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Pakistan: New Industrial Policy Formulated Through Rigorous Consultative Process
Source: brecorder.com
Source Date: Sunday, October 10, 2010
Focus: Electronic and Mobile Government
Country: Pakistan
Created: Oct 10, 2010

The Ministry of Industries and Production, P&P Wing, has sent the following rejoinder in response to Tariq Sayeed's recent critique of the draft industrial policy of the Ministry of Industries and Production in the Business Recorder (October 5).

"Sayeed has raised the objection that the new industrial policy is essentially a repackaged version of previous industrial policies and therefore conforms to the 'flawed' and 'ineffective' principles of neo-classical economies promoted by multilateral agencies such as the World Bank, IMF and the ADB. He concludes by stating his scepticism on the effectiveness of the policy in achieving the desired objectives of increased manufacturing growth. The following is a detailed rebuttal of Sayeed 's article. "According to Tariq Sayeed the industrial policy document is premised in "vintage neo-classical" economies, which he believes was the underlying paradigm for all policies from 1988-2010. Furthermore he asserts that the concept of market failure has been used in the current industrial policy as the only guiding principle behind government intervention. "First of all the theoretical underpinnings behind government intervention stated in the industrial policy are not singularly restricted to the standard neo-classical arguments centered on market failure. There is an explicit mention of the role of the state in industries or sectors, which exhibit increasing returns to scale or possess dynamic comparative advantage, which could lead to the formation of industrial clusters. This particular rationale for state intervention is based on what is known as co-ordination failure that falls in the domain of Neo-Keynesian heterodox economies. The recognition of co-ordination failure has provided the basis for the recent developments in the literature on New Economic Geography pioneered by the Nobel Laureate Paul Krugman of Princeton University in 1991. Therefore, if anything the new industrial policy is closer in many ways to the Neo-Keynesian principles as it frequently proposes strategic government interventions which would be an anathema to a neo-liberal economist.
"Also, the new industrial policy is sensitive to spatial inequalities and proposes balanced economic development which is a marked departure from standard neo-classical prescriptions focused on achieving efficiency in the allocation of resources rather than equity. Since the issues of economic geography and spatial distribution of economic activities have recently come to the attention of academies and policy makers, this industrial policy, in contrast to Tariq Sayeed's cavalier assertions, cannot be dismissed as "old wine in a new bottle".

"Secondly, the critique of neo-classical economies presented by Sayeed rests on the perceived inability of the state to implement policies, ie government failure is more pervasive than market failure. Ironically, this is a rather hackneyed neo-liberal criticism of state intervention which Sayeed employs without realising the apparent contradiction with what he proposes a paragraph or two later - 'catalytic' role of the state in industrialisation through a 'symbiotic partnership between the public and private sector'.

What Sayeed has failed to understand is the important distinction between policy formulation and implementation issues. In principle policies which are forward looking should not be determined by the present capacity or ability of the state to deliver these. If that were the case, Pakistan should have abandoned policy-making a long time ago. A positive approach is to address the capacity issue directly by formulating effective institutional mechanisms of implementation rather than limiting policies on the basis of existing state capabilities.

"Tariq Sayeed in his article states that the industrial policy 'laments the limitation of policy space' and 'arbitrarily assumes that nothing can be done to widen the scope for policy intervention.' A more thorough reading of the policy would have revealed to Sayeed, the recommendations put forward to enhance policy space. For example, the promotion of knowledge-based industries through the construction of a full-scale Science Park, which would allow the government to circumvent certain WTO regulations, has been completely overlooked. Moreover, the use of Non-Tariff Barriers in trade such as standards and quality compliance as effective ways to create policy space seem to have also escaped his attention. "The most erroneous, unsubstantiated and irresponsible remark of Tariq Sayeed is that "the specific policy recommendations can all have been lifted verbatim from a standard World Bank Industrial Sector report." He then goes on to stress the need for a home-grown policy as opposed to what he has imagined to be a document straight out of the offices of the World Bank. First of all it is apparent from these remarks that Sayeed is ignorant of the fact that for decades the World Bank has opposed activist industrial policies in developing countries. For instance, Dani Rodrik, who is a Professor of Economics at Harvard University recently stated that "the World Bank, after decades of consensus that industrial policy does not work for developing countries" is now realising the merits of industrial policy. "With regard to whether this polity is home-grown or not, it would suffice to mention here that the sector-specific policy interventions have been derived through a three-month long stakeholder analysis which entailed from level value chain analysis, surveys and interviews of various industrial associations in the country and secondary information available on specific sectors. Also, the draft industrial policy was presented to ten different chambers of commerce and industry across the country in order to solicit the views of the private sector and create the necessary 'buy in'. The comments and suggestions received from these interactions have been factored in the policy document. Although all this was mentioned in the Industrial Policy document, it was either conveniently overlooked by Sayeed or he has some other definition of a 'home-grown' policy.
"Tariq Sayeed is all praise for the successes made in the Ayub Khan's era, when PIDC, PICIC and IDBP were established to nurture industrialisation at a time when the business community was risk averse and hence not willing to convert their merchant capital into industrial capital.

To address this co-ordination failure, the government had to directly intervene and use foreign loans to subsidise the industry. Ayub Khan's government adopted a number of other policies to support industry, eg tariff walls, licensing and quotas, bonus-voucher schemes etc. Although these policies fostered industrial growth, they exacerbated wealth concentration and resulted in uneven development across provinces and across spatial units. The literature is replete with criticism of the economic policies of the Ayub Khan's era including the ones that Tariq Sayeed subscribes to. "After fifty years, the ground realities have dramatically changed: the government must step in to promote industrial growth by both restructuring old industry and facilitating the creation of new industry while being sensitive to spatial inequalities in economic activity. It was rightly pointed out that the government should play "a catalytic role" just like in the late industrialising countries, however, there is a limit to what the government can and cannot do. Government intervention in China, Korea and Japan has not always been a success. Therefore, there is no standard recipe for a successful industrial policy: excessive government interventions may bring some successes, but it may also bring expensive failures. On the other a 'laissez faire' approach promoting the unfettered working of the market has not been adopted by any country which has successfully industrialised. However, what has been a common feature in all these countries is an evolving and flexible Industrial Policy - that is an industrial policy which is not a 'one off' but a process involving institutionalised interaction of the private sector and the state policy-makers.

In this respect the new industrial policy is the first of its kind which has been formulated through a fairly rigorous consultative process backed by the latest concepts and ideas within the discipline of economies. Labelling this as a repackaged industrial policy is therefore a gross misinterpretation of the document".
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