Future at stake: deindustrialization–II

The analysis presented in the first part (carried by the newspaper on Wednesday) of this two-part series of article can be granulated to capture the trends in Punjab. The province has a smaller share of large-scale manufacturing (8.1%) compared to the national average (10.8%).

Large-scale manufacturing’s share in value-added for Punjab is even smaller, averaging at 51% while the national average is 80%.

Simultaneously, SMEs have a larger share of GDP contribution at 3.4% while the national average is only 1.9%.

Future at stake: deindustrialization—I

The inconsistent overall industrial performance of Punjab over the last 15 years is the greatest cause for concern.

Punjab has been unable to maintain consistent growth over consecutive fiscal years, and declines following a peak of 7.8% of GDP (ICID, 2018).

Notably, the years Punjab has seen growth have been during export-led growth in textiles coinciding with sufficient energy provision. To summarize, Punjab represents a microcosm of the overall trend for development in Pakistan.

Given the precarity of industrial performance in the province, Punjab is especially vulnerable to irresponsible government policy, but also stands with the most to gain from industrialization.

Another avenue to observe Pakistan’s development has been long-term productivity gains. According to the World Bank, Pakistani firms do not capture productivity gains as they mature.

Advances in productivity have slowed particularly in the post-1990 period (World Bank, 2022). State investments in R&D have fallen from 0.32% of GDP to 0.28% of GDP, and national and domestic savings are declining as a share of GDP.

Pakistan is exhibiting signs of stalled industrialization. The current response and simultaneous driver of this process have been early tertiarization, wherein the service sector and informal economy enlarge to act as sponges to absorb the large surplus of urban labour that is unable to find work.

The service sector is a highly polarized labour market, which is driving inequality between the small segment of high-skilled labour and larger segment of low skilled labour (Sumner, 2018).

The large amount of surplus labour stagnates wages, and distorts capital use efficiency. In order to prevent a downturn towards premature deindustrialization, a revamping of policy and development strategy is necessary.

Export Led Growth

Within this context, the fate of the textile industry is consequential to the overall outlook of Pakistan. Textiles comprise the nation’s largest export (60.81%), its largest source of employment in manufacturing (40% share in employment), and have the highest weight of 20.91 in the quantum index of manufacturing (Finance Ministry, 2022). This means that the performance of textiles has the greatest impact on the overall performance of the large-scale manufacturing sector.

However, the size and share of the textile sector in GDP is shrinking, and has consistently been shrinking post-1990.

In 2020, textiles’ share of GDP was only 1.8%. Gains in investment, productivity, and production within the textile sector are highly elastic to consistent, motivating government policy. Therefore, regulatory decisions that reduce the capacity for textiles to remain competitive in the highly competitive GVC world threaten the long-term development trajectory of Pakistan.

High tariffs on imports limit the capacity of the sector to attain better quality intermediate inputs. Inconsistent export promotion schemes, and the lack of long-term financing, prevent investments into capacity expansion.

The incentives for diversification, especially into value-added or niche products, are also hampered due to export incentives being allocated towards ‘traditional’ goods (World Bank, 2022).

The exclusion of indirect exporters from financing and promotion schemes also hinders development of backward linkages within the value chain.

One of the largest contributors to declining textile competitiveness is been energy cost. Across all provinces, energy comprises the largest conversion cost in the sector. The reversal of the regionally competitive energy tariff (RCET) has thus been particularly detrimental.

It has created unevenness amongst producers provincially, as Punjab pays higher costs for energy than Sindh. And has undone the progress in employment, investment, and capacity growth witnessed upon its introduction in 2018.

Conversely, its removal makes downstream sectors regionally uncompetitive and upstream sectors lose their price rankings (Hussein, 2021). Given the level of price-based competition within the region, especially from Bangladesh and Vietnam, such a loss is untenable.

As previously mentioned, textiles have the largest weight in the quantum index of manufacturing, implying that stagnation in textile growth can have externalities for the industrial sector as a whole.

This is visible given that textiles have the longest production chain of any industry in Pakistan, and also the greatest potential for value addition at each step in the chain.

Textiles also support numerous ancillary industries, from cotton to readymade garments. Therefore, the potential for deep industrialization and the ability to capture competitive advantage in higher value added segments of GVCs is achievable through the textile sector.

Conversely, if the current policy regime continues, reversal in textile sector growth will lead to a loss of gains in development.

Pakistan is currently experiencing a difficult paradigm. Responsible economic decisions have allowed activist states such as South Korea and the East Asian Tigers to direct the initial growth spurt attained from GVCs towards investments in value-added production, industrial expansion, and sustainable growth.

If Pakistan does not engage or incentivize similar capacity building, it cannot make tangible gains towards sustained industrialization. Instead the nation is edging closer to a perennially unsustainable balance of payments crisis, and the pitfall of deindustrialization.

(Concluded)

Copyright Business Recorder, 2023