Checklist for Industrialization

Pakistan has prematurely deindustrialized. Investment as a percentage of GDP significantly lags the region. FDI is not export oriented and is mainly in consumer products that serve the domestic market. Local business is also inward focused with major investments directed to guaranteed return projects. Pakistan’s share in world exports has declined. Exports are also narrowly based and over-reliant on the USA and Europe. Agriculture, the bedrock of Pakistan’s economy and provider of livelihoods to the vast majority, is struggling to feed the growing population at an affordable cost and Pakistan is now a net importer of food products. The sector is also unable to provide enough cotton, which is the major input to the country’s largest export industry. With a disproportionate burden of taxes on a few taxpayers, long periods of unrealistic exchange rates, an FTA with China which, despite renegotiation, fails to fully serve Pakistan’s interests, frequent power outages now replaced with an uncompetitive energy cost, smuggling, under-invoicing, illicit trade, the crowding out of the private sector from borrowing, import and FX controls have all combined to reduce the role of manufacturing in the economy. Unable to meet domestic demand from local production of even basic goods, reliance on imports has increased. As a result, Pakistan suffers from recurring external account crises, leading to a need for handouts from friendly countries and repeated IMF Programs. Front-loaded, revenue centric targets as part of IMF programs have also failed to address the fundamental flaws in the economy, though the primary reason is lack of political will.

The Pakistan Business Council (PBC), through its “Make-in-Pakistan” thrust has long advocated industrialization as the means of generating employment, promoting value-added exports and encouraging import substitution in a sensible and sustainable manner. Aside from broadening the tax base, it advocates for additional tax revenue to flow from higher profits of business, not from higher rates of tax or new taxes. PBC also recommends consensus between political parties and key stakeholders on a minimum set of fundamental reforms. This is essential to provide assurance of continuity and consistency in the policy framework, as also to mobilize additional resources to fund investment in socio-economic development. Pakistan stands at the bottom of South Asia in virtually all socio-economic indicators.

Recently the government has embarked on a fresh impetus to revive industrial growth. This checklist is drawn from the PBC’s more detailed studies available on its web site and its earlier checklist published in May 2021: www.pbc.org.pk. Much of PBC’s advocacy addresses the three platforms of “Make-in-Pakistan”, namely “Grow More/Grow Better”, “Make More/Make Better” and “Serve More/Serve Better”.

The checklist provides an action toolkit for policy makers’ attention and is split into four parts:

1. Checklist for Promoting Corporatization and Formalization of Business
   This sets out the basic enablers for the formal sector to gain scale and competitiveness to galvanize effective action.
2. Export Checklist
   The main thrusts are to promote exports. Exports are the only sustainable way to balance the external account and achieve solvency and autonomy for the country.
3. Import Substitution Checklist
   The key actions to facilitate import substitution in a sensible and sustainable manner without indefinitely undermining consumer value and choice.
4. Priority Sectors for Growth
   These are the main sectors identified for special focus