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July 11, 2020

Subsidy is the surrogate mother of inefficiency


July 11, 2020

LAHORE: Technically backward countries in past used to make up for lost efficiency through cheap labour. Efficiency gap continued to widen when more efficient technologies nullified the impact of cheap labor. Post pandemic, the economies with better technology are going to be in the driving seat.

Efficient machines have reduced the need of workforce drastically. These machines are ideal to work with during the period of social distancing. It is unfortunate that Pakistan is a very low technology economy. Its largest exporting sector the textile is operating mostly on obsolete technology. Its transport system lacks modern trucking facilities. Its health facilities still depend on tools and machines long abandoned by most of the emerging economies.

Only banking or financial system of the country has acquired the better tools used by its peers around the world. This perhaps is the reason that during so many ups and downs in economy the banks performed robustly. Still their financial penetration in the masses is very low. This is the reason that we see rush outside all banks due to COVID-19 SOPs (standard operating procedures) as they struggle to get services manually at banking counters.

In most developed and in many emerging economies all banking transactions and services are available electronically. Even the cheques and cash could be deposited through dedicated machines. We have this facility at few branches, but the machines often remain out of order.

Our industry, as a whole, continues to operate with outdated machines. We see some tile makers producing tiles on 5-6 decades old machines. Majority of plastic molding machines in Pakistan are power guzzlers dating back to 80s. More efficient plastic molders give four times higher output with same energy. The new machines thus not only reduce the power cost by 25 percent but also reduce the need of manpower drastically. Inefficiencies persisted in the industries catering to the domestic needs because they were established under the concept of import substitution and were heavily protected from imports.

Our economic planners failed to realise that by overprotection they were making the domestic industry inefficient.

They never planned that the industries that were established to reduce imports could one day become exporters as well if they performed efficiently. The planners also neglected to check the quality of locally made products and see if these match the quality of those produced in other economies.

The standardisation of products remained as inefficient as the industries were. Because of protection the local industries never felt the need to upgrade technology.

With time their efficiency deteriorated as was the quality. Now the time has come when most of the protected industries cannot compete with the imported products that enter the country by paying protective duties.

The planners again came to their rescue by slapping regulatory duties over and above the protective duties. This patronship of economic planners discouraged the urge to upgrade. When some industries like tyre and tube manufacturers went ahead with modernization, the planners looked the other way as under-invoiced tyres started flooding our markets along with smuggled tyres. It is indeed a pity that some tyre manufacturers are exporting their products to Europe and Middle East but have to compete in domestic market. It is an irony that same under-invoiced or smuggled tyres cannot compete with the Pakistani tyres in global markets.

While we destroyed the competitiveness our domestic industry through a chain of flawed policies; some exporting sectors were bailed out every time they felt the heat from their competitors through subsidies.

They were provided rebates, subsidised loans and protective duties.

It is indeed deplorable that a country known for its textiles needs protection from imports. We lost our competitiveness over time. As instead of improving their efficiencies the textile sector was sheltered by the government subsidies, concessions and increase in rebates. Today we have the most inefficiency spinning industry in the region. Hardly two dozen mills have added state of art spinning machines that are faster and consume 60 percent less power.

The industry wants energy at subsidised rates but does not want to improve technology that could save it 60 percent energy. The industry would continue to avoid upgrade till we continue to compensate them for their inefficiencies. Our weavers were at top in global market on wide width fabric; now the position has been taken by Bangladesh and India.

World has shifted to dry processing we still continue with wet processing. We are using the same stitching machines that were in service at the start of century. Many stitching units have closed down, but their machines were acquired by the surviving units. We would continue to struggle in global market if we failed to modernise our equipment.