Industrial Sector of Pakistan: Challenges and Response

Shahid H. Raja
11 min readJun 12, 2023

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 Resource Base and Subsidy-Dependent Culture:

Pakistan’s industrial sector started with a weak base, inheriting a small number of industrial units of limited significance in 1947. Early industrial development was heavily reliant on state subsidies and support, which created a culture of dependency on government incentives rather than market-driven growth. This approach led to the production of substandard goods that were sold in captive markets. Generous civil and military aid during the Cold War further entrenched the subsidy-dependent culture, distorting market dynamics and discouraging the pursuit of efficiency and competitiveness.

2. Low Priority to Human Development:

Pakistan has historically underinvested in human development, including education and skills training. This has resulted in a shortage of skilled and trained workers in the industrial sector. Without a skilled workforce, industries struggle to adopt advanced technologies and improve productivity.

3. Irrational Exchange Rate Policy:

Pakistan has often maintained an overvalued exchange rate, making imported capital-intensive machinery more attractive due to the availability of cheap dollars. This policy has distorted the industrial mix, discouraging investments in labour-intensive industries that could have created more jobs. An overvalued exchange rate has also made Pakistani exports less competitive in international markets, hindering the country’s ability to leverage its capacity for export-oriented industrialization.

4. Neglecting Agriculture:

All over the world, it is the agricultural revolution that has preceded the industrial revolution and not vice versa. Agriculture is a vital sector that provides both a market and raw materials for the industrial sector. Neglecting agriculture has resulted in missed opportunities for industrial growth, as a thriving agricultural sector can fuel agro-processing industries and provide a stable domestic market.

5. Lack of FDI:

Pakistan’s industrial sector has struggled to attract sufficient Foreign Direct Investment (FDI) due to security concerns and competition from regional rivals. The perception of insecurity has deterred potential investors, limiting the influx of capital, technology, and expertise that FDI can bring. FDI is crucial for upgrading technology and expanding industrial capacity. Pakistan should work on improving its security situation and creating a more favourable investment climate to attract foreign investors.

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. 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

4. 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

5. 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

6. 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

7. 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

8. 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.

9. 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.

10. 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.

11. 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.

12. Reinvigorating 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.

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