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The Competitiveness of Pakistan

By Dr. Mohammad Hanif Akhtar
Department of Economics, B. Z. University,
Multan, Pakistan.
Jun 12 - 18, 2000

Foreign direct investment (FDI) has increased significantly over the last few decades. Major factors behind these trends are increasing numbers of cross-border mergers and acquisitions (M&As), move towards privatization and growing competition among the countries to attract FDI in the recent years.

According to the data provided in the World Investment Report 1998 (WIR98), Asia, among developing countries of the world, has emerged as the largest recipient of FDI followed by Latin America and the Caribbean. The intensity of such inflows is largely concentrated in the countries of South, East and Southeast Asia excluding Pakistan. This includes countries like China, Singapore, Indonesia, Malaysia, Thailand, India, Korea and Philippines being the top ten recipients of these flows during the year 1997. Given the fact that Pakistan possesses several clear locational advantages, it has never emerged as a major recipient of FDI in the Asian periphery. The important locational advantages include; a large domestic market, with potential for servicing dynamic adjacent regions such as the Gulf States and the transitional economies of Central Asia; and a substantial surplus labour force with relatively low wages. But the phenomenon of low FDI inflows in Pakistan alludes to the fact that there is a lack of some strategic factors complementing these locational advantages. An explanation of such factors definitely needs to be sought. As the competition for inward FDI intensifies across the globe in general and Asia in particular, the issue of competitiveness of Pakistan economy becomes vital. Such an issue needs to be evaluated in context of economic, socio-political and physical factors prevailing in Pakistan.

Macroeconomic stability seems to be critically important to determine the country's attractiveness not only for greenfield but also for the expansionary FDI. A more stable macroeconomic environment is also expected to pay off the MNEs in the economy. Increase in FDI flows is very much dependent on the stabilization of public policies and consistency in monetary, fiscal and financial matters. Inadequacy of fiscal and monetary policies, weaknesses in the financial system and inappropriate exchange rate policies have contributed a lot towards high and variable rates of inflation and a high degree of instability in real exchange rates. These factors have resulted in making the macroeconomic environment quite unstable.

Although, there exists a surplus labour force in Pakistan, the quality of such a labour is relatively poor in terms of productivity. A good quality labour with technological, innovatory and managerial capabilities and organizational competencies is considered to be significant in improving the competitiveness of countries for inward FDI. But there appears to be a lack of such qualities and skills in labour force in Pakistan.

The overall political climate in any country is bound to have an impact on FDI inflows as it affects the long-term investment strategies of multinational corporations (MNCs). Time and again, Pakistan has been plagued by political turmoil, including three periods of martial law since the country was created, and numerous changes in government. Partly because of political uncertainty and instability, there has also been relative macroeconomic instability.

There appears to be a lack of policy consistency and transparency in the country. Frequent changes in the government led to the inconsistent policies and lack of commitment towards economic goals. In a developing country like Pakistan, eager to attract more and more FDI, adequacy of and consistency in the policies has to be ensured on long-term basis.

The taxation and tariff policies in Pakistan are considerably less favourable to the corporate sector as a whole. The top marginal corporate tax rate for 1996 was the highest of the countries like Malaysia, India and Thailand. The magnitude of tariff- and non-tariff barriers on manufactured goods also indicates a high degree of protectionism, when compared to Malaysia, Sri Lanka and Thailand.

There are significant anomalies in the tariff structure leading to uncertainty for investors in Pakistan. For example, in the economic revival programme announced in early 1997, the existing regulatory import duty of 10% was withdrawn, but at the same time a minimum tariff rate of 10% was imposed.

The culture of export processing and free zones is significantly underdeveloped in Pakistan as compared to some of its competitors in Asia. These zones are reported to be 124 in China and 26 in Indonesia (WIR98). Such zones are attractive in terms of providing trade and fiscal incentives, as well as appropriate infrastructure, to encourage production for international markets. This undoubtedly reduces the economy's attractiveness for this form of FDI.

Quite apart from these discouraging factors in the sphere of policies and politics, there is a further important factor limiting the FDI inflows, namely the low level of investment in physical infrastructure. There is a shortage of facilities normally expected by investors, such as telecommunications, electricity supply, road and rail linkages, sewerage and drainage. Existing infrastructures are also plagued by cost inefficiencies and waste, undermining attempts to achieve competitive levels of productivity.

Problems of law and order inevitably create an insecure investment environment, slow the implementation of development projects, and affect the location and scale of new inward investments. Ethnic as well as domestic regional rivalries have ignited the law and order problem in Pakistan and consensus on development policies has been delayed.

Reduced levels of corruption in the public sphere makes a country more attractive for FDI. As in many developing countries, corruption is an unwelcome but prevalent phenomenon throughout the society, but especially at higher levels. Such practices inflate the real cost of projects, discourage potential investments in Pakistan, and further tarnish the country's image internationally.

Bureaucratic inefficiencies continue to create delays and obstacles for those undertaking investment projects in Pakistan. Again, this wastes the resources of both state and investors, and further discourages the latter.

Ostensibly, despite the various liberalizing measures taken by the government of Pakistan, which should have directly or indirectly stimulated inward FDI, actual inflows have remained modest. The increase in inflows in recent few years might be attributed to the more liberal FDI regime, but equally it may be the result of the ongoing process of privatization. It would be difficult to foresee if the higher inflows mark the beginning of a new phase in economic development of Pakistan, or whether they will fall back again as privatization — necessarily a limited, once-and-for-all process — is completed.

To attract and sustain larger amounts of FDI in Pakistan, there is a need to improve the macroeconomic discipline and continue with the market liberalization measures. MNCs would be more confident and happy to invest in Pakistan if there exists a pro-FDI regime in the economy. Such an investment regime needs to be based on sound financial and economic policies, stable political environment, strong institutional framework, availability of skilled and productive labour force, good quality infrastructure and policy consistency.