Pakistan Policy Note—Revitalizing manufacturing 79569 Pakistan Policy Note 5 Dan Biller and Ernesto Sanchez-Triana 1 Revitalizing Manufacturing J une 2 0 1 3 On a trend decline since 1960, Pakistan’s economic At the same time, a young and largely low-skilled growth is highly dependent on financial inflows of unemployed labor force has also been rising. Part of aid and worker’s remittances. Manufacturing has the solution is for Pakistan to follow in China’s great potential, though, based on a growing labor footsteps by engaging in low-skilled labor-inten- force and rising urbanization and connectivity, but sive manufacturing, filling the gap left behind as its poor performance stems from its largely low-skilled China moves up the value chain with its increas- labor force, poor commercial environment, and failure ingly sophisticated labor force and amid pressure to diversify production and climb up the technology from increasing wages. Yet, equally important is ladder. Manufacturing remains heavily concentrated to join China in moving up the value chain. on nondynamic low value-added consumer products that attract little investment. Though manufactur- Jolting Pakistan’s manufacturing into increasing ing is improving these factors, it has room to sharply its share of GDP involves a raft of measures. They raise its contribution to GDP while reducing public include improving skills and the commercial “bads� of an unemployed labor force, such as social environment; harnessing the positive forces of conflict and the need for widespread social assistance. agglomeration (such as focusing on infrastruc- Equally, negative impacts of industrial expansion, ture investments and facilitating trade); pro- such as pollution, need to be mitigated with a com- moting inclusive green industrial growth (by, bination of economic instruments, public participa- for example, addressing bottlenecks in supply tion, industrial voluntary actions, and command chains, taking advantage of cleaner industries THE WORLD BANK GROUP SOUTH ASIA REGION and control regulations. This note discusses ways in and certification for exports, and facilitating which Pakistan can revitalize its manufacturing and entry of women in the labor force); and ensur- promote agglomeration economies, thereby increas- ing that regulations are in place and enforced to ing manufacturing’s contribution to medium-term avoid the negative externalities of agglomeration. growth and to job creation. Spatial Transformation, Manufacturing Like other South Asian countries, Pakistan is experi- Performance, and Economic Growth encing a shift from an agriculture-based to a services- based economy. But South Asia—unlike East Asia Pakistan is in the midst of two key trends that can where manufacturing has played an increasing provide increased manufacturing potential: sig- role in recent decades on the path to becom- nificant migration to urban areas and the develop- ing largely middle income—has seen its manu- ment of “agglomeration� economies. The first is facturing share of GDP stagnate since 1980 in a physical concept, the second an economic all major economies except Bangladesh. For one. Urbanization facilitates agglomeration, as Pakistan, trends are complicated by declining face-to-face exchange of information is impor- growth since 1960 and overreliance on finan- tant in allowing labor and production to learn cial inflows (aid and worker’s remittances). from each other and to apply technological Pakistan Policy Note—Revitalizing manufacturing advances. It can also reduce transport costs, agglomeration, they are important engines as moving goods, people, and ideas becomes of economic growth. Figures 1 and 2 provide cheaper. People may take advantage of agglom- snapshots of this relationship in 1960 and 2011. eration when different ways to connect and In 1960, Latin America was fairly distant from exchange information are available (telecom- South Asian and East Asian economies not only munications, information technology, and so in urban population but also GDP per capita. on). Agglomeration economies also help create Half a century later, the Republic of Korea and internationally connected cities, concentrating Malaysia are not only as urbanized as Latin 2 production and further facilitating economic American countries but are also richer. Paki- growth.1 These trends combined can have a stan, however, has not moved up the curve: profound influence on how natural resources although one of the most urbanized countries and infrastructure are used, which in turn in South Asia, its urbanization and growth pale may influence migration, agglomeration, and in comparison with that in other countries. It ultimately the prospects for high-productiv- has been unable to use its urbanization and ity jobs and economic growth (Box 1). But if agglomeration to generate the growth and unchecked, urbanization may backfire due high-productivity jobs that should come with to the public bads associated with it—hence them. Equally, megacities like Karachi suffer the importance of ensuring that such growth from the public bads of urbanization, like con- is “green� and inclusive (that is, it takes into gestion, pollution, and social conflict. account environmental and social issues). As an economy develops and urbanizes, the share of Countries tend to move up the path of urbanization agriculture in GDP inevitably declines while that and economic progress in tandem. As cities catalyze of manufacturing and services rises. This form Box Infrastructure, agglomeration, and urbanization 1 Rising shares of services and manufacturing in an economy are generally associated with urbanization as the economy increases its sophistication through stronger productivity and growth. The box figure presents a simple conceptual framework of various factors. All influence one another in a virtuous circle, and infrastructure services (connectivity) are inputs to the different quadrants and to the circle as a whole. The goal of a virtuous circle Urbanization Infrastructure Green economic services Agglomeration growth (connectivity) High-productivity jobs Figure Snapshot of urbanization, 1960 1 (PPP $, in ation adjusted; log scale) 5,000 Mexico Chile 4,000 Brazil GDP per capita 3,000 Sri Lanka Malaysia 2,000 Philippines Indonesia Bangladesh Dominican Republic 1,000 3 Korea, Rep. Pakistan Afghanistan India 0 Bhutan China –1,000 0 10 20 30 40 50 60 70 80 Urban population (percent of total) Note: Regions are in different colors. The size of the bubbles represent country populations. Source: World Bank 2012; www.gapminder.org. Figure Snapshot of urbanization, 2011 2 30,000 Korea, Rep. (PPP $, in ation adjusted; log scale) 20,000 GDP per capita Malaysia Chile Mexico China Brazil 10,000 India Sri Lanka Dominican Republic Philippines Nepal 0 Indonesia Afghanistan Maldives Pakistan Bangladesh Bhutan –10,000 0 20 40 60 80 100 Urban population (percent of total) Note: Regions are in different colors. The size of the bubbles represent country populations. Source: World Bank 2012; www.gapminder.org. of intersectoral change normally represents Small industrial companies have generally had a a gradual shift from low- to high-productivity more stable and upward trend than larger companies, activities. With country growth, manufacturing amid lagging industrial growth generally. Growth tends to diversify as firms produce and export of small and household firms has been fairly a wider range of more sophisticated products. steady since 2000 while large-scale manufactur- At even higher levels of income, specialization ing saw a sharp increase in 2002–05, followed again increases but in high value-added and by a sharp contraction, reflecting weakening technologically advanced products. Increased aggregate demand, deteriorating security, and product diversification therefore represents power shortages (Figure 4). an intermediate stage in a country’s economic development. Yet, apart from Bangladesh, Districts with faster population growth have seen stron- manufacturing has been virtually stagnant for ger growth in manufacturing production value, a sign the past 30 years in South Asia (Figure 3). Agri- that even though manufacturing is underperforming, culture’s loss has largely been services’ gain.2 agglomeration is an essential element in its growth While mitigating the potential negative effects, (Figure 5). Districts with a population density of Pakistani manufacturing needs to capture the more than 600 persons per square kilometer are benefits of agglomeration. characterized by industrial development and by Pakistan Policy Note—Revitalizing manufacturing Figure Evolution of GDP composition in South Asia, 1960 –2010 3 Agriculture Industry Services 100 75 Percent 50 4 25 0 2000 2000 1990 2010 1990 2000 2010 1990 2000 2010 1960 1970 1980 1990 2000 2010 2000 2010 1970 1980 1990 2000 2010 1960 1970 1980 1990 2010 1960 1970 1980 1990 2010 Afghanistan Bangladesh Bhutan India Malaysia Nepal Pakistan Sri Lanka Source: World Bank 2012. Figure Growth of large and small manufacturing in Pakistan, 1950 –2010 4 Large rms Small and household rms 30 20 Percent 10 0 –10 1950–59 1960–69 1970–79 1980–89 1990–99 2001 2005 2010 Source: Ministry of Finance 2008. Figure Relationship between value of manufacturing production and population growth 5 1.00 Population growth, 1981–82 to 2005–06 Tharparker Quetta Karachi Karak Lahore 0.75 (log scale) Faisalabad 0.50 Kalat Nawabshah 0.25 Toba Tek Singh 0.00 0 100 200 300 400 500 600 700 800 Value of production, 2005–06 ($ millions) Source: LUMS 2011. better education, health infrastructure, and san- communications, and transport is a top infra- itation than those in rural areas.3 By contrast, structure concern for businesses worldwide. districts with low population densities—below Pakistan provides relatively low access to ser- 30 persons per square kilometer—offer few job vices, which in turn inhibits foreign invest- opportunities and little to no industrial pres- ment. As examples, Pakistan has only 2 fixed ence (World Economic Forum 2011). telephone lines per 100 people, far below the 70 in China, 17 in Sri Lanka, 16 in Malaysia, Agglomeration’s importance is also seen in loca- and 16 in Indonesia, and less than India’s 3 tion and type of firms. Firms tend to set up in (World Economic Forum 2011). Road density 5 areas with “location economies�—areas that in Pakistan is also far lower than in India and minimize procurement costs (such as those Sri Lanka. Only about 62 percent of the popu- of transporting raw materials to the firm) and lation has access to power, less than the 99 per- distribution costs (such as those of distributing cent in China and 80  percent in Sri Lanka, products to customers). These are areas with while unreliable energy supply in Pakistan has specialized labor, interindustry spillovers, local stifled industrial growth (World Bank 2009a). transfers of knowledge, and access to export An inefficient transport sector costs Pakistan’s markets. Statistical results based on the Ellison economy 4–6 percent of GDP a year.5 and Glaeser Index indicate that 35 percent of industries in Pakistan are highly agglomerated, Investment in key areas is declining. Although 38 percent are moderately agglomerated, and the share of transport and communication 27 percent are not agglomerated (Ellison and investment in the total rose from 12 percent to Glaeser 1997). The most highly concentrated 24 percent in 2000–10, the share of industrial industries are ship-breaking, followed by sports investment fell from 38 percent to 20 percent.6 and athletic goods. Other highly concentrated The share of manufacturing recorded a similar industries are those which need to be close to decline, driven largely by a steep fall in invest- consumers and suppliers.4 ment in large firms (Figure 6). Main Issues in Industrial Development The Global Competitiveness Report 2011–2012 ranks Pakistan 115 of 142 countries in infrastruc- Declining resources for infrastructure to ture. The biggest obstacles for doing business in stimulate agglomeration-benefiting industries Pakistan are government instability and coups, corruption, policy instability, inadequate sup- Weak infrastructure is one of the main bottlenecks ply of infrastructure, and inefficient govern- for doing business in Pakistan. Access to power, ment bureaucracy, followed by poor access to Figure Share of manufacturing investment in total fixed investment, 2000 –10 6 Large rms Small rms 30 20 Percent 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Pakistan Economic Survey (various issues). Pakistan Policy Note—Revitalizing manufacturing funding. All these factors reduce export com- Lack of trade competitiveness due to petitiveness, hit the economy’s ability to inte- little manufacturing diversification grate with global supply chains, and increase the cost of doing business (World Economic Rapid growth in global manufacturing exports has Forum 2011). allowed developing countries—notably excluding Pakistan—to gain a sizable share of the world mar- Little diversification and low ket. The global share of exports from India, productivity in manufacturing Malaysia, and Thailand, for example, increased 6 considerably over 1974–2008, while Pakistan’s A main reason for industry’s poor performance is its share remained stable for the period, though it heavy concentration in low value-added consumer declined over 1990–2008 (Table 2). products, such as food, beverages, and textiles, which account for more than 70  percent of total exports. Moreover, Pakistan exports a narrow range of manu- These goods are nondynamic (Table 1), offer factured products to which it adds little value. This little possibility for technological improvement, can be captured by the PRODY index, which and attract very little foreign direct investment associates a certain income to each prod- (FDI). Industry has largely failed to move into uct, and the revealed comparative advantage more sophisticated capital goods or to develop (RCA), a measure that is greater than 1 if the upstream ancillary manufacturing, such as country has a comparative advantage in pro- chemicals and engineering. Crucially, manu- ducing a given good.8 The results in Table  3 facturing focuses on products that are losing suggest that, despite being a major producer of share in the world market. In 2010/11, the raw cotton, Pakistan does not have a compara- share of textiles in the country’s exports was tive advantage in those textile products that about 50 percent (Planning Commission 2011), fetch the highest prices. Its exports are instead but as a share of total merchandise exports it concentrated in goods produced by low-income dropped from 1.72 to 1.65 for 2009–11 (WTO countries (raw cotton, cotton yarn, and cotton 2012). Value added in industry (as a share of fabrics). Pakistan’s high RCA in these prod- GDP) is much lower than that in comparator ucts is due mainly to government policies that countries: it ranged from 21 percent to 27 per- have favored low value-added items over more cent in the 1970s and 1980s, constant at about sophisticated products, such as felt articles or 23 percent in 1994–2003, and around 27 per- bonded fiber fabric. cent since. India has had higher industrial value added since the early 1980s, and even In sum, Pakistan’s export position in world markets low-income countries have recently overtaken is not very encouraging. This can be illustrated Pakistan.7 graphically: Figure 7 compares the growth rate Table Average product shares in manufacturing, Pakistan, 1970 –99 1 (percent) Product 1970–79 1980–89 1990–99 Food and beverages 30.45 30.94 22.89 Textiles 27.78 18.14 25.06 Industrial chemicals 11.20 14.29 15.50 Metals and nonmetals 9.10 14.20 13.20 Petroleum and coal 5.27 6.01 3.26 Electrical machinery 3.31 3.26 5.43 Transport equipment 2.99 2.89 3.05 Apparel, leather, and textiles 2.04 2.37 2.80 Nonelectrical machinery 1.84 2.14 2.09 Rubber and plastic 1.80 1.80 1.42 Source: Pakistan Economic Survey (various issues). Table Country export shares in world exports, 1974 –2008 2 (percent) 1974 1980 1990 2000 2008 India 0.56 0.43 0.57 0.70 1.32 Malaysia 0.55 0.74 0.94 1.61 1.43 Thailand 0.32 0.37 0.74 1.13 1.25 Pakistan 0.14 0.15 0.18 0.15 0.15 Source: United Nations Statistics Division n.d. 7 Table PRODY and revealed comparative advantage in textiles, 2008 – 09 3 Product PRODY ($) Revealed comparative advantage Raw cotton 2,036 5.9 Cotton yarn 5,631 86.5 Cotton fabrics 4,541 115.0 Men’s and boys’ readymade garments 6,777 13.2 Women’s and girls’ readymade garments 5,160 5.2 Clothing accessories (knit wear) 9,419 22.5 Articles of felt (technical textile) 22,486 0.1 Bonded fiber fabric 31,250 0.2 Source: United Nations Statistics Division n.d. Figure Competitiveness and performance of exports, India and Pakistan, 2004 –11 7 India Pakistan 2 Annual growth of product’s share in 1 Chemicals Pharmaceuticals Chemicals global exports (percent) Pharmaceuticals 0 Iron and steel Iron and steel –1 Machinery and transport equipment Machinery and –2 transport equipment Clothing Clothing –3 –4 Textiles Automotive Textiles Of ce and telecommunications products equipment –5 –10 0 10 20 30 –10 0 10 20 30 Annual growth of country’s share in product’s global exports (percent) Source: Nabi 2011. of a given good in world exports with the cor- The underlying reason for Pakistan’s inability to responding growth rate in Pakistan’s exports. achieve a dynamic competitive advantage is the If the product is in the top right-hand quad- persistent failure to diversify its production and rant (the “competitive quadrant�), the product climb up the technology ladder (Lall 2000).9 In is internationally competitive. Pakistan has fact, in 2008 medium- and high-technology only 4.8  percent of its exports in that quad- products accounted for a mere 9.5 percent of rant, compared with India’s 13.8 percent. Man- Pakistan’s exports, but 57.6  percent of world ufacturing exports are dominated by textiles exports (Table 4). Moreover, the performance (35.8 percent), whose world demand is falling. of medium-technology exports has not been Pakistan Policy Note—Revitalizing manufacturing Table Technological level of exports, Pakistan and the world, 1998 –2008 4 (percent) Pakistan exports World exportsa Growth Share Share Growth Share Sector 1998–2008 1998–2000 2006–08 1998–2008 2008 Primary 10.1 12.3 12.7 11.2 11.4 Resource-based 23.9 3.5 10.9 10.5 14.8 Low-technology 8.2 74.7 66.7 9.2 16.2 8 Medium-technology 8.7 8.6 8.1 10.1 35.5 High-technology 17.5 0.8 1.4 9.3 22.1 Total 9.6 10.1 a. Excludes oil. Source: Pakistan Economic Survey (various issues). encouraging, with growth below both the corre- than in nonmanufacturing sectors of the econ- sponding world growth rate and Pakistan’s total omy, which in turn promotes economic growth export growth rate. The growth of high-tech- (Wang 2009). To halt this declining trend, it is nology exports, by contrast, has been remark- important to strengthen policies that reduce able at 17.5 percent a year, although their share firms’ costs of doing business and that keep fis- in Pakistan’s total exports is negligible and cal and monetary imbalances from becoming exceptionally low relative to other countries. too large. Overreliance on remittances and official assistance fur- Lack of financing ther aggravates the above impediments. The evidence is considerable that remittances result in appreci- The financial market in Pakistan is shallow. Firms ation of the equilibrium exchange rate, eroding rely principally on retained earnings to finance manufacturing international competitiveness their working capital and investment needs, (Lartey, Mandelman, and Acosta 2008; Montiel ranging from 78 percent in Sindh to 88 percent 2006). Such appreciation also stimulates final in Khyber Pakhtunkhwa (World Bank 2009b). consumption (of imports), further conspiring If firms draw on external finance, they usually against a competitive local manufacturing sector. resort to banks and trust funds (67  percent), While the Pakistan rupee has experienced nomi- or the Central Directorate of National Sav- nal depreciation since the 2008 global financial ings (22 percent). Further, access to finance is crisis, it has been largely overvalued for a long highly uneven across firms, and credit ration- time (and remains so in real terms), effectively ing hits small and medium-size enterprises penalizing Pakistan’s international competi- (SMEs)—potentially some of the country’s tiveness, especially in activities that depend on most dynamic—making it hard for them to medium-term investment like manufacturing. grow or improve productivity. SMEs also face barriers over weak and poorly enforced credi- FDI in recipient countries has strong links to economic tor rights, as well as high costs of borrowing. growth, but FDI can be inhibited by an unstable They are also are often perceived as risky bor- macroeconomic environment. FDI in the last two rowers, both because of their variable rates decades has come in the oil and gas sector and of return and their lower human and capital in the power, financial, and telecommunica- resources to withstand economic adversity. And tions sectors, shifting away from manufactur- their accounting systems and financial controls ing. Less than a fifth of Pakistan’s FDI in 2008 are often inadequate, undermining the quality went to manufacturing, reflecting a declining of their data. trend that started in 2004. Due to economies of scale and technological spillover effects, Onerous collateral requirements are particularly FDI in manufacturing generates more benefits problematic (Bari, Cheema, and Haque 2005). Most banks require collateral exceeding 100 percent has been done to tackle it. High levels of dan- of the loan to mitigate asymmetric informa- gerous pollutants, such as fine particulate mat- tion. Yet the principal asset of manufacturing ter and sulfur dioxide, are major health risks. firms is land, which is in effect removed from At the firm level, particularly among manu- the collateral pool by a highly inefficient land facturers, corporate social and environmental market. The main problem is that land acqui- responsibility is becoming increasingly impor- sition is cumbersome, involving multiple agen- tant to gaining and maintaining export markets cies, complex record keeping, and past sales in high- and upper middle-income countries. transactions lacking valid conveyance docu- Some firms for which exports are important 9 ments. It takes 49 days to register a property have market-friendly mechanisms to signal and costs about 4.2 percent of its value (LUMS to their market that they are serious about 2011). And vendors rarely transfer formal titles, this responsibility, as exemplified in attain- thus preventing firms from accessing credit ing process certifications such as ISO  14001 and preventing land from being put to its most (which covers environmental processes). Yet efficient use. Pakistan (as well as India and Sri Lanka) are far behind China, for instance, which increased Social conflict and pollution its ISO 14001 certifications nearly 60-fold over The growth of manufacturing can also lead to 2000–07 (Figure 8). Moreover, lax enforcement public bads that, if not addressed, can act as of occupational safety standards makes indus- bottlenecks in the form of social conflict and trial hazards common. The Karachi garment pollution. factory fire in September 2012 was the worst in Pakistan’s industrial history—more than 280 Social conflict, heightened by Pakistan’s demographic people died—and such events harm the coun- growth, manifests itself as sectarian or ethnic strife. try’s manufacturing reputation. Yet a growing urban population can become an important economic asset and lead to jobs Policy Recommendations growth, assuming that appropriate policies are in place to mitigate these negative impacts. A combination of the following policies may help And this can be a virtuous circle as agglomera- improve Pakistan’s ranking in competitiveness and tion economies in urban areas can themselves manufacturing’s contribution to GDP. (Table 5 sum- mitigate the likelihood of social conflict. marizes these suggestions.) Social conflict affects industrial production at several Build a prudent macroeconomic framework levels. First, lack of security creates a poor per- ception of Pakistan in international markets, Current nominal exchange rate depreciation linked to and buyers in these markets have become skep- macroeconomic difficulties could easily swing toward tical about doing business with suppliers in the nominal and real appreciation associated with country. Second, a perception of lack of secu- remittances and other capital inflows. Such appre- rity causes the private sector to reduce its eco- ciation may inhibit exports and thus potential nomic activity, with implications for business industrial growth, making it critical to reduce property and assets. Based on a World Bank fiscal and monetary imbalances in order to survey, the proportion of firms considering law build a strategy for sustainable industrializa- and order a major constraint to their business tion. It also makes it all the more important to rose from 22 percent in 2002 to 35 percent in remove distortions in the credit market, trade 2007 (LUMS 2011). policy, and tax regime. Finally, the government could facilitate FDI from Pakistanis abroad by Industrial degradation of the environment presents enabling the creation of diaspora-focused ven- health risks for the population and may have impacts ture capital and private equity funds in such for firms trying to access international markets. areas as information technology, automobile-­ Ambient air pollution in medium and large vending industry, medical equipment and ser- urban centers is extremely serious but very little vices, and hospitality. Pakistan Policy Note—Revitalizing manufacturing Figure Number of ISO 14001 certifications, selected countries, 2000 – 07 8 China India Malaysia Mexico Pakistan Sri Lanka 300 200 10 Thousands 100 0 2000 2001 2002 2003 2004 2005 2006 2007 Source: ISO Survey of Certifications 2004, 2007. Table Summary of challenges and suggested solutions 5 Sector or issue Challenge Solution Fiscal/trade (S) • Discriminatory tax regime • Make manufacturing activities attractive to invest in by not • Fiscal and exchange rate fluctuations taxing them net when compared with other economic activities • Mitigate by prudent macro policies and remove distortions in the credit market, trade policy, and tax regime Transport (S M L) • Poor transport sector • Efficiently connect cities and industrial clusters • Give increased attention to rail • Modernize trucking fleet • Redefine government’s role to focus on regulation and improve the private investment environment • Adopt new technology Power (S M) • Power shortages • Develop more and clean energy • Exploit power trade with neighboring countries Trade and logistics (S) • Weak cross-border infrastructure • Exploit Gwadar’s strategic location for gas pipeline Social development (S M L) • Little skilled labor for small and • Improve skills training and education medium‑size enterprises Government (M L) • Limited capacity • Strengthen institutional capacity of infrastructure sector and • Burden on the environmental management environment agencies framework • Combine command and control and market-based incentives to address environmental degradation S is short run; M is medium run; L is long term. Source: Authors. Address systemic issues most services are out of the tax net, which makes it more attractive to invest in nonman- Issues eroding manufacturing competitiveness ufacturing activity. Taxes increase the cost of include a discriminatory tax regime, poor access to doing business and reduce incentives to invest credit, and ad hoc incentives such as statutory reg- in manufacturing (Manes 2009). Pakistan’s tax ulatory orders (Nabi 2011; Planning Commission system needs to be better balanced across eco- 2010). In 2009, 40 percent of firms stated taxes nomic activities and should be focused on tax- as being a barrier in doing business (though a ing bads. decrease from 47 percent in 2002; World Bank 2009b). The bulk of the country’s total tax rev- In other areas, increasing access to credit, especially enue is collected from manufacturing firms for SMEs, facilitating vocational training though (corporate income tax) and their output (sales industry chambers, and supporting firms’ certifica- tax and various excises), while agriculture and tion in international standards of practices (ISO 14001, for example) would help raise manufactur- ­ ardest—the government should urgently develop h ing competitiveness. These wide approaches run new sources of energy supply. This entails, in par- counter to the government’s current incen- ticular, developing cleaner sources of energy tives to manufacturing, which are generally ad as an alternative to its limited supply of gas hoc measures like statutory regulatory orders, sources, upgrading distribution networks, often provided without a clear economic ratio- investing in thermal and hydro plants, using nale. The government should instead focus coal in a clean way as an alternative source efforts to improve the overall commercial envi- of energy, and cooperating with other South ronment for production and address market Asian countries to exploit sources of energy, 11 failures related to environmental and social particularly gas and electricity from neighbors. degradation. Break down trade barriers and improve Facilitate agglomeration through cross-border infrastructure for the major better connective infrastructure transport corridors and markets Cities and industrial clusters need to be better inter- A 2007 study found that trade between India and connected by upgrading, extending, and rehabili- Pakistan would increase by 405 percent if political tating infrastructure. In Khyber Pakhtunkhwa, and territorial conflicts were resolved.10 The stra- Punjab, and Sindh, spatially connective infra- tegic location of Gwadar should be exploited: structure—particularly interregional trans- it serves as an important node for any Iran– port infrastructure, as well as information Pakistan–India gas pipeline that could be and communication technology services—can developed. Importing natural gas would partly help facilitate links between cities and along address the energy concern, given that natural trade corridors. The planned rail and road gas demand in Pakistan far exceeds supply— infrastructure connecting Gwadar Port with there would still be a supply gap after 2015 northern Sindh is one example. Investments even if indigenous gas reserves and planned in freight transport should be developed, coor- projects in pipelines in the country materialize dinated with efforts to establish or strengthen (LUMS 2011). industrial clusters. Synergies between freight transport and cluster development would boost Improve skills training and education of the structural and spatial transformations that workers to better match employment Pakistan is undergoing. needs and supply in industry The potential of freight transport needs to be Such efforts are crucial given that many SMEs lack unleashed. Reforms should prioritize integrat- access to skilled labor. Pakistan is rapidly urban- ing different modes of transportation while izing, and reforms in trade and infrastructure emphasizing rail for long distances, where it is are expected to contribute to this trend, par- more efficient than road transport (adopting ticularly as investments and new employment a multimodal transport system); modernizing opportunities will most likely materialize in the trucking fleet to reduce environmental urban areas. Although urbanization offers and social externalities; redefining the gov- benefits, low skills and education can offset ernment’s role to focus on regulating and them. attracting private investment and gradually eliminating the biases that distort the market; Strengthen the institutional capacity and fostering new technologies and procedures of provincial environmental agencies to that add value to the trade and transport sec- implement appropriate regulatory frameworks tor, including moving from the current focus of bulk cargo to containerized cargo. Strengthening provincial environmental agencies should be a priority (particularly after devolution due As more reliable energy is critical to industry— to the 18th Amendment). Such agencies have little indeed, energy shortages have hit this sector capacity to address the many environmental Pakistan Policy Note—Revitalizing manufacturing and social issues that arise during construc- 6–12 percent of GDP (Rodrigue, Comtois, tion and operation of transport infrastructure. and Slack 2009). In India, the transport Raising their capacity to design and imple- sector contributed 5.7–6.4 percent of GDP ment environmental and social regulations in 1999–2005 (ADB 2007). (that address market failures and diminish rent 6. See Pakistan Economic Survey (various seeking) at the earliest planning stages and issues). to address issues as they arise would generate 7. Even in textile-related industries, a move in wide benefits for the population. These steps the value chain may prove beneficial. For may also have long-term benefits for industrial example, 50,000 pounds of cotton fiber 12 growth and exports, though such growth— creates 400 jobs in each of the three stages with its countrywide effects—may burden the of the textiles value chain—spinning, environmental management framework. Pro- weaving, and finishing of cloth. At the vincial agencies need to improve their capacity next stage (garments manufacturing), the to address environmental and social impacts of same volume of fiber creates 1,600 jobs. In industrialization as well. addition to being the most labor-intensive stage of the textiles chain, garments manu- Notes facturing creates by far the largest value The authors wish to acknowledge the research addition and is the least energy- and cap- assistance of Ashma Basnyat and the comments ital-intensive segment of the textiles chain provided by Jose R. Lopez-Calix, Javed Burki, (Nabi 2013). and Anthony Cholst. 8. The PRODY index is constructed as the 1. The literature on agglomerations is vast. weighted average of the per capita GDPs of See, for example, Fujita and Thisse (2002) the countries exporting a specific product, and World Bank (2009). and thus represents the income level (and 2. It has been argued that Pakistan could productivity) of that product. The weights leapfrog into service led growth. Yet to are the RCA of each country in each prod- take full advantage of modern services and uct (normalized to 1). If most high-income spread the benefits across society, Pakistan countries have an RCA in the export of a needs a well-educated and prepared labor product, the PRODY would be high. (The force. Moreover, the very long–term future RCA is the ratio of the share of product of the country’s economy may well be ser- A in Pakistan’s total exports to the share vices. This note argues that the path to of product A in total world exports. If the services for Pakistan would go through a RCA is greater than 1, it implies that the dynamic manufacturing sector if there is country has a comparative advantage in to be a shared prosperity. The services sec- that product.) tor in South Asia has also been extensively 9. The product concentration level is mea- discussed in recent literature (for example, sured using the index Ghani 2010). 3. These districts include Karachi, Lahore, Peshawar, Faisalabad, Sialkot, Islam- , abad, Multan, Swabi, Gujrat, Rawalpindi, Charsadda, and Gujranwala (World Eco- where k is the number of products that nomic Forum 2011). account for more than 90 percent of Paki- 4. Including furniture and fixtures, scientific stan’s exports and Wi is the share of com- instruments, pharmaceuticals, apparel, modity i in total export earnings. The handicrafts and office supplies, print- index can take a value between 0 and 1; ing and publishing, pottery and china the closer it is to 1, the greater the degree products, and paper and paper products of concentration. Pakistan’s value is 0.40. (LUMS 2011). 10. Naqvi and Schuler 2007. According to 5. Ministry of Finance 2011. In many devel- World Bank (2009a), in 2004 Pakistan oped countries, transport contributes and India engaged in the “Composite Dialogue� on peace and security issues, Ministry of Finance. 2008. Pakistan Economic including terrorism and drug traffick- Survey 2007–08. Islamabad: Government of ing, confidence building, economic and Pakistan. commercial cooperation, and friendly ———. 2011. Pakistan Economic Survey 2010–11. exchanges in various fields. Islamabad: Government of Pakistan. ———. Various issues. Pakistan Economic Survey. References Islamabad: Government of Pakistan. 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