Conclusions: The Need for a Competitiveness Strategy

Globalisation means a number of things:

• shortening of distance as transport and telcommunications costs fall
• accelerated technical change with emphasis on ICT-driven technology
• heightened fragmentation of production as global production networks emerge to replace unified production systems
• acceleration of international trade and investment and a tendency towards emergence of regional trading blocs
• greater emphasis on international rules for trade under the WTO.

None of these trends are completely new, but the last decade or so has seen their emergence to a greater degree than before. Competitiveness means the ability of enterprises to take advantage of the opportunities offered by these trends, and a competitiveness strategy is the response of national governments to this problem. Governments of most OECD countries, for example, have been debating issues of competitiveness and what they can do to support their firms for a number of years.

In principle, intervention should have a clear economic rationale in support of externalities and correction of 'market failures', which are in effect real world conditions. It should have both macro and firm-level dimensions and involve a range of initiatives, from investment in education and R&D to maintenance of a favourable climate for investment, through to support for firm-level technological upgrading.

Most importantly, policy for competitiveness needs to be informed by a 'strategic vision'. This vision should reflect the interests of all stakeholders, including the private sector, government institutions, employers' organisations, trade unions and so on. There is a need for setting out a view of where it wants the economy to go, define short and long-term goals and start planning how to strengthen or create the capabilities to reach those goals.

Essential background to the development of such a long-term perspective is benchmarking of an economy's current competitive strengths and weaknesses. This involves evaluating industrial performance in domestic and export markets and the main drivers of performance: the macroeconomic and policy framework, human resources, technology, FDI, finance, physical infrastructure and supporting institutions.

Where possible, evaluation should use quantitative benchmarks against selected comparators within the region, in other developing regions that are likely to offer direct competition to Pakistan and in more advanced countries that serve as role models. However, many indicators cannot be quantified. Here the benchmarks have to be qualitative: comparison with best practice in the comparators. This is the procedure commonly used in competitiveness strategy analysis throughout the developed and newlyindustrialised countries (Lall, 2001.b). Here we hope to have made a start in this benchmarking exercise by drawing on readily available international data. Naturally, informed qualitative judgements require a much more in depth knowledge of the local industrial sector than we possess.

After benchmarking comes the task of allocating resources at various levels. At the highest level, it has to be decided which generic areas - education, infrastructure, finance, science and technology and so on - have to be addressed. This needs a view of what the main engines of industrial competitiveness are going to be. At the sectoral and sub-sectoral levels, the government has to decide on which activities to support, not 'picking winners' in detail, but allowing winners to emerge in the sets of activities that hold most promise of long-term economic and technological growth.

These activities have to be identified from clusters of inter-linked industrial activities that share strong technological externalities, use the existing base of skills and capabilities, can develop good backward linkages and face rising competition both locally and abroad. The best way to proceed is to examine closely the experience of countries that have similar endowments but have been successful in developing competitive bases. This is an art rather than a science and involves considerable benchmarking and policy analysis.

Most governments are not structured for designing and mounting effective industrial strategies. The responsibilities and functions that affect industrial competitiveness are scattered over an array of ministries and institutions: finance, trade, industry, labour, education, science and technology, and others. These often have different objectives and do not communicate with each other on a regular basis. There is a strong case for locating responsibility for competitiveness policy in a single high-level agency.

We note that there are already various initiatives in place in Pakistan concerning competitiveness and technological upgrading (Government of Pakistan 2003). Official statements have recognised clearly the need for amongst other things:

• export diversification
• development of clusters
• firm-level technological upgrading
• encouragement of export-oriented FDI.

The key issue therefore is how to go about achieving these important objectives. As we do not presume to know the effectiveness of current measures, we would simply make a few basic points.

First, in the light of the international benchmarks noted above, adequate government support for a competitiveness strategy requires significant commitment in terms of public investment in relevant technical and general education, as well as strengthening of public R&D activities. Some of these problems will require long-run, not short-run, solutions.

Second, there are a number of weaknesses in the area of physical infrastructure, such as power. Besides infrastructure development, any further measures to improve the investment climate, whether reducing bureaucratic restrictions or ensuring continued macro stability, will also help in competitiveness terms.

Third, it is at the firm level that critical competitiveness problems need to be addressed, and here the role of government is to facilitate and support. The issue is whether current plans - such as measures to support technological upgrading and joint ventures with foreign investors through an Upgradation Fund - go far enough. In principle, support can take a range of forms, including the standard tax incentives for training and R&D expenditure, cost sharing for various consultancy services (as covered by the Upgradation Fund), a version of innovation consortia in which firms collaborate in information sharing and technology development, and provision of finance for technology support, particularly a form of venture capital for relatively high risk initiatives or matching grants for innovative activities. ²⁰

Development of industrial strategies is not easy; if it were, all countries would have mounted effective strategies. The 'bottom line' of all strategies is, of course, how well they can be designed and implemented in practice. Government capabilities are therefore vital. The history of development policy is replete with cases of failed policies. The failure of some interventions does not, of course, mean that all interventions are undesirable as long as market failures exist. The experience of East Asia in developing highly competitive export-oriented industries shows what can be achieved. Wholesale reliance on free markets will be inefficient compared to a situation where policy can improve or create markets; the trick is to find ways to support and accelerate, rather than hinder, enterprise development.

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