INVESTMENT is sine qua non, specially for developing countries like Pakistan, starved of jobs. Only investment generates employment. And nothing else!

Over the years, however, investment in Pakistan has been confined to low value-added segments: textiles, sugar and cement, which have reached a saturation point, with surplus capacity remaining idle. These traditional sectors are unable to attract any worthwhile investment.

The non-traditional segment, particularly basic industries — which include, steel, engineering, chemicals, pharmaceuticals, refineries, fertilisers, and automobiles — were nationalised during the early 1970s, and have now been advised to be ‘phased out for being internationally uncompetitive’.

The imprudence-free economy slogans (except for development engineering contracts) have particularly led to: ‘Pakistan-made obsession not workable,’ and ‘Steel industry facing uneven competition’.

The preference for assemblies over manufacturing and a cut in protective tariffs — a typical case being the reduction of customs duty on CKD parts of home appliances and TVs — among others, tends to deprive the local industry, on the whole, from erstwhile competitive advantage.

Free trade initiatives, including trade with India — sans socio-political stratagem — have stifled entrepreneurial initiatives and discouraged local and foreign investment.

Be that as it may, there is no such thing as a free economy — in strict sense of the word — the world over. At the most, there is regionalism or protectionism if not narrow nationalism demanding developing countries to open their economies, when the developed world itself is practically a closed market. If it were not so, there would have been no EU, Nafta or recently the Saarc adventurism of whatsoever value.

The developed world protects its industry, services and agriculture alike, including through restrictive quota systems for imports from the developing ones. The US has recently imposed additional customs duty on import of steel, when Pakistan has been advised to phase out her steel industry for being ‘internationally uncompetitive’.

It is usual for the US to do so, wherever American interests are at stake. Extra duty on import of automotive vehicles — the ‘luxury vehicles’ — from Japan is a well known case in this respect. The US Customs once penalised a Japanese manufacturer millions of dollars for having imported components and parts from their plant in Canada, a Nafta member country (along with the US and Mexico), which they had agreed to produce within the US.

It is common knowledge that the World Bank does not encourage investment in any sector if it is internationally uncompetitive. The IMF traditionally favours devaluation of currencies, curbing public spending, increasing rates of interest — all leading to rising local costs, discouraging investment. The WTO is believed to represent 0.01pc of the richest multinationals; or it is alleged to promote free trade for the benefit of developed countries and not for the developing ones.

In this background, allowing Pakistanis to set up businesses abroad, rather freely, transferred Pakistani capital to foreign countries including the US, UK, Canada and Middle East, instead of promoting investing locally which is the dire need of the moment to spur investment, production, export and employment and raise government revenue.

Cumulatively, these policy measures have led to more trading — unorganised trading — than industrial development. The gap between imports and exports has continued as before; claims of increase in exports remaining mere rhetoric. Rising exports of billions of dollars year after year have remained significantly less than the rate of inflation. Smuggling, under-invoicing and imports through other irregular channels continue to increase instead of decreasing.

The chambers of commerce and industry have generally failed to guide the government in the larger interest of the community. One witnesses absence of focus on the organised industrial sector. It is time that the chambers are bifurcated into separate trade bodies for commerce and industry.

Then, there is the question of free trade with ‘neighbouring countries, including India’. While India will provide a large market, there is a lot of economic disparity between the two countries. To begin with, India does not borrow from the IMF, a traditional micro-deflator for developing countries — that is why independent economies — like Malaysia following Nobel Laureate Amartya Sen have to harmonise IMF policies with local priorities.

There is the usual foreign exchange disparity between Pakistan and India, with the dollar presently at 61 Indian Rupees against 102 in Pakistani Rupees — a base inflator for import costs for duty and sales tax applied down to retail. Sales tax in India is 5-12pc, varying from state to state, and in Pakistan it is at a uniform rate of 15-17pc. In Pakistan, there is presumptive tax on income at 5-6pc, whether there is income or loss, while in India there is no such tax.

There are lower rates of interest and bigger volumes, in addition to a highly subsidised socio-physical infrastructure in India compared with Pakistan. The result is that although India and Pakistan make cars and motorcycles, which, as an example, are comparable in ‘net of government levies,’ the retail prices are naturally not comparable. Economic parity with India — with a lot of trade barriers — must be obtained before opening bilateral trade in order to ensure compatibility of gains to the two distinct economies.

In the auto sector, as an example, there are several other disparities within Pakistan as against India. The customs duty on spare parts vis-a-vis those on CKDs is one. Then, there has been the import of truck components and parts as scrap, in fact, ready for assemblies, encouraging trading rather than industry.

There has been a dumping of motorcycles at throwaway prices and further under-invoicing and clearance on ridiculously low prices, if not duty-free, thus developing the unorganised sector at the cost of organised sector investment. Same or similar is the case with cars, commercial vehicles, trucks and tractors, not excluding other engineering goods like TVs, air conditioners, home appliances, to name a few.

Such ‘briefcase assemblers’ have discouraged investment in the industry, which has substantially indigenised, with a lot of time, effort, and much less investment.

There is a case of rectification with duty on spare parts to be enhanced equitably — say 50pc — in order to nip the evil in the bud. Further, the deletion programmes must be ensured to continue till such time as the economy does not get internationally competitive — come what may, being in the national interest.Dumping and under-invoicing must not be allowed.

On the other hand, the industry, wherever it has reached an export stature, must be incentivised for exports. All this will lead to localisation, with wide- ranging economic benefits.

While the representative case of the auto industry explains why investment is shy, it also explains why revenues are short and there is rampant unemployment — more so of the educated elite, like engineers, MBAs, IT graduates, to name a few.

While due to the 9/11 aftermath, visas are not generally available for such educated elites to go abroad for employment, those abroad are losing their jobs and returning home. With no jobs available here, unemployment is going to be a serious problem.

The truth also is that when local investment goes shy, foreign investment follows it. The reverse is not wholly untrue. Foreign investment also follows political stability and socio-economic solidarity. It is indeed attracted with sufficient protective walls and local competitive advantages, and for no other considerations at all.

If there is a completely free economy, foreign investors have a choice of markets and shall certainly choose the best of all, including the country with a stable government, law and order situation and socio-economic harmony — generally not ideally available in countries like Pakistan. Unless all this is granted, foreign investment remains a wild goose chase.

With macroeconomic stability somewhat achieved in the last couple of years, particularly, all these issues, thus, can now be addressed through a stable government and an acceptable socio-economic order. Equally important is an approach towards growth economy — investment — hi-tech value-added investment and dovetailing IFIs’ policies with local priorities.

There is thus an obvious case to align IFIs’ policies with local priorities. Foremost in this respect, among others, is to mellow down the WTO’s operations, in particular, so long as Pakistan’s economy is not internationally competitive, and, in general, harmonise World Bank and IMF percepts with the local genius for growth strategy in the short and the long run.

The country’s resource base, including high quality human resource and dynamic entrepreneurship, has led to an average GDP growth of over 4pc, despite frequent socio-economic changes, uncertainties, but owing to clearer policies, howsoever inadequate and inconsistent. With leadership — experience, expertise and foresight — let us ensure that these important national issues are resolved sooner than later to ensure economic growth, leading to socio-political harmony:

(Wealth denotes name and fame!)

Published in Dawn, Economic & Business, March 9th, 2015

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