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Friday July 01, 2022

Productivity paradox

March 25, 2022

One of the basic problems with Pakistan’s economy is that it produces less of the end products that can be sold in the world market and consumes more of what is produced outside its borders. Therefore, its imports are much more than its exports which leads to current account deficit and balance of payments issues.

In a way, Pakistan’s strategic location is also its great disadvantage. Due to the country’s strategic location; the world powers are always interested in it and are willing to bail out its economy through the inflow of external resources. These powers will always keep Pakistan’s economy afloat in the foreseeable future. The question is: is it enough?

Pakistan’s economy needs two crucial elements to make it dynamic: it needs to produce more that it can then export; and it needs to effectively tax its elite and middle classes. The productivity in the economy is often manifested through industrialization and value addition. Akbar Zaidi has good chapters on industrialization in his book ‘Issues in Pakistan’s Economy’. Asad Sayeed also has a well-researched chapter in S M Naseem and Khalid Nadvi’s edited book. There are other journal articles as well; space does not allow all of them to be listed here.

As Asad Sayeed points out, Pakistan has landed in the finance capital stage having been not too successful with the industrial capital from 1988 onwards. Real estate and investment in stocks carries less risk and is more profitable in Pakistan than investment in industrialization. Why should anyone invest in industry then?

In some ways, the takeover of finance capital is a worldwide trend in the era of neoliberal economy. However, it is also peculiar to Pakistan’s political economy. All sorts of elites in Pakistan (both military and civil) have hugely invested in real estate. Elites in Pakistan do not allow the real estate to be effectively taxed, so windfall profits are made in the exchange of real estate and setting up of new gated housing colonies while paying minimum or no tax. Therefore, capital is parked in real estate or the stock exchange, diverting investment away from the productive industrial sector.

Imagine an industrialist who needs to be in the office every day for certain hours, deal with dozens of government agencies, interact with his/her downstream suppliers, and bear the deadline pressures of upstream local and international customers. And then there’s the additional political instability, sudden change and reversal of policies and many such other contingencies. Why would this industrialist park his/her money in industry and deal with so many risks and headaches, when s/he can invest in real estate and earn amazing returns without having to do anything or at least much? This explains the productivity paradox for Pakistan.

The takeover of finance capital in Pakistan is intrinsically tied to the prevalence of the neoliberal economy in the world. Finance capital has spread its tentacles everywhere in the world. Both Akbar Zaidi and Asad Sayeed write in detail how the structural adjustment phase in Pakistan with Pakistan’s economy sovereignty being handed over to the IMF and the World Bank, leading to boom and bust cycles of the economy underwritten by the deregulation, devaluation, high interest rates, reduced tariff, exchange rate liberalization, and privatization amongst others.

The 1990s was the ‘lost decade’ in Pakistan’s economy with 4000 industrial units having been declared sick. Bad debts in the industry that have their roots in Bhutto’s nationalization of financial institutions in the 1970s and them being effectively used in the 1980s to buy patronage peaked in the 1990s where many speculators took loans, then declared them bad loans and closed their units.

Asad Sayeed’s original contribution is that it looks at the harmonization and disharmonization of the state-society equilibrium to explain the success and failures of large-scale manufacturing in Pakistan. As long as the state reflected the power of the dominant groups (Alavian framework); those were the years of conjuncture despite the fact of them being highly unequal. When the state could not muster enough resources to make pay-offs to the middle class and its factions; it led to years of disjuncture. The patronage demands of the middle class and its various factions drained the state; hence the structural adjustment and adoption of strategy to minimize the role of state in the economy.

Akbar Zaidi offers many insights and the space available here does not allow one to do justice to all of them. However, a few points are worth visiting. One of them is that Pakistan’s economy is largely private-sector led. In the 2000s, private-sector investment was almost three times more than public investment. The small-scale industry or the informal economy is dynamic and productive and constitutes the bulk of the economy.

The informal economy is precisely productive since the state largely does not interfere with it. Zaidi quotes Abid Burki’s 2010 work to state that small-scale industry constitutes 90 percent of manufacturing units, produces 30 percent of GDP, earns 25 percent of exports revenue, and employs 78 percent of the non-agricultural labour force. This explains the huge importance of the informal economy in Pakistan.

What is needed is to effectively tax real estate and the stock market and shift the investment from finance capital to industrial capital, and maintain political stability and continuation of policies. What is also required is to develop state capacity and meritocracy in the bureaucracy to lead state-directed exports-oriented large-scale manufacturing, provide finance and other facilitation to the SMEs sector to further add value to it, and revitalize economic planning and long-term inclusive and equitable economic development in the country.

The writer is an Islamabad-based social scientist. She can be reached at: fskcolumns@gmail.com

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