Case for a home-grown industrial policy in Pakistan
Policy tools and solutions imported from foreign experts are often not in sync with ground realities
Labourers work on the scaffolding of a construction site at an industrial zone in Beijing. PHOTO: REUTERS
LAHORE:
We spoke about the signs of premature de-industrialisation plaguing Pakistan in our last article “Government faces Herculean task to reverse industry phase-out” published September 11, 2017.
It raised the question about options the government has to address the shrinking size of the industrial sector. Does the answer lie in active industrial policy management, or should the government leave market and the private sector to eventually fix itself?
Raison d’être for an industrial policy
It is pertinent to mention that the use of active industrial policy became unfashionable, particularly in the Anglo-Saxon countries in the 1970s. The notion that the government can formulate or even select better choices than markets was anathema to liberal economists.
When East overtakes West
The view was driven by the past expensive experiments of active industrial policy in earlier times. A strong consensus was formed that governments are not good at ‘picking winners’ and are even worse at making the difficult choices of withdrawing support from ‘losers’.
This said, the financial crisis of 2007-08 raised alarming questions about growth and economic stability in the developed economies such as the UK and even the US. The events that preceded the financial crisis proved to be a tough test for the free market liberals. The realisation that solid fundamentals are important for sustained growth became a key theme. Consensus emerged that there was indeed a strong case for governments to develop industrial policy interventions, albeit they should be more sophisticated than their previous versions.
The evidence of the relative success of the Asian Tigers and more recently of China and India in sustaining high growth rates on the back of an activist industrial policy further stimulated discussion on the topic.
The extent of state intervention in these economies ranged from a variety of input subsidies; tax exemptions; tariff protection to direct public sector investments in large scale projects e.g., steel manufacturing plants in Korea and Japan.
However, the two principles that outshone the others include; (i) modern industrial interventions must look to identify the binding market failures, rectifications of which would result in wider economic and may be social benefits and; (ii) it should build stronger implementation tools and institutions that strengthen the governance management such that the industrial policy does not become a gravy train for well-organised vested interests.
Experiments with industrial policy in Pakistan
The shifting away of developed economies from an active industrial policy sort of matched the time when Pakistan was exiting its nationalisation phase in the mid to late seventies. Thus, the country needed a response to this exit.
CPEC investments lift Pakistan's hospitality industry
Jumping on the ‘free market bandwagon’ or as Lant Pritchett would put it, ‘sedated by the isomorphic mimicry’ of the developed West, Pakistan embraced the Chicago school whole heartedly. The next few decades saw the rise of ‘trade polices’ without any reference or awareness about building productive capabilities or competitiveness.
Industrial diversity was compromised at the cost of favouring a few which seemed like earning foreign exchange was the government’s main priority rather than economic development. The result of this has been a declining manufacturing sector, stagnant exports, no innovation and erratic performance resulting in a crowd of ‘opportunity grabbers’ rather than ‘real entrepreneurs’.
Industrial policy for Pakistan: dos and don’ts
More recently, although one must be cautious of the isomorphic mimicry influence; once again the policymakers in the country have started to talk more seriously about industrial policy.
The national and provincial governments are in the process of formulating industrial strategies, mostly on the back of CPEC events and opportunities. However, it is extremely important that these industrial policies or strategies are well-grounded in the local context and are home-grown rather being a compilation of global agendas, solutions, forms and apparatus of policies that are identified by outsiders as ‘best practice’. There exists a wealth of evidence showing that the developing countries such as Pakistan get stuck in ‘capability traps’ because they are often blinded by ‘international operators’ selling fancy-looking tools and solutions. This policy-related gadgetry looks impressive on the outside, but is usually un-implementable due to different domestic dynamics.
More importantly, these global scripts close the space for novelty by local actors who are closer to, and more aware of, the actual issues. Thus, the policy makers should opt for novel solutions developed locally rather than importing best-practice models.
So what should industrial policy focus on?
While an industrial policy should provide a comprehensive framework to operate the key levers such as exchange rates, interest rates and taxation policy on the one hand, it should also take a dynamic approach on the other to allow careful tweaking as initiatives are rolled out.
Besides infrastructure, Pakistan must also seek capital for export industries
The industrial policy, both at federal and provincial level, should set some key targets that are achievable and will result in ‘good industrialisation’. Areas such as long-term investments in hard infrastructure to improve logistics, transport, internet bandwidth, energy production and distribution should lie at the core of the policy.
The banking sector currently suffers due to excessive public-sector borrowing and lack of competition in small and medium enterprises (SME) development financing preventing credit flows to productive SME firms. The industrial policy should therefore focus on capacity-building of banks to allow better understanding of SME development.
It should be very clear in identifying if the economy’s best bet is to make keyboard of processing units – it should articulate the space for innovation and evolution of the industrial landscape going forward. The policy should support the ‘early stage’ of innovation and technology development that will not be adequately picked by the private markets.
Incubators such as those at NUST are producing excellent talent developing cutting edge commercial technology, but there is no public support available to put them on market canvas to attract investments. Environmental compliance and having industry with a low carbon foot print is a key competitiveness indicator.
The way most of the industrial sector is organised in the country, soon it will be extremely difficult for them to sell their products in value-added markets which have extremely strict compliance standards. Business facilitation and investment climate reforms are also important; however, the policy makers should not be deadened by measuring performance through indicators such as the World Bank’s Ease of Doing Business and instead should go for more on-the-ground issues faced by different sectors. The importance of technical skills, although not a binding constraint, must be addressed in the policy. This, of course, is not an exhaustive list.
In short, Pakistan or any of its provinces should favour a home-grown industrial policy that on one hand is addressing key issues of the existing industrial base and on the other provides a dynamic tool to the policy makers which allows continuous management via effectively governed institutions.
Muhammad Usman Khan is an Adviser and Dr M Aman Ullah is Chief Economist at the Planning and Development Department, Government of the Punjab
Published in The Express Tribune, September 25th, 2017.
We spoke about the signs of premature de-industrialisation plaguing Pakistan in our last article “Government faces Herculean task to reverse industry phase-out” published September 11, 2017.
It raised the question about options the government has to address the shrinking size of the industrial sector. Does the answer lie in active industrial policy management, or should the government leave market and the private sector to eventually fix itself?
Raison d’être for an industrial policy
It is pertinent to mention that the use of active industrial policy became unfashionable, particularly in the Anglo-Saxon countries in the 1970s. The notion that the government can formulate or even select better choices than markets was anathema to liberal economists.
When East overtakes West
The view was driven by the past expensive experiments of active industrial policy in earlier times. A strong consensus was formed that governments are not good at ‘picking winners’ and are even worse at making the difficult choices of withdrawing support from ‘losers’.
This said, the financial crisis of 2007-08 raised alarming questions about growth and economic stability in the developed economies such as the UK and even the US. The events that preceded the financial crisis proved to be a tough test for the free market liberals. The realisation that solid fundamentals are important for sustained growth became a key theme. Consensus emerged that there was indeed a strong case for governments to develop industrial policy interventions, albeit they should be more sophisticated than their previous versions.
The evidence of the relative success of the Asian Tigers and more recently of China and India in sustaining high growth rates on the back of an activist industrial policy further stimulated discussion on the topic.
The extent of state intervention in these economies ranged from a variety of input subsidies; tax exemptions; tariff protection to direct public sector investments in large scale projects e.g., steel manufacturing plants in Korea and Japan.
However, the two principles that outshone the others include; (i) modern industrial interventions must look to identify the binding market failures, rectifications of which would result in wider economic and may be social benefits and; (ii) it should build stronger implementation tools and institutions that strengthen the governance management such that the industrial policy does not become a gravy train for well-organised vested interests.
Experiments with industrial policy in Pakistan
The shifting away of developed economies from an active industrial policy sort of matched the time when Pakistan was exiting its nationalisation phase in the mid to late seventies. Thus, the country needed a response to this exit.
CPEC investments lift Pakistan's hospitality industry
Jumping on the ‘free market bandwagon’ or as Lant Pritchett would put it, ‘sedated by the isomorphic mimicry’ of the developed West, Pakistan embraced the Chicago school whole heartedly. The next few decades saw the rise of ‘trade polices’ without any reference or awareness about building productive capabilities or competitiveness.
Industrial diversity was compromised at the cost of favouring a few which seemed like earning foreign exchange was the government’s main priority rather than economic development. The result of this has been a declining manufacturing sector, stagnant exports, no innovation and erratic performance resulting in a crowd of ‘opportunity grabbers’ rather than ‘real entrepreneurs’.
Industrial policy for Pakistan: dos and don’ts
More recently, although one must be cautious of the isomorphic mimicry influence; once again the policymakers in the country have started to talk more seriously about industrial policy.
The national and provincial governments are in the process of formulating industrial strategies, mostly on the back of CPEC events and opportunities. However, it is extremely important that these industrial policies or strategies are well-grounded in the local context and are home-grown rather being a compilation of global agendas, solutions, forms and apparatus of policies that are identified by outsiders as ‘best practice’. There exists a wealth of evidence showing that the developing countries such as Pakistan get stuck in ‘capability traps’ because they are often blinded by ‘international operators’ selling fancy-looking tools and solutions. This policy-related gadgetry looks impressive on the outside, but is usually un-implementable due to different domestic dynamics.
More importantly, these global scripts close the space for novelty by local actors who are closer to, and more aware of, the actual issues. Thus, the policy makers should opt for novel solutions developed locally rather than importing best-practice models.
So what should industrial policy focus on?
While an industrial policy should provide a comprehensive framework to operate the key levers such as exchange rates, interest rates and taxation policy on the one hand, it should also take a dynamic approach on the other to allow careful tweaking as initiatives are rolled out.
Besides infrastructure, Pakistan must also seek capital for export industries
The industrial policy, both at federal and provincial level, should set some key targets that are achievable and will result in ‘good industrialisation’. Areas such as long-term investments in hard infrastructure to improve logistics, transport, internet bandwidth, energy production and distribution should lie at the core of the policy.
The banking sector currently suffers due to excessive public-sector borrowing and lack of competition in small and medium enterprises (SME) development financing preventing credit flows to productive SME firms. The industrial policy should therefore focus on capacity-building of banks to allow better understanding of SME development.
It should be very clear in identifying if the economy’s best bet is to make keyboard of processing units – it should articulate the space for innovation and evolution of the industrial landscape going forward. The policy should support the ‘early stage’ of innovation and technology development that will not be adequately picked by the private markets.
Incubators such as those at NUST are producing excellent talent developing cutting edge commercial technology, but there is no public support available to put them on market canvas to attract investments. Environmental compliance and having industry with a low carbon foot print is a key competitiveness indicator.
The way most of the industrial sector is organised in the country, soon it will be extremely difficult for them to sell their products in value-added markets which have extremely strict compliance standards. Business facilitation and investment climate reforms are also important; however, the policy makers should not be deadened by measuring performance through indicators such as the World Bank’s Ease of Doing Business and instead should go for more on-the-ground issues faced by different sectors. The importance of technical skills, although not a binding constraint, must be addressed in the policy. This, of course, is not an exhaustive list.
In short, Pakistan or any of its provinces should favour a home-grown industrial policy that on one hand is addressing key issues of the existing industrial base and on the other provides a dynamic tool to the policy makers which allows continuous management via effectively governed institutions.
Muhammad Usman Khan is an Adviser and Dr M Aman Ullah is Chief Economist at the Planning and Development Department, Government of the Punjab
Published in The Express Tribune, September 25th, 2017.