Pakistan: a case of de-industrialisation

Industrialisation of economies is the sine qua non of developed countries. In fact, the distinction between the developed and developing countries depends upon where a particular country falls on the scale of industrialisation of its economy. In other words, the modern concept of development is synonymous with industrialisation.

The problems of poverty, unemployment and social and economic tensions faced by developing countries are not the cause but the consequence of their low levels of industrialisation. These countries – unless their economies are floating on oil and gas reserves – are unable to generate wealth to finance higher standards of living of their people without industrialising their economies.

This can also be confirmed by the fact that the wealth generated in global economy in 100 years after the Industrial Revolution was more than the wealth generated in 1,000 years prior to the revolution – in the late 18th century.

So, how come Pakistan, which followed this wisdom in its first 30 years, and achieved 12 percent industrialisation in the composition of its GDP – a high figure among developing countries at the time – could increase its share in GDP by only one percent in the subsequent 40 years? When manufacturing was contributing 12 percent to our GDP in the 1970s, it was contributing 10 percent to Malaysia’s GDP, 12 percent to South Korea’s and 13 percent to Turkey’s. These facts show that the level of industrialisation of Pakistan’s economy was better or the same in other Asian countries.

But in the subsequent 40 years, while the leaders of other countries accelerated the pace of industrialisation of their economies, we wandered about aimlessly towards different policy directions. Instead of generating indigenous wealth by continuing to industrialise our economy, we started leaning on foreign borrowings to finance our needs and also what we did not need.

This turned the tables on Pakistan vis-a-vis other countries as their current comparative positions show. During this period, Malaysia upgraded the industrialisation of its economy from 10 to 22 percent, Turkey from 13 to 19 percent, Indonesia from less than 10 to 21 percent and South Korea from 12 to 29 percent. But Pakistan could only increase the industrialisation of its economy by one percent in 40 years – from 12 to 13 percent. Expected, by all accounts, to join the ranks of developed countries the earliest among other developing countries, Pakistan almost disappeared from the radar of these newly industrialising countries during most of these 40 years.

Nothing illustrates the de-industrialisation of our economy better than the history of the country’s largest industrial enterprise, the Pakistan Steel Mills. Founded in 1974, with an initial capacity to produce 1.1 million tons, PSM has never been able to increase its capacity or upgrade its product range in the 40 years of its existence. Instead of modernising and upgrading it, there has even been talk of dismantling it and, as some have been contemplating, taking over its valuable land for luxury housing projects.

Compare that with how seriously other countries take the role of their steel industry in the industrialisation of their economies. The Pohan Steel Mills in South Korea was also set up around the same time (1972) with a lesser initial capacity of the Pakistan Steel Mills. But every Korean government continued to expand its capacity and upgrade its product range. Today, the Pohan Steel Mills produces 42 million tons of steel and employs only 30,000 people. This means that it produces 40 times more steel than PSM, but employs only twice the number (15,000) of people on PSM’s payroll.

The industrialisation of East Asian economies was achieved by attracting investment and technology from developed countries – first from Japan and the West, and now China’s investment is continuing to grow in these and other markets. Pakistan was the first South Asian country that had pioneered the policy shift, in 1989, from official loans to private investment, to accelerate the industrialisation of its economy. And the blueprints of our Board of Investment were adopted by other South Asian nations to set up similar institutions in their countries. By the mid-1990s, Pakistan had become the most attractive destination for foreign investment in South Asia and had succeeded in attracting more FDI than all the net loans borrowed by Pakistan from the Aid to Pakistan Consortium.

But we could not sustain the hard work needed to keep Pakistan an attractive destination for investment and, instead, took the easy path of financing the country’s needs by borrowing from here, there and everywhere. Our borrowing spree, from multilateral as well as bilateral sources, has put the country under a mountain of over $90 billion of external debt. Add to this the widening gap between the rupee-dollar parity, which would keep our future generations mortgaged for a long time and put restraints on our sovereignty.

The fact is that despite all the evidence, we have not yet internalised the knowledge in our systems of governance, that the largest sources of financial resources and technology patents in the world are not controlled by governments but by the private sector. The absence of clear, consistent and well-designed investment policies to tap into these resource flows has resulted in Pakistan being pushed out of the investment market in the last several years.

The investors saw our lack of policy focus and continuing deterioration in the investment climate and moved on to other markets. Malaysian Prime Minister Dr Mahathir Mohamad had also given a friendly advice/warning to our leaders to bring discipline into our policymaking. He told them that there is much more to national development than playing politics, and that the frequent changes to Pakistan’s national policies has made it difficult for its friends to plan a long-term relationship with the country. But neither the proven merit of our policies nor the external advice of our friends made us change our habit – that politics is the only game in town.

After long years of an investment-drought, it was the Road and Belt Initiative (RBI) of Chinese President Xi Jinping that brought investment into Pakistan through CPEC. Since 2014, this FDI has largely come in energy, transport and communications and construction sectors.

However, there has been little investment in the manufacturing sector. For that to happen, Pakistan has to do a great deal of homework regarding building the capacity of its institutions which have remained neglected for far too long. The first step in this direction should be to develop a holistic concept of national development and recognise the relationship between investment, industry and exports. Operationally, this means setting up a ministry of investment, (international) trade and industry (MITI) – the need of which was explained in an earlier article ‘In the East lies inspiration’ (June 7).

This MITI should serve as a platform for working with Chinese companies and the Chinese government to identify areas of common interest where manufacturing and exports can be a win-win for both the countries. This would be Pakistan’s best shot to reverse the de-industrialisation of its economy, modernise its management practices and technological know-how, and upgrade its embarrassing exports basket.

The writer designed the Board of Investment and the First Women’s Bank.

Email: smshah@alum.mit.edu