Challenges facing the industrial sector
Since its very inception, Pakistan’s economic development has been affected by our geo-political situation: Pakistan inherited the Kashmir dispute, played a pivotal role in the Afghan War against communism alongside the very ‘freedom fighters’, who are now labelled terrorists and is perpetually dealing with Indian hostility since independence in 1947. In the process, Pakistan lost half its territory - East Pakistan - now Bangladesh, in 1971. An additional factor now is a reported agreement between Iran and India, whereby Iran is said to have offered her territory as a safe haven in the event of a military attack against India. And now, Pakistan is a front-line ally in the war against terrorism. These wars have been basic deterrents for any investment and particularly, long-term investment in the large scale industrial sector, hence preventing sustained development.
Policy support: Along with its geo-political adventures, Pakistan has also relied heavily on the Anglo-American bloc for economic policy support. Accordingly, in the 50’s, when Pakistan was focusing on an import substitution strategy for economic development, other countries in the region namely, Japan, India and Malaysia were busy in planning export led growth. During the 70’s, the country faced heavy nationalization including in the ten hi-tech basic industries - steel, fertilizer, engineering to name a few, which are now being advised to be phased out for being internationally uncompetitive. Be it as it may, Pakistan always imports more than it exports.
The gap has been filled by loans and credits. Cumulative loan amount was $38 billion, a couple of years ago, which made up a staggering 66 per cent of Pakistan’s GDP. This has now been reduced to $30 billion, or about 50 per cent of the GDP, still a sizable debt burden. Additionally, Pakistan’s major industries - cement, textile and sugar - have continued to under-perform. The cement industry on the whole, has been incurring losses year after year. Textile industry results in recent years have been 25-50 per cent lower than the norm. Sugar is a cyclical industry - Pakistan imports sugar one year and exports in the other and that too with large subsidies.
Global discipline has turned Pakistan into a dumping ground. For example, there is no check on import prices even though there is a minimum export check price from the countries of origin. Everything is thus being dumped and underinvoiced if not smuggled. According to a recent report prepared by the Institute of Business Management, Karachi, dumping, underinvoicing and smuggling of all kind of goods,including heavy duty trucks, buses, light commercial vehicles, tractors, cars, motorcycles and their components and parts, have been taking place. Construction tiles, auto parts, shoes, socks, undergarments, handkerchiefs, stationery items, like pens, pencils, are other examples.
In most cases all such dumping is from China, otherwise a friendly country, which has fixed for some time now a minimum export price. Some established industries also import their products now rather than manufacture locally, leaving them to only stamp their trade mark on the finished goods. As such, the local industry is generally shutting down. Therefore, as long as smuggling, underinvoicing and dumping continues, developing countries like Pakistan will continue to suffer.
Highly influential IFIs —the World Bank, the IMF and the WTO, for example, are no doubt highly prudent organizations. However, those running these organizations are experts in their particular areas of operations and their prudence and expertise, unfortunately, does not cater to individual countries. In fact, they hardly know the local genius or aspirations of countries like Pakistan. Traditionally, therefore, local priorities and aspirations have been the responsibilities of local and not foreign institutions, something which has been absent from the Pakistani psyche since its very inception.
Regionalism: Let us, however, also understand that there is no such thing as a free economy anywhere in the world. At best, there is regionalism if not outright protectionism. How else can we explain the meteoric rise of regional institutions like EU and NAFTA in particular, and MERCOSUR and Saarc to a lesser extent?
According to Deepa Narayan’s study, “Voices of the Poor”, there are 497 people in the world worth $3.1b each or $1,540.7 billion collectively, which is equivalent to the total worth of 1.2 billion people living below the poverty line in developing countries. According to the Economist, the WTO represents 0.01 per cent of the richest corporations and individuals in the world. The thousand largest corporations control 4/5th of the world’s industrial output; while the last decade saw a 70 to 85 per cent increase in wealth for the richest 20 countries as against a 2 per cent decline in the poorest countries of the world. George Shultz for one is an advocate of abolishing the IMF altogether.
The former IMF Managing Director, Mr. Michael Camdessus, meanwhile wants a complete review of IMF’s concepts, systems and overall usefulness. Is it little surprise then that no worthwhile investment is being made in Pakistan? Unemployment has increased from 7 to 9 per cent and inflation has increased from 3.5 to 5 per cent. The demands of the globalization, thus have led Pakistan nowhere! No wonder Pakistan’s GDP growth has fallen to the lowest 2.5-3.6 per cent against an average of 4.90 per cent over the years since 1951 despite several socio-political upheavals, particularly since the IFIs-led growth policies have reigned supreme in Pakistan as per the following table:
Growth economy: However, since the attack on the World Trade Centre, Pakistan’s macro-economic situation has improved. Loans worth over $12billion have been rescheduled - generally payable after 23 to 30 years - a great achievement indeed. Loans of about $2billion have been written off and another couple of billion dollars have been received as grants. Well over $5 billion have been received as remittances, which continue to pour in. A couple of billion dollars have been bought from the open market - all amounting to a foreign exchange reserve of over $10 billion.
The rupee has been up-valued from about Rs67 to Rs58 to the dollar and would strengthen further if it was not defended, to well below Rs50 as it is in India and Bangladesh, our main regional competitors. Interest rates have decreased from double to single digit - lowest in the living memory! Export proceeds are being received in full with no more cushioning. As a result of the macro economic successes, the dollarized economy has reverted to a rupee economy. This is an unusual situation - indeed enviable for any growth economy. This macro economic situation therefore must lead to growth economy now.
In this connection, first and foremost, focus on development expenditure, especially education, health and generally socio-physical infrastructure will set the ball rolling for investments, employment and export, despite what the WTO says about the need for greater fiscal discipline, since the Pakistan economy is not ready for such adventures yet. The government must also clear the stance on the hi-tech value-added ten basic industries, including steel, fertilizer, engineering, etc. which were nationalized during the 70’s and are now being recommended to be phased out. It is the value addition industries, which really add to the GDP. Value addition must include Pakistan’s major industries: textiles, cement and sugar.
Unless hi-tech industries make their headway with value addition, investment will continue to be shy. Most of our industries depend upon imports including capital goods and parts. If, for example, we export textiles, we import all textile machinery and parts. This practice must stop. Pakistan must revive her capital goods industry which was set up with huge capital, not only in textiles, cement and sugar but all the basic capital goods industries, which either lie idle or work at less than full capacity, such as, machine tool factories and heavy complexes in Wah and Taxila, not to mention textile machinery making factories elsewhere.
Large scale, hi-tech industries have necessarily a large gestation period and, as such, among others, need incentives, promotions and protection: Every country does it: the USA, the UK and the EU too: They not only protect their industries, but also agriculture and services. When Pakistan was being advised to phase out its steel mill due to being internationally uncompetitive, the USA chose to impose 30 per cent additional protective duty on its 100 years old steel mills. So why can’t Pakistan do the same?
Above all, the holier than the king attitude in Pakistan needs to stop in the overall national interest. Such statements as, “Pakistan made obsession shall not work..” (Dawn 19.9.02) or “...I want to see Pakistan a nation of traders” (Dawn 4.12.02) particularly dampen investment in the industrial sector. Such negative pronouncements have hurt the cause of investment much more than any other negative signal. It is thus the positive signals which will work in the promotion of investment - local and foreign alike. Further, smuggling, dumping and underinvoicing must stop at all costs if the Pakistan economy has to be viable.
Trade with India: India is Pakistan’s immediate neighbour. The two economies can indeed benefit from mutual cooperation. Trade with India, however, has to be so structured as to be in the interest of both and more so for Pakistan as India has a market of over one billion people as against Pakistan’s 140 million. However, Pakistan will have to harmonize its economy with India’s; otherwise Pakistan will be the loser. Indian rupee to dollar parity, for example, is Rs47.65 against Pakistan’s Rs57.88. In India, sales tax is 5 to 7 per cent and rarely 12 per cent varying from state to state. Sales tax is a provincial subject there. Sales tax in Pakistan is 15 to 18 per cent.
Corporate Tax in India is 30 per cent as against Pakistan’s 35-43 per cent, not to speak of presumptive tax at about 6 per cent, whether there is income liable to tax or not. In India, there is no such tax at all. Socio-physical infrastructure cost in India is 2/3rd of that in Pakistan. India does not borrow from the IMF and therefore the IMF discipline is not applicable in India, whereas Pakistan is heavily reliant on it and subject to all its severe conditionalities.
India is a highly subsidized economy. Talk of the much maligned retail prices in Pakistan being higher than India is misplaced. As an example US dollar net of government levies (NOGL) price comparison of cars in Pakistan and India are most competitive as shown in the following table:
Exchange Rate : 1 US$ = 59.95 Pak Rs., 1 US$ = 48.76 India Rs.
Calculations: NOGL US$ Calculations are based on the formula used in the study by
Engineering Development Board.
Automotive industry has been quite vibrant in the past couple of years resulting in foreign exchange savings of $750 million and contributing Rs43 billion (about 5 per cent) to total revenues. The industry is hi-tech value added and this must be encouraged along with other basic industries. All this would necessitate a review of our policies with an emphasis on large scale industries from the traditional emphasis on sub-contracting or small and medium size enterprises in order to fill in the gaps in investment, production and export, so very vital for any viable economy in every respect.
IFI’s role: Economy is where the means of production are, not trade. In whatsoever case, globalization must not be encouraged at the cost of political, social and economic disharmony. Wolfensohn says, “We need local ownership and local participation. Gone are the days when development could be done behind closed doors in Washington or Western capital or any capital for that matter” Pakistan must learn this fundamental objective of economic development and harmonize global policies with local priorities and aspiration as accepted worldwide.
All this would require revival of the elite service - present in the early days of Pakistan, but now being constantly wiped out knowingly or unknowingly. All viable economies - the USA, the UK, France, Japan and India have elite service to ensure their socio-politico-economic fabric remains intact. Politicians everywhere are generalists. They are not supposed to be experts in economic matters.
The elite service - the elite economic managers - that we inherited will deliver the goods befittingly, and more so, in our present circumstances. According to a recent UN study , updated by Harvard University: Where there is an elite service, the economy is strong and socio-economic order is in place thus ensuring a viable political system. The sooner we accept this reality, the better.
(In self reliance lies the solution)