At the dawn of 2017 Pakistan is at an economic crossroads. On the one side we have the IMF warning that unless Pakistan puts in place a comprehensive strategy for reforms, investment, exports and growth, Pakistan will be unable to service the debt liabilities of the China Pakistan Economic Corridor (CPEC) and this would lead to a debt trap that would be difficult to navigate. On the other hand, the World Bank in its recent research report has projected South Asia as the next export power house of the world as East Asia has become comparatively more expensive with an aging workforce. The author explored some of these issues in his article "Export or bust" carried by Business Recorder on December 29, 2016. Pakistan with its huge youth bulge has the potential for leading South Asia as the next export power house and in the process reap enormous prosperity for its people. Therefore, it is important that 2017 becomes the year of reforms and growth but unfortunately the political environment is not conducive for reforms and the government has shown no appetite or capacity for meaningful reforms.
When Pakistan is stacked up against East Asian export power houses our shortcomings are glaring. Global competitiveness is key to becoming an export power house and reforms to boost Pakistan's productivity are critical to achieving global competitiveness. The East Asian economies lead in the global competitiveness index rankings published by the World Economic Forum. Singapore is ranked 2nd, Japan 8th, Malaysia 25th and China 28th. There is a second tier in East Asia headed by Thailand at 34th, Vietnam at 60th and Cambodia at 89th.
South Asia is headed by India which under Narendra Modi has achieved global ranking of 39th, Sri Lanka is at 79th and Pakistan is at the bottom with a ranking of 122nd. In the race to be the next export power house in South Asia, India is clearly in the lead while Pakistan is totally unprepared. Needless to say, there is a one-to-one link between better global competitiveness rankings and higher per capita incomes enjoyed by the people of these nations.
To become an export power house requires a focused and comprehensive national vision and strategy for a breakthrough. The East Asian economies' path from backwardness to global leadership provides a wealth of real world information and role models for countries wishing to make the cut of a leading global manufacturing workshop. The national strategies involved targeting global markets, commandeering and mobilising all national resources, high savings, designing government and private institutions to promote domination of international markets, leap frogging in technology and national capabilities with continuous improvement in national productivity led by research, development and innovation.
The story of Japan was an inspiration for the East Asian tigers. The post-war Japan was in ruins with a shattered infrastructure and a ravaged economy. It had no known natural resource or comparative advantage to drive its economic growth. It adopted a development paradigm purely on the basis of its national leadership and the Liberal Democratic Party's (LDP) resolve to ignore the economic thinking of the time dominated by confining countries to their global role on the basis of their comparative advantage and instead embark on a revolutionary path to develop a competitive advantage in areas in which they had no initial advantage but could lead to huge opportunities in their targeted global markets that at that time was exclusively the United States market. The idea that competitive advantage can be created through a well-crafted strategy and developing institutional capacity to carry out the strategy was born.
After having selected the US market Japan created a national structure of public and private institutions revolving around the key Ministry of International Trade and Industry (MITI) and Ministry of Finance (MoF) who along with the Economic Planning Agency (EPA) manned by a few thousand talented technocrats engineered the financial and industrial policies of Japan. They concentrated on key strategic sectors comprising iron and steel, aluminium, shipbuilding, aircraft, machine tools, petrochemicals, automobiles and consumer electronics.
These were sectors in which the US manufacturers had major comparative advantage vis-à-vis Japan. To overcome the perceived disadvantage Japan Inc was born in which the private sector led by the large corporates known as Keiretsu Groups with associated export houses were selected to lead the charge in a highly competitive US market. The large clusters of Japanese SMEs were interwoven with the Keiretsu system and fully backed up by the Japanese banks, government and civil society.
These government business partnerships enabled Japan Inc to acquire the technology, skills, innovation and marketing prowess to achieve excellence in manufacturing processes and product development leading to the capture of the lucrative American and global markets. The success of the strategy created immense prosperity for the people of Japan and transformed the Japanese economy into the second largest economy in the world with a per capita income matching America's.
While the rest of East Asia also followed the trajectory emblazoned by Japan Inc each one had its own characteristics of blending business government partnerships to acquire the competitive advantages to become global export power houses. The leaders in East Asia; China, Japan and Korea are now also the world leaders in R&D and innovation with annual spending between 3 to 4 percent of their GDPs on new processes and product development. In contrast, South Asia spends relatively little on R&D and its competitive advantage if any depends on its cheap labour and will thus be highly dependent on FDI to bring new processes and products that can give competitive advantage to South Asia.
Learning from the East Asian example Pakistan needs to forge a new business government partnership in which the government needs to elaborate a national vision for becoming the next export power house with a comprehensive national strategy to harness the potential of global markets in China, western and Central Asia, Africa, Latin America, North America and Europe. It needs to rejuvenate its economic governance institutions from the ministries, central bank, banking system, human resource development entities, FDI and technology acquisition entities including the private corporate and the SME sectors. The national strategy should outline how Pakistan can optimise its agricultural potential and leverage its savings to create the manufacturing and services strengths to underpin Pakistan's emergence as a global export power house.
Pakistan has to facilitate the textile industry to achieve economies of scale and scope to become the first export power house segment followed by other sectors. The domestic players need to graduate from serving the domestic markets to becoming global players. In this respect the engineering industry has been ripe to become globally competitive but due to lack of a focused national strategy global breakthroughs have not happened. Pakistan has now a recognisable defence production capability from tanks, aircraft and weapon systems. It also has substantial clusters of farm machinery production and automobile clusters. Domestic electronic clusters are also shaping up. The key is to stack up these clusters against international standards, identify the technological and innovation gaps and address the shortcomings. Creating design capability within the country and global marketing expertise will be the key to penetrating international markets. Becoming part of global value chains will be important.
The China-Pakistan economic co-operation can be a big game changer. China has a huge domestic market; it also has the relationship with Pakistan for becoming a partner in FDI, a technology and skills development partner, a banker for financing infrastructure, a partner for research and innovation, and involving Pakistan in global value chains encompassing a variety of product markets. It is time to revisit Pakistan's medium- and long-term development plans and revamp them to focus on global and Chinese markets, develop strategies for Pakistan to become a South Asian export power house, revamp and redesign the government machinery, promote and facilitate entrepreneurs and deliver economic growth and prosperity to the people of Pakistan.
(The writer is a former Finance Minister)