Value Addition in Manufacturing: Study of High Potential Products for Local Manufacturing and Export Diversification

Industry plays a central role in delivering broad based economic growth by creating jobs. Pakistan needs to create up to two million jobs to absorb the new entrants to its young workforce each year. This can only be achieved by increasing contribution of industry to GDP, which can provide skilled and better paying jobs to the youth of Pakistan. In Pakistan, there is a chronic problem of underemployment, which can be solved by industrial growth and helping the workforce graduate into skilled jobs.

Pakistan’s future industrial growth is predicated upon improving the industry’s export competitiveness driven by expanding Pakistan’s ‘Product Space’ of locally manufactured goods. Pakistan currently manufactures a limited array of products locally, and exports even fewer products. In order for Pakistan to make economic progress, it needs to diversify its exports, and enter new global value chains. In order to do so, the Government has to play a proactive role by improving the regulatory regime, the tax and tariff structures and reduce the cost of business.

This report identifies key products in industrial sectors that Pakistan should prioritize for localization. These industries include higher value-added manufacturing in the Automobile, Electronics, Machine Tools and Food Processing industries. Investments in these industries will broaden the product space of Pakistan and with appropriate incentives and technology, achieve competitiveness for increasing exports. The raw materials utilized in the manufacturing of these products should also be localized to the best extent possible. Local raw materials will not only help improve competitiveness, but also reduce the burden of imports on Pakistan’s external account.

This report presents a 10-year framework for increasing indigenization of industrial manufacturing in Pakistan. Divided into three phases, the framework aims to provide a planned approach to encourage domestic manufacturing in and export orientation of new industries. In the first phase spread over two years, the Government should reform the regulatory regime as proposed under PBC’s “Make in Pakistan” thrust, while providing special incentives to investments in the priority sectors identified in this report. At the same time, a joint effort should be made by the Government and Industry to make an outreach to international companies in the identified sectors for inviting them to establish factories in Pakistan. In the following five years of the 10-year framework, the aim should be for new industry to establish manufacturing units in Pakistan, whereas the last phase spread over three years should prioritize expansion in exports.

In order to achieve results, future Governments need to ensure policy continuity and macroeconomic stability. In absence of macroeconomic stability, the investment returns remain uncertain, discouraging potential investors.

Pakistan should approach industrialization in a planned manner, by expanding its product range for pursuing export diversification. This report is an effort to provide strategic insights for Pakistan’s future industrial landscape.