Manufacturing-shy auto, telecom policies stunting industrial growth

ISLAMABAD: Pakistan’s past and present auto and telecom sector policies merely focused on assembly units instead of developing manufacturing capacity, an independent think tank said on Thursday.

The Economic Advisory Group (EAG) of Policy Research Institute of Market Economy (PRIME) has come up with these observations at a time when the government is contemplating upon devising a fresh auto policy for next five years (2021-2026).

The independent EAG of PRIME met to review the industrial policy and reforms being pursued by the government, especially in the automobile and telecom industries.

It said the upcoming automobile and mobile phone manufacturing policies were a repetition of the mistakes committed over 40 years ago in the automobile industry by applauding market-seeking FDI (foreign direct investment) and establishment of assembling plants.

“These plants are the lowest components of the entire value chain and the least profitable as they neither enable transfer of technology, nor do they contribute to the growth of the domestic industries.” Therefore, a comprehensive review of the upcoming policies through economic modelling was required before their implementation, to ensure consumer and overall economic welfare, the think tank said.

Instead of focusing on assembly units, it stressed the need for developing manufacturing capacity, which was the real driver of growth in an economy, arguing that consequently the inflow of FDI remained limited compared to profits earned and repatriated out of the country.

Furthermore, the efforts of the government to attract FDI in the automobile and telecom sectors in the form of assembly units depended on incentives such as tariffs and subsidies.

It said the protection provided to make these industries competitive was based on assumptions of latent comparative advantage, without any utilisation of tools such as Mill and Bastable Tests, which were used as gauges by policymakers while making decisions regarding the efficacy and compatibility of protection.

“The rationale behind protection is to provide an opportunity for subsequent research and innovation in technology to augment efficiency, which has never happened in the case of Pakistan,” the EAG of PRIME observed.

“The existence of market failures and externalities justify government intervention in the form of initial protection to make sectors competitive at the global level, but continuous protection does not equip industries to become efficient and leads to consumer and welfare losses due to higher prices.”

“The globalised and value-chain based world of today requires rapid and systematic removal of protection so that a country is forced to identify and operate in its area of comparative advantage or risk being delegated to producing a minuscule share of global value addition.”

In the context of the upcoming auto policy, the decrease in the tariffs on CKDs, as envisaged in Finance Bill 2021-22, which would be imported into the country and then assembled, in reality, would discourage domestic auto-part makers because imported items were being subsidised against domestic production.

“This implies that relative profits will be higher in the assembly business as compared to the auto-parts manufacturing business, which will gradually reduce the linkage between auto assemblers and domestic auto-part makers.”

It said the auto industry had not been able to scale as the domestic market was too small due to demand being squeezed through protectionist policies.

“Pakistan is also not sufficiently connected to the international industrial community to enable transfer of knowledge and technology,” the EAG of PRIME said adding,” The country has more incentives to scale domestic auto-parts than the assembled finished goods because the former has a higher demand due to utilization in new and used cars”.

According to the think tank’s observations, in the context of expected FDI in the telecom sector, if mobile phones are assembled without value-addition arising from some intrinsic latent advantage but only as result of some fiscal incentive, then the industry will remain dependent on protection from the government and manufacturing will not become a profitable avenue for companies.