DE-INDUSTRIALIZATION is one of the most disastrous consequences of the policy of liberalization. The United Nations Industrial Development Organization has recently provided data, which reveals how Pakistan has been following the course of de-industrialization during most of the policy liberalization era.
This era was inaugurated by the signing of the first Structural Adjustment Agreement (SAA) with the IMF in 1988.
The UNIDO has just published estimates of national industrial capabilities of 87 countries for the years 1985 and 1998 and ranked them in terms of several capability indices. The UNIDO has also attempted to combine individual capability rankings into an overall competitive industrial performance (CIP) index - the construction of this aggregate average index is based on several unrealistic assumptions, which I have discussed in a separate technical note (available on request).
This paper summarizes the evidence on industrial capabilities of Pakistan, India, China and Israel in 1985 and 1998. Unfortunately, like other UN agencies, the UNIDO provides no data on the Islamic Republic of Iran (this is surprising since America is not a member of the UNIDO) and I have, therefore, been unable to compare Pakistan’s industrial performance with that of our most important regional partner.
Table 1 summarizes evidence on manufacturing value added or net output (MVA) and manufactured exports. In terms of manufacturing net output per capita Pakistan ranked 70th among 87 countries in 1985 and 71st in 1998. India’s rank remained unchanged in the two years, but both China and Israel significantly improved their international position. Significantly, Pakistan’s net manufacturing output in 1985 was roughly equivalent to that of Israel but by 1998 it had fallen to 60 per cent of the Israeli total. Pakistan’s manufacturing net output in 1998 was only 2.7 per cent of that of China and 15 per cent of that of India. In 1985 Pakistan’s net manufacturing output was almost 18 per cent of that of India.
Pakistan has also performed poorly in terms of manufactured exports. “Manufacturing exports per capita” is a theoretically ambiguous — largely meaningless — concept (why should exports grow faster than population). Our performance in aggregate terms is also unsatisfactory. (It is not possible to compare MVA and manufactured export performance on the basis of these figures). You will see, for example, that in 1998 Israeli manufactured exports were more than Israeli net manufacturing output. This is because while MVA is calculated on the basis of the ISIC classification, manufactured exports are estimated on the basis of the much broader SITC classification. In fact, “true” manufactured exports are much lower and thus significantly less important in all four cases than the UNIDO estimates.
Manufactured exports by Pakistan in 1998 were only 75 per cent higher than in 1985 (in current dollar terms). As against this, Indian and Israeli manufactured exports more than quadrupled in 1998 as compared to 1985. Chinese manufactured exports were 28 times greater in 1998 than in 1985. In 1998 Pakistani manufactured exports were 75 per cent of those of India, China and Israel. In 1998, our manufactured exports were about a third of India and only 4 per cent of the value of Chinese manufactured exports.
Table 2 presents data on technological characteristics of manufactured production and exports.
There is a marked deterioration in the high - medium technology intensity in Pakistan’s manufactured production and exports. Pakistan’s rank in terms of high and medium technology industries (as defined by UNIDO) in net manufacturing output had fallen from 36th in 1985 to 45th in 1998. Pakistan’s rank had also gone down in terms of high - medium technology products share of manufactured exports. Pakistan’s exports of high technology intensive products are almost nil. The share of high tech exports in total Indian manufactured exports is also very low. Both Israel and China have made spectacular gains in this respect.
Table 3 presents data on skill levels and R and D expenditure. Pakistan’s rank has deteriorated in terms of overall skill levels as well as in terms of the share of the population in tertiary technological education. India’s position has also deteriorated on both counts and the R and D share of Indian GDP has also declined. Pakistan spends almost nothing on R and D and is ranked with the poorest least developed Sub Saharan African countries on this indicator.
We can see from this table that foreign direct investment is of little significance for industrial capability enhancement as are royalty payments for accessing MNC technology. Even in China, FDI to total investment ratio does not exceed 14 percent and UNDO presents no data to show that FDI flows to China are in high technology intensive areas. China in 1998 paid a meagre $410 million as royalty payments. Albania, Nigeria, Nicaragua and Uganda have significantly higher FDI to total investment ratios but are of course industrially devastated areas.
Pakistan’s FDI to gross investment ratio has risen from 1.4 percent in 1981-85 to 5.7 per cent in 1993-97 while industry has stagnated. India’s FDI to investment ratio was only 2.2 per cent during 1993-97 but the technological structure of Indian manufacturing is significantly more advanced than Pakistan’s.
In terms of the overall CIP, Pakistan’s position had deteriorated from rank 55 in 1985 to rank 60 in 1998 in the group of 87 countries. China has significantly improved her rank fro 67 in 1985 to 31 in 1998. India has maintained her rank at 50 in both years and Israel’s rank has also remained unchanged at 20. Pakistan’s industrial sector backwardness has thus increased with respect to all three countries on this basis.
As noted earlier, the C1P is not a theoretically well-grounded concept, however. Using population as a denominator in the MVA and manufactured export components indices is inappropriate and diminishes achievements of countries such as China, India, Indonesia, the US and Pakistan. Measurement of technological intensity of industry (high, medium, low) is somewhat impressionistic and arbitrary. Assemblers of high technology manufactured exports are assigned very significantly upward baised ranks - thus the Philippines ranks 25th on the CIP index in 1998 well above Hong Kong, Australia, Brazil, Poland, China, Russia, Portugal and India. Moreover no account is taken of price distortions in international markets (due to sky rocketing levels of firm concentration) of manufactured products and this also renders CIP rankings, vulnerable to large margins of error.
Both manufactured export indices incorporated in CIP are thus suspect. Since all four components of the C1P are assigned equal weights (without adequate theoretical justification) this is a serious error. The emphasis on competitiveness is fundamentally misplaced. The focus, as Paul Kragrean, has repeatedly pointed out, should be not on competitiveness but on productivity growth. A large developing country can focus on the expansion of the domestic market (through a high wage strategy) to stimulate industrial productivity growth.
Unfortunately, the report has nothing to say about productivity growth. The key issue here is generation of reliable data on employment, capital stock and technology flows. UNIDO should develop such data bases as a priority.
Despite these limitations the report should serve as a wake-up call for Pakistani industry. Policy liberalization is destroying Pakistani industry. We are de-industrializing at a rapid pace. Assuming a three percent dollar inflation rate net manufacturing output in Pakistan rose at an annual rate of just 0.75 per cent during 1985-1998 according to UNIDO estimates. Technological capabilities have deteriorated. The share of high and medium technology intensive industries in net manufacturing output has fallen. Less than 0.1 percent of our manufactured exports are high technology intensive. We have fallen behind in terms of skill level and industrial R and D expenditure is non-existent. This is a very alarming situation - deindustrialization with a vengeance.
We need to abandon the policy of liberalization. The growth of foreign trade and foreign investment retard industrial technological upgrade - they lock Pakistan into oligopolistic, inequalizing global market structures, which discriminate viciously against developing countries.
For rapid industrial development and for making up the ground lost in the policy liberalization era we need a strong state. We need a state, which dominates the market, invests heavily in productive sectors and in the infrastructure and articulates a domestic demand-oriented high wage macroeconomic strategy. Such a strong state alone can reverse the process of de-industrialization in Pakistan.