Rent-seeking and protectionism
Conventional wisdom tells us that industrialisation promotes self-reliance and generates employment. It builds a country’s economic muscle and its position in the comity of nations.
Generally countries, whether industralised or developing, tend to foster competition and free trade within national boundaries while pursuing different degrees of restrictive international trade practices. In times of crisis, countries tend to turn protectionist on a selective basis while others, like what Brazil is doing, take sweeping tariff measures to protect their manufacturing from foreign competition.
While conceding to the infant industry argument, it may be argued that protectionism carries serious risks. It may degenerate into rent-seeking, particularly under state patronage or owing to market failure. But the underlying principle of achieving a right blend between protectionism and free trade needs to be recognised, without which, free trade can turn into mercantilism of the pre-capitalism era.
However, protectionist policies have to be constantly reviewed, monitored and phased out to improve work and management culture and to develop a globally competitive market. Often tax incentives are offered for a specified period of time but linger on for years without
achieving the intended outcomes. The frequent tax amnesties make matters worse.
In recent years, a number of factories have closed down because of cheaper imports from China. Some local firms also get their products manufactured in China under their own label, having closed their plants. This is de-industrialisation that Pakistan is now facing. As it is, the economy has huge excess manufacturing capacity that remains unutlised because of lower domestic demand.
Currently, a debate is going on whether or not the government’s decision to allow imports of three-year used cars was a prudent one. Critics say that the industry is prospering on rent-seeking and the decision would hurt the consumers. Auto assemblers representative claims that their sales were going down because of liberal imports of used cars.
The core issue under discussion is rent-seeking that impacts adversely on productivity and the consumers. It is quality and price of a product that matters for consumers. Rent-seeking culture is all pervasive and too deep-seated to be managed by a single-dimensional approach i.e. to liberalise car imports. Like the fertiliser industry importing fertiliser, the resourceful car assemblers can turn to import
business, instead of undertaking the hassle of manufacturing. It should not be forgotten that since the pre-mature massive cut in tariffs, the economy is caught in a ‘deindustrialisation trap.’
Liberal imports are not possible given the state of balance of payments position as foreign capital inflows are dwindling and imports continue to outpace exports, with surging workers’ remittances not enough to take care of the balance of payments position. There is not much room for policymakers to raise foreign money in the current going financial turmoil, expected to last at least a few years more. The contribution of imports in the GDP is negative and the economy is currently in a low growth cycle and needs to be put on a high growth trajectory. The import-oriented economy tends to keep the country in a perpetual balance of payments crisis.
Perhaps, it is a difficult balance of payments situation that has induced the government to divert public sector imports to the state-run Pakistan National Shipping Lines.
Rent-seeking needs to be resolved by strengthening and not weakening regulators, as is the current practice, in order to safeguard the consumers’ interests. For all practical purpose, the government has made regulators toothless. The original competition law, that was designed to protect consumers, has been made virtually ineffective by subsequent amendments.
Policymakers also need to encourage industry to improve productivity, quality and price of their products for the benefit of consumers. And many in the private sector need to return to lost business ethics and adopt much-needed voluntary self-discipline to make markets work better.