PAKISTAN’s chronic trade deficit this year to record the highest deficit level in its history. The explanations usually given by the representatives of the government and the corporate sector tend to point to some measures they are now undertaking ending with the hope for everyone else to believe that everything soon would be alright.

But it doesn’t get alright. Policy incentives, fiscal and financial support, tariff and non-tariff protections and the ubiquitous ‘packages’ given from time to time have not turned our industry and agriculture into efficient production systems.

The early habits of protection and rent seeking have become deeply embedded in the business model we have been practising and its structural problems have not been seriously addressed. This has become a losing business model in the global economy and our trade imbalances are likely to get worse.

In our open economy, we have little control over the consumption goods coming from the first World (cars, cell phones, etc). But this first world consumption challenge cannot be successfully met by a Third World production system. With such a mismatch between two parts of its business model, Pakistan’s economy would encounter increasing difficulties in meeting the challenges of globalisation. It would also not help in addressing the growing problems of poverty and unemployment in the country.

The latest round of WTO negotiations in Hong Kong did not hold out any promise for the hopes of developing countries for securing greater access to the markets of the developed countries and removal of agricultural subsidies. Access to these markets is important for a fair trade system and for reducing poverty in the developing countries. This is especially so where agricultural products are concerned since these are the bread and butter of the poorer sections of the developing countries.

But market access is one thing and market share is another. Even if market access is available, are our production systems efficient enough to claim a bigger market share from their competitors? Because while access could be granted by governments as a concession, market share could only be given by the consumers whose vote of confidence would depend on the price and quality competitiveness of products on sale.

Nothing highlights this fact better than the example of Mexico. No one had closer access to the American market than Mexico and with Nafta protection; it even had preferential bilateral legal agreements with the governments of the US and Canada. And yet, the low-cost but high-quality goods produced 7,000 miles away in the factories of East Asia particularly China, have been able to claim a big share of the American market away from the Mexican products. In fact, several American and even Mexican companies that had earlier set up their manufacturing facilities just across the US border in Mexico, later closed down their factories and relocated them in China.

So how do Pakistan’s production systems compare with those of other developing countries with whom it would be competing to win a bigger share in the markets of the developed countries when access to these is available?

World Economic Forum (WEF) produces one of the well recognized measures for competitiveness. The position of the countries on its Global Competitive Index (GCI) shows who is winning or losing the game of competitiveness in the global trade. The latest evidence (2005) from WEF places Pakistan among the least competitive countries and the production efficiencies of Pakistan’s economic system, even among developing countries, continue to be rated way down at the bottom along with Myanmar in Asia and Zimbabwe in Africa — much lower, for instance, than the rising Asian economies of Malaysia, Thailand, China, India and several others.

The fact that our production systems have not been efficient and competitive has, unfortunately, been repeatedly proved by several countries that have overtaken us from behind: South Korea in 1960s, Malaysia in 1970s, Thailand and Turkey in 1980s, Vietnam and India in 1990s, to name only a few.

Productivity is, of course, a measure of technical and financial efficiencies; but above all, it is a cultural phenomenon. Higher productivity invariably leads to higher profits. But if higher profits can be obtained without increasing production efficiencies, what is the need or incentive for putting in hard work to earn good profit?

A rent-seeking culture — whether in public or private undertakings — is an antithesis to promotion of productivity. And yet, taken together, our economic system has been rewarding inefficiencies and rent-seeking habits. Of course, there are many business leaders who have refused to be part of the culture, and one knows of several entrepreneurs and corporate leaders who have upheld excellent value system although some of them have faced difficulties and have even fallen victims of the rent-seeking culture.

Production efficiencies in Pakistan are handicapped not so much by a lack of the ubiquitous ‘packages’ but by the structural flaws embedded in the business model we have been following for decades. Take a look at some features of this business model.

Our corporate and security laws discourage takeover of inefficient private enterprises. No market for corporate control exists through active and balanced laws on mergers and acquisition to promote productivity. Small investors and minority shareholders have neither protection through corporate governance nor legal redress against inefficient management.

There are high entry barriers that keep the system closed to outsiders. Incentives and ‘packages’ have remained confined thus keeping Pakistan a single industry economy even after 58 years. It was easy to set up a shop without any equity stakes and even easier to get the loans written off. Again, if profits can be made by persuading governments to tinker with fiscal and monetary policies or the tariffs, where is the incentive for improving earnings by improving the competitiveness of products in the markets?

An open market system is not an anarchic system and as the recent sugar crisis has again confirmed, the regulatory incentives for better business practices are an integral part of any open and efficient economic system.

As for agricultural production, our approach has continued to treat this sector more like a traditional one than a modern production system. This model has not generated its linkages with business and industry to make it outgoing, value adding and market competitive.

Is it any wonder then that even in our predominant industrial activity — the textiles — the non-cotton producing countries are more competitive and enjoy a much bigger market share in the higher value segments of textile and clothing business in world markets than Pakistan?

During 1990s when we were marketing various investment opportunities in Pakistan to foreign investors, it was natural to invite their attention to the over 4,000 ‘sick’ industrial units. These units had locked in several hundred billions of rupees of national wealth in the form of urban land they occupied, the utilities and services extended to them, their shareholders’ investments and huge amount of bank loans outstanding against them.

The idea was to get foreign investors interested in purchasing these ‘sick’ units from owners, pump in new capital and technology and make these units producers of wealth for themselves and the country. Repeatedly, however, one heard the same stories from several interested foreign investors who soon threw in their towel complaining they could not purchase these ‘sick’ units since our economic system rewards inefficiencies and there was no incentive in the system to sell these ‘sick’ units.

The challenge for the government and the corporate sector is to develop an open and competitive production system. No one from outside can do this job for us. Nor can Pakistan’s production system stand up to global challenges by sticking to their accustomed ways. Instead of disjointed ‘packages,’ Pakistan needs holistic reforms of its flawed business model that create strong linkages between productivity and profitability. These reforms will pump vitality into our production systems and help create a first rate production system here. Only such a production system will help Pakistan secure a larger share in world markets and catch up with the rising economies of Asia that had earlier overtaken it.

Email: smshah@alum.mit.edu