Protecting inept sectors
BY its recent decision to ban imports of five-year-old cars the Economic Coordination Committee couldn’t have expressed a greater indictment of our motor car industry’s inefficiency and inability to compete.
What can you say of an ‘infant’ who even after 25 years wants to be coddled and protected because it cannot compete with five-year-old cars! The industry insists that we should not be able to buy better quality cheaper cars because it would otherwise die. Maybe it is time to read its last rites.
Another equally inefficient sector, dominated by politically powerful individuals and that continues to be lavished with government support and subsidies is the sugar industry. And then there are others — the list is a fairly depressing one. These industries are not likely to be competitive in the foreseeable future, partly because of the lack of opportunities (given the small size of the market) to improve efficiencies through economies of scale.
These generally inefficient sectors have been thriving simply at the expense of the hapless consumers who are at the mercy of producers that are not competitive internationally and that manage to continue to garner for themselves high levels of protection.
The cost to the economy of this protection has been huge in terms of scarce resources being tied up in the inefficient production of goods. The cost to the economy is compounded by the different rates of duties applied on components and sub-components, which incentivises corruption and mis-declaration for the purposes of saving import duty.
All these arrangements are made under the cover of the reprehensible practice of SROs representing a cosy pact between inefficient producers and the bureaucracy, whereby the former are provided opportunities of ‘extracting rents’ outside the budgetary proposals approved by parliament.
This way neither of them is accountable to parliament for striking such bargains. I hope to take up this issue in a future article.
Going back to the case of cars, although import duties had been lowered in recent years they are still exorbitantly high.
It is indeed bizarre that whereas in the rest of the world, manufacturers, even of cars like Mercedes, are offering upgrades to existing consumers and offers abound on discounts to buyers, in Pakistan we are required to pay upfront (the infamous ‘on’ of almost 10 per cent of the price of the car) a premium for the privilege of owning a car, thereby meeting the working capital requirements of assemblers free of cost.
In other words, there is seemingly no end to the level of protection that the cartel of local assemblers of motor cars will continue to enjoy. They can never seem to get adequate protection to survive against competitive forces.
The only solution now left is to clearly define a sunset clause, which sets out the timeline and phasing out (a maximum of five years) of this exceedingly high level of protection available to this industry.
We need to simply accept the reality that despite the sharp increase in the production of cars and jeeps in recent years, the market is rather narrow compared with what would be regarded as the minimum efficient size of the related plant.
It is distressing that car assemblers are resisting the opening up of the sector to the rest of the world despite their happy experience of even the marginal liberalisation/competition induced in the motorcycle sector.
Although the motorcycle industry (being the mode of transportation for the less affluent segments of the population) still enjoys relatively high levels of protection of more than 70 per cent, it is revealing that the number of motorcycles sold by existing players has increased phenomenally in recent years following the opening of the sector to greater competition.
More vigorous competition has forced existing producers (who were hitherto benefitting from obscene levels of protection) to reduce their prices, making motorcycles affordable for a larger percentage of the population.
Who says this country is not unique in allowing cartels of inefficient producers to brazenly fleece and exploit consumers in the name of industrial development?
One wonders what role if any the Competition Authority of Pakistan, mandated to promote competition, will play if such grotesque structures are allowed to persist. If these cannot be dismantled why do we bother setting up competition authorities?
The writer is a former governor of the State Bank of Pakistan.