A developing economy like Pakistan cannot afford to not have an industrial policy. The policy can be a good policy, a bad policy or a bullshit policy; except that there has to be an industrial policy. According to James Miller, “Any discussion of industrial policy should begin with (the) recognition that we have one. The issue is what type.” On a separate note, I concede that the word ‘bullshit’ has not been used with the panache that first-time usage deserved; my impatience got the better of me!
Singapore has one; the aggressive pursuit of which is why they have managed to be the manufacturers and suppliers of high-value components to Multinational Corporation’s supply chain. Japan has one, managed by technocrats, insulated from political pressures, which is why in spite of it’s almost nill resources, the country remains one of the largest exporters of the world. China has one, which is the reason why they are now recognized as the manufacturing backyard of the world. And while too lazy to Google it, I am willing to take a bet that Germany has always had one, South Korea has one and now even Vietnam has one.
Historically speaking, even the UK had one, which was aggressively imperialistic and included the colonization of the sub-continent by the East India Company. The repeal of the Corn Laws in the nineteenth century was also used to support the industry, amongst many other policy decisions to protect the domestic industry going bank to Henry I, and only when Britain decided to — or made the mistake of — unilaterally adopting free trade, were they disseated as the industrial power of the world. The Americans had one; tariff, to protect domestic industry, was the second bill signed by George Washington on Independence. Perhaps, the American civil war was also because of tariffs to protect the industry. And once again, the Americans feel the need to have an aggressive industrial policy and have elected President Trump to bring back manufacturing jobs.
And does Pakistan have an Industrial Policy? I confess that I was completely ignorant about whether we had one or not, which meant that even if we had one, it was top secret and was, therefore, kept completely confidential. If we did not, industrialization was not amongst the priorities of the Government. Accordingly, the obvious recourse was a Google search, and the results were disheartening. Apparently, we had a 10-year industrial policy covering the period between 2005 and 2015, which based on the current state of exports, was probably not very effective. We apparently have an infrastructure policy and we have a CPEC policy, both of which, in tandem, are enablers for growth. Admittedly, during the construction period, infrastructure projects boost economic activity, but such gains are short term and short lived. Putting it bluntly, we need to have industry, and something to sell internationally, if this entire infrastructure and the CPEC opportunity is to finally bear fruit.
Curiously, in fact, surprisingly and encouragingly, the Google search highlighted that the Khyber Pakhtunkhwa issued its industrial policy in 2016. I was not aware of this and would like to suggest to its government to actively publicize the policy and proactively establish contact with business houses to generate interest. A bad policy is when you issue one and follow it up with inaction. For the record, the province offers interesting incentives: bearing five percent markup on financing for five years, which nowadays means free debt; financing 25 percent cost of industrial plots; subsidizing 25 percent of transportation costs from Karachi port to industrial site; bearing 25 percent of electricity cost for three years for labour-intensive industry; financing 25 percent of equity for projects set up by female entrepreneurs; and the exemption from custom duties and income tax in certain cases.
It would be useful if other provinces followed suite and came out with their own industrial policies, however, unfortunately, provincial industrial policies will always have a pervasive limitation. Without tariff protection, infant industries will remain unable to compete with foreign corporations, who are generally protected by their respective countries and have the resources to sustain a prolonged price war. A favorite example is PIA. To expect that the national airline can compete with Emirates and Etihad, when both are completely protected and supported by the UAE government, is illogical and blatantly delusional. The downside of allowing access to China across the length and breadth of Pakistan is that we have simultaneously and unilaterally opened our market of 200 million Pakistanis to their industry, which can marginalize our own industry purely because of the economies of scale. And to again blast an irksome comment, the Chinese can definitely make cheaper jharoos as well. It is our choice whether we want to support the traders or manufacturers of Pakistan; the former will ultimately derive us over the cliff, no doubts about that. The worryingly growing external debt is the direct outcome of falling exports and increasing trade deficit, curtsey the traders.
A careful study proves something, which has been repeated in this column numerous times: economic growth is directly correlated with growth in exports. For the lovers of the infernal GDP, the net trade balance is part of the GDP; qualitative growth is dependent upon the export of manufacturing, all else is an illusion and farcical. Manufacturing remains the quintessential increasing returns industry, agriculture and unskilled manufacturing will always face diminishing returns. In our case textile is our primary export engine, which in turn is dependent on cotton produced; we seem to be stuck around 11 million bales per annum of cotton production for years now and expect to increase our exports!
Lately, there has been a lot of jubilation over the decision by Volkswagen to set up an assembly plant in Pakistan; to quote from a book I am at a loss to recall at the moment, “Lego brick manipulation of sophisticated inputs in an unsophisticated way”. The automobile industry, to my knowledge, under the industrial policy — when we did have one — was required to follow a strict deletion regime. How many have complied with that? Something is definitely wrong with our industrial strategy.
Exporting mined natural resources or raw produce, while perhaps necessary in the short term, is not a durable policy either; such resources eventually deplete. Since we have decided not to build Kalabagh Dam, and are already water stressed, how long will we be able to keep growing cotton and exporting textile?
Random financial incentives to the industry may or may not help. What is needed is a more dynamic approach. As a first step, there is a need to set up an empowered team of experts to understand our declining economic competitiveness and develop an industrial policy, if need be, laced with real incentives for the industry, which are deemed to be the future for Pakistan. Our national market should be used as a leverage against foreign corporations and ultimately a flat tariff across the board to protect domestic manufacture might well be a natural outcome. Without the benefit of complete knowledge, my guess is 30 percent. Irrespective, I sincerely hope that this article becomes a catalyst for an Industrial Policy.
The writer is a chartered accountant based in Islamabad. He can be reached at firstname.lastname@example.org and on Twitter @leaccountant