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Premature de-industrialisation

December 26, 2016


Prolonged stagnation in the manufacturing sector, and a consistent decline in investment in Greenfield projects, capacity expansion and technology replacement have led many to conclude that Pakistan could be facing ‘premature de-industrialisation’.

It’s a little too early to reach such a radical assumption. But as a study — ‘Pakistan: a case of premature de- industrialisation?’ — by Naved Hamid and Maha Khan of the Lahore School of Economics points out, the country may be on the brink, if not already in the process, of premature de-industrialisation at a very low income level as a result of stagnation in manufacturing since 2007.

Manufacturing — especially large scale industry that constitutes almost 80pc of the manufacturing sector output and contributes 11.7pc to GDP — which plays a crucial role in the economic growth of a country by helping it absorb most of the urban labour and attain higher income levels, has been in trouble for quite a long time.

“Hounded by over 36 departments, numerous taxation structures, and continued opening up of the economy in the name of fair competition and competitiveness — with lower tariffs and free trade agreements — factory after factory is shutting down,” says Syed Nabeel Hashmi

Naved and Maha show that some kind of ‘structural break’ happening around 1990 had affected and slowed down large scale manufacturing (LSM) growth.

“LSM was clearly the driver of robust GDP growth in the 1960s, 1980s and mid 2000s. In the 30 years prior to 1990, LSM (and GDP) growth averaged over 5pc per annum throughout, except for six years in the 1970s. But in the 25 years since 1990, LSM (and GDP) growth has averaged 5pc per annum for only nine years, mostly in the 2000s,” they argue.

The two researchers conclude that the structural break could have occurred because of the country’s decision to abandon its proactive industrial policy around 1990 and start a stop-go process of trade and economic liberalisation at the behest of international financial institutions.

“However, trade liberalisation policies do not seem to have had much long-term impact on Pakistan’s exports, which, as a percentage of GDP (after reaching a peak in 1992) and world exports (after reaching a peak in 1996), have either declined or stagnated,” they insist.

They go on: “It is possible that, in the last 25 years, Pakistan has managed to get the worst of both worlds. By abandoning its active industrial policy, it lost the benefits of an economic focus on the development of the manufacturing sector, while its lackadaisical attempts at trade liberalisation were not enough to start the process of export-oriented manufacturing and economic growth.”

LSM has grown, on average, by only 1.1pc per annum in the seven years to 2015 as shown by Naved and Maha. The trend continues with a little improvement in the growth rate though. Pakistan has seen LSM growth slow down to an annual average of 2.1pc in 1972/1977 and 2.3pc in 1995/2000. But the current slowdown is different from the earlier extended periods of industrial sluggishness.

LSM growth rate during the two earlier periods, for instance, was still twice as high as it is now.

Moreover, LSM picked up sharply in the 7th year of the previous sluggish growth periods but there are fewer signs of a rapid pickup in manufacturing activity now.

LSM, for example, grew by 3.2pc in 2015/2016 (the year not included in the LSE study) if the official numbers are to be believed and by just above 1pc during the first quarter of the ongoing financial year to September, leading to the conclusion that the present slowdown in industry growth may not be a ‘temporary problem’.

Abdul Basit, a leading Lahore-based businessman, identifies factors such as lack of a progressive, proactive policy to encourage manufacturing, rapid trade liberalisation at an early stage of industrial development, the government’s focus on revenue generation at the expense of manufacturers, high cost of energy and doing business and poor quality of human resource as major factors leading to the slowdown in the growth of industry and investment.

“De-industrialisation is a reality, an ongoing process in Pakistan. We are facing industrial slowdown because of the government’s failure to pursue industrialisation, diversify and encourage exports, protect manufacturers against the onslaught of cheaper imported goods, and the tendency of policymakers to give in to pressure from strong lobbies at the expense of the larger good of the economy,” the president of the Lahore Chamber of Commerce and Industry argued.

Many see Pakistan fast turning into a consumer economy. “With the influx of cheaper goods from China and elsewhere no new investment is taking place. Local manufacturers aren’t only facing intense competition in export markets, but also losing consumers in the domestic markets,” stressed Javed Kayani, a leading sugar producer.

He thinks that the government must curtail import of all locally produced items and devise a framework for increasing and diversifying exports to protect local investors and industrial jobs, as well as to reduce its dependence on foreign loans and assistance.

“The business community, particularly manufacturers, must be involved in the policy-making process if the industry’s potential is to be realised and jobs created.”

Syed Nabeel Hashmi, a prominent auto parts manufacturer and exporter, feels that the country’s policies are far removed from the ground reality and focus merely on generating revenue rather than on industrialisation or job creation.

“Hounded by over 36 departments, numerous taxation structures, and continued opening up of the economy in the name of fair competition and competitiveness —with lower tariffs and free trade agreements— factory after factory is shutting down,” he contended.

He pointed out that improvement in security conditions after the operation against militants and the start of work on the China Pakistan Economic Corridor offered a major opportunity to the country to revive manufacturing growth.

But he warns the revival of the industry will not be an easy job.

“If we want to take advantage of better security conditions and the CPEC, the government must implement proactive industrial policies to provide a level playing field to manufacturers by addressing their taxation, technological, and competitive issues, and by protecting them from cheaper imports of finished goods.

Only then will the manufacturing sector once again become the main driver of economic growth.”

Published in Dawn, Business & Finance weekly, December 26th, 2016