A long-term policy based on an export-led industrial strategy is being evolved as Pakistan strives to become an industrialized country. By 2009-10, manufacturing output is planned to be raised from the current level of 18 per cent to 22.4 percent of the Gross Domestic Product by making the sector innovative and dynamic to respond to WTO challenges and policies of regional economic blocs. Industry, as a whole, accounts for 25 per cent of the GDP.
Apparently, policy makers want to build upon what has been achieved so far by industry-driven foreign trade. Ninety per cent of the exports are of manufactured goods (78 per cent) and semi-manufactured items (12 per cent) and 10 per cent is contributed by primary commodities.
Similarly, 90 per cent of the imports is accounted for capital goods and raw materials for consumer/capital goods industry. The share of consumer items is ten per cent.
Whereas foreign trade has provided an impetus to industrialization, the economy has suffered from the perpetual trade deficits on merchandize account. The current trade gap is currently running at over $3 billion per annum.
Imports continue to exceed exports, says Munnawar Hamid, Chairman Pakistan Oxygen, because measures to boost exports are of a "peripheral nature". They are focused on removing bottlenecks, enhancing facilities, providing incentives, increasing access to markets and exploring new markets- all these are facilitation in the process of exports.
Munnawar Hamid has been intimately involved in promoting trade and investment between Pakistan and the United Kingdom as former chairman of a representative body set up by the two countries.
What is needed is to gradually develop an industrial sector that produces and exports quality goods at highly competitive rates. Currently, exports are primarily driven by textiles. There is need to develop three or four more sectors like textiles, may be, light engineering and IT.
No less important is that the industrial policy and the next Five-Year Plan should be submitted to the Parliament for approval, says Munnawar Hamid, as both are needed as reference points for annual budgets and policy evolution. The economy has developed haphazardly for lack of harmonized sectoral growth. Functional growth needs to be put right.
The Planning Commission sources reckon that the long- term policy will be based on export-led industrial strategy through diversification and development of resource or non-resource based industries specially related to agriculture, engineering and small- and medium-sized industries. The textile vision, engineering vision and leather vision may lead the way forward.
In the five-year plan period starting from July next, officials reckon that the small and household sector will grow at an average rate of 8.5 per cent and the large scale manufacturing is projected at 15.1 per cent per annum.
These growth rates are to be achieved by improving productivity. Gains in productivity are to come through formation of cluster-based technology parks, embodying research and development and human resource development.
Tariff rationalization and export orientation is also expected to improve total productivity and lead to specialization in areas of comparative advantage. The manufacturing sector is intended to be restructured to achieve faster and self-sustaining growth.
It may mean phasing out the inefficient industries that can not stand market competition and ending tariff protection beyond a specified period of time. For example, the textile vision is expected to provide an open, market-driven, innovative and dynamic sector, which would be internationally integrated, globally competitive.
State Bank governor Dr Ishrat Husain says one of the particular means through which change in composition of exports can be accelerated is by removing barriers and constraints in the way of foreign investments and multinational corporations.
Foreign direct investment (FDI) is an important force for integration. MNCs set up supply chains and integrated production networks that tend to locate each stage of production in the country with the lowest cost. Affiliates of a MNC in one country often export to another for eventual sale in a third country market.
Dr Ishrat Husain believes that South Asian countries have so far missed the boat by not becoming part of a global value chain and participating in international supplier chain.
Despite government's all out efforts to attract FDI, foreign investment is not picking up. Though the sovereign ratings made by various international rating agencies has improved in recent times, these ratings are stated to be below the acceptable investment grade.
One of the major issues confronting foreign investors is political stability. Foreigners see the political situation as critical to their investment decisions. Geopolitics appears to be outside domestic control.
Apart from FDI, the success of an export-led industrial strategy depends on the access to the developed markets and an even playing field. It is the dominant corporate and financial interests in developed world which set the WTO agenda.
US pushed financial liberalization, says Joseph Stiglitz, because it had comparative advantage. The WTO's development agenda, a concern of the developing states, has been put on the back burner.
Dominating the WTO issues are environmental concerns, anti-dumping duties, intellectual property rights and trade liberalization by developing countries, etc. Anti-dumping duties imposed by developed states are bogus as hardly any developing country enjoys a monopoly in any product, says Stiglitz.
To produce on economies of scale to cut costs, Pakistan needs to be a part of a regional bloc. So far, there is no uniform preferential tariff area in the making. Finally, the production of a wide range of diverse products at competitive price is a long term excerise and not within easy reach.
It has taken more than half a century to develop the textile sector in which there are merely 12-15 big groups which can withstand global competition in all circumstances. The country needs at least 50-60 such manufacturing groups.
Whereas the integration of the national economy into the international market does benefit export-oriented industries and helps improve the macro-economic indicators, it does not have the desired impact on poverty reduction.
As the policy makers recognize that large scale manufacturing is subject to diminishing job intensity, they reckon that the small and medium sized industries have to take the lead in employment promotion.
Indications are that the government is planning to work closely with the commercial banks to open special windows for financing this sector. It is also stated that SME Bank is also reducing the cost of financing.
Also under official stipulation is the creation of a dedicated credit fund for labour-intensive, small scale self-employment units at the federal and provincial levels through National Credit Plan and Poverty Alleviation Fund.
As development of SME sector is stated to be a major policy focus for the government, support centres are to be set up at growth points for small scale industry. Officials reckon that the SME sector has the potential to spur pro-poor growth. Poverty has emerged as major national and global issue and to quote a leading corporate citizen "capitalism is under strains because it creates poverty."