Industrialisation: local and global impact

Unleashing the potential of industrialisation and manufacturing requires allocating resources for science and technology

Today nothing seems more important than having machinery in place for local production as this alone can ensure an adequate response to calamities like Covid-19.

Pakistan, for example, direly needs personal protection equipment (PPE) for healthcare providers and ventilators, potentially for a large number of patients at critical stages of disease. Both are not produced locally. This is a sad reality of our manufacturing capacity. We have to import them from other countries. That increases pressure on our current accounts.

The neoliberal orthodoxy rejects efforts for creating indigenous industrial manufacturing capacity as inefficient “economic nationalism”. Its institutions condemn the desire and design structural adjustments in such a way that the country cannot build a manufacturing base. However, episodes like the Covid-19 epidemic show us that Pakistan has a case for resource allocations to promote local technological capabilities and industrialisation.

Apart from the Covid-19 situation, Goal 9 among the sustainable development goals (SDGs) is: “… promote inclusive and sustainable industrialization and foster innovation”. Research has shown that countries and economies cannot provide fertile grounds for learning and innovation without going through the phase of special emphasis on industrialization. They can also not create a sufficient number of jobs for large young populations. It is estimated that “every job in manufacturing creates 2.2 jobs in other sectors”.

However, the pace of industrialization is extremely slow in the less developed economies. “At the current time, however, manufacturing value added per capita is only $100 in the least developed countries compared to over $4,500 in Europe and Northern America”. No wonder “global share of manufacturing value added in GDP increased from 15.2 percent in 2005 to 16.3 percent in 2017, driven by the fast growth of manufacturing in Asia”. This shows that the countries other than tiger economies of East Asia are lagging behind in industrialisation and reaping its benefits. There is little or no progress in most cases and in some cases there is “premature de-industrialisation”. Pakistan falls in the latter category.

Although, neoliberal economic thought questioned selective industrial policy, globally, a shift is occurring in the thinking about industrial policy. Once it was argued that industrial policy must be general, not specific, so that it does not discriminate among sectors giving priority to one sector over the other.

This line of argument recommended that industrial strategy must not try to benefit some sectors of economic growth interest with “picking winners” and leave out the sectors of lesser interest. Nothing can be more naive than this myth of general or non-discriminatory industrial policy.

The fact is that irrespective of the way an economy allocates resources, it does create a system of preferences, and does it in a complex way. After primary school education, every education system starts providing a set of selected options. Therefore, even a general education system is not ‘general’ and reflects the society’s choices.

Industrial policy helps allocate resources in the direction of desirable outcomes of investment allocations with various instruments for social protection and risk socialization to generate potential for innovation and economic growth.

However, certain factors are changing the global production landscape. The first is the global organization of production, and the second is the relationship between various sectors. Since 1990s, there has been an emergence of global and regional value chains (GVCs). These have emerged as a result of the falling transportation costs and interconnectedness owing to the information and communication technologies.

These value chains have provided opportunities to less developed economies to enter technology-intensive industries owing to segmentation of production tasks across the globe. In this scenario, China, South Korea, and Taiwan were clear winners. They used the opportunities to their advantage, and ultimately China became the “OPEC of industrial goods” in the world. However, there are several issues in this approach that warrant a serious understanding.

Pakistan needs multi-sectoral growth. It should invest in designing, implementing and evaluating industrial policy interventions.

The first issue is that transnational corporations (TNCs) command and control the GVCs. More often than not, they exploit the suppliers particularly in commodity-based GVCs. In addition, they create monopolies and entry barriers using tools like patents, quality standards, copyrights, and trademarks. Along with such barriers and controls, TNCs keep developing countries at the lower rung of unsophisticated basic processing and assembly related tasks.

Even the medium and large-scale production facilities are constrained and made to import capital goods i.e., machine-making machines. Deepak Nayyar has recently alluded to Chinese way of investments in Africa in which the recipient countries are lowered to the provision of raw materials rather than upgrading industrial manufacturing to benefit from GVCs.

Parallel to the emergence of GVCs, there is another change which is coming in the global production systems. The key driving force here is technological convergence which is blurring sectoral boundaries. Now many knowledge-intensive and production-related services are offered and used in the manufacturing sector. Even boundaries between various manufacturing industries have been blurred, and many intermediate goods and components are used in different manufacturing processes leaving standard boundaries challenged with technological changes.

Antonio Andreoni, an associate professor of industrial economics at University College, London, calls such technological linkages “capability domains”. So, TV manufacturers, food processing, or control systems are not separate sectors. “For example, these days the agro-food sector draws not just on traditional food processing capabilities (e.g. cleaning, cooking, canning), but also on the capabilities in mechanics and in control systems for packaging, on ICT capabilities for food tracking and, finally, on the capabilities in advanced materials for smart packaging”.

The implication of sectoral convergence is that we need to redesign industrial policy thinking to identify the capabilities which are based on capability domains so that our engineers have more opportunities to join different firms, and the firms have capabilities to serve many sectors simultaneously.

The Covid-19 lessons and SGDs have highlighted the fact that Pakistan needs multi-sectoral growth. It should invest in designing, implementing, and evaluating industrial policy interventions. But can governments lacking “deep pockets” as a result of structural adjustments do it? Our answer is that they can as long as there is the resolve to take a leadership role. Take the example of the subsidised Airbus.

Establishing state-owned enterprises (SOEs) may be the only solution. “Korea’s steel-maker (POSCO), established in the late 1960s when the country’s income was only 4 percent of the US income, and Brazil’s aircraft manufacturer (EMBRAER), established in the late 1950s when the country’s income was only 8 percent of the US income, are the supreme examples of this kind”.

So, our conclusion is that to unleash the potential of industrialisation and manufacturing, there is a need to use industrial policy interventions that can help allocate resources for science and technology-based inclusive industrial development.

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

Industrialisation: local and global impact