ADMITTEDLY, a can opener may not be a priority for Pakistan; the said instrument is only used as an example to illustrate — pursuant to the joke wherein an economist assumed that he had a can opener on a deserted island.
Today, you don’t have to be a rocket scientist to understand leading economic thought; all it boils down to is, free markets and less and less government. Free markets, free trade in goods, services and free flow of currency are supposed to take care of all ills of the economy, in theory at least. Except, in real life, they do not!
Free markets, which substantially operate on the principle of the survival of the fittest, apparently have no solution for the downtrodden of society and to date capitalism struggles to address income inequality. Without the strong arm of the government to enforce and appropriate, the market cannot even operate, let alone correct itself automatically; essentially, without all else being theoretically kept constant, pure free market becomes entirely mythical.
Further, nowhere in the world have free markets been a catalyst for a developing nation joining the ranks of the developed nations; in history, anytime that happened, protectionism was the driver, which was the underlying theme of an earlier article by the writer ‘Why it won’t work’ — that piece was surely not about who has done it or who is doing it! Everything is not political.
We have probably forgotten how to make can openers.
One is open to debate on protectionism. However, with even America closing its markets to imports in recent times, to bring manufacturing back home, the chances of a convincing argument to the contrary are bleak.
Economics argues that free floating currency and inflation-driven interest rates are supposed to make domestic products competitive and spur savings. Except, that when you initially opened your markets to the world, the domestic can opener industry could not compete with the shinier and cheaper can openers, and eventually shut down. Now with a weaker currency, domestic can openers might have become cheaper, but unfortunately since the industry had shut down, we don’t make can openers anymore, in fact we have probably forgotten how to make them.
And there is no switch; you cannot suddenly start manufacturing can openers. Setting up a can opener factory can easily take three to four years in normal circumstances, with a lot of luck; developing nations do not generally rank very high on the ease of doing business index. So in the interim you will still need to import can openers at an exorbitant price; until someone starts manufacturing can openers locally.
Unfortunately that is easier said than done.
With a continuing trade deficit, and currency on a free float, a foreigner is rather unlikely to risk investing in a domestic can opener factory, unless he was guaranteed a 30 per cent dollar return by the state; the benchmark set by the power sector. Most likely even with that kind of guaranteed return he would probably stick to an assembly unit; like the automobile sector.
Finally, irrespective of our affection for FDI, it is marginally better than imports; do compare FDI inflows with primary income deficit annually, a debate for another time.
Unfortunately, however, the likelihood of a domestic investor risking capital is even more remote. At interest costs as high as 16pc and expected to rise further, and a weak currency, it may not be feasible to import the machinery for a can opener factory or to borrow for the domestic component; the bigger risk is that by the time the factory starts production, imported can openers are shinier and available at cheaper prices.
For the sake of argument, let’s assume that all these hurdles are overcome and we have a go at setting up a can opener factory; even then an international manufacturer of can openers will have the advantage of economies of scale, simply because of the size of the global market they cater too.
At this point the theory of comparative advantage is supposed to come into play; except, in the real world, the consumer is only concerned with price, and if the imported can opener is still cheaper and shinier, so be it, why would he worry about some dumb economic theory?
Controlling imports through tariff hikes or other direct measures perhaps is the sensible, rather only available option. Admittedly, WTO will be a pain; except considering our current account deficit, we cannot be forced to keep importing can openers, especially when even America resorts to tariffs.
The probability of our spoilt trading partners blackballing our exports is reasonably high as well; except why export if every time you do, you have to import twice as much? We really seem to be not good at trading. And we still have not manufactured a can opener! Can we?
We definitely can!
The writer is a chartered accountant based in Islamabad.
Published in Dawn, July 17th, 2019