Deindustrialisation at work
Pakistan is de-industrialising itself because industrial development has not been prioritised with policymakers taking it to be a natural consequence of macroeconomic stability. This is demonstrated by a major study on the performance and prospects of the largescale manufacturing sector during 2010 by the Institute of Business Management for the Federation of Pakistan Chamber of Commerce and Industry.
The study shows that industry in Pakistan is a leading growth sector. Growth in industrial net output leads to growth in all other sectors-industrial growth Granger causes growth in agriculture, commerce construction, finance and other service sub-sectors. The industrial sub-sector has strong forward linkages with all segments of the national economy.
Pakistan is de-industrialising. Industrial development cannot be the unintentional automatic consequence of achieving macroeconomic stability as the government has been presuming since the signing of the first major Structural Adjustment Agreement with the IMF in 1988. Prioritising industrial development is essential for stimulating growth throughout the economy.
The large-scale manufacturing sector's share has remained stagnant at about 12 per cent of GDP during the present decade. Its share of total employment is less than 10 per cent.
Growth has fluctuated widely and has decelerated for all major manufacturing sub-sectors during 2008-2010. Output growth has exceeded value added growth during this period-indicating a failure to upgrade the quality of manufacturing production.
The pattern of manufacturing sector growth has become distorted and there is little evidence of structural transformation and technological upgrade. The share of capital goods in manufacturing value added has remained stagnant at 10 per cent for over a decade with a slight declining tendency. The country mainly produces cheap labour intensive consumer goods which have limited capacity for technological diffusion down the supply chain.
Technological backwardness is indicated by the low value of the capital-output ratio and the slow growth in total factor productivity in most branches. Inter sectoral terms of trade have deteriorated for manufacturing during the past decade. Manufacturing output prices have increased much more slowly than the manufacturing sector's input price indices (energy, raw material, imported machinery) and general price indices (WPI, CPI).
This has reduced both profit rates and real wage growth within the LSM sector. Raw material prices are likely to skyrocket due to the impact of the floods and under relentless IMF pressure, fuel and electricity prices are also expected to rise rapidly in FY11.
Bank credit to the LSM sector has fallen catastrophically during 200810. Even in earlier years, the annual rate of growth of bank credit to the LSM sector was not significantly higher than the rate of growth of nominal GDP. The LSM sector's share of scheduled bank advances has been halved during 2005-2010.
Manufacturing investment has also fallen sharply. Public investment in manufacturing has been virtually eliminated and this has had a drastic negative impact on the intermediate and capital goods branches (non metallic minerals, steel, metal products). Cost of credit has shot up since 2007 and every year the weighted average lending rate (WALR) increases by leaps and bounds as the SBP continues its policy of mercilessly jacking up the policy rate.
Long term financing has disappeared and the collapse of the DFIs has meant that there are virtually no major locally funded manufacturing sector projects.
Indeed all public support for BMR investment and for project rehabilitation has been phased out under pressure from the IMF and the World Bank and as a consequence non-performing loans (NPL) have doubled during the last five years and will exceed Rs500 billion by the end of FY11.
The financial position of the corporate manufacturing sector has weakened since 2007. Both sales revenue and net profit growth rates have fallen. Operational inefficiencies have risen as have financial costs as a ratio of operational profit.
Demand constraining macroeconomic policies, specially the emphasis on increasing the rate and widening the scope of indirect taxes have seriously hurt sales revenue growth. The imposition of the reformed GST is likely to exacerbate tax administration costs of the corporate sector and will have a strong negative impact on the growth of sales revenue.
Manufacturing exports have been stagnant. The share of both manufacturing exports and imports in national aggregates has fallen during 20052010. We continue to export a small number of low value added goods to a small number of saturated markets in which our market share is miniscule - usually less than one per cent.