November 17, 2003	Monday	Ramazan 21, 1424

Investment is a major determinant of economic growth and a mechanism of employment generation and poverty alleviation.

However, in Pakistan, investment remains almost stagnant, notwithstanding the strong recovery of economic growth of 5.1 per cent in the preceding fiscal year, mainly emanating from the sharp revival in agriculture and manufacturing sectors.

This, however, does not point to the injection of additional dozes of investment in these sectors. It is due to the re-activation and utilization of the previously invested capital and resources. In the manufacturing sector particularly, as a consequence of deceleration in economic growth in 1990s, enormous axcess capacity had been created.

It is a well-established phenomenon that a stable macro-environment serves as a pacesetter for accelerated investment and sustainable growth. However, despite macroeconomic stability, characterized by foreign exchange reserves, record export of over $11 billion, inflow of home remittances, touching new heights, rupee stability viz-a-viz dollar, no major breakthrough was witnessed in investment which continues to be sluggish.

The total investment of GDP, which was 17.1 per cent in 1995-2000, slipped to 15.5 per cent in 2002-03. The fixed investment went down from 15.31 to 13.1 per cent and the public investment was reduced from 6.4 to 4.5 per cent and the private investment went down from 8.9 to 8.6 per cent during this period.

Although the inflow of foreign direct investment has improved, in absolute terms it is not very significant, particularly when compared with China and India.The bulk of the foreign investment in Pakistan has gone to power, oil and gas sectors, which are also capital-intensive and do not create much jobs opportunities. There has been more portfolio investment in stock exchange and real estate, resultantly the situation of employment has worsened.

The unemployment in Pakistan, according to the Labour Force Survey, is 7.82 per cent: 6.94 in rural areas and 9.92 per cent in urban areas. Obviously, the data do not reflect the real situation. The figure of 7.82 per cent of unemployment in a developing economy like Pakistan does not look very alarming. The visible impact of unemployment, however, in socio-economic life suggests that its rate is much higher than what is officially being depicted. The growing poverty of about 25 or 30 per cent, bearing a new dimension of suicides, suggests a much higher rate of unemployment. The refuge, however,is taken under the ILO definition of employment, which stipulates that if a person works even for an hour in a day, he will be treated as employed. Is it not the mockery of the meaning of employment?

It will be interesting to know that the countries, having full-employment economies like France, Germany, Spain and others have a much higher rate of unemployment. It is 9.61 per cent in France; 10.6 per cent in Germany and 11.41 per cent in Spain. Whatever investment was made during the recent past, it did not have significant employment-generation potential because it was made in the textile industry under balancing, modernization and replacement (BMR) programme. Some of the machines were so modern and automatic that led to displacement of workers.

The engineering industry, excepting surgical goods and fans, did not make much-needed strides, which could be evidenced from the fact that the annual import of engineering goods are within the vicinity of $2 billion, whereas exports consist of $300 million only. The automobile industry has witnessed a spectacular progress during the last three years and the production of car has doubled from 30,000 to 60,000, mainly because of the consumer financing by the banks relatively at lower rate. Its growth rate has been around 50 per cent.

This industry as well as downstream vendor industry provides employment to more than 300,000 people. However, the auto-industry has thrived on the basis of protection and not through competition. Since this industry as well as cement and sugar industries had axcess capacity, they did not attract fresh investment. The scope for job-creation in the hi-tech and capital-intensive industry, is very limited. Hubco, with an investment of $1.5 billion, hardly employs 200 people.

In a historic perspective, the jobs used to be provided in the public sector corporations, state-owned enterprises, including steel mills, railways, banks, Wapda, the KESC, etc. There was over-staffing, which was not a prudent policy. The government gives subsidies to such public sector organizations of around Rs100 billion annually. With the re-structuring and streamlining of the public-owned enterprises and banks, thousands of people were rendered unemployed.No new job opprtunities were created.

The process of privatization during the preceding year, moved at a snail’s pace and only one mega project i.e. United Bank was privatized. However, with the speeding up of privatization of the proposed organizations, like the KESC, Wapda, the PTCL, the Habib Bank, the Oil and Gas Development Corporation (OGDC), etc., the problem of unemployment would be further accentuated. The government, therefore, has pinned hope for creating more employment opportunities in agriculture, small and medium enterprises (SMEs) and housing. Investment in agriculture sector, whose performance in the past, has remained subdued, due to the catastrophic drought, remained shy. This sector is the largest provider of employment to over 48 per cent of the labour force. The strategy of mechanization and modernization of agriculture almost remains unimplemented. Meanwhile, the corporate management has yet to be inducted in the sector. The application of intellectual property rights to agriculture and the insistence of developed world on retaining subsidy of around one billion dollar a day to their agricultural products, poses a threat to the very survival of our export in the world market. As such the agriculture sector could not be upgraded to generate more employment. The recent pest attack on the cotton crop has caused many-sided hardships for the growers as well as for the textile industry.

It is indeed noteworthy that SMEs, which are described as “unsung heroes”, have been making multi-dimensional contribution in the economic development of the country. Their share in GDP is around 30 per cent and in country’s exports is around 25 per cent. They provide employment to about 60 per cent of urban labour force. Despite this, however, due to a variety of factors, their share in the total bank credit is not more than 10 to 15 per cent. There is no standard definition of SME. Only recently, SME bank has defined an enterprise as small, having productive assets from Rs2 to 20 million and employment between 10 to 30 people.

Likewise, an enterprise is termed as medium, with productive assets between Rs20 to Rs40 million, with employment between 31 to 99 people. However, for the purposes of sales tax and excise duty, the definition is different. The new set of prudential regulations, applicable to SMEs, would hopefully fill in the gap of catering to the special credit requirement of SMEs. The multiplicity of taxes and labour laws also act as disincentive for the growth of SMEs; these must be reviewed for improvement. The role of SMEDA is very pivotal in training and guidance and in espousing the cause of SMEs and to ensure their sustainable growth on modern lines.

The last federal budget has accorded a priority treatment to the Housing Sector, as a deliberate policy to provide shelter to the homeless people as well as an effective strategy for generating employment. However, so far, no visible progress is discernible in this sector. The 9/11 events and their aftermath have had a stifling-effect on the growth and expansion of information technology industry (ITI). A large number of Pakistanis in USA were deprived of jobs and most of them were even deported. The Middle East, as a source of employment has already dried up. Now Malaysia is being tapped. During the outgoing year, as many as 1,26,418 persons were sent abroad for employment. The tourist industry, another dependable employment-creating avenue, has persistently suffered because of the worsening law and order situation and sectarian terrorism.

A serious disequilibrium between demand and supply of labour force aggravates the unemployment situation. The growing unemployment also owes a great deal to the poor quality of education and low rate of literacy. It is indeed paradoxical that on the one side, unemployment among the educated youth is growing at an alarming rate, and on the other, candidates of required qualification and training are hardly available.

Among other contributory factors to rising unemployment is the emergence of around 4000 sick industrial units in the country over a number of years, which could not be revived. The government set up the Corporate Industrial Restructuring Corporation (CIRC) with a mandate to revive or dispose off 868 sick units only. The remaining units would either continue to be sick or be liquidated. The performance of the CIRC has been disappointing.

The private sector also has not responded in a big way because due to the banking reforms and new set of prudential regulations project-financing has become difficult.

The deteriorating law and order situation,inadequate infrastructure, exorbitant rates of power tariff, combined with complex and complicated taxation and labour laws, continue to act as dis-incentive. The fact is the country does not have a composite industrial policy.

A team of American businessmen, which recently visited Pakistan, stressed that they were planning to invest as much as $ 5 billion in the next two years in Pakistan, but they are deterred by the deteriorating law and order situation and political instability. The travelling advices, declaring Karachi as one of the terrorist cities, non-arrival of some of the biggest world airlines, also vitiate the investment climate. The long stand-off between the government and the opposition over the legal frame order (LFO) is also being cited as an anti-investment development. It is a pity that Pakistan’s membership of Commonwealth has not been restored.

The government, after achieving a reasonable macro-economic stability, must shift its over-riding emphasis to high economic-growth through, accelerated private investment both in agriculture and industrial sectors. This would underline the need for identification of investment constraints, through consultation with the representatives of private enterprise and re-framing the investment-inducing package. In the new investment/industrial strategy, there must be a built-in mechanism for pro-poor growth, through sustained trickle-down effect. Meanwhile, the domestic private sector must be preferred and focused for massive investment, for giving a lead to the foreign investors.