China’s emergence as a world factory has induced developed states to seek protectionism to spur industrialisation, arguing that the country’s overcapacity’ is a strategic risk to their market economies. Instead of pursuing financial globalisation like many nations, Beijing had earlier mainly focused on industrialisation, which led to growth in all other sectors of the economy.

Now, many policymakers and economists are concerned that the rising protectionism and thousands of new industrial policy measures around the world over the last year are threatening free trade.

“Trade, for the first time, is not the engine of growth,” concedes International Monetary Fund (IMF) managing director Kristalina Georgieva.

However, we forget that the modernisation of China’s industrial capacity has provided a huge opportunity for it to pursue a selected mode of globalisation. Beijing’s investment and financing to developing countries is focused on improving infrastructure and enhancing productivity; the country does not interfere in the internal affairs of a country while advocating free trade.

Industrial strategies to improve domestic economies are likely to replace international trade as a defining engine of growth

International trade is likely to enter a new phase in which nations prioritise domestic needs and exchange goods and services only when surpluses are created. Over time, according to social scientists, the international order would give way to the creation of a world economy.

To widen prosperity, China empowered local governments with a bottom-up approach to gainfully employ its huge population in socioeconomic activities at the grassroots level and create a prosperous domestic consumer market for its growing and job-creating industries.

The IMF, which has long railed against emerging industrial strategies as being inefficient and costly, now “appears to be expressing a more open mind”, to quote The New York Times analyst Alan Rappeport.

A research paper by Fund officials in October showed that industrial policy “in principle can help address market failures if properly designed”. Furthermore, Thomas L. Friedman says, “We must make sure that super-intelligent machines remain aligned with human values and interests.”

‘It has become clear that globalisation without guardrails was not benefitting most people equally’

Ms Georgieva acknowledged that “Clinging to policies of the past carries its own risks. We cannot stay still while the world is changing.” It may be noted that distrust over multilateral institutions’ policies, micromanaging borrowers’ economies, and getting trapped in unsustainable foreign debts with uncertain long-term futures is growing.

Pakistan’s Deputy Prime Minister Ishaq Dar, a critic of IMF, recently said the notion that exchange rate depreciation boosts exports is a theoretical myth, as it disproportionately harms 92 per cent of the economy not engaged in export activities, while only benefiting the remaining 8pc. It further perpetuates a vicious cycle that increases costs and undermines economic stability.

“Pakistan’s exports never benefitted from [exchange rate] depreciation because it did not have an exportable surplus,” Mr Dar said while addressing a recent seminar.

According to the Pakistan Business Council (PBC), the country needs a new industrial policy that revolves around a “Make-in-Pakistan” theme to be driven by three key success metrics: the creation of incremental jobs, an increase in value-added exports, and import substitution.

In the absence of an industrial policy, investment priorities are unclear, investment is low, and fiscal, trade, and energy policies are neither well-aligned nor predictable, says Pakistan Business Council’s Chief Executive Officer Ehsan Malik. Therefore, even with better trade agreements, he argues, it is unlikely that market access alone will boost exports of value-added goods.

Though Pakistan is still not out of the woods, it has succeeded in containing external sector vulnerabilities by building up substantial foreign exchange reserves, significantly improving its current account position, stabilising the exchange rate and reducing interest rates as the inflation rate falls.

According to State Bank of Pakistan (SBP) Governor Jamel Ahmed, the country’s total interest expenses are projected to decrease by Rs1.3 trillion to Rs8.5tr in FY25 from the budgeted Rs9.8tr following a reduction in SBP policy rate by 7pc since June 24. Similarly, a stable exchange rate reduces the rupee cost of foreign debt servicing; remittances in October finally crossed the $3 billion mark.

Official data shows that the entrenched budget deficit turned into a one-off fiscal surplus during Q1FY25. At the same time, the federal Public Sector Development Programme (PSDP) has dropped by almost 45pc to just Rs22.7bn as compared to about Rs41bn during the same period last year. The government had budgeted development spending at Rs1.4tr for this fiscal year, up from Rs950bn PSDP for FY24.

In the United States, US Treasury Secretary Janet L. Yellen made a case for industrial policy in an interview with The New York Times last month. She explained, “Over time, it has become clear that globalisation without guardrails was not benefitting most people equally and that the idea that free-trade is always good is not a universal principle.”

To quote a US analyst, most central to the vision of President Donald J. Trump, who calls himself a ‘Tariff Man’, is the ability to reverse globalisation and induce factories to move back to the United States.

Canadian Deputy Prime Minister and Finance Minister Chrystia Freeland says, “We need industrial strategies right now — we need government investment to sort of facilitate that transition.”

Published in Dawn, The Business and Finance Weekly, November 11th, 2024