A friend set up a small industrial unit just outside of Lahore about 15 years ago. At the time he had gone through hell, or gone near enough to it, to get all the departments to do their work and allow him to set up the unit.
From getting approvals of loans from banks that were at that time in public sector, to getting approvals for import of machinery, getting the buildings made for the factory, getting access to water, gas, electricity, and so on, everything was a chore and took a long time. There were definitely cases in which he did not have to pay any rishwat, but these were few and even in these cases he had to wait a long time, spend a lot of time fulfilling red-tape requirements and massaging egos to get his work done.
To give just a couple of examples: value of machinery was inflated to make room for payoffs for bank people. The machinery was to be used as collateral also. But the inflation in value just created space for getting some extra money up front from the bank and this was done in collaboration with the bankers and with their knowledge and a big chunk of that ‘extra’ went to the bankers themselves as payoff for approval of the loan.
Wapda was giving the run-around and not installing the required transformer for the factory. It required a major ‘sifarish’ to get the process started and payments for almost everyone involved to get the transformer installed. This was in days when there was almost no load-shedding. And in the end what Wapda did was that it took away a transformer from another factory that was also in the process of being set up and installed it for my friend’s factory. I do not know when the other person finally got his transformer.
Even when machinery arrived at the dry port in Lahore, my friend had to pay a significant amount to get the machinery to be moved from the dry port to the factory: the payment was to port authorities for ability to move things and ‘bhatta’ payments to some transport related mafias.
Manufacturing brings growth, income, jobs and exports for us. Its importance, for our economic well being cannot be overestimated. But it is not easy to be a manufacturer in Pakistan. The government has made sure of that. It is true industrialists in Pakistan have gotten away with protections in some industries and with all sorts of subsidies in many others and many evade taxes, and this continues in some industries even today, but it is also true that the transaction cost of doing business is very high in Pakistan.
Though there have been publications on cost of doing business, business environment and so on, in Pakistan over the last decade and a half, many of them done by the World Bank, that have shown that Pakistan has made some progress towards bringing down the cost of doing business, but the progress has been slow and uneven. A lot of licensing requirements have been removed and NoC requirements have been pared down. But it does not seem to have had a significant overall impact.
In fact, another friend, who has set up a small unit over the last couple of years, has also gone through almost the same level of problems as the friend who set up the unit 15 years ago. Departments get full marks for consistency at least. The same departments created the same sort of issues for this friend 15 years down the road. One wonders why people set up manufacturing units in Pakistan? It must be the case that it is still profitable to do so. But one also wonders if all of these hassles were not there and we had efficient departments and efficient level of transaction cost, how many more manufacturing units could there be in Pakistan? And don’t we need that number?
Over the years we have been involved in numerous conversations with manufacturers and traders in Pakistan. They complain about a lot of things, some of complaints make sense, others do not, but one thing comes through consistently. A lot of manufacturers say that a) they made a mistake in setting up a manufacturing unit, b) if they could get rid of it at a reasonable price they would do so, and c) they would rather go into trading. And it is seldom that we have come across a trader who wanted to go into manufacturing. And this trend seems to be strengthening. If you can import goods cheaply into Pakistan from China and East Asia, and can get rid of all of the hassles related to managing a manufacturing unit, why would you not do it? And that is exactly why trading is so popular in Pakistan.
But it does raise a difficult national problem. Manufacturing is where a lot of jobs tend to be. Given the large population base we have, the lack of literacy and education, if we do not have basic manufacturing jobs, where the labour is going to go and where the jobs are going to come from.
Received wisdom from the West suggests that the lower the barriers to trade the better. But we have also seen, evidenced by China and East Asian countries, that more discriminating trade and industrial policy regimes can garner significant returns to countries as well, even to the point of developing competitive advantage in new areas in less than a couple of decades sometimes.
Manufacturing is important for us. But right now incentives, from transaction cost point of view and from trade/industrial policy point of view, are such that manufacturing does not make sense for people to go into, except for particular industries that have been protected heavily (automobiles). These incentives need to change or before long we will have an even narrower base of manufacturing and exports and even graver problems of unemployment and lack of growth. But for that to happen we need fairly detailed and thorough work on incentives and policies at the product level. Our government currently does not seem to have the willingness or the capacity to do that.
The writer is an Associate Professor of Economics at LUMS (currently on leave) and a Senior Advisor at Open Society Foundation (OSF). He can be reached at [email protected]
