ADB calls for new industrial policy

www.dawn.com

By Ihtasham ul Haque

ISLAMABAB, Feb 14: Expressing concerns over Pakistan’s falling exports, the Asian Development Bank (ADB) has urged the policymakers to develop a new industrial policy, which should ensure “strategic collaboration” between public and private sectors with a view to effectively compete in the international export market.

This strategic collaboration between the two sectors, the bank believes, is an important tool to increase exports and achieve the objectives of higher productivity.

In its latest analytical report - A Note on Competitiveness and Structural Transformation in Pakistan - it said the share of the top 10 exports in Pakistan’s total exports had decreased significantly in the last two decades, although it is still highly concentrated in textiles.

The weighted average of the per capita GDPs of the countries importing Pakistan’s top 10 exports has declined significantly, indicating that the country is stuck in exports that are being exported by even poorer countries. And the income level of Pakistan’s exports, a proxy for the country’s export complexity and competitiveness, is at the same level it was two decades ago.

It also said that Pakistan‘s growth rate-cum structural transformation-have been lower and slower than those of other countries in Asia.

“Accelerating the rate of structural transformation must be a key objective of Pakistan’s policymakers,” it added.

It called for undertaking sector-specific reforms with a view to fostering competition so as to transforming the economy. This requires a dose of good policy as the market alone will not do it.

“Industrial policy is not about picking winners”, the bank said adding that identification of the product space along the lines of the new literature is the way to identify sectors.

The idea is that a country has given capabilities that allow it to produce some products. These capabilities should also allow it to produce similar goods (because they require similar capabilities). Jumping successfully from the production of less sophisticated products (e.g., textiles) into the production of more sophisticated ones (e.g., electronics and automobiles) is not simply a matter of training more engineers and scientists at school, but of mastering the steps in between, the way the successful Asian countries did it. Without this, the effort at industrial upgrading will be an exercise in futility.

The bank said that as Pakistan’s growth rate had accelerated in recent years and the contribution of investment to overall growth has increased, policymakers must seize this momentum to implement a growth strategy that aims at transforming the economy in the direction of the successful Asian countries.

This does not mean that Pakistan should aim at emulating Korea, for example. It is not possible to do this, not only because the international environment is very different (perhaps less favourable to Pakistan today than to Korea 30 years ago), but also because the initial conditions of both countries are also very different (e.g., Pakistan’s degree of poverty and social inequalities).

Despite this, there are lessons that can be studied and appropriately adapted. Perhaps the most important is that structural change requires purposeful actions and a political will.

The bank also said that the industry and services output growth rates are significantly higher than agriculture’s, and given the service sector’s high share in output, services are the major contributor to total output growth rate (over 50 per cent).

The contribution of agriculture and industry are significantly smaller.

Pakistan is a service economy from the point of view of its output structure, but an agricultural economy from the point of view of its employment structure.

Intra-sectoral labour productivity growth has contributed substantially more than reallocation of labour from agriculture into the other two sectors to overall labour productivity growth.

The latter factor in fact plays a minor role accounting for overall labour productivity growth.

Reallocation of labour from agriculture into services has been much more important than from agriculture into industry.

Pakistan, the bank said, suffers from falling labour absorption as the absorption capacity of the service sector is not enough to compensate the falling capacity of agriculture and the stagnation of industry.

Although Pakistan’s manufacturing share is not low, given its income per capita, trade ratio in GDP, and population, the share of this sector in total output has been stagnant since the 1970s. This contrasts with what has occurred in Indonesia, Malaysia, and Thailand, for example, which have seen their shares increase.

The manufacturing sector, it said, is heavily concentrated in food and beverages and textiles. Together, they account for close to half of the sector’s value-addition. The level of technology of Pakistan’s manufacturing sector is relatively low compared to that of other countries in Asia.

Moreover, the share of manufacturing value-added accounted for

by high-technology products is low and has remained stagnant during the last 40 years. Pakistan’s level of labour productivity has increased very slowly since the 1970s. There is still plenty of room for catch-up with the developed world.