These sectors have now reached a saturation point, if not over-capacity. The traditional sector has, thus, not been able to attract any worthwhile investment, create employment and generate revenues.
The non-traditional sector, particularly the basic industries, which include steel, engineering, chemicals, pharmaceuticals, refineries, fertilizers, and auto industry, and were nationalized during early 70s, are being advised to be “phased out being internationally uncompetitive” (Dawn - 23.12.00). Imprudent free economy slogans (excepting development of engineering contracts) have particularly led to ‘Pakistan-made obsession not workable’(Dawn 19.09.02) and the steel industry faces uneven competition” (Dawn 04.12.02): Preferences to assemblies over manufacturing, reducing protective tariffs - a typical case being the reduction of custom duty from 30 to 5 per cent on CKD parts of home appliances and TV, among others— tend to deprive local industry, on the whole, from erstwhile competitive advantage. Free trade initiatives including trade with India (Dawn - 13. 11.02) without having a socio-political stratagy - has resulted in entrepreneurial indecisiveness in whatsoever manner. These measures, among others, have discouraged investment - local and foreign - and need a thoughtful consideration in order to encourage investment, employment and elimination of the gaps between revenues and public spending.
Be it as it may, there is no such thing as free economy, as the word suggests, the world over. At the most, there is regionalism, protectionism, if not narrow nationalism, demanding developing countries to open their economies when the developed world itself is practically a closed market. If it were not so, there would have been no ECC, Nafta or recently Saarc, of whatsoever value. The developed countries protect their industry and agriculture alike. They restrict imports, among others, through restrictive quota system from the developing countries. One recent case is of the USA having imposed 30 per cent additional custom duty on import of steel when Pakistan has been advised to phase out its steel industry being “internationally uncompetitive”. It is usual for the USA to do so, wherever the American interests are at stake. An extra duty on import of automotive vehicles - the ‘luxury vehicles’ - from Japan, is a well known case in this respect. They had, once, penalized a Japanese manufacturer by imposing a penaty of $100 million for having imported components and parts from their plant in Canada, a Nafta country together with the USA and Mexico, which they had agreed to produce within the USA.
During early 90’s, the competitive advantage to the local industry was reduced from over 100 to 60 per cent by an interim unrepresentative government - for three months only - led by a former Vice President of the World Bank and assisted by a local known businessman, as minister for finance, also an advisor to the World Bank. The present situation is also more or less, the same, when the competitive advantage has further been reduced to just 25 per cent. To top it all, an agreement was signed with the WTO, allowing free import and export (?) from the country almost during the same period - in 1994, in the same or similar circumstances. The private sector came to know of it, only a couple of years ago, thus giving no time to the industry to prepare for it. It is a common knowledge that the World Bank does not encourage investment in whatsoever sector, if it is “internationally uncompetitive”.The IMF has traditionally one formula- ‘fit for all’. It favours devaluation of currencies, cut in public spending, increase in socio-physical infrastructural cost including rates of interest - all leading to increasing local costs and thus shying away investment. The WTO is believed to represent 0.01 per cent of the richest multinationals and promote free trade for the developed countries not so much for the developing ones.
Then there are some educational institutions, financed by foreign interests, some scholars duly aided by IFIs and some Pakistani “elites” duly compensated, who are always ready to follow these policies, not conducive to national genius (Dawn 04.12.02). Generally, Pakistanis with foreign nationalities and residencies or those aspiring for such facilities are available for biased research, reports and recommendations which have ready acceptance by some government in power, to say the least.
In this background, freely allowing Pakistanis to set up businesses abroad, promoting Pakistani investment in foreign countries including the USA, the UK, Canada and Middle East instead of investing locally is against the national interest. These policies have affected investment, production and export, on the one hand, and employment on the other. A vested interest at the helm of affairs is being blamed for the untimely measure depriving the local economy from its rightful immediate gains. This process is going on unabated with the local industry being out of focus, somehow or other.
Consequently, these policy measures, have led to more of trading - unorganized trading - than industry - more of unorganized industry.The gap between imports and exports has continued as it was, the claim in the increase of exports is just rhetoric. Exports had touched $8.5 billion in 1996-97 and rose only to $9 billion in 2002 - rising at less than the rate of inflation. Smuggling, under-invoicing and imports through other irregular channels have actually increased rather than decreased. “Bara Markets” continue to flourish despite government’s claim to the contrary. Chambers of commerce and industries continue to toe a path of applause - if not flattery - in limited vested self-interest rather than playing a role guiding the government in the larger interest of the community - that is industry in organized sector - that attracts investment, creates employment and raises revenue and not commerce and trade, as such, and more so, in the organized sector. It is high time thus that the these chambers are bifurcated into commerce and industry, as in many other countries, in the broader national interest.
Then, there is the question of free trade with “the neighbouring countries”, in fact, India. While India will provide a large market, there is a great economic disparity between the two. To begin with, India does not borrow from the IMF, a traditional micro deflator for developing countries.That is why independent economies like Malaysia follow Nobel Laureate Amartya Sen, in harmonizing IFIs policies with local priorities. There is great disparity in the value of Indian and Pakistani rupees in relation to dollar ( Rs48 in India against Rs58 in Pakistan).It inflates import costs through duty and sales tax application down to the retail level. Sales tax in India is 5 to 12 per cent, depending upon state to state, and in Pakistan, a uniform rate of 15 per cent. In Pakistan there is presumptive tax on income at 5 to 6 per cent whether there is profit or loss, while in India there is no such tax.
There is low rate of interest and 10 times bigger volume in addition to a highly subsidized socio-physical infrastructure in India compared with Pakistan. The result is that although India and Pakistan made cars and motorcycles, as an example, are comparable in “net of government levies,” the retail prices are naturally not comparable. Economic parity with India thus must be obtained before opening trade with India in order to ensure compatibility of gains to the two distinct economies.
Further, over 70 years old steel industry in India is generally protected at 50 per cent, custom duty against about 5-25 per cent in Pakistan’s 25 years old Steel Mill. Custom duty on spare parts in Pakistan is lower at 25 per cent against 30 per cent 35 per cent on CKD for assembly and progressive manufacture in most engineering goods industry including auto’s. In India engineering industry is almost 100 per cent localized and is a major exporter. In Pakistan it is still an import substitution industry. Import of trucks components and parts as scrap, in fact, are ready for assemblies encouraging trading rather than industry in Pakistan. There has been dumping of motorcycles at throwaway prices and further under-invoicing and clearance on ridiculously low prices, if not duty free, thus developing unorganized sector at the cost of the organized sector investment. Same or similar is the case with cars, commercial vehicles, trucks and tractors not excluding other engineering goods - TVs, air conditioners, home appliances, to name a few.
Such ‘brief case assemblers’ have discouraged investment in the industry set up with a lot of time, effort and investment. Additionally, there are cases of import of pass-through spare parts leading to assemblies, the government claiming that there is no law to check it, and, if not, then why not enact one rather than let be gone, be by gone! The new entrants are required to start with the deletion already achieved with minimum investment and facilities, such as, frame assembly, engine assembly, paint shop, maintenance, testing, after-sales / warranty and PSQCA certification not being generally guaranteed. A provincial government recently released for registration consignment of such illegal imports against the clear direction of the federal government. The concerned department of the federal government, on the other hand, is holding up action on a similar case in Lahore dry port which did not abide with the localization criteria laid down in this respect.
There is thus a case of general review, as a whole, with immediate rectification of the duty on spare parts to be enhanced equitably - say, 50 per cent in order to nip the evil in the bud, avoiding use of spare parts in assembly and progressive manufacture of the industry, instead of indigenization as per local deletion programmes.
Further, the localization programmes must be ensured to continue till such time as the economy does not get internationally competitive — come what may, being in the national interest— WTO or no WTO! Cases of dumping, under-invoicing and misdirection for clearance must not be allowed. On the other hand, the industry, wherever, having reached an export stature, for example, vending industry, must be given incentive for exports. All this will lead to localization, per se, and hence investment, production and export leading to employment and much needed government revenues.
While the above explains why investment is shy, it also explains, why revenues are short and unemployment is growing— more so of educated elite, engineers, MBAs, IT graduates, to name a few. While due to 9/11 aftermath, visas are not available for such educated elites to go abroad for employment, those already abroad, are losing jobs, and returning home with no jobs available here. Unemployment, therefore, is going to become a serious problem to the country which no government can afford, much less the newly elected government.
The fact is that when local investment goes shy, foreign investment follows suit. The reverse is not wholly untrue. Foreign investment also follows political stability and socio-economic solidarity. It is indeed attracted with sufficient protective walls and local competitive advantages and for no other considerations at all. If there is complete free economy, the foreign investors has a choice of markets and shall certainly choose the best of all including stable government, good law and order situation and socio-economic harmony - generally not ideally available in countries like Pakistan. Friendly relations alone neither help foreign investment nor only the incentives. Therefore, unless all this is granted the foreign investment remains a wild goose chase.
With the macro economic stability - foreign exchange reserves rising to $10 billion, rupee valued at about Rs58 and generally single digit rate of interest - achieved in the last couple of years, particularly, these issues, thus, can now be addressed through a stable government and an acceptable socio-economic policies.Equally important is an approach towards growth economy— hi-tech value added investment, dovetailing international financial institutions’ policies with local priorities, depriving competitive advantage to the local investment not practiced by the developed world itself. This is also acclaimed at the cost of political, economic and social disharmony of the developing countries, not to speak of Pakistan - so that leading to agitation - lawlessness - from labourers, social workers, and small and medium size entrepreneurs all over the world - wherever these IFIs’ meetings are held. There is thus an obvious case to align IFIs policies with local priorities. Foremost in this respect, among others, is to mellow down the WTO’s operations if not suspend them completely, so long as Pakistan economy is not internationally competitive, and, in general, harmonize the World Bank and the IMF perceptions, with the local genius of growth strategy, in the short and the long run! Mr. Wolfensohn, the World Bank President, himself believes in, glocalization i.e. globalization through localization: He says: “We need local ownership and local participation. Gone are the days when development could be done behind closed doors in Washington or Western capitals or any capital for that matter”.
We thus must harmonize such thoughts with local aspirations. Experience in countries like Malaysia shows that as long as a country has sufficient reserves - which thanks to the government, we now do - then industrial policy can be formulated that simultaneously promotes export based industries, nurtures import substitution industry and protects strategic industries. The hi-tech value added industry, can be nurtured and promoted to become globally competitive - instead of phasing out being presently “internationally uncompetitive”. In India, the hi-tech value added industry is now one of the major export and top tax generators for the government. They did it through focusing on manufacturing and value addition and not assembly. Why not in Pakistan?
The country’s resource base, including high quality human resource and dynamic entrepreneurship,has led to an average GDP growth of 4.90 per cent since 1951, despite frequent changes in government— 8 from 1980 to 2002. It seems, this GDP growth was despite uncertainties, of whatsoever nature, but, due to the clearer policies, howsoever inadequate and inconsistent. With leadership—-experience, expertise and foresight—-let us ensure, that these important national issues are resolved- sooner than later- including investment and employment - of educated elite - and revenues matching expected public spending, among others, in order to ensure economic growth leading to our socio-political harmony, to say the least.
(In self reliance lies He salvation)