POLICYMAKING seems to be undergoing a paradigm shift towards an integrated approach for more comprehensive, durable solutions.
Earlier, firefighting to address financial distress provided policymakers with breathing space but left underlying problems unresolved; leading to resurfacing microeconomic instability following every economic growth cycle.
On crucial trade and current account issues the PTI-led government seems to be adopting an integrated approach in an attempt to come out of the woods.
Finance Minister Asad Umar recently said that Pakistan is seeking an integrated economic package from China which shall encompass financial support and increase in trade and investment. The CPEC programme’s main problem is figuring out how to minimise the bilateral trade imbalance and finance the trade deficit.
The Chinese Ambassador to Pakistan Yao Jing has responded positively to Prime Minister Imran Khan’s call for industrial joint ventures. He recently said: “We want more state-of-the-art factories to be set up in Pakistan”.
Policymakers have traditionally focused on a few critical issues or sectors hoping the rest will fall in line
To quote the draft Trade-Related Investment Policy Framework (TRIPF) released by the commerce ministry: “FDI inflows, trade and investment have become intertwined”. TRIPF is designed to transform Pakistan’s manufacturing base into high value-added sectors that are integrated with the international market while also able to cater to domestic demand.
The TRIPF report points out how Multinational Enterprises (MNEs) are directly involved in 80 per cent of international trade and act as an export promotion agent for developing countries. The MNEs account for more than 50pc of China’s exports. Intermediate goods manufactured by MNEs in production facilities and processes in different countries constitute two-thirds of international trade.
In the present global environment and given Pakistan’s current economic development, officials of the commerce ministry consider the country a good candidate for relocation of manufacturing facilities for both domestic and foreign markets.
TRIPF envisages leveraging the domestic market through time-bound protection to develop competitive import-substitution industries while upscaling export-oriented manufacturing facilities for value-addition. It stresses that sufficient tariff protection is intended to be provided for the pay-off period of an investment which is to be reduced gradually in order to make output globally competitive.
Before making any decision, MNEs take into account a country’s ‘doing business’ ranking, corruption perception, governance, competitiveness and trade.
On the eve of his visit to China, Prime Minister Imran promised to remove bottlenecks in foreign direct investment. More significantly, Mr Umar recently stated that in his opinion “instead of increasing taxes the focus currently should be on trimming government expenditure”.
However, the structural reforms planned with regards to ease of doing business will take some time to materialise. Here also the State Bank of Pakistan, in its annual report for FY2018, has stressed that “reforms in a particular area of the economy may not be effective unless coordinated efforts are made with reforms in other sectors”.
The central bank report’s said it can hardly be over-emphasised that the success of reforms crucially depends on improvement in governance. Two separate task force(s) set up recently to recommend measures for reforms and improve governance, are expected to submit their reports shortly.
In this digital era networking, cooperation, collaboration and alliances are fast turning into a way of doing business. To quote another central bank study: “A key feature of the fourth industrial revolution is the blurring of the traditional boundaries between the services and the industrial sector”.
Manufacturing processes are being re-engineered in a way that hardware is optimised by components which add significant value to the end product. Similarly, digitalisation in Pakistan — e-commerce, fintech and e-governance — is also triggering significant changes in some segments of the services sector.
Over the past half decade, 81pc of the cumulative FDI inflows of nearly $10 billion went into non-manufacturing sectors. The TRIPF report points out that “FDI in manufacturing sector also remains a market-seeking rather than efficiency-seeking investment” which could provide competitiveness to export-oriented sectors and enhance productive capacity of import-substituting industries.
As the manufacturing sector remains disproportionately taxed, investment funds are diverted to speculative trading activities. The manufacturing sector bears 58pc burden of taxes compared to its 13.5pc share in GDP.
Here it must be recognised that it is the domestic private sector that will play the key role in realising Mr Umar’s vision of an independent economy. And foreign investment will be stimulated by capital spending by the country’s private sector.
Published in Dawn, The Business and Finance Weekly, November 5th, 2018
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