Sunday March 26, 2023

Whom to blame for elusive investment

January 17, 2023

LAHORE: Pakistanis accuse China of not investing in Pakistan despite claiming to be our close friend, but they ignore the fact that even our domestic investors have also kept their investment on hold or somehow transfer the resources outside.

Our industrial sector is shrinking. Chinese are interested in relocating their industries in neighbouring economies including Pakistan. But this was only because of labour shortages that Chinese were experiencing after decades of rapid industrialisation; reaching the ‘Lewis turning point’ that depicts acute shortage of labour.

That phase started in the first decade of this century, but it is subsiding as the Chinese have achieved what they wanted in the last 15 years. Development experts point out that when a society moves from an agricultural to an industrial economy, the balance of labour demand and supply shifts as well. In the initial stage of development, most people remain in rural areas, engaged in agricultural production.

When this concentration of workers leads to underemployment in rural areas, the industrial sector can expand and increase its labour force with no pressure to raise wages. Thus, there may follow a period of industrial growth with no rise in real wages. However, as the industrial sector develops to the point where the supply of labour from the agricultural sector becomes limited, industrial wages begin to rise quickly.

Based on the historical experience of developed countries, Lewis in 1954 first conceptualised this process of economic transformation. In the literature, the structural change from an excess supply of labour to one of labour shortage is often called the Lewis turning point.

Unfortunately, our industrial growth in the last three decades has remained very low that has created a large unemployed labour pool. This is the reason that real wages in Pakistan have not risen.

If we look at China, the reforms started in China in the late seventies have continued successfully since then. It also greatly improved their agricultural productivity and released a tremendous amount of surplus labour from the land.

As a result, a large number of labourers moved from the agricultural to the industrial and service sectors. For more than two decades since the economic reform, the supply of labour seemed to be unlimited, enabling China’s manufacturing sector to maintain a comparative advantage in labour-intensive products.

Fuelled by cheap labour, many of China’s manufactured goods became so competitive in the international market that China earned the name “the world’s factory”. Now there is no more surplus labour available in rural China and the ever expanding factories they added are starved of labour.

Wages are rising rapidly making many low value products unviable. Our political system was plagued with uncertainty, terror threat and power shortages when China was relocating its industries. In between 2012-16 over 1,000 delegations from China visited Pakistan to find out investment opportunities. Almost all of them pointed out the flaws in our policies, but those were not removed.

China during this period relocated many of its low cost garmenting units in Bangladesh, Vietnam and Cambodia; as high wages made it unviable for them to produce low cost garments in China.

The Chinese however were unable to relocate their basic textile industries in these non-cotton producing countries. Governance issues in Pakistan deterred investment in Pakistan. The Chinese initially asked for allocation of a huge industrial area exceeding 10,000 acres. But the response was muted. Ultimately even the basic textile units were relocated in the above three countries.