Glut of low-skilled workers blamed for lack of investment in manufacturing

LAHORE: Statistics of last fifteen years prove that higher interest rates slowdown growth even in times of lower inflation. But the current new reality of low inflation and low interest rates has increased growth without investment.

Investment in the manufacturing sector has been very low during the past decade. Job creation was negligible in the earlier half of the past five years, when high inflation was accompanied with high interest rates and declining rupee value.

The sudden decline in crude oil rates tamed inflation that subsequently resulted in low interest rates. Still the investment in manufacturing sector remained stagnated. However, employment opportunities were created during the past 50 months. The employment was generated by the services sector and the construction boom.

While industrialists protest against loss of over a million jobs; its impact is not visible in the society. The construction boom was a blessing for the unskilled workforce of the country. It is the only sector that has the capacity to absorb every unskilled worker. The jobs created in the construction sector, outnumbered the jobs lost in the industrial sectors, particularly in textiles.

Even in the textile sector, most of the jobs were lost in the capital intensive low-workforce, basic textile sector. The value-added apparel sector showed enough growth to offset the jobs lost in basic textiles.

Higher interest rates do impact growth. When the interest rates were 13, 12 and 10 percent in 1999-00, 2000-01, and 2001-02, respectively, the growth during these three years of single digit inflation was 4.2, 3.9 and 1.8 percent, meaning an average growth rate of 2.93 percent.

The firms survived because when the demand for goods and services did not increase, the firms passed on the increase in financial cost to the consumers, thereby raising inflation that slowly started increasing.

When the discount rate in 2003-04, 2004-05 and 2005-06 was 7.5, 7.5 and 9 percent respectively; the average growth rate during these three years was six percent. Against this, the discount rates during high inflation years 2008-09, 2009-10 and 2010-11 were 13, 13.5 and 14 percent, respectively, while the average growth rate during these years was 2.71 –the lowest in past one decade.

Similarly, the highest investment in textile machines of around $1 billion in Pakistan was achieved in 2004-05. The rupee remained volatile during 2000-2003 periods increasing from Rs51.90 against dollar in 2000 to Rs63.5 in 2003-04. The rupee remained stable against dollar during lower discount rate periods of 2004-05 to 2006-07 from Rs57.75 to Rs59.70.

Against this, during high discount rate periods of 2008-09 to 2010-11, the value of rupee declined from Rs80.45 to Rs85.50. The investment in textiles –the largest manufacturing sector of the country amounted to only $217 million in 2009-10.

Manufacturing sector entrepreneurs concede that they have not been able to benefit from the low interest and low inflation opportunity because the dynamics of production have changed. They said the machines being rolled out currently are high tech and very efficient.

However, the workforce that could operate these machines is not available. In the past, manufacturers used to replace their old machines with the latest technology and train their existing staff to operate them.

Now this is not possible on sophisticated machines. The existing workforce is not capable of operating these machines, while educated skill force is not available in the market.

At the start of this century, the basic demand of investors was to bring down interest rates and inflation. Now they want the state to arrange skilled workforce capable of operating new machines. Still some entrepreneurs have gone for new technology and hired trainers from the suppliers to retain their share in the global and domestic market.