Pakistan’s industrial & liberal investment policy regime: A political economic perspective

Pakistan's industrial sector is plagued by chronic structural and policy challenges. These challenges dilute foreign investment and create obstacles to the development of the manufacturing sector. This ultimately leads to a decrease in exports, requiring imports to fill the domestic demand for raw materials and giving rise to a trade deficit. Due to the faltering industrial sector of Pakistan, the trade deficit remained at $25.8 billion dollar during the July-May period of the fiscal year 2022- 23. This negatively affected the already dwindling foreign exchange reserves. Pakistan's current account deficit always fluctuates due to the unstable balance of payments, structural issues, and the lack of reforms targeted at structural issues and inclusive growth. The private sector is the engine of economic growth in any economy. However, governments in Pakistan have been reluctant to make allowances for the private sector in the mainstream industry and trade sector because of an elite capture process.

At its inception, Pakistan inherited a weak industrial base. In the 1950s, policymakers focused on alleviating the agricultural economy and undertook diverse policy initiatives aimed at encouraging the public and private sectors to develop the manufacturing industry. The policy initiatives included import-substituting policies under tariff barriers and an overvalued exchange rate. Industrial strategies evolved into a more coherent industrial policy in the 1960s. During this time, enterprises were set up in the public sector and subsequently divested as running ventures to the private sector. Additionally, incentives were offered to exporters under an innovative "Bonus Voucher" scheme to promote exports. However, such reforms were criticised for their exclusionary approach.

The decade of the 1960s and 70s is primarily marked with "Green Revolution". From 1965 to 1980, the production of crops doubled, and then the average increased slowly from that point onward. The increase in agricultural productivity significantly boosted agricultural revenue.

Through the Economic Reforms Order of 1972, the government of PPP, headed by Zulfikar Ali Bhutto, nationalised ten major industries, including iron and steel, motor vehicle manufacturing, cement, and utilities such as gas and oil refineries. This move reflected the government's lack of confidence in the competence of the private sector. By keeping foreign entities out, the gulf between the private sector and the government deepened further. As a result, public investment increased, while private sector investment gradually decreased. This shift of industrialisation to the government occurred as it took precedence over the private sector.

From a political economy perspective, the celebrated socialist interventions in the 1970s with the economy were carried out much to the pleasure of feudal lords, leaving businessmen beleaguered. The diversification of trade was halted due to low investment and the lack of competition in the market. The centralisation of the economy in the 1970s extended the role of bureaucracy and its control over productive units.

However, the tables turned in favour of the private sector in the 1980s as a result of the decentralisation of the industrial sector. The policy encouraged the growth of the private sector, leading to a significant increase in investments. However, it primarily focused on low-value-added goods like textile spinning and weaving, and as a consequence, Pakistan became heavily dependent on textile goods exports without diversifying its export base.

As part of the IMF programme, several market-oriented programmes were introduced in the 1990s, which helped integrate the textile and agriculture sector into the General Agreement on Tariffs and Trade (GATT). The overall purpose of GATT was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. However, this integration proved to be somewhat discouraging for Pakistan, as it resulted in export tariff reduction for its main export products and slow integration into GATT. Due to the high protection afforded to the domestic industrial sector of Pakistan, it shielded itself from foreign investments, which, in turn, led to a lack of significant competition and subsequently low product quality.

However, in the 1990s, certain measures were taken to revive the private sector, including large industries and banks. The government started to step back from direct interventions in the market. However, some large industrialists still sought government support to maintain rent-seeking behaviour. The striking feature of the 1990s industrial policy was the establishment of the Small and Medium Enterprise Development Authority, (MEDA) in 1998. This was the time when states were asked, through structural adjustment under the Washington Consensus, to reduce their role in the market from an active role to policy intervention only. However, the political and economic dynamics never allowed the government to fully withdraw from the market and cede control to the private sector in Pakistan. In the same decade, the government embarked on a liberalisation programme through privatisation and deregulation of the economy. Pakistan adopted liberal, market-oriented policies, and declared the private sector as the engine of economic growth. However, the investment had not been very encouraging, but it was still able to shift the balance of investment from the public to the private sector. The majority of the private sector investment went into the manufacturing sector, with over 90% directed towards the large-scale sector. Private investment increased from 8% of GDP to a peak of 10% of GDP in the early 1990s.

During the 1990s, Pakistan implemented substantial liberalisation in the tariff sector and tax incentives as instruments of industrial policy. The deregulation and liberalisation have benefitted industries like textile, leather, food and petroleum. Nevertheless, the question remains that despite substantial tariff liberalisation in the 1990s, Pakistan is facing a recurring trade deficit years after years. Pakistan has always relied on emergency measures to remedy the deep-rooted ills in the economy, which does not yield any lasting results. In the wake of prevailing economic crises, two months ago, a ban was put on all imports, particularly luxurious items, to conserve foreign exchange. This has resulted in ad-hoc regulatory duties on imports.

Moreover, trade policy favours are enjoyed by the businesses and industries usually owned by individuals who are either government representatives or have close links with the policymakers and legislators. This allows them to wield influence in policy-making for their political capital. This is a characteristic feature of the political economy of Pakistan as discussed in the famous article by Hamza Alvi, "The State in Post-Colonial Societies", where he argued that Pakistan is an underdeveloped state due to disproportionate growth of its civil and military bureaucracy. This leads to considerable discretionary trade protection through powerful lobbying.

Many economic reforms were undertaken in the year 2000 to address unresolved economic issues persisting since the 1990s. These issues included mounting debt crises, declining economic stagnant exports and deteriorating governance. The reforms of deregulation and privatisation did not produce the expected outcomes, as investment in the manufacturing industry did not increase.

The lack of coherence in Pakistan's economic policy coupled with the constant flux of old and new policies, serves as evidence of the disarray among the stakeholders of the economy. The absence of a comprehensive plan or strategy to uplift the industrial sector of the country further exacerbates the situation. Despite numerous economic programmes, some of which contradict each other, none have proven to be a lifesaver for the economy.

The industrial sector is plagued with legal and operational hurdles, making it hard for small firms to scale up their operations, signifying the elite capture of Pakistan's industry and trade sector. One can conclude that the protectionist trade policy is not primarily driven by any sound economic objective but rather driven by the vested interests of the elite. Businesses controlled by powerful elites, wielding significant influence in political circles, enjoy greater trade protection compared to sectors without political connections.

The industry, trade, export and other sectors are responsible for extracting money that could be raised as revenue to finance the development sector or other redistributive purposes. However, due to the element of the elite capture, the Pakistan economy bears a loss of 2.7 trillion rupees on account of these losses. This thoroughly explains how rent-seeking practices have operated in Pakistan, and how the elite have captured the industry and trade sector in the country. The groups controlling the mode of production are connected to powerful individuals, either in the legislature or in bureaucracy, who play significant roles in policy making. This allows them to bypass many formalities or procedures, enabling them to obtain undue exemptions and favourable conditions, incentives or protection from competition for their industries or businesses, with the tax burden often placed on the other sectors.

There has been incoherent industrial policy in Pakistan, which has been invariably implemented. The presence of elite capture in Pakistan's industrial and trade sectors hinders the rationalisation of tariffs and the fair distribution and redistribution of resources. As a result, preferential treatment is given to specific firms rather than focusing on the sectors as a whole. Pakistan requires a policy for inclusive and sustainable development, encompassing the provisions of decent work, social responsibility of firms and well-considered climate change issues. Industrialisation without considering these aspects is likely to lead to growth benefitting only a few at the expense of other sectors. The magnitude of subsidies and incentives provided to the elite surpasses the circular debt of the power sector of Pakistan. Pakistan's economic policies have been marred by inconsistencies and the influence of powerful elites, hindering equitable development. To foster sustainable growth and inclusivity, a comprehensive and transparent approach is needed, prioritising the welfare of the broader economy over selective benefits for a privileged few.

-The author is a political economist and the winner of prestigious Martin Luther King Award