Transition towards formalization and urbanization not only benefits the economy, it also has benefits for the larger good of society. The state and society in Pakistan needs to move towards even further formalization of relations of power and production. Economic reforms, boosting exports, improving human and physical infrastructure, and the new economic agreements need to be evaluated through the prism of transition towards formalization. To unpack some of the issues mentioned above, we refer to some literature (Hasan 2015; Amjad 2015) in this article.
There is a dire need to document the economy in Pakistan. The undocumented economy is not synonymous with the informal sector only. Some parts of the formal sector are also undocumented as there are instances of even the registered firms not fully reporting their production to avoid documentation. There are many registered firms that avoid reporting their accounts all together.
In addition to the neglect of the social sector development, other factors identified in the literature for not favourable economic outcomes are: lacking adequate capacity to turn high external inflows into growth; not achieving sustainable investment; weakening governance structures that has led to decline in institutional performance including in the provision of public services; not overcoming poverty at an adequate pace; and missing opportunities by not fully benefiting from manufactured goods exports trend.
The focus on exports growth has never been fully a strong driver in the industrial policy. The protected local manufacturers preferred domestic market sales over exports as the former was more beneficial to them. For example, in the textiles, for a long time, the local price of cotton was kept less than its price in the international market, and it offered an indirect subsidy to the manufacturers. However, such protection led to production of largely low value-added goods in the textiles such as cotton yarn. There was an element of anti-export bias in the industrial policies as they discouraged importing inputs by applying high duties on imports. There was a need to diversify the manufacturing base by using imported inputs for the promotion of exports that was not fully achieved in the past.
In terms of recommendations, there is a need to focus on exports as they not only improve productivity but also require low capital for growth. Since the textiles is still the main sector of the economy, it not only requires substantial incentives to boost new investments, it also requires skills upgradation
Some elements of the development patterns in the past such as inadequate focus on human and physical infrastructure development and an excessive reliance on the textiles as the main manufacturing sector has still remained with us. It is reflected in low levels of development outcomes, narrow manufacturing base, and insufficient exports.
Another challenge blocking economic structural reforms is the hold of strong vested interests and entrenchment of protection of old economic elite in the country. It has not been easy to dismantle the structures that protect the vested interests and replace it with better ways to govern the economy. Such protection is also partly carried out by prolonging the statutory and regulatory orders (SROs) regime. Such discretionary usage of SROs has expanded rather than shrinking.
In terms of recommendations, there is a need to focus on exports as they not only improve productivity but also require low capital for growth. Since the textiles is still the main sector of the economy, it not only requires substantial incentives to boost new investments, it also requires skills upgradation. There is need to upgrade the technology as well and increase the scale of technological upgrade.
There is also the need to expand the manufacturing base going beyond the textiles sector. Small and medium industries offer a good opportunity to diversify manufacturing and exports in production of goods other than the textiles. Therefore, there is a need to focus on the small and medium industries and expand their manufacturing base.
There is also the need to implement the recommendations made by the Strategic Trade Policy Framework 2009-12. It had recommended to lessen the anti-export bias in our economic policies and to withdraw protection from those industries that prove to be inefficient. Another recommendation was to do away with or zero-rate customs duty on the key inputs that are required to boost exports in the textiles and clothing sector. It has also recommended at the same time to levy less taxes at the investment phase of new industries in order to offer them incentives. Needless to say that new industries should be taxed at the same level as others, once they have matured in a time-bound manner.
There is need to evaluate the past economic and industrial policies, draw lessons from areas where they stumbled, overcome the resistance of the old vested interests, and implement policies that would induce economic dynamism, improve human capital and physical infrastructure, and effectively reduce poverty.
The writer is an Islamabad-based social scientist