In the East lies inspiration

A survey at the recent meeting of the World Economic Forum (WEF) in Davos showed that 60 percent of the businessmen and political leaders attending the annual gathering expressed lack of confidence in the prevailing system of governance.

So it is not only young idealists of the ‘Occupy Wall Street’ movement but the hard-boiled business and government leaders also think that old ways of governance are not tackling problems effectively and the economy is not gaining momentum.

On the other hand, the success of East Asian nations in attaining double-digit growth for a number of years, delivering high standard of living to their people and producing the most competitive economies has been attracting the world’s attention towards the East Asian models of economic and political governance, that are becoming the driving force of global economy.

If the real objective of our public policy is early eradication of poverty and illiteracy, removing dependency and creating an industrialised, prosperous and powerful country, then East Asia provides a successful model of governance. And since their social and economic conditions were until recently not much different from Pakistan’s, their experience acquires greater relevance compared to that of Europe and the US, which had acquired the status of developed countries a long time ago and where social, cultural and economic conditions were different.

Japan pioneered this model over a century ago after a thoroughly studying the factors that had brought power and prosperity to the West. Japan then selected the ‘best practices’ from around the world. The strategy was so successful that within 50 years after the Meiji Restoration of 1868, Japan had acquired power and prosperity that made it second to none.

In that strategy, economic development was prioritised among all policy objectives of the state. The strategy specifically meant heavy investments in the education sector, especially science and technology, and industrialisation of the economy. As the state had an important role to play in this strategy, it required a meritocratic bureaucracy capable of co-ordinating private investment flows with the objectives of national development. Both the state and the market were recognised as key agents of national economic development. This model of governance later came to be known as the ‘developmental state’ model.

The four Asian tigers – Hong Kong, Taiwan, South Korea and Singapore – practised the same model of governance, and within 30 years became developed countries. As did Malaysia, by following the same model. Politically, their leaders are credited with being nationalistic and keen on developing industrialised, prosperous and powerful nations. Economically, a developmental state was not a socialist enterprise. China’s meteoric rise with a double-digit growth, to become the largest economy of the world and transforming lives of hundreds of millions of its citizens, is also attributed to the success of the developmental state model that had Chinese characteristics.

Pakistan is familiar with this model as it was practised here for about 15 years and had helped the country achieve a measure of social and economic transformation. The two periods in which this model worked in Pakistan and accelerated the pace of industrialisation of the economy were during the governments of Gen Ayub Khan and Zulfikar Ali Bhutto. Under the former, the textiles and light consumer goods industries spread out, while under the latter steel, chemicals and heavy engineering industries were set up in the country.

After that came a deluge and the developmental state model was wound up. For the first time, Pakistanis heard of a new phenomenon called the ‘sick industries’ of otherwise healthy owners whose poor management practices had originally caused the problem. All over the world, bailouts come with conditions, such as upgrading technology, change of management or even outright sale of the enterprise, so that the investment pumped through bailouts does not go waste and the production unit is revived, made competitive and managed by more capable hands. There is a whole discipline of mergers and acquisitions (M&A) dealing with such situations.

But Pakistan gave out free lunches. Bank loans outstanding against the so-called sick industries were completely written off, without the required restructuring to revive the production unit being done. Consequently, several factories were closed down, their machinery sold off and the space converted into warehouses or used for other commercial purposes. Over the years, loan write-offs became a flourishing business. The hundreds of billions of public deposits in banks, which were given out as loans, were written off by people in the banks and the government, who would otherwise not write-off even a penny of their own money.

This was the modern equivalent of the toxic medieval culture ruling the roost, addicted to free rides, windfalls and rent-seeking. In the process, the banks started becoming sick, bled to death by the write-offs, People’s savings in the banks became unattractive as returns on deposits started to decline. The de-industrialisation of the economy had started and Pakistan moved from being a production-driven to a consumption-driven country.

This was clear from the contrast between Pakistan and Turkey’s industrial and export performances during the decade of the 1980s. Both the countries had wars raging on their borders at about the same time. The Afghan War (1980-88) on Pakistan’s border and the Iraq-Iran War (1980-88) being fought at Turkey’s borders. When the two wars started, Pakistan and Turkish exports were of the same order, about $6 billion. Turkey used the war in its neighbourhood to quickly set up factories and used cash and barter to supply cheap goods to both Iraq and Iran. The wars ended in 1988 by which time Turkey had fully utilised opportunities and its manufactured exports had doubled.

On the other hand, our exports had barely crept up to $8 billion after eight years of missed opportunities. Even today, the contribution of manufacturing in our GDP is embarrassingly low: half of that of Bangladesh, and one third of all East Asian countries.

But a large country like Pakistan cannot provide higher standards of living to its citizens without industrialising its economy, which also explains our poor performance in exports. Take a look at Pakistan’s basket of exportable goods and one would be embarrassed to find out that more than two-thirds of this basket comprises goods from industries set up during the days of the developmental state. There has been no new industrialisation for exports. Our exports, which in all fairness, should have been over $100 billion are not even one-fourth of that. But for that small period of the developmental state model, we might still be exporting raw cotton or handicrafts in the 21st century!

We have had no industrial policy worth the name, neither a strategy for creating synergy between investment, industry and exports. In other words, we need an integrated ministry of investment, (international) trade and industry – an MITI of Pakistan to channel investment for rapid industrialisation of the economy and export-led growth.

Pakistan must revert back to the developmental state model because it served it well and has proved to be a system that is compatible with globalisation. The question is: how quickly can Pakistan revitalise state institutions to discharge responsibilities of a developmental state and compensate for the lost decades?

The writer designed the Board of Investment and the First Women’s Bank. Email: smshah@alum.mit.edu