers twice in this decade. 

Structural reforms were carried out in the agricultural sector and the protections given to the industry were removed. In the agricultural sector, the reforms were targeted at four main areas: (a) Improving the availability and efficient use of water, (b) ensuring an environment centered on market for input and output prices, (c) providing support and physical infra-structure for extension work and research, and improve the links between the farm to the market (d) providing access to suitable land for cultivation. The farmers showed a positive response to these structural reforms and changes (Hussain 2005).

A major issue of that era was widespread corruption. During 1990s, many public financial organizations faced huge loan defaults. It was noted that these institutions were used by the political leaders to grant favors and political patronage by generously rewarding their loyal followers and winning over people in their opponent’s camp (Hussain 1999). The cost of the project was shown to be more than the real cost so that the funds for the project would be sufficient to finance the equity part of the project as well. The funding for these projects was generated through bank loans which were often not repaid. This meant that the whole project was gifted to the contractor/ developer by the bank or the government at the expense of the bank’s customers and the nation's taxpayers.

Bust-Boom-Bust (1999-2008)

A third marshal law was enacted in Pakistan in 1999 and Pervez Musharraf took over the government. In the beginning of this era, Pakistan was struggling with economic sanctions which were imposed after Pakistan demonstrated its nuclear capability in response to Indian nuclear tests in 1998. After 9/11, Pakistan became a front line state in the war against terrorism. Being an ally of the US, it enjoyed economic and military aid and the economy flourished at a rate of 7% until 2007 (Singh 2011). But then Pakistan itself became a victim of terrorism and suicide attacks started happening on a regular basis all over Pakistan. All foreign investment left Pakistan and its economy collapsed. This was the Bust-Boom-Bust of Musharraf era. He took over an ailing economy, it grew for a while because of foreign aid and investment and then that economic bubble burst.

For much of the Musharraf era, Pakistan pursued the policies of privatization and deregulation. The priority of the regime was to achieve economic recovery, good governance and institutional reforms. The government employed a two-pronged strategy of introducing structural reforms and ensuring macro-economic stability for self-sustainable growth. Because of these policies, the economy experienced a growth of 7% per annum for four straight years (Singh 2011).

A New Beginning (2008-Present) 

Musharraf left in 2008, after him, Pakistan has had three regimes: Zardari (2008-2013), Nawaz Sharif (2013-2018) and Imran Khan (2018-Present). This has been one of the most challenging era in the history of Pakistan where each government had to face enormous challenges. The biggest task for Zardari government was fighting terrorism, Nawaz regime had to tackle the problem of power generation, whereas Imran Khan is facing the enormous challenge of foreign debt servicing and stabilization of the economy. 

This is the era in which Pakistan formally joined Global Entrepreneurship Monitor (GEM) in 2010 and the government started making policies focused on entrepreneurship. Government and private institutions started collecting data about entrepreneurship. Incubation centers were established at the universities.

The current regime has taken a lot of positive steps to promote entrepreneurship in Pakistan, such as:
  • Zero Income tax on IT & ITeS exports till June 2025.
  • Zero Income tax for Pakistan Software Export Board (PSEB) registered IT start-ups for 3 years.
  • 100% foreign ownership of IT & ITeS companies.
  • 100% repatriation of profits to foreign IT & ITeS investors.
  • Tax holiday for venture capital funds till 2024.
Imran Khan himself has inaugurated Pakistan’s first National Science and Technology Park (NSTP) in my alma mater National University of Sciences and Technology, Islamabad on 9th December 2019 (Ehsan 2019). I believe this is just the beginning. Pakistan has joined the entrepreneurship revolution quite late but we are finally moving in the right direction. There is a long way to go, but this is the way towards a better future and a prosperous Pakistan.

Prevailing Problems:

In this section, we will briefly describe some of the problems that have plagued the development of entrepreneurship in Pakistan.

Rent-Seeking Culture: From the very beginning, the government policies of giving incentives to the industrialists has created a culture of rent-seeking businessmen in Pakistan. These businessmen look for ways of acquiring wealth by manipulating and misusing the policies instead of focusing on innovation and manufacturing. This rent-seeking culture slows down the growth of entrepreneurship and small scale enterprises.

Lack of Government Policy: Entrepreneurship has been impaired quite badly by the lack of government policy, legislation and regulation. Every government after the other continued the trend of investment and focus on large industrial complexes (Haque 2007). As a result, they only promoted oligarchy and rent-seeking and could not promote true entrepreneurship.

Corruption: Corruption in the public sector is a big roadblock in the way of entrepreneurship. It discourages the entrepreneurs from entering the formal economy and creates a distrust and a negative relationship with the government. This means that entrepreneurs continue to operate in the informal sector without ever registering their businesses formally. 

Lack of Innovation: Historically, there has been a serious lack of innovation in the Pakistani entrepreneurship. Most of the businesses in Pakistan are mere imitations of a global brand. Investors have been known to rush in to follow a fashion like blind sheep. For example, first we had a textile wave where everyone was investing in textile, this was followed by the garment factory wave, then we had socks wave and so on (Nadvi 1999). Most of the businessmen do not diversify their businesses either. There are very few who went on to become multinationals and conglomerates.

Recommendations: 

Despite the overwhelming problems elucidated in the preceding section, there is a lot of hope for the future in Pakistan. The country has been blessed with a number of opportunities at this critical moment of its history. It is imperative for the current and future governments of Pakistan to capitalize on the opportunities presented to them and make full use of them to lead Pakistan to a much better future of prosperity, safety and hope.

Reinventing the Role of Government: The government does not need to interfere in the free market. A fair and healthy competition would ensure innovation and better quality control. When the government has no favorites and does not offer incentives to any one, the rent-seeking culture will come to and end.

Utilizing the Human Potential: Pakistan has one of the highest population growth and the ratio of youth in the population in the world. This enormous human potential is a big asset for Pakistan. If they are educated and trained properly as entrepreneurs and a suitable environment is provided to them. They can propel Pakistan to new heights of economic growth and prosperity. 

Rule of Law: No society can function without proper law and order. It is imperative for the government to ensure the safety of life, property and honor of every citizen. The judicial system needs to be improved, it needs to be more efficient in ensuring the protection of intellectual property and fulfillment of contracts. 

Conclusion: 

Historically, the entrepreneurship and small scale sector has been very limited in Pakistan. The governments have been focusing only on the large scale industries while ignoring the SMEs which form the backbone of Pakistan’s economy employing about 80% of the non-agricultural workforce. 

The governments all around the world have started to realize the importance of entrepreneurship and its role in achieving sustainable progress and improving economy. The entrepreneurship revolution has transformed and will continue to transform our world. Millions of people are taking control of their lives, improving their income and quality of life through entrepreneurship. 

For a developing country like Pakistan, that has one of the highest population growth rate and number of youth population in the world, entrepreneurship presents a plethora of excellent opportunities. Though Pakistan is a little late in realizing this potential, but the government has finally started to take steps in the right direction. What is needed now, is that the government, academic institutes and other stake holders should come together and join hands in promoting the culture of entrepreneurship in Pakistan, which is so crucial for the future of our economy and the progress of our country. 

Summary Table

Period
Background
Law/ Policy
Tools
Evaluation
1947-1958
Early days after independence.
Planned and closed economy. “Government Knows Best” policy. 
Tariff Protection, Import Licences etc. 
Zaidi (2005)
1958-1968
Ayub era. Decade of Development. 
Focus on industry as well as agriculture. Strong and disciplined planning
5 year planning schemes. Formation of Planning institutes
Toor (2011)
White (1974)
1971-1977
Bhutto era
Better wealth distribution
Nationalization 
Mahmood (2006)
1977-1988
Zia era
Economic recovery
De-nationalization
Hassan (1998)
1988-1999
Power struggle between Benazir and Nawaz Sharif
Structural Reforms 
Privatization
Hussain (1999)
1999-2008
Musharraf era
Economic recovery, Institutional reform
Deregulation, Privatization
Singh (2011)
2008-Present
Recovering from terrorism. Zardari, Nawaz and Imran regime. 
Promotion of Entrepreneurship for the first time
Tax cuts. Establishment of Incubation Centers and Technology Parks

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