At no point in recent history have calls for Pakistan to industrialize been stronger than they have been now. Industrialization is arguably the most talked about subject among policymakers since years in Pakistan. Yet, action on the ground has so far failed. Better quality of life for people of Pakistan is an election campaign for every political party, this can only possible with the ability to bring prosperity, job creating and better incomes for all. Yet Pakistan is less industrialized today than it was few years ago. In fact, the contribution of Pakistan’s manufacturing sector to the gross domestic product actually declined year after year, where it has remained stagnant over the past few years. It is believed that one of the main reasons for Pakistan’s slow industrialization is that its leaders have failed to pursue bold economic policies.
It is said that Pakistan has lost the opportunity because of its political elite and decision makers. Pakistan needs to have self-confidence to develop alternative policies and must stick to them. Pakistan has so far failed to industrialize because technology is reducing the demand for low-skilled workers whereas decision makers in Pakistan have found a short term solution by importing goods rather than pursuing companies to manufacture their goods in Pakistan. Another reason is weak infrastructure, lack of electricity, poor roads and ports, and cost of moving raw materials. Pakistan’s favorable demography, rising urbanization and extensive agricultural resource base has underscored the potential of country’s manufacturing industry.
The failure to industrialize Pakistan is also due to bad policies of various governments. It is fair to conclude that none of these policy regimes succeeded in bringing industrial growth. Pakistan started very well in late fifties and early sixties then comes the period of nationalization, which literally destroyed everything. It took almost 20 years for Pakistan to come out of side effects of nationalization. Pakistan was opened for private sector in 90s, but that also brought extreme political unrest. Pakistan couldn’t attract investment in manufacturing sector so far. In fact there are several reasons why Pakistan can reasonably aspire global market players for industrial goods. First, economic changes are taking place in a number of countries that can create a window of opportunity for industrializers to gain access in the global markets. Second, the nature of manufactured exports themselves is changing. As a matter of fact, trade in industry is made up of various stages of vertical value chains rather than finished products. Trade offers an opportunity to enter markets in areas suited to a segment and endowments of skills and capabilities. Third, trade in services and agro-industry is also growing faster than trade in manufactures, where a lot can be done.
Pakistan has one of the lowest per capita income but also a very low level of wages. Rising real wages in other countries may offer Pakistan a second chance to industrialize. There are several reasons to think that the difference in wages may become sufficiently large to support some of Pakistan’s productivity advantages.Whether Pakistan can realize its low-wage advantage is highly dependent on various factors including policy related matters. Low wages are important but not sufficient to attract end-stage assembly operations. Because end-stage tasks depend heavily on imported intermediate inputs whereas infrastructure for international trade (customs and ports) must be of a high standard.
Whether Pakistan is able to take advantage of the opportunities offered to it due to CPEC will ultimately be depended on the policies and actions undertaken by the federal government. Since late, policy attention to industrialization by both the donor agencies and governments has focused on reform of the investment climate, the physical, institutional, and policy environment within which firms operate. Pakistan lacks the infrastructure, skills, and institutions needed to support industrial productivity growth.
In last couple of decades, efforts to improve the investment climate have had little impact on growth of the industrial sector. This is because investment climate reform programs have been poorly designed and implemented. The investment climate reform agenda should be intended to balance reducing the physical constraints to industrialization, mainly infrastructure and skills, with reforms to the regulatory and institutional environment. Most of the production-related skills are derived from post-primary education, including vocational and technical training.
Policies and institutions for attracting FDI are a key tool in the industrialization strategies for Pakistan. Transmission of knowledge from foreign firms to local firms most often takes place through supply chain relationships. One area where a lot of work is required is to remove the obstacles that current policies place in the way of linkages between foreign and local firms, which means improving cost of doing business and improving laws and simplify legal process. Once a foreign company establishes a track record with locals then it is important to maintain that relations rather than considering it’s a onetime offer and offering sub-standard services by the locals to foreign companies, which is a very common element in Pakistan.
When natural resources are present, the foreign investors are often competing to gain access to the resource. This provides an opening for governments to encourage the formation of value chain linkages between foreign natural resource investors and domestic firms. It is also an area where federal government will need to exercise great care. A perfect example is CPEC and Reko Diq. We have seen carless attitude of policy makers in case of Reko Diq and the complications Pakistan faced when government tried to rectify those mistakes. A more fruitful approach would be for the public sector to develop programs in partnership with the foreign investor to improve the technology and skills of potential supplying firms and quality certification processes for their outputs.
Meeting the challenge of industrialization will require new thinking and investment climate reforms in Pakistan. While investment climate reforms are needed, they must be re-prioritized and refocused. Urgent action is required to address Pakistan’s growing infrastructure and skills gap with the rest of the world. So far, Pakistan has failed to adopt an effective export-oriented industrialization strategy, it needs to be rectified at the earliest. In addition to implementing a changed investment climate reform agenda, Pakistan’s federal government needs to mount an export push. This will require creating an effective free trade environment for exporters, reforming the regulations and institutions directly affecting foreign trade, and investing in better trade logistics. More serious efforts are required whereas infrastructure and institutions are also needed in the country. Upgrading the performance of special export processing zones (whether under CPEC or otherwise) are required as per the world-class standards so as to push exports. Pakistan is offering a window of opportunity for global investors. Whether Pakistan can seize the moment depends in large measure on public policy. If federal government continue with business as usual, success is unlikely.