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February 28, 2020

Inefficiency operates in a protective atmosphere

Business

February 28, 2020

LAHORE: We need strong and competent trade associations with a strong secretariat manned by experts in their respective trades. Only then they would demand free and fair trade practices instead of seeking sector specific concessions.

Our trade associations play the same game played by the political families in which one family member is in one party and the other in the opposing party. Trade associations similarly have supporters of all political groups, and elect those who have a soft corner for the ruling party.

Secretariat staff has to toe the line of the elected leaders of the trade body even if it is against the principles of open market economy.

Associations producing raw materials for the domestic industries want undue protection on import of the same raw materials. This restricts the local industries from buying those basic inputs from local manufacturers at costs determined by them.

Often the cost of locally produced raw material is higher than the imported variety, or the local raw material is of inferior quality. This puts domestic industries at a disadvantage in quality and price against foreign manufacturers, both in domestic and export markets.

Unfortunately, this role of seeking concession has become the culture of most of our trade associations. The textile millers oppose free import of yarn and fabric; the sugar millers want regulatory duties on sugar imports and subsidy on sugar export. The cement sector opposes free import of cement.

In this culture despite being a so called open economy, we are forced to operate in a protective atmosphere that has allowed even the most efficient industries to survive and most expensive to go on increasing their sales.

Under the principle of open market economy, only the fittest survives, while the inefficient go out of business. We see efficient sugar mills having distilleries flourishing along with the most inefficient sugar mills of the country.

The only difference is that their profits are much higher than the inefficient ones (this is besides the point that the most efficient ones conceal profits). In the same way, there are highly efficient spinning mills, recently established by some big houses in Pakistan.

These efficient mills consume 40 percent less energy and employ one-third workforce. They are surviving along with the most inefficient ones. The end price of the yarn produced by efficient and inefficient is the same but profits are different.

Tendency of trade and industry to seek concessions to ensure survival of both efficient and inefficient industries of a sector is the basic reason behind government failure to set the right policies.

The leaders in each trade association are close friends, but it is by design that each of them cultivates relations with different larger political parties.

At the time of annual elections, leaders prefer the one that is close to the then ruling party. When elected that trade representative tries to convince the ruling party higher ups about the changes that they need in the official policy about their sector.

Sometimes they are obliged, but most of the time their requests are not entertained or partly accepted. The association head in case of total refusal of the government to give in stays mum as he/she does not want to annoy the ruling elite with which he/she has cordial relations. In case of partial acceptance, the leader gets appreciation from the association members.

One can understand that there are various flaws in the government policies and they need to be addressed. The high energy rates are unjustified, but providing subsidies to some specific sectors is also highly unjustified.

What is the crime of other industrial sectors that have been left out? Moreover, unconditional subsidy has always landed us in trouble.

Now that we all know that the majority of five exporting industries are operating on obsolete technology, there should have been a condition to upgrade at least 10 percent per year to be able to compete globally without government support.

There should be a strong movement and administrative onslaught to eradicate corruption in the power sector. There would be no need for subsidies if its inefficiencies are fully addressed (18 percent line losses are highly unjustified at least 15 percent are due to theft).

In the same way, inability to collect billed amount is a crime that should be severely punished. If these inefficiencies are removed, the tariff for all consumers including industrial sector would rationalise without any subsidies.