Setting priorities for industrialisation
By Shahid Javed Burki
Monday, 06 Jul, 2009
THIS may be a good time to reflect on some of the basic assumptions that have governed the making of public policy with respect to industrialisation.
It is now recognised by economists and policy analysts that industrialisation – its pace, scope and content – responds to public policy.
This is one reason why Islamabad, working closely with the private sector, should carefully define the content of public policy in order to determine the direction the country should take. The focus should be on three aspects of structural change in the sector of industry. As industrialisation gathers pace, what should industries produce?
Where should industries be located; should industrialisation be used to lift the more backward regions of the country as was attempted during the period of President Ayub Khan (1958-69) or should the question of location be left to the private sector?
And, where should the products of industrialisation be sold? The last question leads to another issue: how much emphasis should be placed on export promotion as an objective of industrialiation?
Economists have also begun to recognise that since countries have different histories and different structural characteristics, appropriate policies will differ and evolve differently. There is no one-side-fits all public policy approach to industrialisation.
In Pakistan’s case, the initial direction of industrialisation was influenced by the trade war with India that broke out in 1949 over the issue of the rate of exchange between the currencies of the two countries. For legitimate reasons, Pakistan had refused to devalue its currency with respect to the dollar, a step that was taken by all countries of the British Commonwealth.
That changed the rate of exchange between the two currencies from parity to 144 Indian rupees for 100 Pakistani rupees. This was not acceptable to India. When trade with India stopped, Pakistan was forced to industrialise quickly by emphasising the production of basic manufactures.
Since the Pakistani state at that time was weak and was short of funds, it relied on private initiative to lead the industrialisation drive. This had a profound consequence for the development of the structure of the industrial sector. Unlike India, Pakistan focused on consumer industries and on private initiative while India put the public sector on the commanding heights of the economy and invested heavily in heavy industries.
The other significant historical influence on the industrial development was the decision by the administration of President Ayub Khan to spread the ownership of industrial assets by using the government’s licensing mechanism for inviting new comers and by encouraging them to locate the sanctioned units in the underdeveloped areas. This approach checked the growth of Karachi as the country’s industrial hub.
This policy also had a profound consequence for the structure of industry, particularly of textiles. By sanctioning new units of no more than 12,500 spindles, the country developed an industry that did not have the scale to become competitive. It also restricted most weaving activities to cottage industries.
The structural consequences of Prime Minister Zulfikar Ali Bhutto’s nationalisation of large-scale industries are another historical fact that needs to be factored into the understanding of the character of the Pakistani industrial structure.
With this as the background, we will begin to find answers to the questions posed above. Analytical work done at the UNIDO has established a strong relationship between industrial sophistication, structural change and growth.
According to the institution’s latest World Industrial Report, “research findings confirm that diversifying and moving up the production sophistication ladder in industry are important drivers of development.” But sophistication need not imply the production of a large number of final products in a number of different sub-sectors. With the changes in the international industrial structure that have resulted from the remarkable development of information and communication technologies, the production process has been decomposed into a series of tasks which can be apportioned according to the comparative advantage of various production centres.
For countries such as Pakistan that have missed out in the initial phase of industrialisation that produced a number of economic miracles, particularly in Asia, it may be more appropriate to concentrate on building a task based industrial economy.
Researchers who have studied the development of this approach to industrialisation and compared them to structures that produce total products, the conclusion reached is that the concentration on tasks is no less sophisticated than the one where industries concentrate on start-tofinish production.
That is said even when an entire product is produced in one location – men’s shirts in Bangladesh for instance – there is still some reliance on imports. The garment producers, for instance, buy buttons from China which are most probably produced in Qiaotou, often called the button capital of the world. The world is moving rapidly towards greater integration of industrial processes.
The next issue is of location. Manufacturing industries and service activities tend to concentrate in geographic areas, often in or close to major cities. According to UNIDO, “the economic literature on high and middle income countries provides persuasive evidence of the existence of agglomeration economies…industrial agglomeration is also important for developing countries. Productivity is higher if manufacturing firms cluster together.” Cluster economics has become an important subject of study ever since the pioneering work done by Michael Porter of Harvard University. Pakistan has some examples of clusters whose development was not induced by public policy but by organic growth. Sialkot, the home of sports goods and surgical industries, is one example of a cluster. Gujranwala (electric motors and electric fans), Gujarat (furniture), Peshawar (fruit processing) and Kasur (leather) are some other. Qiaotao, China’s (and the world’s) button capital is the most intensively analysed case of a cluster.
As indicated, the development of clusters in Pakistan was not the outcome of public policy directed at them. It happened naturally. For the government to help the industries located in the clusters, it will need to provide help to upgrade technology, provide market information, and also introduce them to new sources of finance such as private equity and venture capital funds. The most important contribution the state could make is in the area of knowledge development.
Some of the more successful clusters in the developed world are located in close proximity to the institutions of higher learning. It was the close-at-hand presence of Stanford University and the Berkeley Campus of the University of California that resulted in the development of the software industry in the Silicon Valley. Given the close proximity of Sialkot, Gujranawala and Gujrat, the government could work with the private sector to locate a school of engineering somewhere in the area.
The third question concerns the link between export and industrial development. Both macro evidence as well as the evidence gathered from individual case studies suggest a strong association between the two. Trade in manufactures has continued to grow much more rapidly than manufacturing output. And the share of developing countries has increased. Their manufacture exports increased from $1.4 trillion in 2000 to $2.5 trillion in 2005.
The growth in the trade in tasks was even more impressive. In the period 1986-1990, imported intermediary products accounted for 12 per cent of the world’ manufacturing output and 26 per cent of total intermediate imports. By 2000, these figures had risen to 18 and 44 per cent respectively. By 2009, more than one-half of the intermediate products going into final production are imported. The proportion is much larger for East Asia. The conclusion is clear. Pakistan by focusing on tasks rather than the production of final products will not lose out on the rewards of industrialisation even if it has been delayed.
The need for sophistication brings together the three factors we have discussed above. There is plenty of evidence to show that the countries that have done well economically have left behind low-sophistication export sectors and entered into more sophisticated ones. Slow growers either stayed in the same place or have moved in the opposite direction. The challenge faced by the policy makers is clear: they need to move the industrial sector towards sophistication. In Pakistan’s case the sophistication will be in developing tasks rather than final products.