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September 22, 2020

Romanticizing industrialization

Opinion

September 22, 2020

An economic growth of 1.9 percent in FY19, a contraction of 0.4 percent in FY20 and estimates of a muted growth of 2 percent in FY21 for Pakistan would have any policymaker rethink the strategy at work.

The urgency for a rethink becomes clearer when we look at recent international growth estimates for South Asia of 7 percent with India at 8 percent, Bangladesh at 6.8 percent and the likes of Malaysia at 6.5 percent in FY21.

Undoubtedly, Covid-19 has impacted dearly but pre-Covid-19 Pakistan’s growth fundamentals were not stellar either. Prior to the Covid-19 pandemic, the engine of our economy was rusty, coupled with an over emphasis on stabilization, placing large-scale industry in the red for more than two quarters – a classical definition of a recession, with Small and Medium Enterprises (SMEs) struggling for markets, finance and survival. Our evidence in the SME sector is anecdotal as we remain constrained by a lack of any high frequency indicators for the 5.2 million SMEs in the country.

There may be differing perspectives on the impediments for industry-led growth for Pakistan, but any list is likely to include the following eight areas where we need to do much better: i) low levels of investment; ii) depressed business creation; iii) weak labor productivity; iv) growth constraints in the tax system: Pakistan has many taxes (for example, withholding payroll taxes and stamp duties) which create a welfare loss for every rupee raised; v) falling behind on digitalization: Pakistan’s ICT sector is a minute size of global peers as a share of GDP with our listed tech sector minuscule by any international standard; vi) lack of skills for an agile economy: prior to Covid-19, unemployment ran high and the abour force was either unemployed or underemployed; vii) archaic Industrial Relations system; and viii) energy policy uncertainty: policy inertia on energy has left us with slowing energy reform and rising costs.

Let us consider some relevant objective measures – venture capital, innovation, Research & Development, worker mobility. It is not hard to conclude that our economic vitality is waning. Successive governments have attempted to address our economic challenges, but each tim, the debate invariably becomes bogged down with day to day running and crisis management. On every occasion, an industrial reform agenda gets stalled.

The aftermath of Covid-19 must create a new motivation for reform as well as a new mindset of cooperation. Increasing productivity through deregulation and creating markets is like stating the obvious. A lot more beyond the confines of the Ease of Doing Business is required in this regard for Pakistan. A strong regulatory guillotine effort, one that is time-bound and captures all non-essential cumbersome regulations at the federal, provincial and district levels, should be undertaken with the realization that this is oxygen for businesses in the country to survive and make money.

Moreover, industrial frameworks are back in business as over-reliance on market fundamentalism alone fails to get the desired results of productive transformations. The need for automation, digitization and Industrial Revolution 4.0 further stimulates a demand for proactive government policies to diversify and upgrade economies beyond simply freeing up markets. A broader emphasis today can be on market creating and market shaping fundamentals and not just on market correction.

It is of vital interest to prop up Pakistan to be able to become a supplier of manufacturing goods, with manufacturing playing a key role in a GDP growth model. For Pakistan, there is a role for a modern version of industrial policy, emphasizing productive services in addition to manufacturing, to help in overcoming premature deindustrialization, low-income trap and to transition into a more diversified economy.

Considering our needs and the global perspective, the industrial policy for Pakistan may not only be about manufacturing but more so about innovation, transformation and productivity. These are more appropriate ways to think about future of an industrial policy design for Pakistan. This framework is about a continuous collaborative approach of the private and public sector – a lot of dialogue about activities to promote rather than experts ordained policy of 168 pages, most of which will never see the light of day.

Pakistan can overcome poverty or alter its relative income status – from low to middle income – with structural changes and upgrading of manufacturing. This is a no-brainer. Traditional public banking functions such as subsidized lending for SMEs or agriculture or housing which may be desirable for social or political economy reasons are not directly able to facilitate the emergence of new, highly productive sectors.

Most of the wealth creation in the last decade has been done in the US and China. It is no surprise that it has not happened by selling T-shirts or basic commodities or selling petroleum products. It is innovation alone which has helped the five largest US companies including Google, Amazon, Facebook, Apple and Twitter, and two Chinese companies namely Alibaba and Tencent, sign over four billion people or half of the world’s population for their products. This is wealth creation in the modern era.

Let us idealize to get back on our feet. We have no choice but to web an industrial eco-system and restore and regenerate the inherent creativity of every individual. Above all, for once let’s take this as our opportunity to make a change by design and not by exigency. It will be a generational effort but one which will establish the economy’s viability with impeccable resilience, domestic strength and lay a framework for a circular economy.

The writer is former advisor,Ministry of Finance, Governmentof Pakistan.

Email: [email protected]

Twitter: @KhaqanNajeeb