Why industrial policy?

Industrialisation is strongly connected with formation of human capital, which is a key driver of innovation alongside labour-absorbing enterprises

Pakistan’s economy is again struggling for macro-economic stability after achieving a respectable 4.8 percent growth rate recently. Is it a sudden collapse or a manifestation of some chronic illness? A chronic illness, like cough, reappears whenever there is a change in internal and external conditions. The ‘infection’ stays uncured though some of the symptoms subside during the adjustment periods. It heats up the body at later stages when economy decides to grow faster. Possibly, the skeleton has too weak bones to support growth in weight and height.

It is being observed that the fundamental weaknesses of the economy are reflected in a progressive decline in industrial fortunes and export stagnation that did not show any remarkable acceleration for many years. In addition, there has been no significant product-and destination-diversification in exports during the last many decades. The early signs of non-traditional exports, such as cement, washing machines, and motorcycles did not become a dependable and expanding feature of our exportable basket although efforts are afoot to make that happen.

There are many reasons ascribed to this economic meltdown. One of the most cited reasons in various heterodox analyses is neoliberalisation of economy precipitating what Dani Rodrik calls “premature deindustrialisation” and its economy-wide results are visible in sticky exports.

Those who argue with this line of reasoning claim that under neo-classical economic thought certain aspects of growth dynamics are overlooked. For example, it treats industrial manufacturing as a mechanical process which does not require government support. This idea does not factor in the role of industrialisation in continuous learning. It also does not recognise the importance of macro-economic interventions in support of manufacturing.

Should we continue with the current neglect or change our direction? Our, economic managers should learn from other countries.

Other examples are a good source of learning in the absence of current, credible, and extensive census or survey data about the state of industries in Pakistan. Looking at the global economic scene, it appears that the US and Germany have revived interest in industrial policy while many developing countries in Asia and Latin America are thinking of using industrial policy to break through the ceiling of “middle income trap”.

It has been reported in research papers that the Gulf region is also exploring industrial policy options for economic diversification after the oil boom. Many countries in Africa are thinking of industrial policy recourse to end poverty. Discussing Pakistan’s economy, Dr Kaiser Bengali, has also argued that a services-led growth model is an inadequate response to our challenges.

Firstly, it cannot create enough jobs. Secondly, Pakistan does not have an educated population that can directly benefit from growth in high quality services. Industrialisation is the only way to make job-creating growth happen, he argues.

We also need to understand that industrialisation is strongly connected with human capital formation which is a key driver of innovation alongside labour absorbing enterprises. Manufacturing creates spaces of convergence for learning during the processes of manufacturing on the one hand and through linkages with educational institutions for trained human resources on the other.

Alongside, the interest rate policy, Pakistan needs to address its exchange rate policy from an industrial development perspective.

Deindustrialisation, in other words, means a loss of learning endowments in the economy. This is what we are witnessing in Pakistan. Natural sciences are on the decline and students are more interested in business administration and marketing degrees, or at best selling their basic language and graphic designing skills as freelancers for international businesses.

Public sector or public policy support for manufacturing firms is essential. All of the now industrialised countries have done it when they were developing or were at the comparable level of economic development. They have done it with various instruments, especially by investing in the basic infrastructure and public goods for strategic industries. IBM, Microsoft, Apple might not have received special grants for their enterprises but they have benefited from public support for semi-conductors research and internet.

Likewise, US aircraft industry, Japanese mainframe computer industry, Finnish electronic industry, and solar and wind power in many countries are some of the notable examples in which public actions create certainty in the markets for evolution of technologies and industries.

Another important factor that influences the manufacturing sectors most is the monetary policy. If the real interest rate is too high it discourages investment, especially in the capital-hungry manufacturing sector. Brazil and South Africa are vivid examples of such restricted access to credit. Eventfully, few players were able to borrow and invest under such circumstances.

However, even under adjustment periods, such as one being implemented in Pakistan, special windows of lower interest rate can be created for capital-intensive industries, which can help generate pockets of growth and employment.

Alongside, the interest rate policy, Pakistan needs to address its exchange rate policy from an industrial development perspective. While keeping it free-floating or overvalued may be discussed at length elsewhere, it is important to provide subsidised credit to export-oriented industries, especially if they are sunrise industries and have the potential to lift economic fortunes of the country in medium and longer term. Brazil’s BUNDES has successfully provided this specialised facility.

Last but not least, one of the most important factors in industrial development which economic managers of Pakistan must try to look into is the provision of improvised social insurance for workers. As economies go under transformation and structural change, there are chances that winners and losers are created in the process.

Providing social protection, the central role of a welfare state, is enshrined in the Constitution of Pakistan. Effective social protection floors are also linked with social stability when industries have to undergo restructuring and it helps lower the chances of industrial action and other disruptions. In fact, social protection and social insurance are a necessary flanking policy for conflict management under economic change, too.

We have tried to argue that premature deindustrialisation cannot serve the longer-term economic and social interests of Pakistan. The country should try to refocus attention towards job-creating and income-enhancing industrialisation which helps in improving investment and learning climate for innovative streams of economic growth and social stability.

The writer is a Chevening Scholar and Executive Director of IMPACT Research International

Pakistan: Why industrial policy?