For the record I am a strong opponent of Darwins theory of evolution. In my view a personal choice to be related to monkeys should not be imposed upon mankind. Recorded history does however, evidence mans economic evolution during the last 2 millennium. Arguably, the quality of life remained more or less stagnant up to the 17th century with world population subsisting on meagre incomes from farming and struggling against uncontrolled epidemics and calamities with few amenities.
The Industrial Revolution changed the world fundamentally through rampant urbanisation, creation of the business and working class and eventually classification of nations into developed, developing and less developed!
It is estimated that after 1800, the worlds average per capita income increased tenfold in the next two centuries suggesting that the industrial revolution was probably the single most important economic transition in history. While industrialisation was spurred on by growth in technological innovation, communication channels, energy sources and commercial banking, its driving force was mechanisation at the factory floor.
The importance of manufacturing can be gauged by our simple desire to have a soft drink, even in the information age today, the internet may efficiently choose and order for us, but without the factory floor the thirst will not be quenched. Manufacturing will remain the determining factor for identifying any countrys stage of development, as long as our desires and wants exist.
Let there be no doubts, world trade is fuelled by our wants and desires. Trade is simply bartering our surpluses for different wants with trade balance signifying available future or consumed past wants. If a country splurges on unnecessary current wants without available manufactured surpluses, it will have to pay dearly in the future by curtailing necessary wants.
To elaborate, the intent here is not to debate the economic merits or demerits of the service sector vis-à-vis the manufacturing sector but to simply identify that in the balance, services are mostly luxurious while necessities need to be grown or manufactured.
Notwithstanding, there should be no need to highlight the benefits of value addition to raw material through a manufacturing process. With the world population growing leaps and bounds, future conflicts will revolve around resources as already evident by the alarming trend of increasing commodity prices which is most likely to continue in the future.
Having established the importance of the manufacturing sector, let us return to our theory of evolution. Britain is widely acknowledged to be the birthplace of the Industrial Revolution, the catalysts being its huge coal and iron deposits complimented by access to raw material and markets of its colonies.
Industrialists and mercantilist from the middle class for the first time challenged the landed ruling aristocracy and the repeal of the Corn Laws in 1846 was probably the pinnacle of their success. Thereafter it was smooth sailing for manufacturers to ask for protection.
Arguments for protectionism included teething period for infant industry, flight of employment, drain on currency and higher taxation through tariffs. The measures centered around protecting Britains own manufacturing sector through tariffs and trade restrictions on its colonies.
After the Second World War, it eventually dawned on the developed nations that tariffs were counter-productive for growth as well as for accessing developing markets hence using the comparative advantage argument, the entire world was coerced into removing trade barriers and shift towards a free market. With superior technology and efficient manufacturing, there was never a doubt that the developing nations could ever compete unless allowed to do so through the quota system and with the Breton Woods Institutions in tow the carrot and stick strategy worked to perfection.
As regards the quality of life, late into the industrial revolution, around the middle of the twentieth century, the working class struggled at subsistence level with extremely poor working conditions while the business class got richer. This may have triggered the support for and rise of communism. Eventually Britain moved towards a welfare state and currently addresses to an extent the disparities in income through taxation.
The economic experiments continue with new arguments being constructed to repudiate previous ones. The world has seen globalisation, shifting of manufacturing to the east (mostly to China) for cost or environmental advantages, and the advent of the MNCs. Finally the current financial meltdown changed all previous paradigms sending the gurus and analysts back to the drawing board. But all this may not be relevant for comparing the evolution of our manufacturing sector with the historic model, we haven reached that far!
In terms of Pakistan, we are to yet repeal the proverbial "Corn Laws". Successive governments have been unable to tax agriculture and the entire burden is therefore borne by the industrial sector. Unfortunately in the case of mature manufacturing industries it is all the more difficult to pass on the added burden to the consumer.
Even today as the finance minister threatens to tax the rich, the industrialist shudder and the landed aristocracy smiles. The question remains, with the agriculturist continuing in the driving seat, will Pakistan cross over to the next phase of industrial evolution at all?
Today most Pakistanis continue to reside in rural areas, dependent upon farming. With around 36 percent living below the poverty line and unemployment at 15 percent, the country is nowhere near a welfare state. Nonetheless, in spite of nationalisation and decades of political turmoil, manufacturing did succeed in creating a segment of the rich business class, a critical step in the industrial evolution process. Unfortunately successive NABs and current non-conducive environment have resulted in their hibernation or flight from Pakistan.
While manufacturing is the third largest contributor to GDP, the pace of its growth has not been sufficient. Struggling with financial deficits and donor restrictions, the government could not provide the necessary impetus to the manufacturing sector for creating employment. Forget incentivising domestic manufacturers, government policies placed them in direct competition with foreigners. Superior technology and resources ensured that the balance was always tilted in favour of foreign manufacturers.
Evolution of manufacturing requires protectionism policy. Coming out of nationalism while some domestic manufacturers were able to lobby for protection, these were mostly ad hoc based. This has either resulted in over capacity as in the case of cement and textile or expensive options as in the case of private power.
Constructive protection of domestic manufacturing require well thought out strategies to ensure transition to resilient business models. The argument that such policies are generally to the detriment of the consumers may apply in developed economies but not where the country is struggling with financial bankruptcy.
Interestingly in the current global recession, protectionism policies are once again being considered, even in the USA. According to an article in NYT in 2010 even China, due to rising costs, may need to engage in protectionism to protect its manufacturing jobs from Bangladesh!
I for one, have always been curious on how Bangladesh succeeded in the garments industry compared with Pakistan where textile is the primary sector. Apparently, Bangladesh as a least developed nation has access to higher quotas in the Western markets. I remain a strong proponent of national pride, but business is business. Did our policymakers lose out on an opportunity for manufacturers?
Communication, infrastructure and energy are additional hurdles for our manufacturing sector. Pursuit of political gains results in industries being subjected to load shedding prior to domestic consumers. It is a mystery how idle plants and consequent rising unemployment is in the countrys interest.
Shutting down the industry is synonymous to breaking the bowl you eat in. Even in the case of infrastructure, lack of resources is a weak argument. Development should be focussed towards facilitating the industrial and manufacturing sector; consequent employment will take care of the rest.
To conclude, today, our manufacturing sector apparently is not geared to spearhead an industrial revolution. While Britain may have taken 200 years, we have an advantage to learn from history. We need not reinvent the wheel. What we do need is a single minded pursuit of industrialisation with a focus on manufacturing sector.
Policies need to be considered for protecting and facilitating the growth of industry, after all most of these ventures are financed by the savings of our countrymen. The continuing war on terror is a credible argument to solicit waiver from the restrictive provisions of the WTO. Protection however, should be carefully thought out and provided to manufacturers who are expected to nurture growth in the long term. All said and done, our manufacturing sector has to evolve for Pakistan to become a developed nation.
The writer is a chartered accountant based in Islamabad. He can be reached at syed.bakhtiyarkazmi@gmail.com