For decades, Pakistan has made efforts to attain macro stability. Yet, it is far from achieving it. Short-term measures such as debt rollovers and control of imports have given brief periods of external stability, but they are not sustainable.
In my recent columns, I have stressed the need for an overhaul in the government of Pakistan’s approach to the economy. The government must rectify past policy mistakes and commit itself to a growth strategy. It must also steadily reduce our over reliance on outside help.
A key component of the growth strategy should be to promote industrialization. I have shared before an outline of such a programme. In this column, I spell out the strategy in some detail.
Industrialization is important as it has a proven link with growth. The path is structural transformation, which spurs the economy into producing new and more complex goods. The private and public sectors work together in a planned way for the economy to progress from low tech to higher tech goods.
For a few decades, Pakistan’s industry has been in decline both in quantity and quality. In the 1960s, Pakistan’s exports were more sophisticated than that of Thailand and Sri Lanka. It is now well behind.
Data shows that Pakistan’s share of manufacturing in GDP is about 13 per cent. India is marginally higher, but the ratio of Thailand, Vietnam and Bangladesh range between 22 and 25 per cent. In terms of investment or gross fixed capital formation, at 12 per cent of GDP, Pakistan is way behind the above economies. India, BD, Vietnam and Thailand have ratios ranging between 23 and 31 per cent of GDP.
Pakistan has lost rank in many other areas. Economic complexity is one such measure. Simply said, it is a holistic measure of society’s knowledge that translates into the kind of goods it makes. MIT’s Media Lab and Harvard’s Kennedy School jointly developed the index. The correlation between economic complexity and GDP/capita is almost perfect. In 2021, Pakistan ranked 94th in the world. India was at 42, Thailand at 23 and China was 18. Vietnam was at 61.
Pakistan has also fallen in the WEF’s competitiveness and UNDP’s HDI indices. Labour productivity too has dropped in Pakistan. The latter is an indicator of the economy’s ability to produce more goods from the same unit of input.
In sum, Pakistan’s industry is in a dire state. There are many areas to focus on for the industry to progress. It is up to our leaders to imagine policies that create national prosperity. It is not something that is inherited or gifted. A continuation of the government’s policy of the last decade, of piling debt on debt, would only make things worse.
Pakistan needs a well-thought-out industrial policy for going up the value chain which enables our goods to compete globally for export. The industrial policy would be a long-term plan to continuously upgrade production and boost exports.
For an economy that currently produces low-tech products, the move up of industry has to be gradual. At present, we do not have the human and physical capital to support production of complex goods. Nor does the government offer enough tech support through R&D and training. On select occasions, firms may also need preferential credit or matching public investment, say in logistics.
All the above must be parts of an industrial policy – to be used as needed. The change will come through a coordinated set of public and private investments with improved rules and regulations in support of businesses.
Given Pakistan’s present fiscal constraints, the effort would have to be modest in the beginning. The government may not be able to improve public goods adequately to meet the needs of firms. Though even basic effort to help with the most critical inputs would make exports and jobs grow. One key step is to establish what the most critical inputs are. The government must have a robust institutional setup to identify what is most needed in consultation with the private sector.
In this column, I do not recommend specific measures or which industry to support. It is important to view industrial policy as a stimulus for structural change rather than promotion of a specific industry. And it is certainly not for specific firms. That would be cronyism.
Today, I discuss industrial policy’s role in transforming industry. Later, we will look at its role in the IT and agriculture sectors. Though most associated with East Asia, public support for private production has a long history in Europe and the US. More recently also, after a period of following the neo-liberal path, the US, UK and EU have embraced industrial policy. It is central to ‘Bidenomics’ as well as to the US’s huge arms industry. The EU too is eager to close the economic gap with US and China. A recent competitiveness report led by Mr Mario Draghi calls for massive increase in public and private investment.
Industrialization does not occur in one single burst. It is a thorough step-by-step process. Government assistance is a process of discovery, by finding out why investors are shy of producing new products or why they cannot export those goods that they produce already. There are uncertainties that, in the eyes of the investor, prevent the firm from becoming profitable. The government and the private sector must combine to detect these hurdles and remove them.
The economy’s present weakness is a major uncertainty for firms. Also, changes in rules such as import control or increase in import tax is another source of unease. Firms also worry about their ability to adapt new technologies to local conditions.
Some new products need coordinated public investment for success. Cut flower or meat exporters need reliable cold chain logistics, without which they cannot transport their goods to the port. There is also the fear of imitation by other firms. The pioneering firm assumes all the risks of making a new product. Yet, when successful, it must share the profits with the imitating firms. These are manageable risks, but they need careful identification and solutions.
Pakistan has made many mistakes in the past where its support to industry has depleted the economy. That support has not helped with jobs or exports, nor has it enabled our firms to bring in new technology. That is why selection of what help to offer is critical. The government of Pakistan must ensure that its limited funds support those few activities that boost growth and exports most.
Furthermore, contrary to all successful examples of industrial policy, our support to firms is long term or even endless. Either there is no performance criteria or government does not enforce them. That is a loss to the state. Government help to private firms must always have a sunset of a few years. Within this period, firms must become profitable or risk losing support.
Firms must adhere to agreed performance requirements. These may include increase in export, intake of new technology, new jobs or meeting environmental standards. There must be clear benchmarks for the firms and how to measure them.
Government support must preferably go to activities that have positive spillovers. For example, training to improve language skills helps several sectors, tourism, call centres or translation and interpretation. The benefit to the economy would be less if the government gave fiscal incentives to just one of those industries.
To be continued
The writer is chair and CEO,
Institute for Policy Reforms.
He has a long record of
public service.