Manufacturing for prosperity

It is time to atone again for our profligacy. While we will soon know whether or not Pakistan enters into another IMF agreement, there are more demanding tasks that the government has set for itself. That job is to put an end to our periodic treks to Washington and other capitals for funds. We must learn to do what most dynamic economies have done, which is to make and export goods that the world needs.

For exports to grow, Pakistan must upgrade its manufacturing and service sectors. At our stage of development, manufacturing holds the greater promise. It can rapidly increase jobs as well as exports. The world traded $11 trillion worth of manufactured goods in 2016, more than 70 percent of all merchandise trade.

Data for Pakistan is less reassuring. Share of all exports in GDP is a paltry five percent, with manufactured exports even lower. Pakistan’s export and manufacturing ratios are some of the lowest in South Asia, and far below those of East Asia. What’s more, their growth rate has been uneven. This has led experts to ponder if Pakistan faced ‘premature deindustrialisation’. Writing in the ‘Lahore Journal of Economics’, Naved Hamid et al say that the drop may not be temporary. Equally alarming, they find that our manufactured goods are losing sophistication. Fifty percent of what we make has the lowest level of knowledge. So, not only is the quantity of manufactured exports small, but they are of low value as well. Consequently, we do not earn enough foreign exchange.

Harvard’s Economic Complexity Atlas lets us compare exports over time and vis-à-vis other countries. Whereas exports from much of Asia have grown in knowledge, our exports are no more complex now than they were 20 years ago. This suggests that we do not have the right policies to promote industry, improve governance, or progress with the rest of the world in social norms, ideas, and technology. Research confirms that economic complexity and national income are closely related.

This is cause for concern as we must meet the needs of a growing population. Forecast by Denver University’s Pardee Center for International Future is instructive. It estimates that by 2030 our population will be 249 million. Nominal GDP will grow from the present $300 billion to $540 billion, a small increase in per capita terms. Many social and poverty indicators would stay at alarming levels. Moreover, with two million young people entering the workforce each year, we need to create many more jobs. Clearly, our people deserve better living standards. And that requires GDP to grow rapidly.

GDP will grow with production and export of higher value goods. Studying Pakistan’s export basket as a proxy for competitiveness, Harvard’s eminent Professor Hausmann shows the path forward. For GDP growth, Pakistan must boost competitiveness and move beyond low productivity activities. To an extent, this depends on public goods. Businesses need skilled workers, infrastructure, property rights, and transparent regulation.

To provide these, Pakistan must have an active industrial policy. Under it, the government of Pakistan (GoP) should deliver inputs and incentives that nudge businesses towards processed goods. Doing so is necessary also as the world market for those items that Pakistan exports is shrinking, while new entrants constantly pose price challenges.

The first step is for Pakistan to compete in goods that it makes already, but does not export. These include new lines of apparel, processed food, jewellery and silverware, wood products, cut stones, chemicals, generic pharma, and fabricated metal goods. As a large sugar producer, Pakistan is exporting some downstream items, such as molasses and ethanol. We must realise fully the industry’s potential by exporting further downstream goods.

The next step in this plan is to help businesses compete in even more complex products. Before long, Pakistan should export items such as electric power and transformer goods, household appliances, plastic goods, and more. There are other products that our research centre has identified.

How to move forward then? The industrial policy above will set the strategic direction and priorities. First, we must integrate the fragmented space that currently exists to support industry. The GoP has many incentive schemes, but businesses find it difficult to avail them. There is a policy for SEZs as well as for EPZs. Also, the GoP offers exporters, concessional credit, duty and tax remission, and zero-rated GST. Providing them under one easy-to-use portal would let businesses optimize and choose what they want. Once announced, the government must ensure that inputs are available quickly and transparently. Second, we must align industrial policy with PSDP, so that the government makes the investments needed to support production activities. Third, continuous consultation should reinforce these efforts. Also, we must avoid the habit of sudden tariff changes. In fact, comprehensive tax and tariff reforms are needed to promote private investment.

Pakistan’s SEZs scheme was announced over a decade ago. We have yet to see anyone profit from it. Perhaps, CPEC would help fulfil its potential. SEZs can enable Pakistan become part of the global supply chain. GSC will link Pakistan with developed economies. That is, it will become part of a globalised assembly line for processing of goods, with some processing taking place in Pakistan. Through GSCs, a major share of global production today occurs in developing countries. However, GSCs demand high levels of efficiency and reliability as well as competitiveness. The inputs proposed above will help Pakistan become a reliable partner.

This approach also would increase FDI flows to Pakistan. So far, FDI into Pakistan is either to produce and sell consumer goods here, or to avail liberal incentives, as with IPPs. There is no FDI that generates exports from Pakistan. We must compete with other countries for export-oriented investment, by providing the right inputs. No amount of support on paper would help without their availability on-ground.

This is where an IMF programme helps. Unlike the past, we must use the space it offers to build a solid base for economic growth.

The writer was commerce minister from 2002 till 2007. He is chair and CEO of the Institute for Policy Reforms.