Is the PBC demanding protectionism?

After the PBC raised the banner of ‘Make in Pakistan’ in its Pakistan Economic Forum summit held last week, a few leading economic observers publicly quipped that the top business advocacy body is demanding “heavy protectionism”. Those concerns are not out of proportion, considering that Pakistan has had its share of protectionism and rent-seeking. BR Research also noted in its immediate commentary: where does one draw the line between protectionism and Make-in-Pakistan. But PBC’s argument that it’s a disincentive to manufacture surely holds truth.

It is difficult to dispute that the share of manufacturing sector in the country’s GDP has been tapering off over the last ten years; it is only this fiscal year and the last that the LSM growth has taken off impressively after a gap of nearly ten years. It is also common knowledge that the share of manufacturing in the country’s total exports has slipped noticeably over the course of last few years.

Ceteris paribus the manufacturing sector is more likely to be in the formal sector than its peers in the trading sector. And with that comes higher tax burden because the formal sector is taxed whereas the informal sector, as the name suggests, either isn’t or isn’t as much. But even in the case of two formal players from trading and manufacturing sectors – say a company that imports bottled drinking water from Dubai and one that makes it here in Pakistan – the tax burden on manufacturing business is substantially higher.

The effective tax rate for shareholders in a corporate sector assuming that all after-tax profits are paid to the shareholders is 41 percent, according to calculations made by A.F. Ferguson’s Partner Shabbar Zaidi. Given the same income a non-corporate entity – which is what most trading sector firms are — effectively pays 22 percent tax.

Then consider that whoever produces bottled water in Pakistan pays two labour levies totalling 7 percent, super tax if it’s a non-banking firm and earns above a certain threshold, plus taxes on inter-corporate dividends. In contrast, those who import water from Dubai don’t have to pay any of this. This is over and above the equal or higher duties on raw material imports needed to make goods in Pakistan – compared to the duties on finished goods in percentage terms.

In light of this, the Make in Pakistan argument becomes difficult to argue with. Asking for a level playing field is not akin to “heavy protectionism”, for these are genuine concerns. The question is, however, where the PBC draws the line. The PBC says that Make in Pakistan is not about protecting inefficient industry at the cost of consumers; nor about denying exporters inputs at competitive prices or creating monopolies in the name of scale or exploiting labour.

The PBC has provided sufficient evidence with real examples in support of its Make in Pakistan argument, by showing how manufacturing is disincentivised in this country. But good research and advocacy entails that it should also provide research evidence with real local examples of how inefficient industries are being protected at the cost of consumers, or exporters are being denied inputs at competitive prices etc, and how the PBC is against such policies.

That will help stakeholders get a clearer picture whether or not the body is about “heavy protectionism”.

Published in Business Recorder