INDUSTRIAL POLICY By Rahim Wazir Ali (3793)

Why Industrial Policy?  Comparative Advantage – Specialization  Coordinative Externalities Taiwan’s traditionally grown sugar industry converted in to world-class orchid industry  Information Externalities – self discovery Example: Bangladesh exports worth million of dollars of hats. Pakistan exports tons of soccer ball every year.

Industrial Backwardness In Pakistan Major Reasons  Energy Shortage  Unskilled labor force & Outdated production technologies  Input Constraints – Rising Cost of doing Business  High Utility Tariffs

Pakistan’s Industrial Policy on Cards Important affairs  Offering an attractive incentive structure for Pakistani firms to have joint ventures with large multinational corporations to invest in Pakistan  Taxation system expected to be reformed to ensure effective implementation of R & D benefits  Developing a vision to move industry into high technology orbit  Diversification towards the development of allied products  Diversification towards non-steel medical devices and electro-medical appliances  Promotion of engineering sector through allocation of resources to basic and technical engineering education

Structural Challenges  Our low ranking on the competitiveness scale due to our internal inefficiencies thus making the cost of doing business in Pakistan relatively higher.  Poor governance coupled with excessive red tape results in extra costs for producers and exporters.  Power supplies are inadequate and a costly input for producers.  Infrastructure especially relating to transportation is substandard resulting in extra costs for exporters.  High cost of capital.  Low reliability of the legal dispute resolution system inhibiting investment and increase in commercial activity.  Low productivity of our human resource due to lack of education and skills deficit.  Lack of emphasis on quality in production and service provision.  Lack of diversification of our export portfolio and over reliance on textiles.

RECOMMENDATIONS TO PROMOTE INVESTMENT FOR ROBUST INDUSTRIAL GROWTH Streamlining and Modernizing Regulation Governing Capital, Land and Labor Markets and Strengthening Contract Enforcement Reducing the Burden of Taxation Lowering the Cost of International Trade Upgrading Worker Skills Removing Infrastructure Bottlenecks Towards Vibrant Small and Medium Enterprises

Changing Nature of Competitiveness Developing Countries have done better in all technology categories than industrialized economies, in both production and exports.

Benchmarking Pakistan’s Performance

Structure of manufactured Exports WORLD PAKISTAN HT 28% RB 18.5% MT 36.1% LT 17.4% LT 87% MT 9% RB 3% HT 0.65% Source: Industrial Development Report, 2004 (UNIDO)

Others Chemicals Agri ProductsTextile & Clothing Engg. Goods Source: WTO Database 10.33% 1.78% 21.99% 2.96% TEXTILES 63% 6% 9% 12% 11% ENGG. GOODS 63% WORLDPAKISTAN Trade Comparison

Lessons from East Asia The ways in which exports were promoted with governments using a range of additional measures to raise the profitability of exporting include:  Selective import tariff protection for home market sales, the profits from which were used to cross-subsidize exports (Korea, China);  Access of credits to exports at Subsidized interest rates  Tax concessions to investors, in the form of tax holidays and accelerated depreciation allowance  Preferential allocation of licenses to exports for technology imports (Korea, and Taipei, China)  Provision of R & D facilities in governement institutes especially in Singapore  Provision of subsidized infrastructure and factory space (Malaysia, Thailand, China)

Net Effect:  Their net effect was to create rents or supernormal profits for manufacturing exporters  In the NIE, such rents tended to be reinvested in further manufacturing expansion rather than wasted in luxury consumption or speculative ventures

Technological Effort  The East-Asian NIEs except Hong Kong have all stimulated technological effort - Technology intensive activities required in national firms - Refusal of foreign companies to license new technology  A strong local innovation base allowed them to to develop their own technologies

Government support in Korea The Korean government supported technological effort directly in several ways – Tax Exempt Technology Development Reserve Fund – The government gave tax credits for up to 125% of R&D Expenditures – It reduced import duties for imported research equipment – Transfer cost of patent’ right and technology import fees were tax deductible – Foreign engineers were exempt from income tax – Income from technology consulting was tax-exempt – Setup of Korean Technology Advancement Corporation and Korea Institute of Science and Technology – A number of laws were passed to promote SMEs

Singapore – Research Incentive Scheme for Companies – Cooperative Research Program to give grants to local enterprises – Innovation Development Scheme – 50% grant to all promising innovation projects – Succeeded in raising the share of private R&D to 65% of the total. Thailand – Sharp Intervention enabled the countries to build the capabilities needed to attract export-oriented FDI

CONCLUSION  Various Initiatives in place concerning competitiveness and technological upgrading –Export diversification –Development of clusters –Firm-level technological upgrading –The encouragement of export-oriented FDI Key Issues “How to go about achieving these important objectives?”

Recommendations  Public investment in relevant technical and general education as well as strengthening of public R&D activities  Measures to be taken to improve investment climate especially physical infrastructure  Standard tax incentives for training and R&D expenditure, cost sharing for various consultancy services  Provision of finance for technological support  Grants for innovative activities  Institutional arrangements for industrial policy