Technological Upgrading and Industrial Competitiveness: How

Has Pakistan Fared?Rajah Rasiah and Nazia Nazeer

(Rough draft)

University of Malaya

Power point presentation prepared for the conference, , Lahore School of Economics, 25-26 March 2015.

1. Introduction• Pakistan has a rich history of cotton and cotton-based product production and exports.

Colonized by Britain the country obtained independence jointly with India in 1947. Much was expected of the country as it was among those that was endowed with reasonable levels of human capital compared to the other newly independent countries at the time of independence.

• However, Pakistan has remained a poor country so much so that its per capita income only grew by around 4 times from US$219 in 1960 to US$790 in 2013 in constant 2005 prices (World Bank, 2014). This growth does not compare well with that achieved by the super industrializer of South Korea, and the other rapid industrializers of Malaysia, Thailand and China. Korea’s per capita income rose by around 22 times from US$1,107 in 1960 to 23,893 in 2013. Malaysia’s GDP per capita grew by 7 times from US$987 in 1960 to US$6,998 in 2013. Thailand’s GDP per capita grew by 8 times from US$437 in 1965 to US$3,348 in 2013. China’s GDP per capita growth significantyoutstripped that of Malaysia and Thailand as it grew by 15 times from US$246 in 1982 to US$3,567 in 2013.

• Cotton-related clothing has remained Pakistan’s chief export throughout these years. Not only that clothing eventually fell in relative significance in the past successful industrializers these economies also demonstrated a significant shift towards high value added economic activities.

• We examine in this paper the possible economic reasons as to why Pakistan did not

manage to join the Asian tigers to achieve long term rapid economic growth. In

doing so we analyse structural change experienced by Pakistan towards

manufacturing activities, and within manufacturing from low to medium and high

technology activities, and finally the extent of technological upgrading achieved in

its chief export i.e. clothing. In the absence of firm-level evidence on technological

capabilities, we rely on key competitiveness classifications introduced by Lall

(2005) to examine the evolution of manufacturing in Pakistan.

2. Conceptualizing Industrial Policy• Industrial policy has a long history with the first considered to have originated accidentally in . Britain

in the 15th Century (Reinert, 2007). The early efforts to define industrial policy saw the term referred to a policy or a set of policies targeted at expanding industry in general, and manufacturing in particular (Kaldor, 1967). While some economists, such as, Young (1928) and Kaldor (1957) focused on the differentiating characteristics of industrialization and its impact on the division of labour and economic expansion they did not analyse specifically the technological deepening issues. Chenery, Syrquin and Robinson (1986) attempted to do this but confined analysis to the categorizations by capital goods, consumer durables, intermediate goods and raw materials. Lall (2005) subsequently used the classifications of high tech, medium tech and low tech industries to address the sophistication of countries’ economic structures. Lall’s (2005) classification is important here as it allows us to examine structural change from low to high value added activities, though, it does go beyond broad categories.

• The transformation of production into different stages and the evolution of embodied knowledge in which the innovation depth has transcended the boundary of the nature and type of goods and services means that it no longer matters whether countries experience structural transformation from a specialization in consumer, intermediate to capital goods. For example, Taiwan and Singapore show greater specialization in components and intermediate goods than Malaysia but the former two are technologically far superior than the latter, which is reflected in their respective value added activities. Hence, a successful industrial policy should be viewed as an exercise in which it successfully stimulates sustainable economic transformation from low to high value added activities of targeted industries, as well as, other industries in the economy.

3. Methodology and Data

• We use aggregate time series trade data to classify industries by low, medium and high technologies and against the grain of growth in global exports to locate them as more and less competitive rather than the static measures used in the past, e.g. Grubel-Lloyd index, revealed comparative advantage (RCA) and trade balance.

• The data was drawn from country sources and comtrade.

4. Industrial Competitiveness Compared

• Manufacturing’s contribution in GDP of Pakistan remained much lower than that experienced by South Korea, Malaysia, Thailand and China. Its share in GDP reached its peak of 18.6% in 1997. It has in other words started to deindustrialize before reaching specialization in high value added activities.

• Manufacturing exports from Pakistan is still dominated by low tech textile and clothing industries (see Figures 2 and 3).

• Following Lall’s (2005) measure of competitiveness the manufacturing sector of Pakistan has demonstrated high growth in the medium and high-tech industries in the period 1990-2013 (see Figure 4). However, that is only because their starting bases were tiny. Indeed, LT industries still accounted for around 98% Pakistan’s manufactured exports (Figure 5).

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Figure 2: Textile Exports in Total Exports, 2005-13 (%)

2005 2013

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Figure 3: Clothing Exports in Total Exports, 2005-2013

2005 2013

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Figure 4: Annual Average Growth in Exports by Technological Intensity, Pakistan, 1990-2013

1990-2000 2000-2013

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Figure 5: Export Breakdown by Technological Intensity, Pakistan, 1990-2013 (%)

LT MT HT

5. Technological Upgrading in Key Industry

• Cotton-based products have dominated manufacturing in Pakistan.

• Textiles and clothing together still accounted for over 50% of manufactured exports in 2013 but that share fell dramatically in the rapid industrializers of Korea, China, Malaysia and Thailand.

• The continued dominance of low tech textiles and clothing in Pakistan demonstrates that there has not been much structural change to higher value added activities.

• Although cotton clothing production has increased, exports of yarn and cloth have remained huge (see Figure 7).

• Thus, despite an expansion in high-tech electronics, Pakistan’s manufacturing has remained dominated by low tech textiles and clothing. Indeed, resource-based textiles have been the most dominant.

• Textile exports still exceeded clothing exports suggesting that little upgrading has taken place.

• While it is good to stimulate structural change into MT and HT industries, Pakistan should not abandon the apparel industry. Instead it should undertake more designing, R&D and brand marketing in the clothing industry/

6. Conclusions

• From a brief look at manufacturing in Pakistan it can be seen that the sector was never a major sector, which started to contract after 1997.

• Specialization in resource-based yarn and cloth, and clothing production has meant that the industry is located in a slow growing market niche.

• Industrial deepening and structural change from low to high value added activities is essential if manufacturing is to play the engine of growth role a la South Korea to stimulate rapid GDP growth.

• A two prong upgrading strategy may work well for Pakistan, one, technological deepening in industries in which it has existing endowments (moving onto designing, R&D and brand marketing in textiles and clothing) and integrating higher value added MT and HT industries.

• A well crafted and implemented industrial policy taking account of the evolutionary dynamics of each promoted industry is important for this to be achieved.