Tariff rationalisation

Every country has to adjust its tariffs with the needs of the economy and, as such, it is generally an ongoing process. In order to discuss the matter with the private sector, Finance Minister Dr Hafeez Shaikh had nominated Nadeem-ul-Haq, Deputy Chairman, Planning Commission, to act as the government's focal person on 5th April, 2012. However, contrary to the expectations of a consensus resulting in mutually agreed proposals to the government, the meeting ended in a fiasco due to existence of serious divergence of views on the imposition of required duties at import stage for protecting the domestic industry among two parties.
Nadeem's stance was based on economic logic and was in consonance with the general policy framework of multilateral institutions like the IMF. As is well-known, he is a proponent of trade liberalisation through the reduction of tariffs to the bare minimum and is also against the culture of SROs, which local business wants to be maintained to "protect jobs in the country". While he pleaded strongly for the old order to change, the private sector representatives argued that issuance of SROs for concessionary imports of raw materials was necessary, when blanket concessions or zero-rated provisions were given for imports of projects, such as power, gas and environment schemes, including plants, equipments and machinery. The imports of finished goods at a concessionary rate of duties or at zero-rate of duty, necessitated the need of allowing domestic industry to import raw materials on similar concessions, so that it could manufacture parts or become a partner during execution of projects.
Private sector representations had also certain other serious reservations. They contended that as the government had failed to provide the necessary infrastructure, the local industry required protection to sustain the growth of the manufacturing sector. They had to use alternative and more expensive sources of energy due to acute shortage of gas and electricity. Businessmen also had to spend large amounts for contingencies due to a bad law and order situation. They pleaded that if the import tariffs were reduced, the growth of the industrial economy, which was less than two percent during 2010-11, would decline further, adding to the number of sick units and increasing the amount of non-performing loans. Nadeem was reported to be obstinate and alleged that the manufacturing economy of Pakistan was rent-seeking and his plan was meant to safeguard the interests of the consumers. When the Chair did not pay heed to the arguments of the industry representatives, they separately walked out of the meeting.
We are really elated by the proceedings in this brainstorming session. Although, there was no agreement on the tariff proposals, yet the meeting has brought to the fore, two diametrically opposed viewpoints that need to be reconciled for determining the future direction of the country's industrial development. Nadeem is right in asserting that protection to local industry through import tariffs can only be justified to protect an infant industry but when the infant becomes an adolescent, protection needs to be withdrawn to benefit the consumers. Unfortunately, in countries like Pakistan, infants abhor their transition to adolescence in order to avoid competition at the international level and maximise their gains till the time they are rudely awakened by the shocks inherent in such a situation.
Opposition to opening of trade with India and insistence on maintaining high tariff walls to protect the local industry are examples of such an attitude. However, while the private sector may be denying their coming of age due to some self-centered motives, their contention also cannot be outrightly discarded. What works in other countries cannot be fully applied in Pakistan because of a huge difference in factors that determine the investment environment. While entrepreneurs have to contend with lack of infrastructure, energy shortages, poor law and order situation, corruption and extortion at almost every level, these impediments and costs are non-existent in most of developing countries. The private sector is also right to demand that tariff rationalisation should be related to progress on documenting the economy and containing the smuggling of commodities from across-the-border. In fact, industrialists are facing so many hazards and the overall situation in the country is so uncertain at the moment that it would be better to take a balanced view of the situation and proceed with utmost care.