Time to shift industrial policy from vertical to horizontal

LAHORE: Pakistan needs an industrial policy that not only facilitates the sunrise industries but also takes measures to let the inefficient units close down instead of putting them on artificial life support in the shape of subsidies and tax waivers. 

Economists the world over are divided on the approach to boost industrialization. Some favor supporting domestic industries at all cost, arguing the forces of globalization favour the global elites and marginalise the newcomers. They assert the industrial policy should be transparent and its benefits must be available to both incumbents as well as entrants. 

The wheels of the entrants should not be greased so generously (by the government) that it makes it impossible for the gears of the incumbents to move. Similarly, the existing players should not be allowed to become too big to let the newcomers enter the game or have a level playing field. 

Industrial policies come in many shapes, sizes, and sometimes flavours, but some strategies clearly work better than others. In fact it is the political need of every government to try to foster conditions for industrial success at home. 

Any government decision, regulation, or law that encourages ongoing activity or investment in an industry falls in the ambit of industrial policy. That the politicians use industrial policies as a means to mollify their electorate goes without saying. The tendency of preventing your voters from changing sides by bribing them with free lunches in the name of promoting economy/investment most of the times results in aberrations. Such moves make some segments of the economy richer at the expense of others. The policy should be fair and transparent that provides equal opportunities to all segments of economy.  By unduly micromanaging industries, governments tend to prop specific industries distorting the economy. 

Pakistan’s industrial and economic policies are focused on textile sector, which, despite all the featherbedding, has failed to increase its share in global economy. The incentive offered to this sector is denied to most of the other potentially stronger sectors like engineering and agriculture. It is more important to create a climate of collaboration between government and the private sector than to provide financial incentives. 

Economists point out there are two types of policies the governments pursue to foster industrial growth one is horizontal and the other is vertical. In the horizontal approach, they provide inputs that a broad range of firms, across different sectors, need for their growth and development. The important inputs needed by all industries include transport infrastructure, trained manpower, and in modern world a labor force proficient in English. The vertical approach limits the ability of a country to exploit its full economic potential. 

Most economists plead with the governments to devise policies that promote education and good governance instead of going for massive infrastructure investments. Still, some countries like India have accelerated growth on the strength of investing heavily on infrastructure. These countries actually started with a huge infrastructure deficit and achieved good economic growth but going forward they would need educated workforce and transparency to sustain the initial success. This also stands true for Pakistan where the present regime is concentrating solely on infrastructure. 

Pakistan’s industrial policy lacks many factors needed for broad-based industrial growth. Besides infrastructure the government would have to invest heavily in education besides improving business environment through transparent as well as even-sided governance. Connectivity is also an important aspect of fostering industrial growth. The present regime is investing adequately on road, rail, and mass communication infrastructure. Moreover an industrial policy should have the ability to reverse market failures. Most importantly before finalising an industrial policy the government should make sure the institutions are capable of executing it. 

Industrial policy failures are not limited to developing countries. They also hit developed economies employing wrong policies. For instance, France supported specific sectors as a part of reviving the troubled industrial sector by acquiring a stake in the automaker Peugeot as an act of “industrial patriotism. On the other hand, German approach is not limited to any specific sector. The European power is striving to create a competitive framework that enables little known entrepreneurs to emerge as global leaders. Thus, the governments should be “actively creating new markets, instead of just fixing some of them.”