Towards an industrial policy

Protectionism and anti-globalisation sentiments have gained momentum in the world ever since the global financial crisis, the rise of the US-China trade war, Brexit and the recent US-Mexico-Canada (USMCA) agreement. The disruption in the global supply chain during the recent pandemic has led countries to rethink more on regionalism and inward-looking trade policies. Thus, developing countries followed the dual policy objective of building their national industries and protecting national sovereignty. Economies in developing countries such as in East Asia, South East Asia and Latin America adopted import substitution policies in the 1950s and 1960s with varying experiences. However, import substitution policy was soon lifted from the world with the emergence of the Washington consensus that favoured trade and financial liberalisation and a free-market economy. India pursued an import substitution policy soon after independence. Due to its strong focus on industrial growth, its manufacturing value addition as percentage of GDP reached 16.6 per cent and its industrial share as percentage of GDP reached 27.4 per cent by 1990. India has given more emphasis on manufacturing consumer goods as its import share of consumer goods has only remained at 10 per cent within the last 20 years. India’s strong industrial base has given impetus to compete in international markets.

Pakistan pursued an import substitution policy in the 1950s and 1960s as the country started with a weak industrial base. The government intervened via tariff controls, quotas, depreciation and interest rates to increase exports and encourage local firms. Through such measures, imports were strictly controlled. Later, in the 1970s, Pakistan pursued export promotion schemes. During the 1960s, average growth of manufacturing value addition remained at 9.9 per cent, and average manufacturing value addition as per GDP remained at 13.3 per cent. Pakistan has faced substantial de-industrialisation over several years. As per the World Bank, during the last four decades, on average every year the industry’s share in the GDP continued to decline by 0.6 per cent. Industry value addition was 22.3 per cent of the GDP in 1980, which declined to 17.7 per cent in 2020. On the other hand, manufacturing value addition to GDP was 14 per cent in 1980 which declined to 11 per cent in 2020. Pakistan’s import dependency has led to an increased trade deficit resulting in a balance of payments crisis, currency devaluation, depletion of reserves and inflation. The trade deficit has increased with an annual growth of 21 per cent i.e. from $1 billion in 2002-03 to $31 billion in 2020-21, according to World Bank.

Category-wise analysis revealed that in the last five years, Pakistan’s imports have been mainly driven by consumer goods (30 per cent) followed by intermediate (29 per cent), capital (21 per cent) and raw materials (19 per cent). The regional comparison shows that in India consumer goods contribute 10 per cent to imports whereas in Bangladesh consumer goods contribute 20 per cent to imports. This implies that consumer goods contribution to imports is highest in Pakistan as compared to regional countries. Pakistan’s exports-to-GDP ratio has been declining since the 1980s. Comparison with regional countries provides a strong indication of de-industrialisation as the export-to-GDP ratio of Pakistan was 12.3 per cent in 1986 — higher than in India, Bangladesh and Vietnam — which has declined to 9.1 per cent in 2021. On the other hand, the ratios for Bangladesh, India and Vietnam have now reached 10.7 per cent, 21.4 per cent and 93.3 per cent respectively.

The lack of comprehensive industrial policy and ad hoc economic decisions has eroded industrial competitiveness significantly. It is recommended that sectors including petrochemicals, light and heavy engineering, minerals and mining, chemicals, food processing and IT services should be prioritised in industrial policy. National and provincial industrial policies should be formulated and monitored. National Tariff Policy 2019-24 should be used as a guideline to develop a competitive industrial base. Industries including rubber and plastic, chemicals, basic metals, machinery, electrical and electronics, construction, textiles and leather manufacturing and food and beverages have strong backward linkages. The policymakers should initiate a “resilient value chain drive for Make-in-Pakistan” to support sectors with extensive backward linkages. To increase market competitiveness, efficiency-based and time-bound incentives should be given top priority. No ad hoc extension should be granted to any sector. The industrial incentive structure should be tied with sectoral production efficiency, upgradation of technology and sector export performance. Cascading tariffs should be implemented in letter and spirit. The real estate sector should be taxed and regulated to channel resources toward manufacturing and productive areas.

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

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