Protectionism: an advantage or a weakness?
For perspective, Fortune 500 includes companies from 36 countries including eight from India, seven from Brazil and one each from 13 different countries; Pakistan has none. In fact the 500th company on the list is a private information technology firm from Taiwan which is twice the size of PSO, our largest listed company.
There are many reasons such as government policies, ability to trade across borders as well as access to global markets. Nationalisation as a policy has not paid dividends as our public sector lacked governance and was unable to efficiently manage these entities, thus stunting their growth. Today public sector is bleeding to the tune of $5 Billion; a huge drain on Pakistan’s GDP.
The one policy which has been debated to no ends and which has the most impact on our industrial global competitiveness is the policy of propagating and supporting ‘Protectionism’ as an economic policy. Protectionism is an instrument to protect domestic industries against foreign competition by means of tariffs, subsidies, import quotas and other restrictions. Over the years we have moved in the right direction, from a high of 65% duties in the mid-90’s down to 25% today, on finished products.
While protectionism can be used to safeguard sustainability of local industry but it is a two-edge sword. On one end it protects local industry from foreign competition, but on the other end it makes the local industry complacent and inefficient. Generally any local industry that prospers under protectionist policies is unable to compete in the larger international market as it has no compelling need to reduce cost, enhance efficiency or drive automation/simplification projects; company is protected by the government against foreign competition.
This policy is in contrast to free trade, where government barriers to trade are kept at a minimum and only those industries prosper which are efficient and innovative. Protective barriers should ideally be employed to shelter an industry during its earlier days; they must not to be used as long term sustainable policy for an industry. Otherwise that industry will never be competitive on a global level, and without global penetration a company’s growth potential is significantly compromised.
Why don’t we have the likes of India’s Birla, Tata and Reliance Group? Two key reasons, nationalisation which cut short lives of some major business houses coupled with historically providing protection to local industries which discouraged a cost cutting culture thus making them uncompetitive globally. If we as a nation are to grow with high standard of livings, we must make our private sector more vibrant and not give heed to decades old industries crying for protection.
It is about time that these mature industries learn to stand on their own two feet and take the world head-on. There is no shortage of innovative ideas, entrepreneurs and business leaders in our country. Government must challenge such industries and provide improved infrastructural resources, protect their intellectual property and enact rules and regulation that don’t hinder but support their growth beyond the borders of Pakistan.
The writer works in the corporate sector and is active on various business forums and trade bodies.
Published in The Express Tribune, April 16th, 2012.
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Frankly we do not need foreign investment or FDI. We have enough funds held by Pakistani's in the country which are parked in foreign banks and investment companies. They just are afraid of the local envirnoment, deteriorating infrastrcutrue (energy mainly), secuirty and lack of governance -- if these improve this will flow into Pakistan and we can florish as a nation. The privatization in early 70's saw billions move out of the country and which is still laying around, some invested into productive industries and sectors but I am sure all Pakistani's are passionate about their country and will jump at any opportunity to come back if things improve. With the new world order after 9/11 there is nothing better than one's own country. Lets hope we can bring some sanity to our country's economic status soon.
Pakistan should give up old fashioned approach to foreign investment.It should maintain a more liberal environment than India, and even Thailand.
An eye opener. But when business is resisting the change in policies and public sector enterprises are over protected under statutes, when government is only interested in using public companies for welfare and not for making profits – The situation will remain. Corporates will never be able to grow and compete globally!