Issues and Opportunities
Since the dawn of the Industrial Revolution and the invention of assembly line techniques of mass production by Henry Ford, the industry has been playing a critical role in job creation, urbanization and expansion in world trade. In addition to economic significance, the industry has contributed massively to countries’ bilateral and multilateral relationships and has even helped them to play a dominant role in the realms of international law, politics, conflict resolution and neo-colonization of the developing and underdeveloped countries. A typical example is the United States of America that emerged on the international stage as a global power by dint of its vast and inexhaustible industrial power that endowed it with both hard and soft power to influence the decision-making of world’s political and economic institutions. Now the industrial power of nations has assumed strategic importance and every nation strives to expand and diversify its industrial power so as to enhance its geostrategic and geoeconomic relevance in world affairs.
Just like the other developing countries, Pakistan also relies on its industrial power to reduce its trade deficit and strengthen foreign exchange reserves. Industrial sector consists of four subsectors: (1) Mining & Quarrying; (2) Manufacturing (Large Scale, Small Scale and Slaughtering); (3) Electricity Generation & Distribution & Gas Distribution; and (4) Construction. Though the industrial sector provides 20.88 percent share in our national gross domestic product (GDP) and is playing a critical role in job-creation and socio-economic advancement, our industry is reeling under chronic issues that are severely hampering its ability to contribute to national growth to its full potential. It is, therefore, pertinent to highlight the various challenges confronted by this important sector so that their viable solutions may be sorted out.
The challenges can be categorized into major areas of historical backwardness, economic constraints, social regression, administrative limitations and dependency on climate.
Historically speaking, the provinces constituting modern-day Pakistan have long been neglected by the British industrially, as a mainstay of their approach was to improve agricultural inputs so that the supply of raw material to their industry could be ensured on a sustained basis. Therefore, they invested massively in improving the agri-related infrastructure like irrigation system, and deliberately stifled local industries through tariff and competition. The situation can be best gauged from the fact that at the time of partition, out of 922 industrial units, Pakistan got only 34. This industrial backwardness meant that we started from scratch and had to mobilize our optimum human and material resources to ensure self-reliance in industrial products.
Economically, there are multiple problems that are responsible for the lacklustre and much-below-the-potential performance of our industrial sector. In this regard, flawed industrial policies like undue emphasis on import substitution strategy rather than export-promoting policies, negligence over developing heavy industries, the policies of blind nationalization and reckless privatization; non-utilization of mineral resources; lack of basic infrastructure such as roads and railways networks; liquid and flexible exchange rates; and poor credit mechanism can be quoted as the underlying economic causes that are creating hindrances in the realization of the potential of our industrial sector.
Energy crisis in the form of power outages and gas shortages has virtually held the industrial sector hostage. Although the previous government has added 11,000 MW of electricity to the national grid – thanks to CPEC-related projects – it failed miserably to curb the ever-ballooning circular debt in both electricity and gas sectors due to theft, line losses and recovery-related issues. Now that the circular debt has soared to Rs. 1 trillion in power sector and Rs. 160 billion in gas sector, given the already worsening economic situation, it is unlikely that the PTI government would be able to clear the circular debt instantly, so the curse of load-shedding, which is already causing a loss of 2 percent of GDP annually, is knocking at the door.
Our industry is also suffering from administrative constraints. Poor performance of state-owned enterprises that drain our national kitty by nearly Rs. 1 trillion annually; complicated procedure of start-up ecosystem and setting up industrial units; poor role of bureaucracy due to corruption and inefficiency; deteriorated law and order situation; and non-existence and non-implementation of intellectual property rights, as well as lethargy on the part of courts in resolving disputes are some of the constraints that impede the sustained growth of industry.
Defective foreign policy is yet another major cause of concern for our business community. Free Trade Agreements (FTAs) with developed countries are causing frustration among businessmen as they face unmanageable competition from imported items. For example, our FTA with China is causing an annual trade deficit of $10 billion and is forcing our local industries to either shift to other countries or yield to the pressure. In addition to poorly-thought-out FTAs and strained relations with the neighbouring countries – potentially, the big untapped markets – are ruining our industrial sector. India, Afghanistan and Iran offer huge markets for our export items; however, by hyphenating trade with security, these markets have been rendered inaccessible to our business community.
Pakistan’s industrial sector is also facing socio-political issues like marginalization of women, corruption, political instability, terrorism and nepotism, and lack of budgetary allocation for research and development. It is unfortunate that despite huge influx of capital in the form of CPEC-related projects, we have failed to establish state-of-the-art industrial research centres where research could be done on the least-cost location of industries, the most appropriate export items in view of the demand in international market, standards of finished products and potential markets for our exports. Chambers of Commerce and Industry (CCIs) are resource-constrained and SOEs are financially handicapped, hence, they can hardly finance research. The result is non-exploration of new markets like Africa and non-diversification of base of industry and negligible high-tech export. We cannot raise our exports to $50 billion or $100 billion by selling only rice, unprocessed mangoes or surgical instruments; we have to invest in scientific and technological capabilities in order to expand our industrial base. If our scientific community can bring Green Revolution in the 1960s, develop nuclear capability in the 80s and make Pakistan self-reliance in missile technology in the 90s, why the same community cannot be trusted again to increase international competitiveness of our industrial products? What we need is to provide goal-oriented research facilities and state protection to the venture capital in the emerging technologies.
The climate also has indirect impacts on the growth of industries. Since most of our industries are agro-based – they draw their raw material from agriculture – changing weather patterns, frequency of rainfall, extreme heat waves and increased temperature are negatively impacting the agriculture and that, in return, is effecting a decrease in the production of industrial units.
Low productivity and international competitiveness are also major issues. Labour has been deprived of its basic rights, the management is facing serious capacity issues, investors cannot expand or modernize their units due to non-availability of soft loans , and no implementation of safety measures render the labour unproductive and costly. The results are high costs of production, low value addition, limited space for expansion in business activities and, sometimes, international sanctions like the ones imposed on our Sialkot-based football industry on the pretext of child labour.
Although there are multiple challenges confronted by our indigenous industry, there are also many untapped potential areas that, if materialized wisely and sustainably, would unlock unprecedented windows of opportunities and generate huge revenues for Pakistan.
One such area is high-tech industries, e.g. computer industries, telecommunication, fibre optics, electrical machinery and robotics. As per an estimate, Pakistan has a potential of exporting $10 billion worth IT products. Although our rankings on the Human Development Index (HDI) and level of research in knowledge economy lag far behind even India and other developing countries of Asia, we can attract FDI in these areas, and, in the meanwhile, adopt long-term strategies to improve our HDI rankings. It is a welcome sign that the incumbent government is fully cognizant of this potential and has announced to launch Pakistan’s first national policy on IT. One can hope that the government would mobilize its resources for the betterment of this long-neglected subsector.
Slaughtering, that is currently contributing negligible amounts to our GDP, has huge potential for earning foreign exchange. Halal food is in huge demand in Europe and the United States due to its hygiene and nutritional value, and also because of a rapidly-increasing Muslim population in Western countries. Despite the fact that India is a Hindu-majority country and marketing of beef there can lead to death and riot, it is the world’s second largest beef-exporting country. Contrary to India, we have all prerequisites for boosting beef-exporting ability like religious freedom, domestic market for consumption, etc. but we have failed to capture world markets. If we ensure a hygienic slaughtering process by establishing state-owned or strictly-regulated slaughterhouses – in addition to its value addition – this subsector has huge potential (erstwhile untapped) for substantial increase in export of beef, hides and bones.
Mining is another subsector of industry that demands immediate structural reforms. Pakistan has huge deposits of several minerals including coal, copper, gold, chromite, mineral salt, bauxite and several others; ironically, we have succeeded in surveying only 21 percent of our total land area. We have no idea as to what kinds of mineral resources are there in unsurveyed areas. In addition, we have virtually zero exploration activities in exclusive economic zones along the coastline of the Arabian Sea despite the fact that we have extended our EEZ by 150 nautical miles in 2015. It is high time we expedited the exploration and mining activities through providing incentives to multinationals and enhancing human and technical capacity of Pakistan Mineral Development Corporation. Enactment of labour-friendly laws, strengthening of environmental regulations and improvement in road and health infrastructure would go a long way in increasing the share of mining sector in our national GDP.
Pakistan has been ranked 147th out of 190 countries on the ease of doing business index of the World Bank. This ranking uses the indicators of starting a business, dealing with construction permits, getting electricity, registering property, getting credit, paying taxes, enforcing contracts and resolving insolvency. We need to improve our rankings by streamlining the process of establishment of new industries, eliminating the bureaucratic red-tapism and corruption, solving the power outage, providing business-friendly banking facilities and strengthening business or consumer courts for speedy trials of disputes.
Public-Private Partnership (PPP) is the model widely adopted by many countries to set up large industrial ventures. This model has more relevance in Pakistan owing to the fact that our state institutions have neither the required financial resources nor the technical expertise to undertake ventures in LSM, slaughtering or mining. The collaboration may be in the form of BOOT (build, own, operate and transfer) arrangement, just like in most CPEC-related energy projects, or it could be sharing-based financial and administrative management. A PPP would require tax concessions, improved law and order, construction of physical infrastructure, political stability and continuity of state policies. It is earnestly hoped that the new government encourages the much-needed private investment by meeting these requirements.
With its domestic market of 201 million people, huge geopolitical, geoeconomic and geostrategic importance and vast mineral and human resources, Pakistan fulfils all the requirements of sustained industrial growth. Unfortunately, we cannot materialize the potential owing to various factors. The CPEC has opened a new vista of opportunity and we must modernize our physical infrastructure, promote technical education and training to improve our HDI rankings and streamline the process of establishing Special Economic Zones (SEZs) in order to capture the industrial markets of China, Central Asian Republics and Afghanistan and India. In this regard, de-hyphenating security issues from trade would pave the way for regional connectivity and integration, the very ingredients for sustained industrial growth.