Industrial Sector of Pakistan: Challenges and Response

Introduction

No one can deny the role rapid industrialization can play in accelerating the rate of growth of the economy, creating employment opportunities, upgrading the technological base of the country, and helping to increase the foreign exchange earnings of a country. Keeping in view the paucity of arable land resources, Pakistan, in the foreseeable future, cannot be a major exporter of agricultural products; as such, the rapid industrialisation of the country could give a boost to its export profile in terms of quantum and diversification. That’s why I am dealing with both together in this chapter

Pakistan has done impressively despite all the handicaps and external shocks to maintain a fairly consistent rate of growth throughout its 70 years of existence as an independent state. However, this rate has not been as impressive as it should have been, keeping in mind its potential in terms of its geo-economic location, resources, and opportunities. Secondly, this rate has not been consistent throughout; high rates are followed by depression in the next year, and so on. One of the main reasons for this lopsided development has been the speed, scope, and style of her industrial development

Unfortunately, the rate of growth of industrialization has not picked up since the 1990s, for one reason or another, with serious implications for its future development process. There are more than 3.7 million people who are presently unemployed, while every year more than 1.7 million people enter the country’s workforce. The rate of unemployment, on the back of stunted growth, has also gradually risen from 5% in the fiscal year 2008 to 6.5% in 2019.

With the current rate of economic growth of around 3% over the past several years, it will not be possible to absorb this rising labour force. The already overburdened public sector can only absorb a fraction of this increase in the increased labour force. On the other hand, the large industrial houses in the private sector have neither the expertise nor the incentive to upgrade their enterprises. The small and medium-scale enterprises have more life in them, but, given their size and lack of finance, they have also not been able to modernize.

The same is the case with Pakistan’s export performance; it has been lacklustre and far below its potential, constituting a meagre 0.15% of total world exports. Pakistan’s export profile is a mixed bag in terms of volume, composition, destination, and growth rates. No doubt, its exports have increased from 15.43 billion US dollars in 2005 to 25.45 billion US $ in 2019, depicting an annual growth rate of around 6–7% per year. However, these growth rates are far below their potential, and have not been consistent over this period; extraordinary growth in one year has been followed by a paltry increase next year, and so on.

The same is true of its diversification profile. The majority of its exported goods have been destined for a few countries, led by the USA and followed by the United Arab Emirates, Afghanistan, China, the United Kingdom, Germany, Turkey, Italy, Bangladesh, and Belgium in descending order. Similarly, the composition of her exports reflects great vulnerability, as more than 60 per cent of Pakistan’s exports comprise cotton and textile products, followed by food items, sports, and petroleum products in descending order.

It becomes all the more depressing if compared with other countries that started their development process at the same time as Pakistan and with almost the same initial conditions. During the last two decades, China’s exports have increased over sixfold since 2000, and India’s exports have grown over five times. Similarly, Vietnam, Turkey, and even Bangladesh have also done well in their efforts to promote their exports. In comparison, Pakistan’s exports have increased only 2.7 times over this period, reflecting its less-than-satisfactory performance, placing it among the lowest achievers on this score.

Causes of Sluggish Industrial Growth in Pakistan

The lacklustre performance of Pakistan’s industrial sector can be attributed to several interrelated factors; I will be highlighting a few of them

1. Weak Industrial Heritage

Pakistan’s industrialization was severely hindered by the legacy of British colonialism, which focused on extracting raw materials and agricultural products from the Subcontinent rather than developing a strong industrial base. At the time of independence in 1947, both India and Pakistan inherited a weak industrial infrastructure, but the areas that became Pakistan were particularly underdeveloped. The British had concentrated their industrial efforts in regions like Bengal, Bombay, and Madras, leaving Pakistan’s territories, including its economic heartland Punjab, with minimal industrial facilities — only 34 industrial units.

This lack of industrial infrastructure forced Pakistan to start from scratch after independence, facing significant challenges such as partition-related disruptions, a shortage of skilled labor, and insufficient financial resources. These factors, rooted in the colonial era, created a difficult environment for Pakistan’s early industrial development, leaving the country far behind India and other nations in terms of industrial growth.

2. Resource Constraints: A Tale of Misallocation and Underutilization

Pakistan has always struggled with resource constraints, exacerbated by economic mismanagement and an overemphasis on conspicuous consumption. Post-independence, the country invested heavily in infrastructure projects like highways and railways, often funded by foreign loans. While these projects were necessary for development, they also led to a significant debt burden. As of 2023, a substantial portion of Pakistan’s national budget is allocated to debt servicing, leaving little room for industrial investment.

Moreover, Pakistan’s tax policy has historically been regressive, with an over-reliance on indirect taxes and a failure to effectively tax agriculture, real estate, and the professional classes. This weak tax base has constrained the government’s ability to invest in industrial development. Compounding this issue, strained relations with neighbouring India have necessitated high defence spending. The 1965 war with India, for instance, was a costly blunder that diverted resources away from industrialization. Following the 1971 war and the subsequent loss of East Pakistan, the country was forced to spend even more on defence, including the development of nuclear capabilities, further squeezing the budget for industrial growth.

3. Subsidy-Dependent Industrial Structure and Culture

Pakistan’s early industrial development heavily relied on state subsidies and support, fostering a dependency on government incentives rather than market-driven growth. This approach led to the production of low-quality goods for captive markets, further entrenched by substantial foreign aid during the Cold War, particularly under Ayub Khan’s regime. While this aid temporarily boosted industrial growth, it primarily focused on consumer goods rather than capital goods, leading to a complacent industrial sector with little innovation or quality improvement. As foreign aid diminished, the inherent weaknesses in Pakistan’s industrial structure became apparent, stalling further progress.

A significant flaw in Pakistan’s industrial policy was the neglect of the capital goods industry, essential for creating a self-sustaining industrial base. The focus remained on consumer goods, which, while initially successful, left the country dependent on imported machinery and technology, driving up production costs and limiting industrial diversification. The nationalization of industries in the 1970s under Zulfiqar Ali Bhutto exacerbated these issues, as the government took over poorly performing industries instead of fostering a strong capital goods sector. This missed opportunity hindered the development of a resilient and diversified industrial base.

4. Irrational Exchange Rate Policy:

Pakistan’s policy of maintaining an artificially strong currency has severely undermined its industrialization efforts. By propping up the value of the rupee, the government has made exports more expensive and imports cheaper, which has exacerbated the balance of payments problem. This approach, exemplified by Finance Minister Ishaq Dar’s $24 billion effort to stabilize the rupee during the PML-N government, drained foreign exchange reserves and made Pakistani exports less competitive on the global stage.

While countries like Japan, South Korea, Singapore, and China leveraged weaker currencies to boost their exports and drive industrial growth, Pakistan’s over-valued rupee has had the opposite effect. This policy has distorted the industrial mix, discouraging investments in labour-intensive industries that could have created more jobs. The influx of cheap imports has stifled local industries and worsened trade imbalances, highlighting a major policy misstep that has impeded Pakistan’s industrial development.

5. Neglecting Agriculture:

All over the world, it is the agricultural revolution that has preceded the industrial revolution and not vice versa. Pakistan’s failure to effectively reform its agricultural sector has significantly hindered industrial development. Inconsistent agricultural policies and an enduring feudal structure limited productivity and prevented the release of surplus labour for industrial work. Although the Green Revolution of the 1960s temporarily improved food security, it did not result in sustained agricultural growth.

This neglect of agriculture has adversely affected industrialization by failing to provide a reliable source of raw materials and a robust domestic market. The lack of a dynamic agricultural sector has stalled rural-to-urban migration, which typically supports industrial growth in developing countries, further impeding Pakistan’s industrial progress.

6. Neglecting Human Development

Neglecting human development has significantly impeded Pakistan’s industrial progress. Without adequate education and training, the workforce is less efficient, produces lower-quality goods, and struggles to adapt to new technologies, which raises production costs and diminishes competitiveness in global markets. This inefficiency makes it challenging for Pakistani industries to thrive internationally, where productivity and innovation are crucial.

This lack of investment in human capital, alongside the neglect of agriculture and the maintenance of an over-valued currency, has been a major factor in Pakistan’s slow industrial development. As global markets increasingly demand sophisticated products and services, the absence of a skilled workforce hampers industrial growth, leading to missed opportunities and economic stagnation. Addressing this issue through investment in education and training is essential for enhancing the competitiveness of Pakistan’s industries.

7. Lack of Sufficient and Appropriate FDI

Foreign Direct Investment (FDI) is vital for industrial development, as it brings in capital, technology, and expertise. However, despite offering attractive policies, Pakistan has struggled to attract significant FDI due to political instability, security concerns, and high business costs, including corruption and bureaucratic hurdles. These challenges have deterred investors, limiting the country’s industrial growth potential.

When FDI has been secured, it has mostly flowed into low-value sectors like consumer goods and real estate rather than industries that could foster long-term industrial development. Investments in areas such as international fast-food chains and luxury brands have done little to enhance Pakistan’s industrial capacity. This lack of substantial FDI in key sectors like manufacturing and technology represents a major missed opportunity for Pakistan’s industrialization and economic advancement.

Response

The best strategy for rapid industrialisation and consequent export promotion entails reinforcing Pakistan’s existing strength in those sectors that are already exporting. These should be supplemented by creating the basis for establishing a new competitive advantage. It will not only increase the quantity of our industrial products but also expand their range to be used domestically as well as export higher value-added goods. For this purpose, it must address the following broad economic and trade-related issues, which play a crucial role in affecting the overall competitiveness of a country’s industry to face competition domestically and globally.

1. Devising an appropriate Policy Framework

To fully exploit her export-oriented industrial potential, Pakistan will have to first formulate business-friendly national economic policies that encourage the production of high-quality goods and services, providing targeted incentives for R&D and value addition. These policies should be reinforcing each other, and any anti-export bias found in any policy should be removed. Within this broader framework, Pakistan needs to formulate a comprehensive industrial and trade policy that should indicate the broad direction for this sector, create institutions and define their respective roles, make rules for coordination, set safety and quality standards, and provide an incentive and rewards system for various stakeholders.

In this policy environment, the Government’s role should be confined to legislation, policy development, regulation, capacity building, and facilitation, while the private sector should take the lead in investment and value chain development on its own.

2. Increasing Exportable Industrial Surplus

Obviously, you cannot increase your exports without creating a substantial exportable industrial surplus in the country. This, in turn, means increasing the production of goods and services in all sectors in general, but in the exportable sector the most. Consequently, it translates into devising policies and strategies to increase production through all three ways: surplus capacity utilization, capacity expansion and productivity growth

A. Surplus Capacity Utilization: Thanks to past policies, there is a lot of capacity in every industrial unit that cannot be utilized for one reason or another—costly imported raw materials, lack of finance, inadequate BMR, shortage of expertise, etc. There is thus a need for carrying out a comprehensive analysis of all the export-oriented industrial units and finding solutions for optimum utilization of their excess capacity. If some industries have lost their relevance or competitive edge, we should take bold steps and let them die their own deaths.

B. Capacity Expansion/Diversification: Related to the above is the need to increase the capacity of existing units or build new ones. Without diversifying the production base, we cannot improve our export profile. We should select goods and services to be promoted for export based on their comparative advantage, global demand, and growth potential in sunrise industries. Some of these sunrise industries are electronic and telecommunication equipment, automotive parts, biological pharmaceuticals, renewable energy, petrochemicals, aerospace, etc

C. Accelerating Productivity Growth: An economic measure of output per unit of input (the ratio of GDP to total hours worked in the economy during a measuring period), productivity gains are vital to the economy because they allow us to accomplish more with less. It comes from three major sources, namely (a) investment in physical capital and promoting innovation (b) skills formation by increasing labour productivity through education, on-the-job training, skill up-gradation and dissemination of new knowledge and techniques; and (c) competition, which ensures that resources are allocated to the most efficient firms and forces existing firms to organize work more effectively

3. Revitalising Pakistan’s Agricultural Sector

To transform Pakistan’s agricultural sector into a robust foundation for industrial growth, the country must prioritize research and development (R&D) in agriculture to increase productivity and devise adaptive and mitigation measures to counter the looming threat of climate change. Enhancing agricultural productivity through innovation, such as the development of climate-resilient crop varieties, efficient irrigation techniques, and sustainable farming practices, is crucial. These advancements would not only ensure food security but also create a surplus that can be channeled into agro-based industries, thereby generating employment and stimulating rural economies. Additionally, Pakistan should formulate a comprehensive land use policy to prevent agricultural lands from being encroached upon by urban sprawl. Protecting these lands is essential to maintaining agricultural output and ensuring that the sector remains a viable base for industrial development.

Introducing corporate farming is another crucial step. By incentivizing small farmers to pool their lands and adopt modern farming techniques, Pakistan can achieve economies of scale, improve yields, and enhance the quality of agricultural products. This shift would also facilitate the integration of agriculture with industry, as larger, more efficient farms could supply raw materials to agro-based industries consistently. Moreover, establishing agricultural cooperatives can provide smallholders with better access to finance, technology, and markets, thereby empowering them to contribute more effectively to the national economy. Strengthening rural infrastructure, such as roads, storage facilities, and supply chains, will further support this integration, making it easier to transport goods from farms to factories and markets. Ultimately, a thriving agricultural sector, supported by sound policies and modern practices, can become the cornerstone of Pakistan’s industrial growth, driving sustainable development across the country.

4. Human Development

To accelerate industrial growth, Pakistan must prioritize human development by significantly increasing resources for education, health, and skill development. A well-educated and healthy workforce is the backbone of any thriving industrial sector, as it directly impacts productivity, innovation, and the quality of goods produced. By allocating more funds to education, the country can improve literacy rates, equip individuals with the necessary technical skills, and foster a culture of continuous learning and adaptation to new technologies. Investing in healthcare is equally important, as a healthy workforce is more productive, has lower absenteeism, and can work more efficiently, directly contributing to industrial output. These investments should be strategically utilized to ensure that education and health services reach all segments of the population, particularly in underserved rural areas, to create a broad base of human capital capable of driving industrialization.

In addition to education and health, focused investment in skill development is critical for preparing the workforce to meet the demands of modern industries. Establishing vocational training centers, expanding technical education programs, and fostering partnerships between industry and educational institutions can help bridge the skills gap, ensuring that workers are equipped with the expertise needed in sectors like manufacturing, technology, and services. Moreover, these initiatives should be aligned with the needs of emerging industries, ensuring that training programs are relevant and responsive to market demands. By creating a workforce that is not only educated but also highly skilled, Pakistan can enhance its industrial competitiveness, attract foreign investment, and increase its presence in global markets. Ultimately, the development of human capital will provide the foundation for sustainable industrial growth and economic prosperity.

5. Maintaining a Rational Exchange Rate

A country that wants to grow has to expand its market; if the local market is not large enough to absorb the expansion in output, it has to find external markets for which its exportable surplus must be competitive. Either your costs of production should be lower or your cost of exchange (value of your currency) should absorb the increased costs and be devalued to that extent. That means maintaining an appropriate effective exchange rate to ensure certainty, not necessarily rigid stability.

One of the major reasons for Japan’s growth has been its continuous efforts to improve its competitiveness by adopting both methods of cost reduction through efficiency improvement and currency depreciation. The Chinese learned their lesson from them and kept their currency undervalued. Americans failed to do so and lost their manufacturing, first to Japan and later to the Chinese.

6. Enforcing Strict Quality Control

There is a need to promote the culture of quality at every stage of the value chain and even among consumers through an awareness campaign, appropriate legislation, institutional mechanisms, etc. There should be strict quality control measures even for the domestic sale of goods and services to make our producers quality-conscious. At the same time, compulsory quality certification and subsidies to the manufacturers of high-quality products are urgently needed. However, it should be complemented by the establishment of facilitation centres by the state to reduce the costs of production and ensure the quality of finished products

7. Rationalising Import Policy

No country can afford to restrict imports in the rapidly globalizing world of today. However, we should not go for the whole-scale opening of imports across the economy to increase efficiency, as no country practices absolute free trade; the US protects its steel, and autos and heavily subsidizes agriculture and the defence sector, while the European Union has provided hundreds of billions in subsidies to its “inefficient” agriculture. We should therefore follow a cautious liberalization of imports, restricting freer imports to the export sector via bonded warehouses and export processing zones. Secondly, reducing the level of protection for domestic industry and agriculture at a time of severe challenges in the form of the internal security situation and the energy crisis and expecting these sectors to compete against the heavily subsidised competition is a recipe for disaster.

8. Attracting Foreign Investment

No one can deny the role of foreign investment in accelerating the growth rate and promoting exports by bringing much-needed capital, technology, and management practices to the country. We should therefore attract foreign investors for export-oriented joint ventures in Pakistan and also establish joint ventures abroad. For this purpose, we should target brand-name merchandisers and large retailers of standardized products. Foreign joint ventures can provide marketing, design, logistics, and financing, while production can be handled by domestic firms. However, it will require greater transparency and disclosure by Pakistani firms aspiring for joint venture relationships and a reliable dispute resolution mechanism to redress grievances.

9. Facing Challenges of the WTO Regime

Globalisation is a two-edged sword; it provides opportunities but also poses challenges. Only those countries will be able to profit from this phenomenon if they accept the challenges and come up with appropriate responses. It is therefore essential to conduct constant research about the issues raised in the new WTO regime to provide useful information for taking market-friendly measures/Regional trade agreements (RTAs) may work as an effective industrial policy, increasing opportunities to export through the reduction of various trade costs while simultaneously promoting market-friendly reforms. However, there is a need to conclude such RTAs in consultation with stakeholders to ensure that the interests of our manufacturers are fully protected

10. Encouraging Private Public Partnership

The confident private sector is forcing the state to give them more space in policy formulation, shed its extra load, and shift from the all-encompassing roles of service provider, enabler, and regulator to merely regulation. Pakistan is no exception to this universal trend, and the private sector has become an active partner and player in development, especially in the export sector. However, it needs incentives like easy access to loans, better infrastructure, tax concessions, etc.

Most of all, it demands good governance, consistency of fairly formulated policies, level playing fields, and a quick dispute-resolution mechanism. We should encourage our private sector to help Pakistan become a trade corridor for the regional countries, particularly Central Asian Republics which are witnessing phenomenal growth with a fast-expanding market for which we need to develop our ports and other transportation networks under a long-term plan

11. Reducing Transaction Costs

Pakistan is ranked 110th by the World Bank in its Ease of Doing Business Index, higher than Argentina, Brazil, and India. Measures are needed to improve this ranking by improving the country’s physical infrastructure. This includes reliable and low-cost supplies of power, water, gas, and telecommunications, cutting down on long delays in shipments, clearances, cargo space, handling at ports and airports, etc. for export industries.

We should encourage domestic investment in shipping to save $1.5 billion annually from being paid to foreign shipping companies. Pakistan has a shipping fleet of 15, which carries less than 10% of our trade as compared to the 40% permitted under international law. Similarly, there is a need to improve its financial infrastructure for which long-term financing and hedging products need to be developed by the financial institutions

12. Social and Environmental Compliance

The opportunities arising from increased global trade are accompanied by numerous challenges, both for manufacturers and exporters. One of these is meeting strict quality and compliance requirements, not only from a specific and technical perspective but also from regulatory, social, environmental, and Customer-specific standpoints. Pakistani exporters should equip themselves to become fully compliant with the requirements of the advanced economies’ buyers and governments. The government will have to come with a heavy hand to ensure social and environmental compliance through appropriate policy formulation, creating institutions and providing an attractive incentive and reward regime

13. Encouraging SMEs to Export

Small and Medium Enterprises (SMEs) play a crucial role in any economy, but they are hampered by their limited access to finance, technology, management practices, and information. However, without integrating the export-oriented SMEs into an organized production network for exports, we cannot give a quantum boost to our exports. The formal sector, through strategic alliances, subcontracting, and outsourcing, can bring SMEs into the production network and lead to overall productivity gains. The state will have to play a very proactive role to ensure easy and affordable access to information, and finance and create facilitation centres in cluster areas.

14. Re-invigorating Economic Diplomacy

The role of exports as an important driver of economic growth in all countries is well recognized. That’s why every country strives hard to enhance its export capabilities. However, that is not enough if it is not matched by an equally important measure: economic diplomacy. We need to reinvigorate economic diplomacy in our foreign relations, especially through our embassies. The role and effectiveness of commercial counsellors in improving relations with trading partners have to be strengthened.

All the institutions tasked with export promotion must be converted into effective marketing organizations by involving the private sector and inducting professionals. From a global perspective, trade is largely conducted through regional alliances/groups. Pakistan is also a member of such regional arrangements as SAARC and ECO, which have yet to contribute to the promotion of intra-regional trade.

Conclusion

Pakistan’s slow pace of industrialization is the result of a complex interplay of historical legacies, policy missteps, and global economic dynamics. To break out of this cycle of underdevelopment, Pakistan needs to adopt a more strategic approach to industrial policy. This would include reforming the agricultural sector to create a robust domestic market, rationalizing currency policy to boost exports, and encouraging investment in capital goods industries. Moreover, improving the security situation, ensuring political stability, and reducing the cost of doing business are essential to attracting the FDI needed to drive industrial growth.

While the challenges are significant, they are not insurmountable. With a more coherent and forward-looking industrial strategy, Pakistan can overcome these obstacles and lay the foundation for sustained economic growth. The key lies in learning from past mistakes and building a more diversified and resilient industrial base, capable of competing in an increasingly globalized world.