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July 24, 2019

Towards a knowledge economy

Opinion

July 24, 2019

Pakistan is finally beginning to change directions under the visionary policies of the present government towards developing a strong knowledge economy. Significant investments worth over Rs200 billion are being made in a multitude of projects related to industry, agriculture, artificial intelligence,

university of new and emerging technologies in PM House, nanotechnology, industrial biotechnology, space sciences etc.

A beginning of a knowledge revolution is in the offing. In this connection an important decision taken by the Knowledge Economy Task Force chaired by the prime minister in January this year was to upgrade five of our best Universities and five of our best research centres to top international level. This important matter will hopefully be soon implemented by HEC, with funding from the Knowledge Economy Task Force.

The steps taken by the HEC during 2003-2008 laid solid foundations for the development of a knowledge economy. The spectacular increase in high quality research papers in top journals drew praise from many international agencies including United Nations Commission on Science, Technology & Development (UNCSTD), Thomson Reuters, USAID, World Bank, and a host of others. From being about 400 percent behind India in 2003, Pakistan overtook India in terms of research publications on a per capita basis in high quality (‘impact factor’) journals in 2017 and forged ahead by about 25 percent in 2018 – no mean achievement.

Now it is time to start tailoring our research directions towards applied projects that will increase exports of high value added products. In this effort, three key partners must come together in a highly coordinated fashion: one, the government should strongly support such an initiative through suitable policies to create centres of excellence in carefully selected fields and offer suitable incentives to industry in order to establish high technology export oriented industries.

Two, the academia should courageously change directions and initiate applied projects that will enhance exports, create jobs and have a national impact. And, three, the private sector should establish industries in high-tech fields such as electronics, alloys, minerals, high value agriculture, engineering goods, Information technology related products, biotechnology, energy storage systems and a host of other such areas.

In order to encourage local manufacturing of high technology goods, a number of policy measures are essential on the part of the government. One important policy measure is the need for the government to issue clear directives to its own departments to prefer local assembled or manufactured products to foreign imported goods. This should apply to both software and hardware.

Drastic changes in the tax regime are also required. In order for local assembly of PCs and other items to flourish, the raw material and other inputs must be zero rated at all stages of the product lifecycle, from the import stage to the sales stage. Levy of GST at the import stage, incorrect use of PCT codes for microprocessors, ad-hoc assessment, and valuation at customs are all issues that result in making local manufacture uneconomical. Bank loans and other incentives should be available for importers, distributors and local assemblers of raw materials such as microprocessors, chipsets and other components.

Various incentives previously available were foolishly removed in 2005, bringing the local manufacturing industry crashing down. The reintroduction of tax and other incentives can kick-start the manufacture of desktops, laptops, servers, tablets, and other devices. Facilities such as that available in the Telephone Industries of Pakistan (TIP) in Haripur, Hazara, have been lying unused for decades. It should be offered to foreign investors interested in manufacturing cell phones locally.

We must simultaneously stop the flow of smuggled goods. About 60 percent of IT items are smuggled into the country, which has been causing a huge loss to the national exchequer, with officials in customs, police and FBR pocketing billions of tax money each week. This must stop, through sting operations and exemplary punishments. The above measures, if implemented, will result in expansion of the local manufacturing industry and lead to the creation of hundreds of thousands of jobs. The ‘Made in Pakistan’ brand needs to be promoted in every possible way.

Ease of doing business is a key factor on the basis of which foreign investors decide which country to invest in. Pakistan is ranked at a lowly 136 out of 190 economies according to World Bank rankings. In this connection, there are a number of hurdles that need to be urgently tackled. These include the long delays and cumbersome procedures in registration of equity to foreign shareholders, and the required pre-registration of loans from foreign entities. This has made the task of doing FDI business highly problematic.

Another blockage is that of equity shares registration. A foreign investor had this to say about the incredibly poor procedures and performance of the State Bank of Pakistan: “If a foreign entity invests USD in return for shareholding in a Pakistani entity, the State Bank of Pakistan’s permission is required as part of the share registration process. The backlog of share registration now runs in years. For reasons best known to the State Bank of Pakistan, they don’t register shares to foreign entity, and also don’t provide any reasons why they are not doing it. If the shareholding cannot be registered, why and how can a foreign entity invest in equity in a Pakistan-based technology company?”

The other major hurdle preventing foreign investment is that of foreign loan processing rules issued by the State Bank of Pakistan. This has made foreign loan transfer very difficult. All such loans need to be pre-registered with the State Bank of Pakistan before the funds can be wired in. No wonder we are so lowly ranked in Ease of Doing Business world rankings.

Another area requiring government attention is the facilitation of new start-up companies. This requires the need to create a start-up culture with ample supply of ‘risk capital’. Start-up financing is rarely provided in advanced countries through bank loans or through traditional loan instruments. Seed capital is normally funded through venture capital firms or through private investors (‘angel investors’). Since this mode of financing is outside the traditional banking procedures, it relies on contracts between inventers and private investors. For it to work, the contractual rights of all parties concerned must be ensured in order to attract private investment.

Major venture capital funds need to be launched to facilitate new start-ups with the government acting as a catalyst. The much needed legislation to guarantee the rights of investors and inventers should be approved, and tax incentives offered to encourage new start-ups.

A simplification of the tax regime is also urgently required. There are a mind-boggling number of categories, thresholds, subcategories of withholding tax which businesses are required to deduct from any payment they make. These must all be simplified to facilitate business development.

With about a hundred million below the age of 20, we have a huge youth bulge. It is only through unleashing this creative potential that we can move forward.

The writer is the former chairman of the HEC, and president of the Network of Academies of Science of OIC Countries (NASIC).

Email: [email protected]

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