Need for a U-turn

Pakistan needs to re-orient its economic change strategy and bring the state back into pro-active action

By Zubair Faisal Abbasi
The underlying economic structure of any economy is of immense significance. Whether the structure is based on industrial manufacturing capability backed by a well-functioning financial and education system or not determines a large portion of success and failure of an economy. What kind of manufacturers it produces for foreign and domestic trade is profoundly important too. This is the crux of political economy of industrial and trade policy which goes beyond the 'export-led growth' mantra of the Ministry of Commerce in Pakistan.
Dani Rodik, a brilliant economist based in Harvard, while emphasising the importance of manufacturing capability strengthened with export growth and export diversification argues that "what you exports does matter." It does matter whether a country exports potato chips or computer chips. The point is that a successful trade policy has to work in line with the industrial development objective enshrined in a well thought-out industrial policy.
In Pakistan, the reality of economic strategies is perching on an inverse logic. In Pakistan, according to the Economic Survey of Pakistan 2007-08, the over-arching principles of economic change are embedded in Washington Consensus approach claiming privatisation, stabilisation, and liberalisation as ideal panacea. It further claims that Pakistan does not intend to re-discover industrial policy.
Perhaps, economic managers of Pakistan want to prove that the economic development route of the UK and the USA as well as of the late industrialises in East Asia who staged a development miracle was wrong. They must have first liberalised their economies with the state taking a back seat and then see the "invisible hand" churning out "development" through increased competition in markets. In fact, the now-dominant economic managers in Pakistan believe that "planning and coordination" is less superior a strategy as compared to "market and competition."
The results of this economic policy are interesting. While the average tariff has been reduced from 77 percent in 1985 to 17 percent in 2004 and around 10-12 percent now, the share of Pakistan's world exports actually fell from 0.16 percent in 1990 to 0.15 percent in 2004. In addition, the growth of the manufacturing component of GNP has also declined from 6.9 percent in 2002-03 to 5.4 percent in 2007-08, which is showing further decline. These results show that industrial decline in Pakistan actually started much before the current global financial decline. Historical data also suggests that the output growth in manufacturing, in terms of annual averages, was 15.7 percent in 1950-60 and 13.4 percent in 1960-70, which declined to 4.5 percent in the years 1990-01.
Taking note of such strategies, Prof. Deepak Nayyar, has recently argued that economies are like springs. Hard springs (developed economies) when compressed with openness and cut throat competition, bounce back while soft springs (less developed economies) lose their strength and do not bounce back. Is Pakistan proving to be a soft spring? Answering this question may not be too difficult. However, in any case, the elected democratic government should try to avoid being a soft spring pressed too hard with liberalisation, privatisation, and neo-liberal type stabilisation. The solution lies in industrial policy aided by a strategic trade policy, which develops a framework of selective regional and global integration and local industrial capability.
Looking at from this angle, the issue is that the state of Pakistan needs to come back with economic planning for structural transformation of the economy. The planning should be able to develop a coherent industrial policy, which identifies the priority sectors and facilitates the development of relevant industries. The need is to identify those industries, which can have wide effects on the economy and shift gears of the whole economy, rather than a single industry.
In the last trade policy 2007-08, it was promised that industrial cluster development will be encouraged along with reducing the cost of doing business and creating a better business climate so that poverty eradication takes place. These are noble promises; however these ideals are placed in trade policy while most of these must have been part of national industrial development strategy, which the economic managers of Pakistan have simply refused even to initiate. What matters is that industrial development does not emerge automatically from general manipulations of tariffs, tax cuts, and subsidies. In fact, the industrial development, which has successfully reduced poverty in East Asia, China, and India, has emerged from industrial development, planning and coordination aided by strategic trade policies.
This is a historical fact that all of the now-developed countries have used, both the infant industry protection and promotion policies, to economically develop and transform their economy from agrarian to an industrial economic structure in their catch-up periods. In fact, they industrialised their agriculture sector as well. With the resultant productivity growth, while managing efficiency-equity concerns, they could reduce poverty. Pakistan needs to learn some lessons about "how to govern growth and poverty" with industrial and trade policies from the now-developed countries.
In Pakistan, in the absence of an industrial policy, large-scale manufacturing has recorded an overall negative growth as shown by the data from Federal Bureau of Statistics. Press reports show that overall data for July-Dec 2008-09 depicts a decrease of 4.72 percent over July-Dec 2007-08. Some analysts claim that the decrease in large-scale manufacturing is due to increase in interest rate and power outages, which tend to increase the cost of production. This may be partially true. Partially, in the sense that such analysis does not explain the institutional environment in which the industrial crisis has actually developed. In fact, the energy crisis in itself is a demise of industrial capability and infrastructure in Pakistan. Some enlightened analysts have argued that the decline in effectiveness of the state apparatus, especially the economic bureaucracy in terms of developing vision, establishing coordination mechanisms and accountable institutional arrangements have precipitated the industrial decline. This decline negatively affects the external trade sector, which cannot capture diversified markets with diversified products.
Interestingly, in one of the addresses at The Federation of Pakistan Chambers of Commerce and Industry, (FPCCI) the Secretary Commerce had announced that the Ministry of Commerce and FPCCI would be partners and not clients. This is a noble announcement and must be appreciated. At the same time, it must be realised that the state has to be sufficiently autonomous and sufficiently efficient so that it is not captured by special interests and can execute an equity-efficiency based public policy agenda.
One can learn from others in this direction. For example, the export promotion organisation in South Korea played a central role in making the Export Oriented Industrialisation (not export led growth which plagues Pakistan) a success story. Under the state and private sector arrangement, the protection and subsidisation was very closely monitored by the state. Monthly reporting from industry to the government was one of the key features. Peter Evans calls this feature as "embedded autonomy" of the state institutions meaning that they were autonomous but at the same time embedded in the private sector organisations so that the state could provide administrative guidance and remove information asymmetries needed for business success.
Another key aspect was that the state could control waste of capital accumulation by comprador class and make productive investments in the priority sectors a reality. In the words of Robert Wade, East Asians created "simulated markets" (as opposed to free-markets) and governed them. No doubt, it requires an efficient, effective, and reasonably honest economic bureaucracy. Pakistan sufficiently lacks a viable administrative infrastructure and is trying to plug the hole of economic waste through de-regulation and liberalisation. Recent researches, however, argue that wholesale liberalisation and de-regulation is neither a question nor answer to the trade and industry related problems of developing countries.
While Pakistan has announced that the next trade policy will be for three years, most of the critics are reluctant to accept the long-term positive effects of such steps. These are at best non-issues, which do not deserve to be headlines. What is required is to develop both the trade and industrial policy jointly with the help of Planning Commission of Pakistan and bring the hometown of neo-liberalism -- the Ministry of Finance -- on board. The case in point is that the financial system should serve the purposes of industrial development. Interestingly, Pakistan could witness during the last one decade a skewed kind of growth. The financial sector could grow at the rate of around 12-14 percent while industry at around 3-5 percent and agriculture sector at 2-3 percent. These trends necessitate that the economic managers come out of the delirium that services sector such as financial service can take the economy on a long-term growth path. A recent report by the State Bank of Pakistan says services sectors sustainability expands as a result of growth in industrial and manufacturing sector development.
Therefore, the economic managers of Pakistan should try to learn a couple of lessons. First, that an effective and efficient economic bureaucracy and "Weberianness" is required to establish industrial and trade development in developing countries. Second, that trade policy should serve the industrial development objectives of the state and be in line with industrial strategy. Third, that accumulation of capital should not be handed out (privatised) to the comprador class for waste but should be re-invested in a productive way. Last but not least, the state should know that a Washington Consensus based economic growth strategy is not a high road to growth. The state has to come back. Public sector development programmes should be on the forefront to tackle the global recession related issues as well as ensure Pakistan's long-term industrial development capability.
Keynesian economics has many solutions, which are now again being adopted by the US and the UK. Prof Fredrick I Nixon had argued many years ago that neo-liberalism (Washington Consensus) is neither irreversible not irreplaceable. Developed and powerful economies will change the strategies whenever they need. The current "growth stimulus" packages doling out billions of dollars in Europe, China, and the UK, and the US show that the state can come to rescue whenever it is required. It can help induce growth through re-allocation of capital beyond the dictates of free-market and free trade philosophy.
Looking at the past and the present of economic change strategies in Pakistan as well as in other countries, Pakistan's (isolated) trade policy will be inadequate to tackle the issues of export diversification and a sizable increase in both the volume and value of exports. Pakistan needs to re-orient its economic change strategy and bring the state back into pro-active action.