While one can somewhat understand the government’s predicament on inflation and fears of an imminent recessionary cycle, the baffling part is its policy choices in countering these. There appears to be no real vision or strategy in place, perhaps primarily because after nearly 6 months, their underlying objectives still seem unclear.
Even more surprising is the reluctance to capitalise on low-hanging fruits by way of supporting or rather promoting exports and by aiding rather than hindering industrialisation—Pakistan as we know has been deindustrialising over the last two decades.
Leading exporters are being denied machinery and equipment L/Cs urgently required for balancing, modernising and enhancing capacities (even the Renminbi L/Cs where supposedly we have currency swap arrangements with China are on halt), raw materials imports for re-export purposes are consistently stalled and an indiscriminate unleashing of FBR and state bureaucracy on manufacturing essentially means that more and more businesses are now looking to exit the documented sector rather than entering it.
By FPCCI estimates, almost 120 departments have intrusive powers over industry and by all accounts, more than 50 percent of business and industry today operates outside of the documented sector! Also, with punishing interest rates and climbing working capital requirements due to endless currency devaluations the operating environment is fast becoming unsustainable, especially when a good chunk of the capital is gobbled up by the government by way of counterproductive levy of sales tax on exports instead of applying a zero-rating mechanism, as being done by our regional competitors.
The wake-up call and the challenge to shore up dwindling manufacturing assumes even greater urgency when looked at in a global context where when it comes to production, the world all of a sudden is getting less flat.
For example, in the largest world economy, the US, the ‘manufacture-in-America’ initiative started under Trump seems to be taking root today. A recent Bloomberg review of CEO business presentations finds a huge surge in buzzwords like onshoring, reshoring and nearshoring, all indicating plans to produce in the United States (or possibly nearby countries) rather than in Asia.
Additionally, of late there has been a flurry of news reports, backed by some solid data, suggesting that companies under a changed vision are building new manufacturing facilities in the US or other high-income developed countries. By nearly all economic accounts (especially post-Covid) we are already witnessing a decline in world trade, which is only expected to increase in the coming years.
While we can keep on fooling ourselves that the extent of globalisation that has happened since the 80s is irreversible, the reality is that it won’t be the first time that this scaling back of global integration will happen. It is common to assume that the world is always getting smaller, and that rising international interdependence is an ineluctable trend, however, history says otherwise.
The world economy was surprisingly integrated on the eve of World War I. In the “Economic Consequences of the Peace”, John Maynard Keynes wrote of the “extraordinary episode” that he claimed ended in August 1914—an era in which “the inhabitants of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery on his doorstep.”
And this first age of globalisation did go into reverse after the Great War. There was a big decline in trade between the start of World War I and the aftermath of World War II.
Today again such a trend is taking shape and developing countries more than ever before need to not only stay competitive but also adapt and guard their domestic manufacturing from erosion. The trouble though in our case is that Pakistan does not have the luxury of time. If already not too late, the possibility of a swift turnaround unless quickly planned and implemented by competent professionals, may in itself cease to remain an option.
One has time and again advised that economic recovery in Pakistan can only come through the organised private sector, which fortunately still showcases as the only silver lining amidst a picture of incompetence, corruption and inefficiency.
The public sector or specifically the state-owned enterprises have been nothing but a hindrance in productive growth and national development and at the same time also a heavy capital drain on the national exchequer—a far cry from the role they should be playing in helping the national economy to stay aligned in terms of the equitable spread of investment, fair employment generation, market competitiveness and inflation control.
Grappling with their restructuring remains a challenge that any government will require to tangibly overcome if it is to succeed.
A recent work by Professor Ahmad Mushfiq Mubarak on Bangladesh’s successes hits the nail on the head, where he links the private sector footprint in an economy to its economic fortunes: As a comparison, he shows that in 1984 the private sector share of total national borrowings in India was a meagre 17 percent and today it is 56 percent, in Bangladesh it was 14 percent and today it is 52 percent and in Pakistan, it was almost 30 percent and today it is 18 percent.
No marks for guessing that we seem headed in the wrong direction and unless this course correction comes quickly, economic success will remain elusive!