Benchmarking Pakistan's Capabilities

7.1 Investment Climate

An important aspect of competitiveness will be the policy environment facing investors both domestic and foreign, and it is widely acknowledged that slow growth in private investment, particularly in largescale manufacturing, has been one of the key constraints on Pakistan's economic growth.

There is now a clear understanding that, in trade policy terms, international competitiveness requires ready access to international inputs at close to world prices and a domestic market subject to competitive pressure, both among domestic producers and between them and imports. Experience in Pakistan and elsewhere suggests that highly protected domestic markets not only reduce the incentive to export but also penalise the economy by allowing inefficient domestic producers to extract policy-induced rents from domestic consumers.

While there is a plausible theoretical case for infant industry support of activities with strong learning effects and positive externalities, experience suggests that if such a policy is to be pursued, it should be time-bound and performance-linked. Theory also suggests that tariff protection is not the most economically efficient means of providing such support, although in practice it has been by far the most common.

Pakistan has liberalised its trade policies significantly over the last decade or so. At present, it is one of the more open trade regimes in South Asia, although South Asia itself remains relatively protectionist by international standards. Pakistan has unilaterally reduced import tariffs so that its applied rates are often below the bound rates to which it is committed by World Trade Organization (WTO) membership. Table 13 [PDF 29KB | 1 page] shows average manufacturing tariffs for selected economies and Pakistan circa 2001-02.

The average for Pakistan has fallen since then to around 10 per cent¹³ as the maximum tariff was reduced from 30 per cent to 25 per cent in 2002; most tariffs are now in one of four tiers from 5 per cent to 25 per cent, but a few sensitive items, like motor vehicles and certain textile goods, continue to have higher rates. There has also been a phasing out of quantitative import restrictions for balance of payments purposes and a running down of the system of exemptions from tariffs, the Statutory Rules Orders. The simple average applied tariff of around 10 per cent in 2003 must be compared with an average of 56 per cent in 1995 and nearly 80 per cent in 1985.¹⁴

Exporters meeting minimum local value-added ratios are eligible for import duty drawbacks for imports of raw materials and plant and equipment, which face modest tariffs of 5 per cent or 10 per cent. Full access to imported inputs duty-free and other fiscal concessions are available to firms located in Export Processing Zones (EPZs) in Karachi, Risalpur and Sialkot, and the two Special Export Zones that are to be established in Karachi and in one of the industrial cities of Punjab.

Under the investment policy introduced in 1997, policies towards inward foreign direct investment to Pakistan have also become liberal by regional standards. Foreign investors are guaranteed national treatment, face low import duties on plant and equipment of between 5 per cent and 10 per cent, and receive a first year profits tax allowance of between 50 per cent and 90 per cent of the cost of plant and equipment. Full foreign ownership is allowed for all but a small number of activities as is full repatriation of capital, dividends and profits, and there is no restriction on the level of royalty payments. Measures have also been taken to introduce an Intellectual Property Rights regime compatible with the WTO. The Board of Investment in Pakistan has contrasted the FDI regime in Pakistan with that in other parts of the region and argues that in no sense is it more restrictive than elsewhere.

However, as discussed below, the investment climate and the uncertain national and regional political situation have kept FDI inflows into Pakistan relatively low in the past. This is brought out clearly in the index of FDI performance calculated by United Nations Conference on Trade and Development (UNCTAD 2002). The FDI performance index relates a country's share of global FDI to its economic size and is taken as the ratio of a country's share in global FDI to its share in global GDP. Hence a value of above unity for the index implies that a country attracts more FDI than is warranted by its share in total economic activity and conversely for a value of below unity. Pakistan's value by this index for 1998-2000 is low at 0.2. Moreover it has fallen over the period since the late 1980s.

On the other hand, South Asia as a whole attracts much less FDI than its economic size would suggest. Pakistan's position by this index is better than that of India and Bangladesh but not as good as the position of Sri Lanka. Performance in attracting FDI is markedly different in parts of Southeast and East Asia, where a number of countries, principally Malaysia, Thailand, PRC and Singapore, attract more FDI than would be implied by their economic size (see Table 14 [PDF 29KB | 1 page]). However, figures for Southeast and East Asian economies in the late 1990s are distorted by the impact of the 1997-98 financial crisis and its aftermath; this is particularly acute for Indonesia.

It should be noted, however, that since FY2001 FDI in Pakistan has been increasing rapidly. Between FY2001 and FY2004 FDI grew at an average annual rate of 45 per cent to reach $951 million.¹⁵

In terms of regulation, it is a common complaint from the private sector that Pakistan still has a fairly regulated business environment. A particular cause for concern is the lengthy delay in customs clearance, though this seems to be changing. Delays at customs make it very difficult for businesses to keep optimal levels of inventories and undermine the notion of 'just-in-time' planning.

There is an awareness of regulatory problems, in particular of the need to streamline tax administration, and measures have been introduced to reform the Central Bureau of Revenue. For example, a system of universal self-assessment has been introduced with a view to minimising contact with tax officials, and there has been an experiment with a new form of customs documentation designed to minimise the number of forms to be completed with a view to speeding up customs clearance.

One way of looking at the degree of regulation is to estimate the time and cost required to start up a new business as a proportion of GDP per capita (see Table 15 [PDF 34KB | 1 page]). From the comparative data available for the late 1990s, Pakistan does not fare well by this criterion relative to the NIEs and Sri Lanka, but does better than India and Indonesia. Changes introduced in 2002 appear to have improved the situation, with a fall in stamp duty reducing the cost of start up; also simplifications in the requirements of the Registrar of Companies and the establishment of an electronically-linked tax administration should save start up time.

High cost and poorly functioning infrastructure can clearly impede the operation of enterprises which may be efficient in terms of mastery of their own production processes. There is evidence that infrastructure, in particular in the power sector, has been a key bottleneck. Unreliability of and difficulty in accessing the grid will force enterprises to invest in their own generators, which will normally be a high-cost source of power supply.

In the telecom sector there is a shortage of fixed line connections. The time taken to get a telephone connection is still high by international standards. Connection costs for phone lines are also high by international standards. These constraints and high costs in telecoms are a contributory factor to the relatively low internet usage amongst enterprises in Pakistan.

Transport has also been discussed as a potential bottleneck, particularly in relation to exports. In relation to ports, for example, there are informal estimates which suggest that port handling costs in Karachi and Port Qasim are higher than the regional average. These infrastructure deficiencies clearly need to be addressed to strengthen the competitiveness environment.

However, competitiveness today requires much more than adequate infrastructure, cheap labour and liberal economic policies. It needs a strong base of human and technological resources, able to support enterprises in handling, adapting and improving new technologies, and selling the output to sophisticated and demanding global markets. The range and level of skills required is rising, calling not just for an initial base of schooling but for constant training and retraining of the workforce at all levels, with competence in the use of information technology playing a larger role. No industrial activity or enterprise, regardless of its technological level or size, is immune to this need.

The development of technological capability is a related but different process. It goes beyond creating skills to creating technology-specific knowledge and organisational routines. It arises partly from on-the-job experience but largely from conscious effort to absorb, adapt, improve and create technologies, and to interact with other enterprises and technologyrelated institutions (Lall, 2001.a). Thus it is just as crucial to competitiveness as having skilled employees: it is the glue that binds formal skills to production efficiency.

A significant part of technological capability arises from informal production activity; in complex activities it also involves product and process engineering and R&D is often considered to be unnecessary in developing countries that can use technologies created elsewhere, but this is mistaken. While it is probably wasteful for these countries to invest in 'reinventing the wheel', formal R&D effort is often necessary for using advanced technologies efficiently in production. Hence we next consider indicators of skills and technology development in Pakistan.

7.2 Skills

By most common indicators of skill creation, Pakistan does not perform well by regional standards - themselves low relative to East Asian levels. Take, for instance, the Harbison-Myer index, a classic index of skills based on school and university enrolments, used by UNIDO (2002) to benchmark 87 countries. Pakistan ranks below all other South Asian economies, (Table 16 [PDF 29KB | 1 page]).

What is more worrying, Pakistan's score and its relative position have deteriorated since the mid-1980s, making it the only country in Asia in which the index declined over the 1985-1997 period; however, several, including all in South Asia, have declined in the rankings.

The charts below compare Pakistan with other Asian countries in different aspects of education. Given the different means of financing education, it is preferable to look at enrolment data rather than at statistics on government expenditure. Figure 23 shows relative gross enrolment rates at secondary school, using the most recent data from the United Nations Educational, Scientific and Cultural Organization (UNESCO) website.¹⁶

Figure 24 [PDF 55KB | 1 page], also from UNESCO, shows a measure of high level technical skills: enrolments in technical subjects (science, computing and mathematics, and engineering) at the tertiary level expressed as a percentage of the total population.

Simple as it is, this measure seems appropriate for assessing human capital available for handling complex modern technologies. It has, however, to be adjusted for the stock of trained engineering and scientific manpower available for industrial uses; these are likely to be particularly large in countries like PRC and India.

7.3 Technological Effort

It is, by the nature of the phenomenon, very difficult to measure technological effort in practice although there is universal recognition of its central role in competitiveness. It is clear that the Government of Pakistan has recognised fully the need for increasing local technological effort. The 1993 National Technology Policy, for instance, stated, "Technological development and rapid economic growth are two sides of the same coin. Development planners consider technology to be one of the most important factors determining economic and social development ... Pakistan must join the world economic community as a member of the group of Newly Industrialised Countries before the current century closes. The goal of the National Technology Policy is to help attain this vision by promoting the best use of international and indigenous technology in various sectors of the economy and thereby accelerating economic growth and improving the quality of life of all Pakistanis". The Eighth Five Year Plan set a target for R&D of 1 per cent of GDP by 1998.

How does Pakistan compare in technological effort? Accepting that R&D is not a perfect measure of technological effort, it is the only activity on which there is comparable data across countries. Table 17 [PDF 44KB | 1 page] gives the latest available R&D data (unfortunately out of date for several countries). Pakistan spends around 0.3 per cent of its GDP on research and development, slightly more than Sri Lanka, Indonesia, Philippines, Thailand and Hong Kong. Most R&D in Pakistan is financed by the government. Enterprise-financed R&D is negligible and the lowest in the sample. On a per capita basis also, R&D spending in Pakistan is the lowest in the sample. More up to date figures for Pakistan are not available to us, but as yet there is no evidence that the 1 per cent of GDP target for R&D, noted above, has been met.

There are three more figures that illustrate Pakistan's technological activity. Figure 25 [PDF 34KB | 1 page] shows the number of scientists engaged in R&D per million inhabitants. Figure 26 [PDF 25KB | 1 page] shows the number of technicians in R&D, and Figure 27 [PDF 22KB | 1 page] shows the number of scientific and technical journals per million inhabitants. All the figures highlight the lag that Pakistan suffers with respect to most of its comparators in the region.¹⁷

Not only are total R&D expenditures low in Pakistan, the share of the total science budget directed to industry is low and declining. In the Fifth Plan, the percentage of total scientific research for industry was 17.7 per cent, in the Sixth Plan 14.3 per cent and in the Seventh Plan 11.4 per cent. The utilisation of Plan allocations to science and technology also declined, from 80 per cent in the Fifth Plan, to 39 per cent in the Seventh Plan and to 15 per cent in the first three years of the Eighth Plan.

There are, nevertheless, a large number of institutions engaged in R&D. At the end of 1988 there were 166 research organisations (118 under the federal government); there were also around 50 educational institutions that could conduct research. Technology infrastructure organisations like the Pakistan Standards Institute and a number of technical extension and training services also conduct R&D. However, according to the findings of a Commonwealth Secretariat mission to Pakistan, it appears that this structure is de-linked from the productive sector. Industrial firms, to the extent that they are even aware of these institutions, are unsure about their capabilities and the services offered. Universities are even further removed from productive activity and the consciousness of industry managers than the public sector laboratories. Among SMEs which need institutional support the most, there is also very limited awareness of the technology institutions, and the institutions, with some notable exceptions, fail to reach out to them to assess and address their technical needs.¹⁸

One indirect indicator of technology effort relevant to export competitiveness is the number of ISO 9000 certificates awarded at the national level. While this relates to quality management rather than technical effort, and covers all activities and not only manufacturing, it is roughly in line with export performance. Table 18 shows the number of ISO 9000 certificates granted till end-2002 in Pakistan and comparators. Pakistan has enjoyed a significant rise in the number of awards, particularly since 1999, but still lags behind major competitors.

Finally, let us consider inflows of technology into Pakistan through licensing, as measured by payments overseas of royalties and technical fees. Figure 28 [PDF 22KB | 1 page] shows such payments on a per capita basis over time and Figure 29 [PDF 34KB | 1 page] the dollar values of the payments and their rate of growth in the late 1990s. The comparators here are India, PRC and Bangladesh (plus Thailand for Figure 29 [PDF 34KB | 1 page]).¹⁹

In Pakistan technology imports by this method have largely stagnated on a per capita basis, though there is an encouraging rise after 1997. India has a slow but steady rise, with a setback in 1999-2000. Bangladesh stagnates at a low level. By contrast, PRC enters the scene in a big way after 1996 and raises its purchases of licensed technology rapidly thereafter. Since a large part of such payments is made by foreign affiliates to their parent companies, this reflects inflows of FDI.

7.4 In Sum

The picture of the main 'drivers' of competitiveness in Pakistan - human resources, technological effort, technology inflows and supporting institutions - seems clear and consistent, and it is far from encouraging. Pakistan has a weak base for building competitive capabilities, and it is not improving over time in response to growing international challenges.

Its long experience in textiles and clothing seems to have given it an adequate competitive base in these activities, but even here new niche markets need to be sought out to keep pace with international competition. The base of skills and capabilities in essentially low and stable technologies may not, in other words, allow Pakistan to diversify into the more dynamic and complex activities that are the new engines of export growth in the global economy. And the base may not be sufficient to attract foreign capital and technology into export-oriented activities in competition with many other low wage economies that are vying for similar investments.The indicators used here are preliminary and need much more refinement. They are very general, sometimes out of date and based on secondary information. They cannot capture the intricacies of skill creation and technological effort 'on the ground' in Pakistani industry, and it may well be the case that in reality there is more of both than they suggest. However, to the extent that they indicate, even roughly, the underlying structure of capabilities relative to competitors, they are cause for serious concern.

Comment(s)

There are [0] comment(s) for this entry. Post a comment.