Pace and pattern of industrialisation

The State Bank has recently advised the government to rethink industrial policy. The national industrial policy 2011, which is well-worded, is not different from erstwhile policies, at least in its substance, which remained either fully or partially unimplemented. The policy seeks to "turn Pakistan into a factory for the world rather than a shop".
However, no signs of its implementation are discernible. It is in this context that a brief resume of the pace and pattern of industrialisation in the country is given herewith. The pace of industrialisation which started gaining momentum in Pakistan in the sixties, could not maintain consistency, having been subjected to acceleration and deceleration during different periods. During the outgoing fiscal year, the industrial growth decelerated to 1.7%.
In a historic perspective, the growth of the industrial sector, the second largest of the economy, in the fifties was 7.5%, whereas in the sixties, the country witnessed an impressive growth of 10%. The decade of the seventies was the worst, because of dismemberment of the country and nationalisation of basic industries. The industrial growth slipped to 5%. The decade of the eighties could be termed as the period of revival, registering an industrial growth of over 8 percent. The application of policies, based on three Ds (deregulation, disinvestment and denationalisation), did wonders. In the 90s, however, industrial growth came down as low as 3.5%. After 2000, the process of economic revival set in. The contribution of the industry to GDP, which remained stagnant at 14%, moved to 18.03% in 2004-05 and now is 18.7%.
Although the country has developed a sizeable industrial complex, but on the whole, its performance has been lacklustre. Notwithstanding this achievement, the manufacturing sector continues to be characterised by traditional low quality and low value-added industries, having comparative resource advantage. A basic criterion to assess the efficiency of an industry is that it must cater to the domestic demand at affordable prices, provide employment to the people, contain influx of imported goods and must have the potential to be converted into an export-oriented industry. The treatment to an industry, on the basis of import-substitution or export promotion did have a damaging-effect on the industrialisation.
In fact, political instability, inconsistent economic policies, a depreciated exchange rate, high utility charges, insufficient infrastructure, lack of human resource development acted as road-blocks. The severity of these constraints, including deteriorating law and order situation, ever-increasing input cost, in the wake of an energy crisis can be gauged from the fact that according to a study, 801 industrial units of various sectors have been closed in Sindh alone during the last six financial years. Almost all public sector enterprises are struggling for survival mainly due to mismanagement. Many industries, including textiles, automobiles, sugar and cement etc have excess capacity, which serves as a deterrent to fresh investment. The excess capacity has been generated due to the urge of entrepreneurs of investing in forward-looking and known profitable enterprises, as well as due to the lack of any roadmap readily available for providing details of aggregate demand and supply of a product, its existing installed as well as utilised capacity, along with import component.
Textile is our premier industry. Its share in employment-generation is 38%, its export in 2010-11 was $14 billion or around 60% of total exports. Its share in global export is less than 2 percent. The engineering industry has a huge potential to grow and contribute to GDP and export, but it did not receive the much-needed focus for development and promotion like other traditional industries. Pakistan Steel Mills is operating below 20% of its capacity and is looking for emergency funding for Rs 12 billion from the Federal government.
The engineering sector is composed of mechanical, electrical/electronics. The light engineering industry encompasses a wide-range of products, ranging from surgical to bicycles. Its global market size is around $2540 billion, in which Pakistan's share is $32 million. The global production capacity of iron and steel is over 1.1 billion tons in which Pakistan's share, which used to be 0.26%, is now almost nil. This has miserably afflicted the growth of downstream industries, including auto cars, construction etc.
The Pakistan Machine Tools Factory (PMTF) which is a precision engineering goods enterprise, caters to the requirement of auto-assemblers, railways, SSGS and others. Its operation losses crossed Rs 5 billion mark in 2009 and is on the verge of closure.
After textiles, the export potential of the leather industry is quite phenomenal. However, its share in the world market of nearly $53 billion is only $447.3 million. The automobiles sector has made impressive growth, but its production capacity falls short of its ever-increasing demand. It is, therefore, denounced for its exorbitant price stance. The industry does, however, provide employment to many people. It is more an assembling industry rather than a manufacturing.
The state of other industries, namely sugar, ceramics, cosmetics, cement, food and beverages, pharmaceuticals, chemicals, edible oil and fertilisers is not better either. Most of these are working much below their installed capacity. The pure agro-based industries - poultry, fisheries and dairy - have yet to be developed on modern lines.
The small and medium enterprises (SMEs) which contribute 40% to GDP are now being treated as one of the drivers of economic growth. The Small and Medium Enterprises Authority (SMEDA), has focused on several priority sectors, including light engineering, marble, gems and jewellery, dairy, fisheries, agro processing, sports goods and furniture. These sectors have been selected to develop specific roadmaps to stimulate their growth. The SMEs have tremendous potential of employment-generation and poverty-alleviation. The growth of SMEs has been restricted due to a variety of factors including uniform policies, both for large-scale and SMEs, which could not meet the specific needs of small industries and the setting up of most of the SMEs in the unorganised and informal sector by entrepreneurs, having little or no educational background.
The SME Bank could not adequately address the fund requirements of this sector. The problem of collateral and high mark-up continues to persist. Due to the escalating cost of production of SMEs, these are unable to compete with the imported cheap Chinese products and are facing closure.
In an era of globalisation, where liberalisation of trade is the order of the day and all physical and fiscal barriers are being dismantled, the maxim of "survival of the fittest" is fully operative, not only in the global, but in domestic market too. The development of an industry in a captive market and under tariff walls is no more possible. The quality of products and their competitiveness indeed, hold the key for success.
Industrialisation also suffers from structural weaknesses. It is not balanced, with the result that industries in some areas are heavily concentrated, while in certain areas there is hardly any industry. The province of Balochistan is very rich in mineral resources, yet the same has yet to be fully exploited. The construction of Gwadar Port is indeed a positive development. Rural industrialisation is primarily in the stage of planning. Thus, the industrialisation of the country so far has not been able to bridge the gap between the leading and lagging areas. The country has been lagging specially in engineering and capital industries and therefore, reliance on imported machinery, including the textile industry continues to persist. Pakistan's share of global manufacturing export is stagnant at 0.18%. The diversification processes are slow and the technological base is thin. Textiles` continues to be the prime industry, whose export consists of 60%. The industrial sector has also been criticised for its poor trickle-down impact, with the result that twin problems of poverty and unemployment have emerged with their full intensity and gravity. The FDI stood at $1232 million during July-April 2010-11 as against $1725 million in the preceding year.
Foreign direct investment (FDI) in the country is, indeed, inevitable to make up for the deficiency of capital resources, modern management and technology. The inflow of FDI has not been very encouraging during the past few years due to political instability and inconsistency in policies and the negative image of Pakistan. It is imperative that in order to develop industry on modern and scientific lines and make it more competitive in the world market, adequate efforts be made to induce FDI. Meanwhile, the total domestic investment has declined form 22.5% of GDP in 2006-07 to 13.4% of GDP in 2010-11.
The cost of doing business in Pakistan is comparatively much higher than in many neighbouring countries. There is acute shortage of infrastructure particularly electricity and water besides a higher rate of interest. The industrial sector accounts for 25.1% of total electricity consumption in the country, which constitutes a major component of the cost of production. For example, it constitutes 10 to 12% for textiles. Pakistan's transport sector mainly Railways and PIA are in bad shape and lack quality, which causes huge losses to industry. There is a shortage of skilled and trained manpower and their productivity is low.
It can, therefore, be safely concluded that the policy is not reflective of the ground realities. The industrial sector is confronted with a host of critical problems and challenges, but the response of the government to address them is very poor, perhaps, due to multiplicity of ministries, dealing with industry, production and trade. Thus the responsibility remains divided, in the face of no mechanism of co-ordination and co-operation. The country, besides the ministry of industry, has the ministry of production, the ministry of investment, the ministry of textile and the ministry of commerce.
This kind of industrial management conforms to the maxim, "too many cooks spoil the broth". In Japan, which is the third most developed country of the world, the whole gamut of trade and industry is looked after by one ministry, ie the ministry of economics, trade and industry. While there is a pressing need for improving the industrial management and strengthening the process of co-ordination and monitoring, the revised policy must address effectively the problems faced by industry and industrialists so that relocation of industries in other countries and entering into the retail business is avoided. Meanwhile, the policy must also visualise a result-oriented mechanism for the full execution of left-out provisions of previous policies. The focus must be on the revival and rehabilitation of existing industries, which are struggling for their survival. The restructuring of public sector enterprises is indeed long overdue. The cornerstone of the policy must be the implementation and creation of a conducive and congenial environment.
(The writer is a former KCCI Secretary)