The problem of industrial development

Pakistan needs to strengthen its domestic industrial capabilities and encourage big firms to start operating in the country

The processes of trade, manufacturing and services are in a melting pot. The main drivers of change are coming from increased and affordable connectivity being an offshoot of revolution in information and communication technologies (ICTs) and transportation facilities. This change was called rapid globalisation during the 1990s and early 2000s. It pushed ahead with the conclusion of Uruguay Round of multilateral trade agreements.

Interestingly, in many analytical works serious concerns about the prognosis of development outcomes were raised, and Doha Development Round was launched. It has remained inconclusive.

Initially, it was argued that not only trade is increasing but global economic output is also increasing while poverty levels are falling. The optimism got a sobering nudge when experts looked deeper into the global figures and found that a handful of countries were benefiting from the waves of globalisation.

It was also argued that although economic growth increased, it was concentrated and divergent. Not all countries were converging towards the same levels of growth. So, it was concluded that both growth and poverty increased at the same time.

One of the key features of this robust global economic growth was emergence of global value chains (GVCs) forming deeper regional integration than the traditional trade ties. GVCs primarily refer to processes of hyper-specialisation at the country levels where parts of the finished product, e.g., automobiles, are made in different countries and assembled at other locations. The basic market of this production fragmentation is efficiency.

Industrial competitiveness literature also calls this phenomena “post-Fordism” since Fordism was about one factory making the entire end-product and maintaining a huge inventory of raw materials.

Against the backdrop of promises of jobs, poverty reduction, and growth embedded in GVC participation, there are at least two main concerns which are relevant for Pakistan’s growth and GVC linkage.

The first concern emerges form the future of technological shifts and the future of manufacturing; the second is the potential impact on poverty and inequality at the national level. The UNDP in their latest human development report has called it “new inequalities”.

While it is argued that “a one percent increase in participation is estimated to boost per capita income levels by more than one percent; about twice as much as the standard trade,” not all countries participate and benefit from GVCs.

Why is it so and can Pakistan try to look at various determinants of GVC participation to successfully wade through speed-reducing hurdles? According to the World Development Report 2020 of the Word Bank, these determinants are factor endowments, geography, domestic industrial capacity, trade policy, institutional quality, connectivity, macro-economic factors, and political stability.

For Pakistan, perhaps the most important factors is domestic industrial capacity since this aspect is one of the central concerns for science and technology-based growth. It also determines whether a country can move ahead on the ladder of global value chains which are dominated by the lead firms who organise the production networks and their governance.

Pakistan’s system of economic governance has manifestly destroyed building up of big firms. It has systematically discouraged entrepreneurs from becoming giant formal organisations.

It is worthwhile to mention here that the State Bank of Pakistan in the first quarterly report of financial year 2020, has laid emphasis on gaining “a foothold in the global value chains (GVCs)”. The report mentions “increased participation in the GVCs would not only align the country’s product mix with trends in global demand, but also put the exports on a sustainable growth path”.

However, having learnt about the success stories from Vietnam in electronics and Bangladesh in apparel that enormously benefitted from the GVCs, Pakistan needs to strengthen its domestic industrial capabilities and encourage firms to start operating in the country. Let us not forget, a firm is the place where the war of a sound growing economy is fought and won or lost.

A firm converts human resources into human capital and forms the building block of an economy. Pakistan’s system of economic governance has manifestly hindered building up of big firms. It has systematically discouraged entrepreneurs to become giant formal organizations.

Recent, IDEAS research studies have highlighted that “Pakistani auto-part manufactures, despite having significant exports, still lie on the periphery of this vast GVC, being secondary contractors to Tier 1 suppliers”. Due to low levels of domestic industrial capacity, Pakistan stands at 104 among 137 countries on economic complexity ranking in 2018.

A part of GVCs are regional value chains (RVCs). Asian Economic Integration Report 2019/20 by the Asia Development Bank mentions Bangladesh being the champion in RVCs followed by Nepal and Pakistan. However, they still rank lower globally since large portions of exportable final goods are domestically produced.

In addition, they have “time-killer” systems for exporters and importers due to low levels of trade facilitation services which are a key driver in GVC participation. Pakistan wastes 130 precious days of exporters in the export process. In addition, “Pakistan’s trade openness in terms of GDP is also one of the lowest in the region. Its trade openness accounts for 26.7 percent of GDP lower than Turkmenistan (30.2pc), China (34.1pc), and Mongolia (99.1pc).”

Having looked at the low GVC and RVC participation of Pakistan it seems important to know how Pakistan can benefit from the increased connectivity potential by CPEC projects. It is a serious question which needs to be looked into and may have wide-ranging implications for our economic growth, job creation, and poverty reduction, especially during the era of pandemics, such as Covid-19.

One of the most important questions is that if a large segment of our population does not undergo skill upgrade, employment in larger manufacturing firms is not created, and our economic governance does not improve to meet the challenges of ICT and Biotech-based industrial revolution called “Industrialisation 4.0”, where shall we stand in the next ten years? Shall we be running like the Asian tigers or reeling under the “new inequalities” like the Asian turtles?

The writer is a researcher based in Islamabad

The problem of industrial development in Pakistan