FAISALABAD (October 28 2008): Asian Development Bank has emphasised the need to promote manufacturing sector's share of GDP increased from 19percent in FY2008 to 21percent and high-value-added output's share of exports increased to at least 15percent by FY2012 in Pakistan.
According to update study and project reports of ADB, banking sector credit to private sector will also be expanded to 32percent of GDP by FY2012.
The top five most sophisticated manufacturing products were (i) fabrics, woven of continuous synthetic fibres; (ii) medical instruments and apparatus, excluding electro medical; (iii) other outdoor sports materials; (iv) fabrics, woven of discontinuous synthetic fibres; (v) stockings, knitted or crocheted, not elastic.
ADB study mentioned that the industrialisation and technological upgrading can not occur without increases in productive investments and capital formation in the proper sectors, especially since productive capacity and technology are embodied in capital goods. The growth diagnostics approach aims at identifying the binding constraints in the economy that prevent investment and growth in potentially productive and dynamic sectors of the economy and, ultimately, industrialisation.
Bottlenecks or constraints to investment and industrialisation in the productive sectors may involve general problems such as poor infrastructure, poor energy generation, bureaucratic impediments, difficulties and delays in setting up and undertaking entrepreneurial and innovative activities, as well as political/economic instabilities. But the binding constraints may also take the form of lack of economic incentives for investment and innovation/technological and scale improvements in dynamic sectors.
ADB study pointed out that the lack of incentives may be in the form of: "Industrialisation and technological upgrading cannot occur without increases in productive investments and capital formation in the proper sectors, especially since productive capacity and technology are embodied in capital goods. The growth diagnostics approach aims at identifying the binding constraints in the economy that prevent investment and growth in potentially productive and dynamic sectors of the economy and, ultimately, industrialisation".
Furthermore, ADB study mentioned that the bottlenecks or constraints to investment and industrialisation in the productive sectors may involve general problems such as poor infrastructure, poor energy generation, bureaucratic impediments, difficulties and delays in setting up and undertaking entrepreneurial and innovative activities, as well as political/economic instabilities.
But the binding constraints may also take the form of lack of economic incentives for investment and innovation/technological and scale improvements in dynamic sectors. The lack of incentives may be in the form of:
(i) lack of specific inputs (such as specialised infrastructure - eg, IT-related infrastructure for computer-dependent sectors) and institutional/legal structures to facilitate specific economic sectors (such as the lack of public institutions to cater to the specific technical and regulatory needs of, for example, medical diagnostics - eg, there should be institutions catering to the training, certification of good quality of the technicians and equipment, and legal institutions and procedures in case of charges of erroneous diagnoses).
(ii) lack of human capital and specialised skills needed for specific sectors (eg, the lack of qualified engineers or software experts due to brain drain and/or lack of training/education facilities).
(iii) lack of technical, R&D and technological investments and support for potentially dynamic industries.
(iv) absence of (or distorted) economic incentives given to productive entrepreneurial, as well as innovative and activities with the potential to be technologically upgraded.
All these possible constraints should be looked at in order to come up with policy suggestions for manufacturing expansion and product up scaling. ADB study also identified possible potential and promising sectors. But it will take time to come up with a plan for manufacturing expansion, product diversification and sector upgrading until all the above possible binding constraints are sufficiently studied and analysed.
In the medium to long-term macroeconomic stability is a necessary, but certainly not a sufficient condition, for a country's development. The latter consists in the upgrading and diversification of the production and export structures. Only the countries that succeed in this endeavour manage to achieve high and sustainable growth rates, and ultimately develop.
The development literature is filled with empirical evidence and examples that show successful development in a country like Pakistan entails passing through different stages, where the essence is the transfer of resources from the less productive sectors of the economy (agriculture in general) to the more productive sectors (industry and services in general).
At one point, manufacturing (and industry in general) must take the lead in the growth process, as this sector is characterised by increasing returns to scale. Likewise, development is accompanied by technological and scale upgrading of the products produced in the economy, especially in the manufacturing sector (as the successes of People's Republic of China, Japan, the Republic of Korea and Taipei, show).
Finally, the literature also shows that the successful countries enter a phase of fast export growth during which they manage to upgrade their export structures significantly.
Despite Pakistan's relatively good growth record over the last decades, its industrialisation achievement lags significantly behind that of other countries, especially those in East and Southeast Asia. Pakistan's manufacturing output share in GDP is much lower than that of PRC, Indonesia, Malaysia, the Philippines, Thailand and Vietnam.
Moreover, the size of this sector has barely changed in decades (during the last few years it has increased and is already close to 20percent). In terms of technology and scale, Pakistan's manufacturing is still dominated by products at the lower end (in terms of technology level) of the spectrum.
Pakistan's manufacturing structure is tilted towards low technology and scale products. Given this, it is likely that the manufacturing structure will also be skewed toward the same type of products. The question is whether it is possible for countries like Pakistan to move up in the development ladder. Standard trade theory seems to imply that indeed it is possible.
This theory explains trade and production structures of a country based on its relative endowments of physical and human capital, labour, and natural resources, plus the quality of institutions. These variables determine countries' relative costs and the specialisation pattern. An implication of comparative advantage is specialisation. It is a country's specialisation in the products in which it has comparative advantages what raises the productivity of the economy.
In the standard theory, changes in the export basket are regarded as a passive consequence of changing factor endowments, and therefore, any attempt to reshape the production pattern beyond the one set by the factor endowments is likely to fail and, even to impede growth, ADB study mentioned.
However, ADB study stated that the recent research examining the patterns of sector concentration and diversification in a cross-section of countries finds a statistically robust U-shaped relationship between specialisation and per capita GDP. It is found that as poor countries get richer, sectoral production becomes more diversified.
This diversification process continues until relatively late in the development process and only after a country's income level reaches threshold level, production patterns start to become more concentrated. The intuition behind this idea is that for countries to be able to manufacture advanced products, they must have mastered the production of a relatively wide range of other products.
This learning process provides them with the necessary capabilities (eg, production knowledge). This finding has a significant implication for the development strategy for poor countries, since it suggests that economic diversification should stand at the centre of their development strategy.
ADB Figures show the specialisation index and per capita GDP of 14 Asian countries. Given its income level, Pakistan is still in the diversification stage and far below the threshold income level where countries' production structures start concentrating. For Pakistan, economic diversification is needed to bring the economy to a higher income level.
