The issue concerns preparing Pakistan's industrial and agricultural sectors to meet the formidable challenges posed by globalisation.
The "competitive gaps" in Pakistan tradeable goods sector appear pronounced across a range of parameters, including: low labour productivity even in relation to many regional economies (arising mainly from an inadequately-equipped labour force due to low educational attainment); low technology-diffusion (stemming from a depleted capacity for innovation and a virtually non-existent research and development effort in the non-military sector); the operation of physical infrastructure constraints; and high business costs.
While some areas of weakness have been addressed through vigorous policy action, such as the pursuit of macroeconomic stability via fiscal consolidation, more direct and sustained policy intervention will be required across a wide front to improve upon remaining areas of concern.
So far, the effectiveness of Pakistan's policy response can be gauged by the fact that the council set up to deliberate upon matters pertaining to WTO has met once (or twice at most) in the last two years - or that the government has considered in the recent past an officer of the police service as a serious contender for the post of commerce secretary. In an era of technocratic specialisation, these missteps underscore how out of sync with reality current policy on meeting the challenges of globalisation is.
SETTING THE SCENE: In an era of globalisation, characterised by progressively more open movement of goods and services, capital, ideas, technologies - and the physical relocation of production processes across national borders - the economic process and well-being of countries has been increasingly tied to the competitiveness of their firms.
Economies able to "plug" into huge opportunities presented by trade and investment liberalisation, leading to the mushroom growth of global production systems and value chains, for example, have prospered in multiple ways. Such successful economies have managed to garner a disproportionate share of developing world exports and FDI for themselves, while the less successful economies have been left trailing behind.
As an example, it is worth considering the following; the five most dynamic developing country exporter nations have accounted for over 70 percent of the total increase in exports from the developing world (and one fifth of the overall increase in world exports) since 1990. In terms of inward FDI, the level of concentration is equally pronounced, with China's share alone at 33 percent.
In this context, where does Pakistan stand? While there are a handful of areas of clear strength and potential opportunity for the country, by and large, across a broad front the international competitiveness of Pakistan's industrial sector appears to be weak, even relative to many of its regional peers. To gain a measure of Pakistan's position on this score, consider the following:
-- While many develo0ping countries have seen a fairly rapid expansion in exports since 1990 - with China, Malaysia, Thailand, and India among the high-performers-Pakistan's share in total world exports (including commercial services) has declined. In contrast, India's total exports have risen from USD 23 billion to USD 73 billion between 1990 and 2002, with its world share increasing from 0.5 to 1.1 percent.
-- A measure of an economy's success in generating a virtuous spiral of export-led growth and inward FDI is the share in total exports of foreign invested enterprises (FIEs). Almost 60 percent of China's exports, for example, are generated by FIEs. In Pakistan's case, FIEs account for only 0.8 percent of total exports.
-- The scale of missed opportunities in Pakistan's case is exemplified by automotive products-global exports of which amounted to USD 620 billion in 2002 (or roughly 10 percent of world merchandise exports). While countries such as Philippines and India exported auto parts worth USD 800 million and 600 million respectively, Pakistan's auto industry managed exports of less than USD 10 million in 2002-despite benefiting from heavy protection for years.
-- Even in terms of technology-intensity, Pakistan's exports have remained heavily concentrated in low technology segments. By comparison, Pakistan's peers, including India and Sri Lanka, have moved up the technology ladder.
-- The low share of technology-intensive products in Pakistan's exports-and the failure to raise this to a meaningful level in well over a decade - while disappointing, is hardly surprising given the country's limited capability in high technology areas. The weak domestic capacity on this front is captured by a host of well-documented indicators such as the number of scientists per thousand population, or the government and/or private sector corporate spend on research and development (R&D).
-- In this context, it is worth considering that, in 2002 (according to World Bank data) India's R&D spend relative to GDP was higher than China's (1.23 versus 1.09 percent).
-- In turn, the monumental policy neglect in developing the economy's skill base and its social/human capital, is best exemplified by the declining spend on education during the 1990s - both as a percentage of GDP and as a percentage of total expenditures. It should be of no surprise, therefore, that Pakistan's tertiary enrolment levels are lower than those of Bangladesh or even Nepal.
-- Given the staggering scale of policy neglect over the last few decades, and some of its consequences as outlined above, what needs to be done? The policy recommendations flowing from the above are set out very briefly in the following section. In some cases, to the credit of the government, initial steps have been taken - but these need to be build upon.
POLICY RECOMMENDATIONS
1. First and foremost, Pakistan needs an all-encompassing, overarching national strategy for improving the competitiveness of its economy. Currently, the overall policy approach is ad hoc and fragmented, with weakly defined ownership (amongst so many stakeholders, it is difficult to sift who's in charge).
2. To assist in reducing "policy lags", as well as to monitor progress in implementation of measures taken, the government should re-institute a high-powered business council. This should comprise representatives from a wide cross-section of the private sector as well as government, to pinpoint implementation failures in the government's investment and export-promotion policies.
3. The issue of businesses in Pakistan operating with higher costs, generally, than their trade competitors in the region, or with less adequate provision of physical infrastructure, is well established. To rectify this state of affairs, it is recommended the government:
-- Increase substantially the size (and actual disbursement) of the Public Sector Development Program (PSDP) - significantly higher than the planned increases projected in the Poverty Reduction Strategy Paper (PRSP) - and focus on a set of core priorities, including removing infrastructure bottlenecks, technological upgradation and skills/human capital development.
-- In terms of removing infrastructure bottlenecks, initially the government should focus on bringing world class infrastructure to high value locations where the externality can be greatest. These will typically be the current export and/or industrial centres such as the Karachi Export Processing Zone (KEPZ), the SITE industrial area in Karachi, Sialkot industrial area, the planned "textile cities", and the four Software Technology Parks established all over the country.
-- Reduce bureaucratic "hassle", by rationalising the number of annual inspections required by government agencies, for example, or by monitoring and regulating the interface with government officials to a bare minimum, by setting up a "register of visits" at the enterprise level. In addition, faster customs clearance of goods, especially relating to the export sector, should be ensured.
4. IN TERMS OF TECHNOLOGY UPGRADATION:
-- Aim to achieve faster diffusion of technology through strategic FDI. Current efforts at promoting FDI lack focus. What is needed is a more targeted approach that aims to attract foreign investment linked to global production systems in sectors such as electronics or auto parts.
-- Link existing technological capacities in non-civilian fields to production processes in the civilian domain;
-- Invigorate interaction between academia, civilian and non-civilian research facilities, and commercial end-users of technology through a system of incentives;
-- Liberalise import regime further;
-- Increase spend on tertiary education;
-- Institute a quantum rise in expenditure on Science and Technology (S&T). in the current year's (FY04) budget, the allocation for S&T was reduced, contrary to the government's stated intention.
5. To promote skills upgradation, the government should incentivise the setting up of vocational training centres by the private sector, and provide for a credible system of accreditation. The areas of training should be set in consultation with the private sector, keeping the country's requirements in a medium to long-term timeframe.
6. The absence of a well-defined bankruptcy procedure hinders the exit of less-efficient firms. Current practice of encouraging banks to settle with defaulting borrowers on a set of terms defined by SBP, without the debtor being penalised in any way, creates a moral hazard. If, to the contrary, a less-efficient firm is allowed to exit, more dynamic firms-technologically and business-practice wise - in the forms of new entrants are likely to take over.
CONCLUSION: Notwithstanding resent success in exports, which may be breeding a sense of complacency, the competitive positioning of Pakistan's industrial sector is weak across a broad range of sectors, barring niches such as in textiles and apparel. Addressing the daunting challenges posed by this state of affairs will require a reconfiguration of government policies. First, a national vision and strategy has to be articulated, defining the long-term development policy of the government and its link with the industrial and export sectors. Second, a strong sense of ownership has to be conferred to this enterprise of national strategic importance. Third, myriad constraints facing private enterprise have to be removed. The overriding challenge is to reverse, in a matter of years, the policy neglect of decades.
This report was completed by the Economics Department of ABN AMRO Bank dated May 24, 2004. The analysis/information in the article above, is not intended as investment advise and should not be construed as such. The contents of this publication may be quoted without permission, but due acknowledgement is requested.
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