When will industrial revolution come?

Manufacturing contributes just 12% to GDP, underscoring urgent need for change

KARACHI:

Picture yourself in a small garden with limited space; you have planted some fruits and vegetable, but you also have the desire to cultivate rare and exotic flowers. Due to unfavourable conditions and limited resources, however, you must make a practical decision to focus on fruits and vegetables – a step that can also save you money on grocery store trips.

Similarly, Pakistan’s policymakers need to take a strategic approach to the economic crisis by focusing on industries that are already well-established and capitalising on its strengths to achieve sustainable growth.

The current economic crisis facing Pakistan is arguably unparalleled in its magnitude. While the country has weathered previous storms, such as the aftermath of the nuclear explosion in 1998 or the global financial crisis in 2008, the ongoing downturn is being felt much more acutely by ordinary citizens.

With headline inflation surging by 31.5% in February on a year-on-year basis, the highest level in nearly 50 years, many are struggling to make ends meet. Recently, the Pakistani rupee closed at a historic low of around Rs285 against the US dollar. If food prices, which traditionally rise during the holy month of Ramzan, continue to climb alongside the rapid depreciation of the rupee, inflation could spiral even higher in the coming months.

Moreover, with almost all businesses facing immense difficulties to stay afloat, and many being forced to shut down factories, job losses are mounting, making the already dire situation even worse. Even if the government secures a loan from the IMF, the people’s plight is unlikely to improve anytime soon.

In the face of this crisis, it is imperative for the authorities to adopt a strategic policy that draws inspiration from developed and rapidly developing nations.

The developed world, particularly Europe and the United States, achieved their current standing through an extended period of sustainable economic growth, primarily driven by the industrial revolution. These nations underwent a complete transformation from agrarian to industrialised societies, with the manufacturing sector dominating their economies.

This was followed by the “East Asian Miracle” that saw the remarkable economic growth of Hong Kong, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, and Thailand between 1965 and 1990, with their per capita GDP growth outpacing that of all other regions by a wide margin.

China’s meteoric rise in the last few decades as the world’s second-largest economy came following investments in infrastructure, the rise of the low-cost manufacturing sector, and the efficient deployment of a skilled workforce. More recently, Vietnam has emerged as a potent economic force and export powerhouse, recording a massive 39-fold increase in per capita GDP between 1990 and 2021, as per data from the World Bank.

These transformations feature a significant decline in poverty and income inequality in each country, enabling many of them to catch up rapidly with the West in terms of income levels and living standards. Industrialisation was a key component of their success, which is precisely what Pakistan needs at the moment.

The manufacturing sector is widely regarded as the backbone of any successful industrialisation process, earning the moniker of the “engine of growth” due to its profound impact on economic development.

Vietnam’s growth story is a testament to the power of pro-manufacturing policies, with the sector now accounting for well over 20% of its GDP, according to data from the World Bank. In contrast, Pakistan’s manufacturing sector contributes just 12% to its GDP, underscoring the urgent need for change.

To improve Pakistan’s economic situation, the government must prioritise policies that strengthen the existing manufacturing base rather than introducing amnesty schemes that divert capital towards real-estate plots.

Moreover, for cash-strapped countries like Pakistan, developing existing industries is more sensible than creating new ones, as they require fewer investments and subsidies. With support from favourable policies, existing industries can quickly start contributing positively to the economy.

For instance, Pakistan’s oil refining industry produces critical fuels like petrol and diesel that are essential to the economy. With favourable policies that enable its expansion, the industry could significantly impact the economy through import substitution.

It is worth noting that Pakistan spent a staggering $4.9 billion on importing 6.8 million metric tonnes of petroleum products like petrol and diesel in the first six months of the current fiscal year. Only domestic production can reduce this import bill.

Pakistan’s oil refineries have the capacity to satisfy all of the country’s fuel needs if the government enables them to operate at maximum capacity and expand their operations. The refineries can efficiently utilise existing capacities to meet the vast majority of Pakistan’s fuel demand, including 100% of the diesel demand.

This transformation can occur quickly, considering the capacity that is already in place but underutilised. It could eliminate the need for expensive refined product imports, and instead, Pakistan can purchase cheaper crude oil and refine it domestically, leading to substantial forex savings. As per one estimate, these savings could exceed $1 billion annually, considering the high diesel prices in the international markets.

Pakistan’s economy can benefit significantly from the growth of other manufacturing industries as well, like textiles and pharmaceuticals. Textiles, Pakistan’s primary export industry, accounts for 60% of the country’s exports and is highly labour-intensive. Therefore, favourable policies that spur the growth of the textile industry will not only increase exports but also create job opportunities.

It is crucial to adopt policies that lead to growth and productivity gains, rather than doling out blank cheques in the name of untargeted export subsidies, which would be unhelpful, as discussed in previous columns.

Just as a smart gardener focuses on cultivating fruits and vegetables that are best suited for their limited space and resources, Pakistan’s policymakers must focus on the industries that are already well-established in the country to achieve sustainable economic growth. By plucking the low-hanging fruit and capitalising on its strengths, Pakistan can stop relying on one IMF bailout after another and provide long-term solutions to its economic struggles.

The writer is a corporate consultant who writes on subjects of business and economy

 

Published in The Express Tribune, March 6^th, 2023.

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