RECENT developments have laid bare the perennial issue of the poor global competitiveness of our productive-agriculture and industry sectors. The high international price of oil in particular and commodities in general had masked this limitation, until the dramatic decline in global commodity prices stripped away the cover.

This weakness is reflected in our farmers and industrialists scurrying to Islamabad to seek protection from international competition. They are pleading (in some cases successfully) for their ‘survival’, demanding that the government increase support prices for their crops and then procure or ensure these prices, and raise tariffs on similar imports. Lo and behold, a 25pc regulatory duty has been imposed on imports of wheat and sugar, there is a 15pc levy on imported tubes and pipes, and a 5pc duty has been slapped on yarn from India, thereby denying Pakistanis the benefits of declining global prices.

A slew of policy initiatives has been taken over the years to spur industrial growth, including protection through high import duties. But the share of manufacturing in GDP has been stuck at a low level of 11-13pc since 1990. Greater competition from abroad has contributed to a gradual fall in domestic value-added in this sector by almost nine percentage points, despite increased production/output. Moreover, the sector hasn’t contributed much by way of growth in labour productivity.

Even as industrial output and exports increased there was little corresponding increase in factors generally linked to employment that produces more (the share hovering around a mere 14pc of the labour force), development of skills, upgrading of technology, etc., because value-added domestically did not grow at the same pace — with much of the employment created in the informal sectors of the economy, characterised by poor quality and low levels of productivity. Domestic demand was, and is, increasingly being met by cheaper imports, because our manufactured goods are losing competitiveness in global markets.

The crisis of the industrial structure today is an outcome of the piecemeal opening up of the trading sector.

Like imported finished goods, imported inputs of intermediate products — being cheaper and of better quality — have gradually replaced the counterpart domestically produced goods. Higher exports are no longer the outcome of higher domestic production since inputs of intermediate products used as inputs in the manufacturing of exports increased with limited domestic value addition.

Even textiles and garments are now witnessing a fall in domestic value-added in exports, a worrying development since these are labour intensive industries that also employ low-skilled labour, our main resource. Increased imports of inputs may have improved the global competitiveness of our exports but have seemingly been unable to raise domestic value-added growth.

Take the case of even a powerhouse like China to illustrate this point. Studies have shown that for every $1 of exports, China retains only six cents. Our share of global value-added created by trade in Global Value Chains is probably less than 0.2pc, a huge issue being the low labour productivity rate. If, using similar machinery and technology, a Chinese worker can produce almost three shirts in the same time that our worker stitches one shirt, any advantage of our lower wages would be more than neutralised by such a difference in productivity.

An industrial structure built on foundations of managed entry and protection behind high import barriers did not have to pay much attention to cost control, quality and customer preferences. In some sub-sectors of industry (assembling motorcars, pumps, pipes, meters, transformers, electrical switches, etc.) capacities were created on the strength of government expenditures run wild with successive governments spending as if tomorrow would never come.

The reforms relating to the deregulation of the 1990s were introduced before trade liberalisation; for example, the sugar industry, the motor-vehicle assemblers, the engineering industry and the All Pakistan Textile Mills Association were pampered. This was a wrongly sequenced policy. The result was that a major portion of industry either sought concessions to compete internationally (with little effort to improve productivity) or focused on the domestic market (supported by the state stepping in through protective measures that came to be better known as the ‘SRO culture’).

The infants who were protected from competition in anticipation that they would grow up remained lazy, unable to compete globally without these props. The arrangements represented a cosy pact between inefficient producers and the bureaucracy; the former were provided opportunities of ‘extracting rents’ outside the budgetary proposals approved by parliament. Consequently, the growth of one domestic industry created the market for another — thus all such markets grew together with hardly any signals to indicate which ones would be allowed to grow or shrink over time. Growth was neither influenced by nor predicated upon the ability to compete without a contrived support structure. Now these entities have to be protected from competition for political reasons — a period of low growth with understandable worries about unemployment ensuing from closures.

Resultantly, all kinds of industries operating with varying degrees of efficiency and inefficiency flourished, with their inability to compete internationally being glaring examples of distortions created by such policies. The crisis of the industrial structure today is an outcome of this piecemeal opening up of the trading sector.

Which brings us to the question of whether the crutches of high import duties can be withdrawn so that domestic producers can learn to walk without assistance from others. Unfortunately, the pace at which these artificial limbs are taken away so that only the efficient ones survive would not only be politically difficult but would also have to be commensurate with the circumstances in which they have to operate — easier said than done in an environment of slow growth both domestically and globally. We cannot just ignore the issues of high interest rates because of massive government borrowings from the banking system, cost-push inflation owing to government administered prices of utilities and staple food items like wheat and sugar, the lack of, and poorly maintained, network of rail, roads and ports, the lack of an assured supply of affordable energy (even after oil prices plunged), the severe shortage of a skilled and disciplined labour force and pervasive bureaucratic controls — all responsibilities of the government.

The writer is a former governor of the State Bank of Pakistan.

Published in Dawn, March 31st, 2015

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