It is policymaking season in Pakistan. The MoF is working on macroeconomic stability framework which is to create conducive environment for the other policies to play - trade, investment and industrial. The macro stability is to work on reducing three key deficits - fiscal, trade and saving-investment gap, and these three to become the foundation for the success of any ancillary policy.
The policies are spearheaded by the PM advisor on Commerce and Industries, whereas Asad is taking the onus of medium term stabilization framework along with the help of Economic Advisory Council members and sub-groups.
The strategy is right as mostly these policies complement each other; but there could be conflicting outcomes of one policy on the other. For instance trade policy focus could be on enhancing trade through export promotion but industrial policy can look for import substitution; and trade policy could be giving fiscal incentives to existing exports but that could hamper the investment potential in priority sectors designed in investment policy.
Another conflict could be too much influence of one or few business forums - for instance the policy prescription of Pakistan Business Council 'make in Pakistan' is somehow been advocated in all the three policies - the interest of members of PBC is on import substitution to strengthen the existing base, to develop backward linkages of products being produced in Pakistan, and to revive existing exports.
Of course, on paper, there is room for new sectors to emerge but the idea being toyed is to create backward and forward linkages simultaneously. The latter is hard to happen in short to medium term; hence, the focus could be on import substitution and strengthening of existing exports base.
Some economic circles fear that it could result in policy capture by a few business forums - this does not mean that the agenda of PBC and others is not aligned to lowering the fiscal, trade and saving-investment gaps. However, to oversee the broader economic interest, central planning is required. That is the role of the Deputy Chairman of Planning Commission - the post is vacant.
The other area is to create debate on the contradiction in import substitution and export promotion policies, and on how to promote new sectors in the process of reviving the existing ones.
The international successes in the past few decades suggest that government intervention in industrial and trade policy is necessary as no country experienced industrial development by adopting laissez faire (free from government intervention) approach. Thus, activist industrial and trade policies are imperative for structural change in Pakistan industrial landscape. The question is what policy mix is to be deployed seeing the weak governance structure.
The new liberal economic school of thought that has been instrumental in the development of Asian tigers has focused on export promotion (outward looking) through horizontal industrial policy instruments - enhancing overall domestic economic competitiveness, and vertical interventions to promote exporting potential in new sectors without considering how much domestic demand is met through these. The policy thinking was coherent and concerted - using effective carrot and stick approach.
In Latin America, activist industrial and trade policies largely failed. The policy focus was not clear and the outcome was suboptimal. The weak governance structure led the rent seekers to keep on having carrots (subsidies and other support) while the economies of scale could not be achieved.
Pakistan needs to learn from others and should not be carried away in an attempt to revive and expedite every industry. The examples of auto and steel sectors demonstrate the failure of import substitution in Pakistan .
One school of thought believes there should be no cherry picking and all the industries should be allowed to grow having strong focus on domestic competitiveness. The idea is to have 'self discovery' (Hausmann and Rodrik 2004) - let the entrepreneurs discover new activities which are to be produced at low enough cost to generate profits - such as garments in Bangladesh, IT services in India etc.
The catch is the higher cost of first entrant (innovator) and once success is established, others can mimic at low cost - no one is ready to incur initial higher costs without government support and a fund is required for innovation to promote in Pakistan. It is a recipe for export diversification
The PM seems to be convinced on supporting existing industries and to create targeted backward and forward linkages. Yes, it is important for correcting trade and fiscal balances in the short to medium term. However, PM's economic team should focus on a policy framework that would take Pakistan out of frequent boom and bust cycles.
History suggests that reviving existing exports and protecting domestic industries did not sustain - the policies in 2002-06 revived the existing sectors but export growth was short lived and investment continued to rely on resources and domestic market seeking. Yes, a few sectors attained efficiencies (such as cement and telecom), but too much protection in cement sector eluded exporting potential.
The success story for Imran in 2023 would be on taking the country out of rut of going back to the IMF programme every five years; and for that sustainable exportable surplus is required. That cannot be achieved by merely focusing on reviving existing exports and just looking for new sectors development with the lens of import substitution. The need is to promote innovation through 'self discovery', protect industries with clear cut sunset clauses, and let the competitive advantage become comparative advantage.