Cars, consumers and protectionism

Indulging only producers, not consumers, in policy-formulation makes it biased

Auto manufacturers are keeping their fingers crossed for yet to be announced ‘automotive industry development policy phase-II’, which is in its final stages. With a new government on board, there are hopes that this policy would likely come up with different policy interventions relative to the auto policy 2009. The reason being the present government somewhat having an industrial background, has given relief to auto manufacturers (at least to some), implying that this new policy would cater to their demands and hopes.

Sadly, consumers are given a back seat while formulating this policy document. It amazes a rational mind as to how a policy related to a consumer product is formulated while overlooking consumers’ needs. Perhaps only having producers in policy making bodies makes this process significantly biased. While it has been mentioned on and off that liberalisation of trade with India or even a slight increase in tax on auto products would result in damage to the industry’s producers and employees, consumers never even get a place in the policy picture.

The automobile industry has now taken the shape of an ‘exclusive club’ mostly promoting and protecting its ‘own interests’ sometimes to the disadvantage of others (consumers). They have their own rigid views which seem unlikely to change any time soon.

At this juncture, a rational mind comes up with questions like ‘is high protection to this industry really justified?’ Of course protection is meant for nascent industries of the economy to grow, but our 34-year toddler industry does not seem to grow at all. One cannot even call it a nascent industry because the term ‘nascent’ signifies potential for growth necessary for independent operation. Although the auto industry is growing in numbers but is yet too fragile to work independently in face of outside competition. Even a tax increase of two percent is enough to make it whine. Now can it be guaranteed that any further protection would enable this industry to become competitive when years and years of protection failed to do so? The government should also keep in mind that over-protection by shooing away any foreign competition might also result in a life-time handicap for either the industry or more likely of the consumers in the form of their paralysed buying power.

Protection is universal and found even in most developed regions of the world. Malaysia also had its automobile industry protected for a long time which, according to many research studies, had to be cut down as the industry stagnated on ‘upgrading and international competition’. Today, Malaysian automobiles form a major part of the global automobile supply chain. The point here is that the policy option to promote growth of the local industry should not be practiced over-ambitiously. To put it simply, adopting protectionist policy as a long term strategy might do more harm to the industry as it restrains the industry from developing immunity to foreign competition. Moreover, this strategy also does not stand well when it comes to the evaluation of the welfare impacts of protectionism. However, using this as an umbrella for a shorter period of time to let the nascent industries grow would be a great help.

Now that AIDP-II is in the pipeline and it would be an important policy governing the automobile industry of Pakistan, it is important to formulate it in a way to offset any possible questions that might arise on the prudence of the decisions taken. Some of the broad brush recommendations which might help feed into the policy making process can be to make this policy ‘consumer sensitive’ (at least to some an extent). Special investment incentive packages can be designed particularly to attract global brands as well as to promote the investment in the manufacturing of critical components. Perhaps we can experiment with tax or subsidy incentives, etc.

With regard to liberalising trade with India in automobiles (this being a major concern of the local industry these days), many policy interventions can be made. For instance, import of second hand cars can be slightly restricted along with the opening of trade with India to buffer for any plausible impact on the local industry. Import can also be made conditional ie auto imports from India cannot exceed 15 percent of Pakistan’s auto market. Moreover in the later phases imports can also be tied to the conditionality of Indian investment in local auto manufacturing.