Success of industrial policy relies on supportive environment

Govt should develop a comprehensive growth policy that covers all areas of socio-economic development

ISLAMABAD: The government has announced that it will soon launch a new industrial policy. Conventionally speaking, the industrial policy is an explicit policy document, which outlines preferred sectors, products or companies, and instruments to develop them.

In other words, the industrial policy is a belief that governments can create comparative advantage by diverting resources to preferred sectors. Historically, Malaysia is considered a successful example of an active industrial policy, which has helped in making this country one of the top manufacturing hubs for electrical and electronic goods.

Staring with one multinational, which set up its assembly plant in 1972, Malaysia achieved the status of world’s largest producer of semi-conductors in 10 years. It was not just about an industrial zone as Malaysia also exhibited good quality of basic education, stable energy pricing, a strong commodity sector, stable political environment and good quality of civil administration.

The government also offered special incentives for “pioneer status” companies, tax credits and other fiscal measures.

Pakistan started with an ambitious industrialisation programme in the 1960s on similar lines. The government focused on import substitution as the cornerstone of its industrial policy and went on to establish large-scale industrial units. One prominent example was Pakistan Steel Mills, which was set up to achieve self-sufficiency.

Another preference was the automotive assembly plants, which were protected by heavy tariffs and other measures for decades. Pakistan largely failed to create competitive domestic substitutes in both sectors.

Pakistan also embarked on a drive to set up several industrial zones and offered special incentives for the relocation of firms to encourage them to make exports, though their exports to date have remained abysmally low.



If we do a simplistic reading of the industrial policies of both countries, we will find similarities, though outcomes have been significantly divergent. It shows that no industrial policy, even if implemented properly, can achieve results if the overall business environment is not supportive.

Another important consideration is that while we can frame a good industrial policy in a couple of weeks, this document often remains a non-starter if extensive and meaningful consultation does not take place to bring all players on board.

In the past few years, discussion about the new industrial policy is back on the world stage, while replacing the old.



The old industrial policy focused on selection of favourite sectors, products or firms and then supporting them through business facilitation, provision of credit and subsidies, and tariff protection.

According to the OECD’s definition, a new industrial policy puts less emphasis on product market support measures and more emphasis on support for technology and skills, public-private partnerships and government role in facilitation and coordination.

Pakistan currently has two types of industrial policies - one is de jure, which is usually parked under the Ministry of Industries and the other is de facto, which is driven by the prime minister and Ministry of Finance.

CPEC is an example of de facto industrial policy. Let’s theorise it: invest heavily in physical infrastructure including roads, railroads, shipping and energy; build specialised industrial zones along new corridors and encourage companies to set up production centres.

This emanates from the classical demand-side economics, where governments expect private sector demand to follow public sector investment - the so-called “crowd in” effect.

While Pakistan is significantly invested into this de facto industrial policy, it is too early to offer any assessment. It is obvious that this policy certainly overshadows any de jure industrial policy. The resources which the government allocates for implementation of a formal industrial policy usually pale in comparison with the de facto industrial policy.

Thus, it is correct, yet simplistic, to say that all that matters in Pakistan is the implementation of a policy. What we should understand is that policy itself is a process of iteration and we cannot isolate implementation from crafting of a policy neatly.

As the above analysis hopefully shows, Pakistan actually successfully implements disparate industrial policies - at the same time, leading to the classical coordination failure. While we spend almost the entire political capital on the de facto type of industrial policies, the de jure industrial policies may be in opposite direction. Finally, it is not just a matter of industrial policy - a country’s tax policy, monetary policy, exchange rate, trade policy and innovation policy have to be aligned and amalgamated together into a single policy document.

In other words, while the government is deliberating on a new industrial policy, it should take a step back and aim to develop a comprehensive growth policy, which encapsulates all areas of socio-economic development. A good growth policy is like an orchestra - scores of tunes have to be synchronised to create a great symphony.

The writer is the founder of PRIME Institute, an independent think tank based in Islamabad

 

 

Published in The Express Tribune, February 25^th, 2019.

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