In a major policy initiative, the PPP-led government of Prime Minister Yousuf Raza Gilani has given commitment to multilateral creditors that it will bring about a fundamental structural transformation in economic policy by shifting the existing focus from the services to manufacturing sector.
Under the new policy parameters, the share of the manufacturing sector will be increased from 19 percent at present to 21 percent by the year 2012. The Prime Minister has constituted a high-powered steering committee, headed by Deputy Chairman of the Planning Commission Salman Farooqi, and tasked it to come up with practicable structural transformation models.
The committee has already started studies to firm up the new strategy. The action plan, currently under preparation, will be placed before the federal cabinet for approval before the end of the current financial year. The steering committee has been directed also to formulate a three-pronged strategy comprising a structural transformation, a reform and investment programme and an implementation programme.
Under the new policy structure, the manufacturing sector, which serves as the spearhead of GDP growth in developed economies, will be given suitable impetus. According to figures quoted in a news report, the share of agriculture in Pakistan at present accounts for 21 percent of the GDP, down from 26 percent two decades ago.
On the other hand, the share of industry declined in the 1990s by two percentage points to 23.3 percent by the end of the decade before it gradually increased to 26 percent at present. However, the largest growth has taken place in the services sector, which increased from 49 percent in 1990 to 53 percent at present. Within the services sector, trade, transport and finance sub-sectors have registered a robust growth.
The structural reforms in the financial sector, with its present share standing at 6.5 percent, have unleashed unparalleled growth since the early 1990s. The planned shift of focus to manufacturing sector from the services sector will not, however, be an easy transition, because the former lacks the wherewithal required for growth.
The manufacturing sector has been hit by numerous domestic and international factors. Political instability and law and order problems have created an environment of uncertainty, which has often resulted in huge loss of manhours. This sector has also fallen a victim to acute energy shortages. Frequent power breakdowns and outages have prevented industries from operating at their optimum capacity.
A major factor that has contributed to the slowdown of manufacturing sector has been the spiralling energy and fuel prices. We believe that lack of due focus on manufacturing sector has been a very costly mistake which has had a multifaceted negative impact on the country's economy. A robust manufacturing sector spawns export-led growth, but in Pakistan the underdeveloped manufacturing base could not keep up the requisite tempo of growth.
An important side effect of this has been an underdeveloped job market, worsened by insufficient number of technical training institutes. This contributed to import-led growth. The pivotal role SMEs play in a country's industrial growth and employment generation at the grassroots level has long been recognised everywhere, but in Pakistan the sector has failed to attract the amount of official patronage or interest that it ought to have.
It is believed that a major cause of this failure has been bureaucratic bottlenecks and lack of a clear policy direction. Promotion of the SMEs sub-sector would have required focus not only on skill development, but also on developing additional sources of energy, which was never done.
Unfortunately, successive governments have treated trained manpower - the basic requirement of a robust manufacturing sector - as an "exportable" commodity for earning petrodollars, which has spawned a dangerous vacuum in the labour market.
Successful economies in Asia such as Malaysia and Thailand have been able to strengthen their macroeconomic fundamentals, unlike in Pakistan where lack of a clear policy vision has forced the economy to pursue a zigzag path.
The other Asian countries have been able to change their output and employment structures and have transferred resources to sectors with higher value addition and diversified production, while unsatisfactory performance of the manufacturing and agriculture sectors in Pakistan has generated a host of problems that have stunted the country's economic growth.
We are sure the Gilani government's planned shift of focus from the services to manufacturing sector will revitalise the economy, leading to the creation of a more robust industrial base, backed up by diversified sources of energy.
It will also help the country develop its human capital, which is the mainstay of any thriving economy. There is a need for the government to ensure that the trajectory of transformation from the services to the manufacturing sector is smooth and productive. If successfully carried out, the switchover can revolutionise our entire economy.