Far behind in the race

Published December 9, 2013

WHEN the rupee started to weaken earlier this year, the government responded by intervening in the currency markets.

Speculators knew that the government with limited reserves could not play the game for long. That is when the State Bank pulled the second lever; it began to raise interest rates.

When there was no let up in the capital flight the government put a lid on the amount of cash that could be taken out. But still the rupee continued to slide so the government decided to approach the UAE government for the remaining $800 million proceeds from the PTCL privatisation to build reserves.

Then recently it offered twin amnesties to black money and to tax evaders. The naive hope is that this money — instead of being ‘dollarised’ — will be invested in manufacturing ventures.

Managing exchange rates is a firefighting measure. At best you deal with symptoms of the real malaise and delay the inevitable. At a fundamental level, Pakistan’s economic competitiveness has been in steady decline over the years.

Today the country ranks 133rd out of 148 surveyed. This means that most goods are now not viable for production in Pakistan and the few that are, are fast losing their shine. This applies to not just manufactured goods but many of our farm products as well.

In a free trade world, this situation places Pakistan at a major disadvantage. A free trade agreement with China has brought an influx of Chinese goods but very little has gone in the opposite direction. Going forward, the situation for Pakistan looks set to worsen.

Two factors have brought us to this pass. One is the failure to develop indigenous energy resources. Today a substantial part of our import bill is fuel. The second and far more serious has been our failure to develop efficient, world beating industries in some key sectors (with few exceptions like cement, fertiliser and textile spinning).

The path taken by Japan and other high-performing Asian ‘Tiger’ economies, all of which were energy deficient, required them to first accumulate capital, then deploy that capital efficiently in a few sectors and finally pursue rapid technological catch-up with the West.

This was done on the back of a high standard of national education and a high domestic savings rate. In Pakistan these factors were not present.

A third ingredient was central planning, which in laissez faire capitalist economies plays a limited but vital role. Once a national economic vision is spelt out, the Five Year Plan is the instrument that helps direct scarce economic resources and necessary interventions supported with enabling policies towards sectors that have to be built.

In our case, the Five Year Plans were of academic value and even that process was later all but abdicated.

Usually a developing economy would build its industrial backbone on the basis of two primary investments. A steel mill that would help kick-start a downstream engineering industry, and a hydrocracker that would make available petrochemical feedstock and spawn the development of a chemical industry. This could be thought of as the hardware.

The national innovative capacity is the ability of a country to produce and commercialise a flow of innovative technology over the long term. This can be thought of as the software.

Empirical studies have found that innovative capacities of economies are very closely correlated with both competitiveness and with GDP.

Pakistan’s steel mill never really got going and the hydrocracker plant never progressed beyond the feasibility study phase. No government bothered to develop or even articulate a credible innovation strategy.

Research and academic institutions remained weak and under-resourced with little linkage to industry. Pakistani firms also do not spend much on R&D, preferring instead to buy licensed technologies or turnkey industrial solutions.

So at this stage can anything be done? The difficulty is that after decades of inaction and decay we are left with very little strategic space to work with. The upside is that Pakistan’s large domestic market still makes this an attractive place to do business.

To start, one needs to ask the question: which three or four industrial sectors can we become world leaders in? This is a contentious exercise because it will also identify certain sectors that may not receive much economic resources. This is because large-scale resources will need to be diverted towards the selected sectors.

Any strategic process creates winners and losers. Big push export strategies would need to be implemented in these three or four industrial sectors in addition to the large domestic market so the necessary scale effects can be achieved. With this in mind, a series of interventions will need to be planned.

The other and somewhat less daunting challenge would be to develop indigenous energy resources.

A politically neutral approach that tries to give everything to everyone would be disingenuous. All that will produce is a patchwork of non-strategic policies often at cross purposes with each other. These statutory regulatory orders or SROs as they are known promote a culture of crony capitalism and do not make for long-term policy stability.

As usual, the hardest part is the politics.

Selecting winners and losers, resisting pressure from vested interest when their privilege gets taken away, refusing to backtrack once a decision is made, preventing mission creep, ie saying ‘NO’ to pressure for inclusion of more and more sectors to the list, implementing the necessary reforms, bringing the full force of law to deal with violent religiously inspired groups that impose an economic cost on business activity and shatter confidence.

The commodity most needed is political will, and as of now, that is the commodity that is in short supply.

The writer is a business strategist and entrepreneur and is also assisting the Planning Commission of Pakistan and its working groups tasked with developing the country’s Vision 2025 and the 11th Five Year Plan.

http://moazzamhusain.com

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