A nation of traders

THE Pakistan Business Council’s (PBC) recent report, titled Pakistan: Rising Imports, Declining Exports & Premature Deindustrialisation, provides careful documentation of three worrying macroeconomic trends. Two of these (imports and exports) receive considerable attention in policy and journalistic conversations, to the extent that Pakistan’s economic performance is often equated with the health of its external sector. However, the third, ie the spectre of deindustrialisation, remains significantly underreported and understudied.

The term premature deindustrialisation has most commonly been used to describe the structural trajectory of African economies after the 1970s. Many countries on the continent developed local manufacturing capacity under statist strategies during the first couple of decades after decolonisation, only to see domestic industry wither under inefficiencies, exogenous shocks, and a liberalised global trade regime. In subsequent years, the ravages of that period have pushed domestic surplus capital towards the services sector, further limiting the growth of manufacturing.

Some of the most well-known industrial conglomerates in Pakistan have branched out into the services sector.

While there are important differences between these economies and Pakistan’s — most notably the time period during which industrial stagnation has set in — the aspect of a lethargic industrial base deserves further attention. Data shows the manufacturing sector’s percentage share in the economy falling consistently, from 14.5 per cent in 2007 to 13.5pc in 2017. This decline is driven by the worrying state of large-scale manufacturing, which has fallen from 12.3pc to 10.7pc over the same decade.

It is not a coincidence that this regression has taken place in a context marked by growing imports and negative trade balances with all major trading partners. Put simply, Pakistan ends up importing a whole host of goods instead of making them at home, while preferentially skewed trade agreements with many countries ensures this pattern stays in place.

In light of its declining industrial base, Pakistan’s structural transformation over this period has been in the direction of an expanding services sector, which now stands at nearly 60pc of the total economy. The largest sub-component within services, and now the single biggest sub-component in the entire economy, is retail-wholesale trade, which stands at 19pc of GDP. In 2017, this sector grew by 6.8pc thanks in no small part to the population’s unceasing propensity to consume, which has pushed private consumption to an all-time high of 80pc of GDP. The comparable figures from India, Bangladesh, and Indonesia are 60.8pc, 70pc, and 36pc respectively.

The onward march of pervasive consumption has been driven in large parts by easier access to im­­ported products, rising incomes, and greater urbanisation. Similarly, the myriad problems encountered while running manufacturing enterprises also make it simpler and quicker to earn money through lower-effort sectors like real estate and trading. Little surprise then that some of the most well-known industrial conglomerates in Pakistan have branched out into the services sector by building glossy shopping malls, running hotels, or selling burgers and cappuccinos to urban consumers. This consumerist upsurge is starkly visible in the built fabric of both major ur­­ban centres, which continue to expand in the shape of suburban housing schemes full of new commercial areas, as well as of smaller towns and cities across the country.

The supremacy of import-driven commerce over manufacturing has serious implications for Pakistan’s development trajectory. Since the Second World War, countries that have successfully transitioned to middle- and high-income status have done so on the back of strong manufacturing sectors. Essentially, an expanding industrial base means greater labour absorption, and a workforce with greater productivity and improved skill sets, which translates into higher incomes and inter-generational upward social mobility in the long run. On the other hand, commerce across the developing world typically remains a low value-add sector, populated by small-scale single-firm enterprises and low-skilled labour. There is little on-the-job learning, and wages remain consistently muted, meaning that the chances of subsequent generations of commerce workers moving up the economic ladder are very slim.

The starkness in labour-related welfare outcomes across the two sectors is highly visible in present-day Pakistan. Today, an individual working as an entry-level machine operator in a large manufacturing enterprise makes more than the minimum wage, and has a decent shot of educating their kids, accumulating some form of savings, and potentially obtaining an asset (such as a house or some land) at a later stage in their career.

However, in the context of industrial stagnation, there are fewer and fewer such opportunities available for an expanding and rapidly urbanising workforce. Instead, most labour absorption is taking place in commerce, which is continuously marked by informality, low remuneration, and no skill acquisition of the kind that would facilitate a move towards a higher paying job in the future.

As of 2017, 90pc of all employment in the retail-wholesale sector is informal in nature, meaning it takes place beyond the ambit of social protection and minimum wage laws and without any recourse to social security and employment benefits. This precariousness, induced by an economy reliant on consumption rather than manufacturing, provides no stable and easily identifiable pathways out of poverty.

The alarm bells sounded by the PBC in its report are, in large parts, self-serving. The analysis and conclusions voice the concerns of large industrial enterprises who are worried about foreign (read Chinese) goods and their unfettered consumers elbowing them out of the economy. But personal incentives aside, its underlying message of an economy facing an uncertain future without adequate course correction is both correct and highly salient.

If the 2013 elections were fought on the narrow premise of crippling energy shortages, it makes good sense to broaden the conversation five years down the line towards the issue of sustainable industrial growth and stable, mobility-enhancing employment. For their part, political parties would do well to shift attention and weigh in on these pressing aspects through their manifestos.

Published in Dawn News