Pakistan's deteriorating industrial sector

Country’s low GDP growth a result of this decline

LAHORE: A country’s industrial sector is crucial for its enhanced economic performance as it increases the per capita income and is pivotal for the economic development of a country.

Unfortunately, the industrial sector has been either stagnating or declining in Pakistan, therefore per capita income is not growing at the desired rate. The share of industrial sector was around 25% in the GDP in early 2000 and has declined to around 20.50% which has become too low considering the level of economic development of Pakistan. There are certain factors associated with this decline.



Reasons for decline

First, the level of trust plays a significant role among industrial capitalists and government to run the wheel of industry. Both sides have to take steps to nurture, promote and flourish this relationship. The government normally expects that industrialists should report, document and discharge their tax liabilities in a judicious manner and formalise the industry.

Similarly, industrialists anticipate that government officials would not intimidate and encroach upon their rights. They also expect that pending commitments and refunds would be dealt with in a timely manner.   Owing to a lack of trust, industrialists became fearful and adopted an informal path and started to appease the government officials.

On the other hand, the government has adopted delaying tactics to meet the pending commitments in order to meet the fiscal deficit. Hence, the level of trust among industrial capitalists and government has declined over the years.

Second, the availability of cheap land is an important factor of production for industrial growth and development. The industrialists prefer to set up factories in the suburban areas of a city and they normally expect cheap land prices since they intend to do long term investment.



Speculation and remittances have played a significant role in jacking up land prices. The unplanned expansion of cities without taking into account proper zoning regulation added salt to injury. The land booms of 2002-2006 and 2011-2016 have increased their prices manifold in metropolitan cities of Pakistan.

These skyrocketed land prices have increased the opportunity cost for setting up a factory. As a consequence, the industrialists started to seek ‘land rents’ and diverted their attention from their core business of establishing and expanding the industry.

Third, the banking sector acts as a spine in the growth of industrial sector since it provides fixed capital, desired working capital and bridge and export financing as per the requirements of industrial capitalists.

However, the focus has been mainly on short term financing such as credit cards, personal loans and auto loans. Since the advent of global financial crises, banks have become more risk averse and started to invest in government securities. The governments stopped borrowing from the State Bank of Pakistan and aided the banking sector by borrowing from them.

Finally, the industrial growth also depends on higher agriculture productivity since higher agriculture productivity increases the real wage of workers. The agricultural productivity is low in Pakistan due to various factors which are also stunting the growth of industry.

All these factors have contributed to a decline in industrial sector in our country.

The writer is an Assistant Professor of Economics at LUMS

Published in The Express Tribune, August 22^nd,  2016.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.