Think tank slams protectionism, outlines vision for auto policy

ISLAMABAD: The independent Economic Advisory Group (EAG) has said that the automotive development policy and initiatives proposed in Finance Bill 2021-22 did not present a path for transformation for the sector to either meet domestic consumer needs or become globally competitive.

The group of economists, policy analysts, financial experts, and academics observed that prevalent policies fell short in providing a mechanism to bring down prices and ensure adoption of state of the art technology in the country that would promote local vendors’ integration into the global supply chains. “The present surge in the sale of vehicles is not driven by policy initiatives but rather pent up demand built up during the Covid-19 lockdown,” the EAG noted. Pointing out to the decades of protection given to the industry, it was noted that it held back the comparative advantages and thus lacked design to achieve international competitiveness. The policy should focus on inherent latent advantages, for example in subsectors.

The auto industry has received protection from the government for more than three decades without requisite pre-conditions, which has been standard practice in most trading blocs (eg EU) for several decades.

It said the industry failed on Mill test and Bastable test that measure empirical efficiency and analyse the outcome of incentive structure to determine the required protection period before a sector becomes internationally competitive and the number of years required to recover the welfare cost of protection on consumers. “It might explain why the industry has still not achieved economies of scale as manifested by production of 110,489 units in 2020 compared to 182,397 units in 2015.” Insignificant localisation was also criticised, which happened due to market-seeking investment instead of efficiency-seeking investment perpetuated by protectionist policies.

The efficacy of any policy is contingent upon prudent allocation of resources while in the current incentive structure, a country's resources are employed in production activities where Pakistan has an inherent disadvantage, and therefore, 1.8 million people currently employed throughout the supply chain could be reemployed across activities where Pakistan enjoys a latent comparative advantage.

Data shows we are likely to have a comparative advantage in auto-parts and two/three wheel automobiles, for which, there are significant primary/secondary markets in Africa and Asia. The EAG proposes that the upcoming auto policy should promote integration of domestic parts manufacturers with global value chains through two actions. First, liberalisation of trade regime to give market access to international automobile manufacturers in exchange for integrating domestic parts manufacturers in their value chains. Second, identifying and engaging with key auto markets across the world with the aim to reduce frictions to cross border trade and provide certainty to international auto players vis-a-vis operating their supply chains from Pakistan.

Policy should focus on securing access to African and Asian markets to expand exports to primary/secondary markets, which can be accomplished through actively seeking FTAs with African Union, RCEP, and Central Asian countries, it recommended. Encouraging research and development and coordination between relevant associations, manufacturers and global players should also be a part of the transformation.

Furthermore, it is imperative to identify emerging skills’ requirements and link engineering universities and NAVTCC to ensure appropriate intervention at the earlier stage. The EAG is an independent group of individuals from economics, policy and the private sector that deliberates regularly on economic developments and shares its views with the government and the public. It is supported by PRIME, an independent think tank.