Deindustrialization, Casino Economy Inhibiting Pakistan Growth

With a current population of 208 million and growing, alongwith one of the largest youth bulge in the region, deindustrialization and a high rate of unemployment could inevitably fuel poverty, insecurity, corruption and extremism in Pakistan and ultimately a lower Human Development Index (HDI). The writer Dr. Farrukh Saleem also makes an interesting observation. He points out that the manufacturing base as a percentage of GDP actually grew when the country was ruled by dictators. He also observes that under civilian governments, the process of deindustrialization has actually gained pace – BE2C2 Note

DR. FARRUKH SALEEM — Red alert: Pakistan has sunk into ‘premature deindustrialization’ whereby the Pakistani economy is fast becoming a service economy without reaching its peak industrialization potential.

The Ayub era (1958-1969): In 1960, the share of manufacturing in our GDP stood at 12 percent. In Ayub Khan’s eleven years in power, rapid industrialization had taken the share of manufacturing in our GDP to 16.5 percent. During this ‘decade of development’, there was a year when economic growth had hit a high of 10 percent while the eleven-year average stood at a respectable 5.82 percent (the best eleven-year average in Pakistan’s history).

Industry includes mining, manufacturing, construction, electricity, water, and gas.

The Bhutto era (1971-1977): The share of manufacturing as a percentage of GDP fell within a year of Bhutto taking over, first as the president and then as the prime minister. Bhutto’s ‘socialist economics’ along with his three-phased Nationalization and Economic Reforms Order (Nero) ended up depressing economic activity for at least three years.

The Zia era (1978-1988): The 10-year average rate of economic growth came to 5.88 percent – the highest 10-year average in Pakistan’s history. For the first five years, industrial activity remained depressed but then picked up steam. In Zia’s last year in power, the share of manufacturing in our GDP came out to be 16.79 percent.

The Musharraf era (1999-2008): In 2005, the share of manufacturing as a percentage of GDP was 18.56 percent – the highest figure recorded in the history of Pakistan’s manufacturing sector.

Red alert: By 2006, a wave of premature deindustrialization had taken over and by 2017 the share of manufacturing in our GDP had fallen back to where it was in 1962 (13.5 percent).

Why are we prematurely deindustrializing?

To begin with, for the past 12 years, our tax policy has been anti-industry. Imagine: the manufacturing sector is 13.5 percent of the GDP but the government extracts 58 percent of the tax revenue from the manufacturing sector. Imagine: corporate profits are taxed at 38 percent – the second or the third highest in the world. Imagine, our industrial sector is obligated to pay 47 different taxes and if the burden of all the taxes is taken into account, the tax rate goes up to 51 percent.

The electricity tariff for the textile industry in Vietnam is seven cents/kWh, Bangladesh 7.3 cents/kWh, China 8.3 cents/kWh and India nine cents/kWh. Imagine: the comparable electricity tariff in Pakistan is 11 cents/kWh. Yes, India’s state governments are giving subsidies ranging from one cent/kWh to two cents/kWh.

The natural gas tariff for the textile industry in Bangladesh is $3/MMBTU, in Vietnam it is $4.2/MMBTU and in India it is $4.5/MMBTU. Imagine: the comparable gas tariff paid by textile mills in Pakistan’s Punjab is $8.6/MMBTU.

Deindustrialization is the opposite of industrialization and deindustrialization has far-reaching economic and social consequences. Red alert: Deindustrialization means higher unemployment. Red alert: Deindustrialization means higher rates of crime.

In the words of Dr Kaiser Bengali, a renowned Pakistani economist: “I think our economy can best be described as a casino economy. This means that we are investing in real estate, stocks etc in anticipation of high returns within a small span of time; there are no long-term goals in sight. Manufacturing is constantly on the decline so the domestic demand is fulfilled by importing products from abroad.”

The writer is a columnist based in Islamabad.

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