Industrial Competitiveness - The Challenge For Pakistan

INDUSTRIAL COMPETITIVENESS: The Challenge for Pakistan
Sanjaya Lall, Professor of Development Economics, Oxford University John Weiss, Research Director, ADB Institute, Tokyo*
Background Paper for the Asian Development Bank Institute Policy Seminars on International Competitiveness in Pakistan, November 2003.
DRAFT
November 2003
We are grateful to Manuel Albaladejo and Jinkang Zhang for their help with collecting and processing data. Peter Brimble provided material on Thailand.
Industrial competitiveness in Pakistan
Table of Contents
1. Introduction 2. Understanding Industrial Competitiveness: A Framework 3. The changing nature of competitiveness 4. New dynamics of world markets 5. Pakistan: the current policy environment for manufacturing 6. Benchmarking Pakistans performance 7. Benchmarking Pakistans skills and technological capabilities 8. Lessons from East Asia 9. Conclusions
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1. Introduction.
t is now a truism that the acceleration in the global movement of capital and goods, termed conventionally globalization, carries both immense opportunities, but also serious potential threats. Ultimately it will be the international competitiveness of firms in particular economies that will
determine how far opportunities are converted into lasting national benefits and how far potential threats from heightened international competition result in serious cost. There is widespread agreement that currently with important domestic policy changes and with the imminent end of the international textile and clothing quota regime the economy of Pakistan is at an important crossroads. The competitiveness of the industrial sector in the new more liberal international and domestic environment will have a critical bearing on economic prospects for the foreseeable future. This paper aims to place the current situation of industry in the country in an international context by benchmarking various indicators of national capability and performance against competitor economies and by highlighting the key lessons from the experience of the successful Asian economies. As such it should be seen as a contribution to the debate on international competitiveness in Pakistan and not the result of a detailed assessment of the efficiency of various branches of industry. We begin with a conceptual discussion of what is meant by international competitiveness, highlighting not only why it is important, but also how the nature of international competition has changed in recent years. We then consider aspects of Pakistans performance, in relation to international trade and national capability. The next sections consider experience in a number of the more succesful Asian economies. We refrain from making detailed policy recommendations, but end with some general comments on industrial strategy and competitiveness.
2. Understanding Industrial Competitiveness: A Framework
ompetitiveness means essentially the ability to compete with firms at the international frontier of best-practice. It must be recognized that it is firms that compete not nations (Krugman, 1996). Firms have their own strategies for lowering cost, improving product quality and finding
marketing networks. However, due to the intrinsic failure of markets in critical areas government support for firms has in some contexts proved to be an important component of the process of attaining competitiveness. Use and development of technology is central. However using technologies efficiently is not a passive, automatic process of simply importing a set of machines and instructions on how to use them. It involves building technical understanding and information, skills, managerial practices, links with other firms and institutions: what we may term capabilities in a broad sense. Such capability development can be a slow, often costly and risky learning process. Adding to capacity (i.e. physical plant and equipment) is only part of this process: what is critical is the ability to understand how to
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operate the capacity at optimal levels, adapt it to local factors and conditions, and upgrade it as technologies improve and new products appear. There is ample evidence that the same technologies are used by different firms at vastly different levels of efficiency. More importantly, different countries differ greatly in their ability to produce efficient firms, and so in their abilities to compete internationally, even if they start with similar initial factor endowments. Why? Because they tackle differently the intrinsic market failures that affect learning by firms. The secret of competitiveness lies in the effectiveness with which countries promote the development of technological and managerial capabilities. Note that developing technological capabilities does not mean innovation in the sense of reinventing the wheel to create technologies that are available elsewhere, often at lower cost. It does mean learning to use existing technologies efficiently: an enormously challenging task. It can involve a lot of investment, effort, time and risk, and constant interaction with other actors with whom information and skills are shared. It is thus far more complicated than travelling down a given learning curve, with predictable costs and outcomes. In developing countries, firms often do not know how to go about making new imported technologies work at world best practice levels. They do not understand what new skills, technical knowledge and organisational techniques are involved and where to access them. When exposed to import competition, they find it difficult to relearn their capabilities and get rid of inherited practices and bad habits. Interactions with other firms or institutions itself requires effort, and overcoming problems of leakage (of trained workers or technical know-how) and trust. Firms may not have access to the information, skills, finance or other factors needed to develop their capabilities. Of course, not all activities involve the same degree of effort or cost: learning needs may be minimal in simple industries like apparel manufacture, and very large in advanced electronics or machinery making. They also vary with ownership: multinational affiliates may be able to undertake learning more easily because of support of parent companies. But such needs exist in every case, and firms differ enormously in the success with which they conduct learning. Effective learning faces market failures, both within firms (their reluctance, lack of knowledge, risk aversion or inability to undertake learning processes) and between them (or between them and institutions). These market failures give rise to the need for corrective policies. This is the essence of competitiveness strategy, to promote in-firm learning, skill development and technological effort, to improve the supply of information, skills and technology from surrounding markets and institutions, and to coordinate the collective learning processes that involve different firms in the same industry, or across related industries (popularly known as clusters, geographical or activity-wise, see Porter, 1990). These factors are given in the figure below, which shows the different markets within which firms develop their capabilities. At the firm level there are several random (entrepreneurial, managerial or accidental) factors that also affect its success, but these are not directly amenable to policy influence and so are excluded. Also not shown are broad macroeconomic, legal, political and similar factors, which affect the environment within which all firms function. This still leaves a number of critical factors: in product markets
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F o r m a l e d u c a tio n , V o c a t io n a l t r a in in g , I n - f ir m t r a i n i n g , S p e c ia l iz e d t r a in in g , E n r t e r p r . d e v e lo p m e n t E x p a t r ia t e a c c e s s
S K IL L S
F IN A N C E : T e c h n o lo g y l o a n s E q u it y c a p it a l, V e n t u r e c a p it a l, D e v e lo p m e n t b a n k s , O th e r s u p p o rt
M S T Q , T e c h Im p o rts , R & D su rt, Industrialpy pl oicompetitiveness in Pakistan U n iv e r s it nks E x t e n s io n s e r v ic e s , I n t e ll. p r o p e r t y la w s , I n t e r - f ir m a ll ia n c e s
TEC H N O LO G Y
IN F R A S T R U C T U R E :
P o w e r, T ra n s p o rt, W ate r C o m m u n ic a t io n s , D a t a , I n d u ls t r ia l la n d / e s t a t e s , E P Z s
F A C T O R
M A R K ET S
E N T E R P R IS E TEC H N O LO G Y D EV ELO PM EN T
S u p p l ie r / b u y e r r e la t io n s , H o r i z o n t a l l in k s C o n s u lt a n t s , S e r v i c e f ir m s , S M E s , In d u s try a s s o c i a t io n s
C LU S TE R EFFEC TS
C o m p e ti t i v e S t i m u lu s :
F o r e ig n a n d d o m e s t ic m a r k e t s
P R O D U C T
M A R KE T S
S p illo v e r s : I n f o r m a t io n / e x t e r n a l it ie s f r o m c o m p e t it o r s
Figure 1: Factors affecting enterprise technology
are competition and trade policy, providing the incentives, rules and regulations which determine whether or not firms invest in their capability development. In factor markets are five sets of influences: physical infrastructure, human capital, finance, technology and cluster effects, which provide the wherewithal for firms to undertake successful learning. The need for competitiveness policy arises when any of these markets fail to function efficiently. The experience of the Tigers of East Asia indicates that coherent and carefully crafted policies can accelerate shifts in competitiveness and promote entry into very complex and high technology activities. However, whilst conceptually whenever markets fail to function effectively there is in principle a case for government intervention, recent history has shown that the capacity of different governments to intervene effectively has been very mixed. East Asian experience has been considerably more successful than elsewhere. Hence current policy advice is normally to recommend limited interventions to tackle clear and well understood market failures (such as under-investment in R and D or training) rather than wider ranging systems of protection or subsidy. Further, in the context of an economy like Pakistan where state regulation has in the past been perceived by the private sector as intrusive and a major burden, and where relatively high effective rates of protection supported high cost uncompetitive producers for many years, support for firm level up-grading and technical change should be essentially promotional, supporting rather than driving, the initiatives of the firms themselves.
3. The changing nature of competitiveness
intensity from practically anywhere in the world. It is based on a bewildering array of new technologies. It calls for a range of new and advanced skills and sophisticated supply-chain and distribution techniques. It is organised in complex systems spanning many countries, tapping differences in costs, skills, resources and tastes to optimize the efficiency of the entire system. It is supported by international brands and
apid technical change, shrinking economic distance, new forms of industrial organization, tighter links between national value chains and widespread policy liberalization, are all altering radically the environment facing developing country enterprises. Competition now arises with great
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networks with the capacity to deliver vast amounts of information at negligible cost. Manufacturing is becoming more information-intensive: growing parts of value added consist of weightless activities like research, design, engineering, marketing and networking. To compete, enterprises must use new technologies and organisational methods at best practice and link up to global value chains. The policy context for competing is also changing. Most countries are lowering barriers to trade, capital, technology and information flows (and even some people flows, but on a much more restricted scale). Most are also giving the lead role in productive activity to private enterprise, reserving the state for the provision of basic public goods. In fact, policy changes in the direction of open trade and investment, level playing fields for all economic actors, transparency and non-discrimination in legal systems governing business, and strong protection of private property rights, are becoming the sine qua non of participating in the global economy. Many traditional tools of industrial promotion infant industry protection, FDI restriction, local content and other performance requirements, reverse engineering and copying, and so on are increasingly constricted or ruled out altogether. In this setting, no industrial enterprise can grow, even survive, without being internationally competitive. The following features of competitiveness today are worth noting. Economic distance is shrinking, driven by technical progress in information processing, transport and communications. This means that international competition now appears quickly and intensely, but also that there are many new market opportunities. With some exceptions, global markets are more open than before and exporters can reach markets more cheaply and efficiently. Rapid technical change pervades all activities, rendering older technologies obsolete even in low wage economies. Enterprises in all countries have to use new technologies to remain viable (new technologies include not just products and processes but also organisation of firms, supply chains, human resource development, technology links and so on). Coping with new technologies calls for new skills, production structures, infrastructure and institutions. This affects not just industrial enterprises but the whole national economic system, its legal and human infrastructure, institutions and ways of doing business. All countries, even developing ones, have to undertake constant technological effort to create or access, absorb and adapt new technologies. Industrial leaders have to invest in technology innovation, followers to invest in absorbing and adapting technologies (a more difficult and demanding task than appears at first sight). The ability to compete depends vitally on the ability to move up the technology scale in all activities, including services. While technical change affects all activities, it benefits some more than others. In general, innovationbased activities normally referred to as high technology are growing faster than other activities. Table 1 shows the growth of manufacturing value added (MVA) for three sets of activities: resource based (RB), low technology (LT) and medium and high technology (MHT). For exports, it is possible
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to show high technology (HT) separately from medium technology (MT) products.1 Over the past two decades exports have grown faster than production, and complex activities have grown faster than other manufacturing. Developing countries have done better in all technology categories than industrialized economies, in both production and exports. This is considered further below.
Table 1: Growth of manufacturing value added and manufactured exports by technology (% per annum, 1980-2000) Activity World Industrialized countries Developing countries Manufacturing value added Total MVA 2.6% 2.3% 5.4% Resource Based MVA 2.3% 1.8% 4.5% Low Technology MVA 1.7% 1.4% 3.5% Medium/High Tech MVA 3.1% 2.6% 6.8% Manufactured exports Total manufactured exports 7.6% 6.6% 12.0% RB manufactured exports 5.6% 5.2% 6.7% LT manufactured exports 7.4% 8.4% 11.4% MHT manufactured exports 8.4% 7.3% 16.5% without HT exports 11.5% 9.9% 20.2% Source: Calculated from UNIDO and Comtrade data.
National and regional patterns of competitive advantage are changing as exports grow in response to two forces: innovation and relocation of processes or functions. Both exist in most industries, but their importance differs by technology and physical characteristics. Some products (like pharmaceuticals) grow rapidly mainly because of innovation; there is little relocation to take advantage of low wages. Some (like electronics) benefit from both innovation and relocation they have low-technology assembly processes that can be placed in poor countries. Some (like apparel) are driven primarily by relocation. Some (like automobiles) undergo some relocation, but their technological complexity and weight (critical components are, unlike electronics, heavy in relation to their value) means that distances have to be small (NAFTA is a good example). Exports in which neither innovation nor
For a longer description of the categories and the rationale behind the classification see Lall (2001.a). Resource-based manufactures (RB) include processed foods and tobacco, simple wood products, refined petroleum products, dyes, leather (but not leather products), precious stones and organic chemicals. RB products can be simple and labour-intensive (e.g. simple food or leather processing) or capital, scale and skill-intensive (e.g. petroleum refining or modern processed foods). Low technology manufactures (LT) include textiles, garments, footwear, other leather products, toys, simple metal and plastic products, furniture and glassware. These products tend to have stable, well-diffused technologies with low R&D expenditures and skill requirements, and low economies of scale. Labour costs tend to be a major element of cost and the products tend to be undifferentiated, at least in the mass-produced (non-fashion) end of the scale. Barriers to entry are relatively low; competitive advantages in products of interest to developing countries come from price rather than quality or brand names. Medium technology manufactures (MT) are heavy products like automobiles, industrial chemicals, machinery and standard electrical and electronic products. These products tend to have complex but not fast-changing technologies, with moderate levels of R&D expenditure but advanced engineering and design skills and large scales of production. In engineering products, there is emphasis on product design and development capabilities as well as extensive supplier and subcontractor networks. Barriers to entry tend to be high, not only because of capital requirements, but also because of strong learning effects in operation, design, and, in certain products, product differentiation. High technology manufactures (HT) are complex electrical and electronic (including telecommunication) products, aerospace, precision instruments, fine chemicals and pharmaceuticals. Products with advanced and fast-changing technologies and complex skill needs have the highest entry barriers. The most innovative ones call for large R&D investment, advanced technology infrastructures and close interactions between firms, universities and research institutions. However, many HT activities, particularly electronics, have final assembly with simple technologies, where low wages are an important competitive factor.
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relocation are relevant tend to grow slowly. In the service area, there is explosive relocation of functions like data entry, call centres and so on to low wage countries. Productive resources goods, inputs, capital, technology and high-level skills move around the globe more easily and rapidly. While some of this mobility does not involve ownership, in general it does, leading to a growing role for transnational companies (TNCs). Their growth is accompanied by a growing trend to internalise more tightly the most valuable technologies, so that entering these activities necessarily involves investment by TNCs. However, FDI in the developing world remains highly concentrated, and is growing more so over time. The share of the leading five and ten recipients of FDI in the developing world has grown, while declining in the world as a whole. Organizational structures and location of production are changing in response to technical change. Industrial firms, including leading TNCs, are becoming less vertically integrated and more specialized by technology. Under competitive pressure, they are scouring the world for more economical locations. Technical progress in transport and communications is allowing them to locate and manage activities in far-flung parts of the globe. Some facilities are under the control of TNCs (mainly from industrial countries) but others are independent local firms, interwoven with the leaders in intricate webs of contractual and non-contractual relations. International industrial value chains are more tightly coordinated than before, both within firms (by TNCs1) and externally (by contractual or informal relationships2). Functions and processes are being subdivided and relocated to take advantage of fine differences in costs, logistics, markets and innovation.3 Locations able to plug into dynamic value chains have seen large, sustained increases in production, exports and employment (UNIDO, 2002). A large part has been in relatively low-skill assembly activities, but in the high technology end, like electronics, activities have tended to stick rather than move on as wages rise. It is low technology activities like clothing that have been relatively footloose. However, only a few countries have become significant players in of global supply chains, even in low technology activities (one of the main drivers, the successor to the Multi-Fibre Arrangement the Agreement on Textiles and Clothing, is about to expire).
1 Thus, some 30-40 percent of the trade handled by TNCs is actually within the firm (between different affiliated companies) and is not transacted on open markets (UNCTAD, 1999). 2
There is a tendency for lead firms to rely on a smaller number of first tier suppliers, which in turn deal with and coordinate second and third tier suppliers. The first tier suppliers are major TNCs in their own right. In some low technology activities like apparel, lead coordinators are international buyers rather than TNCs. The role of direct ownership (i.e. of FDI) in coordinating globalised activities depends on the nature and pace of change of the technology and the availability of specialised suppliers; it is also changing rapidly over time as systems become more open.
3
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The determinants of competitiveness are changing. The possession of primary resources or cheap unskilled labour per se is no longer sufficient. Strong local capabilities and institutions are needed, whether or not countries rely on national firms or FDI; the most effective strategy is to combine both and leverage foreign skills, technologies and marketing systems to develop local competencies. UNIDO (2002) calls this the triple-L (linking, learning and leveraging) strategy, drawing on Mathews and Chos (2002) analysis of East Asian entry into high technology electronics exports. Thus, technological competence, skills, work discipline and trainability, competitive supplier clusters, strong support institutions, good infrastructure and well-honed administrative capabilities are the new tools of comparative advantage.
Global value chains, particularly integrated production systems, are unlikely to spread to all developing countries because of their technological features. Most advanced activities have strong economies of scale and agglomeration, and concentrate in the few locations that can provide the critical mass of skills, suppliers, services and institutions they need. There is unlikely to be continuous cascading of production facilities to other countries as wages rise: on the contrary, there may be large discontinuities in the relocation process. Once established in particular countries, TNCs are likely to stick for long periods, at least until wage and congestion costs rise to uneconomic levels or the supply of relevant skills run out.
Globalization and technical change have strong policy implications, for countries at all levels of development. Countries require new skills to manage technical change, and so have to change the institutional structure for education and training (Narula, 2003). They need strong technical support agencies in standards, metrology, quality, testing, R&D, productivity and SME extension, in addition to institutions concerned with technology and innovation. They need advanced infrastructure in information and communication technologies (ICTs). They need new rules, legal systems and agencies to encourage enterprises to build competitive capabilities and allow knowledge to flow across nations. It is not easy to meet such demands: this is why many governments mount competitiveness strategies (Lall, 2001.b). However, capabilities develop slowly, in a cumulative and path-dependent manner. Thus, economies that start off on a virtuous circle of growth, competitiveness and investment in new capabilities can carry on doing better than those that are stuck in a low level equilibrium and cannot muster the resources to break out. Industrial performance can diverge across countries and continue diverging over time, with no inbuilt forces to return them towards greater convergence. Countries can reverse these trends, but only if they can mount a concerted strategy to shift the economy, its human capital and technology base, its institutions and infrastructure from a low to a high competitiveness path.
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4. New dynamics of world markets
apid technological progress is, as noted, changing the structure of industrial activity. As noted above, activities with higher technological intensity those with higher than average expenditures on R&D are growing faster than other activities. While every activity uses new
technologies, differences in innovative potential, the speed of application of new innovations and different rates of demand expansion affect relative growth rates. Table 1 showed that high technology activities grew faster in both production and trade than other manufacturing activities (and trade grew faster than production, indicating the increasing internationalisation of industry in all economies). Not only are technology-intensive industrial activities more dynamic, they tend to offer greater potential for sustained learning and productivity increase, more spillover benefits to other activities and more scope for FDI in integrated production systems that offer enormous export possibilities. All production and export structures are not, in other words, equal in terms of promoting industrial growth and competitiveness. Countries that wish to strengthen their export market positioning and diversify out of slow-growing activities, to tap rapid technology transfer, to promote technological deepening and to exploit the growing fragmentation of production should shift their structures from simple to complex technologies. To some extent, the deepening of the industrial structure is a normal consequence of the development process, but the most successful and competitive countries have made deliberate efforts to accelerate the process by deliberate policy. This does not mean that low-technology and resource-based products should be neglected in competitiveness strategy. On the contrary, such products are the starting point for building industrial competitiveness in developing countries, and they continue to remain significant exports by mature industrial countries (in 2000, developed countries were the top 10 exporters in the world of resource based manufactures and comprised 7 of the top 10 exporters of low technology products). Both groups also have technology intensive products (see Box 1 below): technical change produces pockets of unexpected innovation even in mature and stable technologies. Biotechnology, for instance, is making food processing into a high technology industry. The bottom line of competitiveness is to upgrade technologies in all activities, building new capabilities and finding new markets and market niches. At the same time, the dynamics of world markets suggest that it is necessary to promote structural change, and nearly all countries that have maintained high rates of export growth have upgraded the technological composition of the exports and production (see below).
4.1 Export structure by technology
igure 2 shows the evolution of different categories of manufactured exports between 1976 and 2000. RB products lost shares since the early 1980s, LT since 1993 and MT since 1998. The only group to steadily raise its market share is HT. These trends suggest that the conclusion drawn
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earlier about the dynamism of technology-intensive products is well-founded. Box 1 discusses the technology composition of the 50 most dynamic products in world trade.
Figure 2: Shares of manufactured products in world exports by technology (%)
35 30 25 20 15 10 5 0 1976 1977 1978
RB LT MT HT 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Box 1: The fifty most dynamic products in world trade, 1990-2000 The fifty most dynamic products (at the 3-digit level of SITC, Rev 2) in world merchandise exports in the 1990s accounted for 38 percent of total merchandise exports in 1990 and 50 percent in 2000. They grew at 9.4 percent per annum over the decade as compared to 6.4 percent for total exports and 6.6 percent for manufactured exports. The list has products from all technology categories, including primary products, but, as the table below shows, technology intensive products dominate. Primary products only account for 14 percent of their value in 2000, and of this oil and gas account for 97 percent. Within manufactures, mineral-based RB products account for 13 percent of the value of the 50 products in 2000, down from 16 percent in 1990. The fashion cluster (textiles, clothing and footwear), the group of main interest to many developing countries, only accounts for 4 percent of the value in 2000, down slightly from 5 percent in 1990. In the MT group, the engineering sub-group has the most dynamic products, with 13 percent of the total value in 2000.
Fastest growing 50 exports, 1990- 2000 Value 1990

Total 50 products
Share 100.0% 16.3% 15.9% 100.0%

17.7% 2.1% 15.7% 16.4% 5.0% 11.4% 26.5% 5.4% 6.1% 15.0% 39.2% 30.6% 8.6%
Value 2000 2,874,428.8 411,104.1 399,587.0 2,463,324.7

358,571.7 42,528.6 316,043.1 332,585.2 104,430.0 228,155.1 551,247.6 104,354.2 118,991.3 327,902.1 1,218,920.2 1,001,742.0 217,178.2 5,692,357.2
Shares 100.0% 14.3% 13.9% 100.0%

14.6% 1.7% 12.8% 13.5% 4.2% 9.3% 22.4% 4.2% 4.8% 13.3% 49.5% 40.7% 8.8%
Growth rate 9.4% 8.0% 8.0% 9.7%

7.5% 7.7% 7.5% 7.6% 7.8% 7.5% 7.9% 7.1% 7.2% 8.4% 12.3% 12.8% 10.0% 6.4%
1,167,240.1 190,188.8 185,138.0 977,051.27

173,225.1 20,192.9 153,032.2 160,219.5 49,318.3 110,901.1 258,538.6 52,506.1 59,140.4 146,892.0 383,078.2 299,366.6 83,711.6 3,072,385.3
Primary o/w oil & gas Manufactured

Resource based Agro based Mineral based Low technology Fashion Other LT Medium technology Automotive Process Engineering High technology Electronics Other HT
All exports
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All manufactures
2,576,443.5
4,883,038.7
6.6%
Each technological group within manufacturing loses shares to the high technology category, mirroring trends in aggregate exports as HT products grow significantly faster than other dynamic products. As a result, they raise their share of the total for the dynamic group from 39 to 50 percent over 1990-2000. They account for 25 percent of total manufactured exports by 2000, up from 15 percent ten years earlier. This has implications for developing countries, since over 80 percent of the value of the dynamic HT products comes from electronics, and nearly 40 percent of electronics exports now come from the developing world. This is a product that seems ideally suited to drive exports from poor countries: it is growing rapidly in world trade, it is highly income elastic, it can provide enormous technological and spillover benefits and it has processes that can be segmented easily. However, the segmentation process so far has encompassed only a handful of countries: the East Asian Tigers (increasingly including China), Mexico and Costa Rica. It is spreading to some East European countries and to North Africa, but the main production system seems to be in place in East Asia. The prospects for its spreading to other regions are unclear.
4.2 Manufacturing value added performance
developing world. Let us consider performance by the main regions in the developing world (Pakistan and its comparators are considered later): East Asia or EA includes China and all countries in the Southeast Asian region apart from Japan, while EA2 excludes China where relevant. LAC (Latin America and the Caribbean) includes Mexico and LAC 2 excludes it. S. Asia includes Bangladesh, India, Pakistan, Sri Lanka and Nepal. MENA (Middle East & North Africa) includes Turkey but not Israel (an industrialized country). SSA is Sub-Saharan Africa (including S. Africa).
eveloping countries are doing well in the current scene. As noted, their MVA and manufactured exports have grown faster than those of industrialized countries in every technological category. However, these overall figures are misleading in that dynamism is spread very unevenly in the
The share of developing countries in global MVA rose by 9.9 percentage points (from 14.2% to 24%) over the two decades 1980-2000. Figure 3 shows that East Asia was the main winner, raising its share by 9.7 points, from around 4.1% to nearly 13.8%, nearly equal to the rise for the developing world as a whole. LAC, the leader at the start of the period, lost 1.4 points; Sub-Saharan Africa (including South Africa) lost 0.2 points. Their combined loss was slightly lower than the small gains made by S Asia (0.9 points) and MENA (0.8).
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Figure 3: Shares of developing regions in world MVA (%) 1980 16 14 12 10 8 6 4 2 0 E Asia S. Asia LAC MENA SSA 1990 2000
Table 2 shows the 10 fastest and 10 slowest growing manufacturing activities (out of 28) in the world as a whole and in developing countries in the 1980s and 1990s. For the period as a whole, the fastest growing manufacturing activities in the world were other chemicals and tobacco, and in developing countries electrical machinery and industrial chemicals. However, the pattern changed over the two decades. Tobacco decelerated in the 1990s, while electrical machinery, furniture, non-ferrous metals, beverages and metal products accelerated. The rapid growth of electronics (and associated information technology) made electrical machinery the most dynamic sector worldwide. Among slow growing activities, textiles, apparel and footwear were at the bottom of the global list in the 1990s, declining slightly since the 1980s. In developing countries, electrical machinery was the fastest growing activity, overall and in both subperiods. The growth performance of textiles, apparel and footwear in developing countries deteriorated or stagnated: apparel sank from 12th to 27th place and footwear from 17th to 28th, while textiles stayed at 26th place in both decades. This trend is of obvious interest to Pakistan, since textiles and apparel constitute a very important industry.
Table 2: Fastest and slowest growing manufacturing sub-sectors (out of 28), 1980-2000 10 fastest growing Rank World 1 2 3 4 5 6 7 8 9 10 Plastic prods. Tobacco Other chemicals Printing & publishing Instruments Industrial chemicals Electrical machinery Transport equipment Paper prods. Other manufacturing 1980-1990 Developing Electrical machinery Industrial chemicals Instruments Tobacco Leather Plastic prods. Other chemicals Transport equipment Rubber prods. Other manufacturing World Electrical machinery Furniture Other chemicals Petrol. refining Printing & publishing Transport equipment Non-ferrous metals Beverages Metal prods. Non-met. Minerals 1990-2000 Developing Electrical machinery Transport equipment Instruments Industrial chemicals Pottery, china Printing & publishing Other chemicals Glass prods. Iron & steel Non-elect. machinery World Other chemicals Tobacco Electrical machinery Printing & publishing Plastic prods. Instruments Transport equipment Industrial chemicals Furniture Metal prods. 1980-2000 Developing Electrical machinery Industrial chemicals Instruments Transport equipment Other chemicals Plastic prods. Leather Pottery, china Iron & steel Printing & publishing
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10 slowest growing 19 20 21 22 23 24 25 26 27 28 Misc. petroleum prods. Non-ferrous metals Pottery, china Leather Textiles Apparel Wood prods Petroleum refining Iron & steel Footwear Metal prods. Non-ferrous metals Glass prods. Beverages Petroleum refining Food processing Furniture Textiles Misc. petroleum prods. Wood prods Paper prods. Glass prods. Rubber prods. Leather Non-elect. machinery Pottery, china Textiles Other manufacturing Apparel Footwear Non-metallic minerals Tobacco Petroleum refining Wood prods Furniture Other manufacturing Rubber prods. Textiles Apparel Footwear Petroleum refining Non-elect. machinery Other manufacturing Wood prods Leather Pottery, china Iron & steel Textiles Apparel Footwear Food processing Rubber prods. Other manufacturing Misc. petroleum prods. Petroleum refining Furniture Apparel Textiles Footwear Wood prods
Source: UNIDO database
4.3 Export performance in the developing world

Coming now to manufactured exports, Figure 4 shows world market shares for the developing regions for 1981 and 2000, separating China from the rest of East Asia and Mexico from the rest of Latin America. East Asia as a whole accounted for 24.6% of world manufactured exports in 2000, up from 6.5% in 1981; within it, EA2 raised its share from 6% to 11% and China from 1% to 6.5%. LAC as a whole lost world market share in 1981-90 (from 3.2% to 2.4%) then raised it over the next decade to 5.2%. The initial fall was due to LAC 2 (from 2.7% to 1.9%), with Mexico steady at a 0.5% share. Over 1990-2000, LAC 2 raised its share marginally while Mexico had a six-fold increase to reach 3.0%. South Asia raised its share slightly from 0.6 to 1.1 percent, but, given its size, remains a peripheral player in export markets. MENA and SSA each lost 0.2 points of global market share.
Figure 4: World shares of manufactured exports (%) 1981 20% 15% 10% 5% 0% EA 2 China South Asia MENA LAC 2 Mex ico SSA 2000
Let us now consider exports by technological category. As shown, developing countries grew faster than industrial ones in all categories and periods since 1981. Their lead was greatest in HT, followed by MT, products: the more complex the technologies the better developing countries performed relative to industrialized countries. This is not a statistical illusion in the sense that complex exports by developing countries had a small starting base and so their growth rates appeared exaggerated. Figure 5 shows the
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world market shares of developing countries in each category in 1981 and 2000. The largest share of developing world exports is, expectedly, in LT, but its share in HT is not far behind and has the largest increase (23 percentage points) over the period. Developing countries now account for nearly one-third of world HT exports. Since the world market for HT is much larger than for LT, the dollar value of developing world HT exports is $113 billion larger than its LT exports in 2000. In 1981 it was $41 billion smaller.
Figure 5: World market shares of developing country exports by technology 40% 35% 30% 25% 20% 15% 10% 5% 0% Total RB LT MT HT 1981 2000
This seems to go against received wisdom the comparative advantage of poor countries vis a vis rich ones is supposed to lie in simple technologies, not advanced ones. There are, however, good explanations of why developing country exports of technologically complex products are growing faster. Some developing countries have built domestic capabilities in high technology, led by the mature Tiger economies of East Asia, the Republic of Korea and Taipei, China. This accelerated development of capabilities was driven in the early stages by strong and pervasive industrial policy, with restrictions on inward FDI, protection of infant industries, allocation of credit, promotion of local R&D and specialized skills and so on (Lall, 2001a, UNIDO, 2002). Several other countries without strong local capabilities have become major HT exporters by plugging into integrated production systems, starting by performing relatively simple assembly. Over time, many countries have upgraded their role, moving into greater local content, design and development, regional marketing and so on. Singapore, for instance, is one of the worlds leaders in advanced electronics, with impressive design capabilities and growing local linkages. However, some countries, like the Philippines or Mexico, are still at the bottom of the value chain and remain vulnerable to relocation by TNCs to cheaper or more competent areas. TNC systems have also spread in some MT products like automobiles. Unlike electronics, these systems tend to be in proximate countries because of transport costs. The three large Latin American economies, Argentina, Brazil and Mexico are good examples of complex MT exports led by the auto industry. This value chain is unlikely to spread to many other developing regions because of its
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enormous scale economies and high skill requirements but it does raise the competitive profile of the developing world in sophisticated products. In the simple categories, rates of export growth are limited both by the slow expansion of trade overall and the maturing of the relocation process in labour-intensive activities like textiles and clothing. Within these products, it is difficult for developing countries to upgrade into the most advanced end of the value chain because of the very demanding skill, design and branding requirements. High fashion exports, for instance, remain the preserve of rich countries, as do differentiated food products. The growth of developing world exports of some RB and LT products is held back by trade barriers, tariff escalation (higher tariffs being levied on imports of processed products than on the raw materials) and subsidies in industrialized countries. Coming now to the regional distribution of manufactured exports by technology, Table 3 shows world market shares for each category. East Asia dominates each category, but is particularly large in high technology products. South Asia gains market share in all categories, but particularly in resource based and low technology products; however, it remains a small player in both by global standards. LACs performance is weak if Mexico is excluded, and only moderately good if it is included. China is making large market share gains in all categories, but particularly in LT products in this group it seems to be taking market share from other East Asian countries (Lall and Albaladejo, 2003).
Table 3: World market shares of manufactured exports in developing regions 1981 Total East Asia EA 2 China S Asia Latin America LAC 2 Mexico MENA Sub-Saharan Africa Total developing 6.8% 5.8% 1.0% 0.6% 3.2% 2.7% 0.5% 1.8% 0.7% 13.1% RB 8.7% 7.6% 1.1% 0.5% 6.8% 6.3% 0.5% 4.7% 1.9% 22.5% LT 17.6% 14.8% 2.8% 1.9% 2.5% 2.1% 0.4% 1.6% 0.5% 24.2% MT 3.9% 3.6% 0.3% 0.2% 1.5% 1.2% 0.3% 0.4% 0.3% 6.2% HT 6.7% 6.5% 0.2% 0.1% 2.1% 0.9% 1.2% 0.2% 0.1% 9.2% Total 18.4% 12.0% 6.5% 1.1% 5.1% 2.2% 2.9% 1.6% 0.6% 26.8% RB 11.8% 8.1% 3.7% 1.4% 6.5% 5.5% 1.1% 4.0% 1.9% 25.6% 2000 LT 26.5% 10.0% 16.5% 3.8% 5.2% 2.2% 3.0% 2.8% 0.6% 38.8% MT 11.0% 7.2% 3.7% 0.3% 5.0% 1.5% 3.5% 0.8% 0.4% 17.5% HT 27.4% 21.9% 5.6% 0.2% 4.2% 0.8% 3.4% 0.4% 0.1% 32.3%
Source: Calculated from Comtrade database Note: EA 2 is East Asia excluding China; LAC 2 is Latin America excluding Mexico.
Figure 6 shows the technology structure of exports in South Asia, East Asia and LAC in 1981 and 2000. There are striking differences between the regions. South Asia has a preponderance of LT exports, and a very low share of HT products (barely higher than Africa); its export structure has remained relatively stagnant over the two decades. LAC reduces its dependence on RB products greatly, with significant rises in MT (mainly the automotive industry) and HT products (led by electronics from Mexico). East Asia also shifts significantly from RB and LT products to MT and HT products, ending the period with the most
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advanced export structure of all developing regions. Note that the most dynamic exporters in developing world (East Asia, including China, and Mexico, but not the rest of LAC) have rapidly upgraded from simple (LT and RB) products to complex (MT and HT) products. As noted, such structural upgrading is a characteristic of countries that are successful exporters for long periods.4
Figure 6: Technology Structure of Mfd. Exports LAC 70% 60% 50% 40% 30% 20% 10% 0%
RB 1981 RB 2000 MT 1981 MT 2000 HT 1981 HT 2000
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E Asia
South Asia
LT 1981
4.4 Sophistication of manufactured exports
e now consider the dynamics of world trade in terms of the sophistication of manufactured exports. Box 2 describes this way of analysing export performance. We return to the results of the sophistication analysis for Pakistan in a later section.
Box 2: Sophistication Index for manufactured exports
The sophistication index classifies exports according to the average income levels of the exporters: the higher the income of the exporter, the more sophisticated the product is deemed to be. The analysis is confined to manufactured products (primary products are largely determined by natural resources) and the rationale is simple the income of the exporter carries a great deal of information about the characteristics of the product. Thus, a product exported mainly by rich countries, to be competitive despite high wages, must have one or more of the following attributes (what we term sophistication):
Advanced technology: Rapid innovation, high level and diverse range of skills, tight links with state-ofart research institutions and universities, strong intellectual property protection Demanding marketing: High design, fashion and customisation to demands of rich customers, strong branding and product differentiation
UNIDO (2002) and Lall (2001.a) find at the country level that sustained growth of manufactured exports was associated with such upgrading.
LT 2000
Scale and agglomeration economies: large scale facilities needing complex organisational and supply-chain management skills, tight supply links with advanced suppliers and interactions with competitors, leading edge infrastructure (particularly in information technology).
The index is not, however, a measure only of technological, marketing and agglomeration advantages. It also captures other elements that can allow high wage countries to retain a competitive edge: particular natural resources (e.g. furs are only available from a few rich countries, pine for paper manufacture is largely found in a few Northern regions and so on), transport costs (heavy products consumed in rich countries may have to be produced in close proximity to the market) and trade distortions (agricultural protection and subsidies). However, even with these problems (some of which are easy to detect) the index provides a useful map of comparative advantage and its dynamics over time. While there is a general shift in export production from rich to poor countries, different products are relocating at different rates. And the shift is not uniformly down the income scale; some locations (i.e. some groups of countries) are gaining much more than others. The sophistication index shown here is calculated at the three-digit SITC (Revision 2) level for 237 products (of which, 181 are manufactures) for 1990 and 2000. However, more detailed four-digit level data are used for analysing performance for selected industries (e.g. textiles and clothing, below). Exporting countries are grouped into ten income categories in 1990 and 2000 (the composition of each group differs over time as countries move up or down the income scale). The percentage share in world exports of each income group is multiplied by its average income for each product, and the final value is standardized to range from zero to 100 for all products. To facilitate analysis, however, products are grouped into six categories according to their sophistication scores; no a priori criteria are applied, and the groups are formed by dividing the total of 181 products into sets of 30 products each (31 for the last group). Level 1 is the most sophisticated category and level 6 is the least. There is, as expected, broad correspondence between technology levels and sophistication. Thus, most high technology products tend to be high on the sophistication scale (e.g. measuring instruments or aircraft) and most low-sophistication products tend to be low technology (footwear, undergarments) or resource based (pottery or some vegetable oils). However, the correspondence is not exact, since other factors affect the ranking. Thus, some medium technology products like radio receivers appear very low on the sophistication index because their production has shifted almost entirely to low wage countries, while some resource based products (chocolate and cheese) appear high on the sophistication index because of advanced skill requirements, subsidies and so on. Some products, like semiconductors, remain highly complex in their design and core processes that remain in rich countries but have simple final assembly operations that allow them to be finished in poorer ones; thus they appear in the middle rather than top end of the scale. This illustrates one useful feature of the sophistication index: it overcomes some aggregation problems inherent in broad technology groupings, where products are placed in low, medium and high technology groups on the basis of general industrial R&D propensities. The sophistication index allows distinctions to be drawn within each group, differentiating products according to technology, relocation, differentiation and so on. At the country level, the index allows the benchmarking of the sophistication of national exports and changes in sophistication over time. Since the index can be calculated at any level of detail (it does not require any data apart from the identity and incomes of the exporting countries) it allows performance to be tracked at finer product levels. The distribution and growth rates of world manufactured exports by sophistication are shown in Table 4. The largest category of such exports is now in sophistication level 4, which contains such important and fast-growing products as semiconductors, automatic data processing (ADP) equipment and accessories for ADP machines that are being rapidly relocated in lower wage countries. The next largest category is sophistication level 1, but this grows relatively slowly and loses share over the decade. The smallest and slowest growing category is the last one, sophistication level 6.
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The best product positioning for growth is categories 4, 5 and 3 high sophistication is not necessarily the route to rapid export expansion. This is in line with the finding that exports by developing countries are generally growing faster than those by industrialized countries. The distinction between the technological and sophistication classifications shows up clearly here: high technology products are the most rapidly growing segment of world trade but high sophistication products are not. The reason is that many high technology products are becoming less sophisticated because they have labour-intensive processes that have led to their relocation in lower wage countries. However, they do not move to the bottom of the sophistication scale: the relocation is not to the poorest countries but to those with relatively low wages in combination with skilled and disciplined labour, growing industrial capabilities, efficient infrastructure and stable, welcoming policy regimes. These economies are in the middle rather than the low income range.
Table 4: World exports by sophistication levels Value ($ millions) Distribution 1990 Level 1 Level 2 Level 3 Level 4 Level 5 Level 6 Total 657,248.2 556,036.7 443,921.6 307,429.8 242,141.0 368,632.8 2,575,410.1 2000 981,123.2 788,901.5 938,816.5 1,098,440.2 583,404.1 491,371.6 4,882,057.0 1990 25.5% 21.6% 17.2% 11.9% 9.4% 14.3% 100.0% 2000 20.1% 16.2% 19.2% 22.5% 11.9% 10.1% 100.0%
Growth Rate 1990-2000 4.1% 3.6% 7.8% 13.6% 9.2% 2.9% 6.6%
Figure 7: Distribution of manufactured exports by sophistication levels

Wo rld 30% 25% 20% 1 5% 1 0% 5% 0% SL1 SL2 SL3 SL4 SL5 SL6
20% 1 0% 0% SL1 SL2 SL3 SL4 SL5 SL6
1 990
2000
50% 40% 30%
East Asia
1 990
2000
So uth A sia 70% 60% 50% 40% 30% 20% 1 0% 0% SL1 SL2 SL3 SL4 SL5
1 990
2001
50% 40% 30% 20% 1 0% 0%
LA C
1 990
2000
SL6
SL1
SL2
SL3
SL4
SL5
SL6
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Figure 7 shows the distribution of manufactured exports by sophistication levels in the world as a whole and in three developing regions in 1990 and 2000 (the data for South Asia are for 1990 and 2001). There are striking differences in the patterns. Some highlights are: In South Asia, exports are preponderantly in the low sophistication group, but there is small fall in its share over time, with a corresponding gain in the medium sophistication group. The gain is due largely to India the rest of region remains at the low end of the sophistication range (below). The structure of East Asian exports moves significantly towards the medium sophistication category, driven by semiconductor, automatic data processing machines and their parts and accessories in level 4. However, its level 3 exports like electrical machinery and telecommunications apparatus are also very large, over 2.5 times larger than LAC in value. The share of highly sophisticated products in East Asian exports remains relatively small and falls slightly over time. LAC exports also move towards medium sophistication but there is a less pronounced shift towards level 4 than in East Asia. LAC starts with and retains a higher share of sophisticated products than East Asia (mainly category 1 products like auto engines and components, aircraft and pharmaceuticals). In the medium category, its dynamic products include telecommunications, automobiles and electrical machinery (level 3); it also has significant values in category 4 exports (but East Asian exports are nearly 10 times larger). However, a very large part of its level 3 and 4 exports come from Mexico; the rest of LAC lags in high technology exports.
Table 5: World market shares of manufactured exports by sophistication levels Level 1 S Asia E Asia LAC S Asia E Asia LAC S Asia E Asia LAC World 0.1% 3.4% 1.1% 0.4% 5.6% 3.1% 15.1% 9.5% 15.0% 4.1% Level 2 0.3% 7.9% 1.6% 0.3% 8.3% 4.2% 3.1% 4.1% 14.4% 3.6% Level 3 0.2% 12.0% 1.6% 0.4% 16.6% 5.7% 14.7% 11.3% 22.3% 7.8% Level 4 1990 0.3% 13.1% 1.7% 2000 0.3% 32.7% 3.5% 14.5% 24.4% 22.0% 13.6% 2.2% 20.5% 7.2% 11.7% 9.1% 19.0% 9.2% 5.7% 34.2% 9.1% 6.9% 5.5% 7.1% 2.9% 1.1% 18.9% 5.0% 8.9% 11.6% 15.3% 6.6% 1.6% 20.6% 3.0% 3.6% 26.6% 6.2% 0.8% 12.0% 2.3% Level 5 Level 6 All manufactures
Growth rates (1990-2000)
Notes: Data for 2000 for South Asia pertain to 2001; its growth rate is thus for 11 years.
Table 5 shows the world market shares of manufactured exports by sophistication for South Asia, East Asia and LAC in 1990 and 2000 and the annual rates of growth. South Asian shares are highest in level 6 products, with a very low presence in levels 1 to 4 and insignificant increases in market share in these. Its slow growth rate in level 6 drags down its overall export expansion, overriding fairly healthy growth in
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levels 1, 3 and 4 (but this is from very small bases in each). East Asia has a significant global presence in all sophistication categories, with around one-third world market share in levels 4 and 6 and around onefifth in level 5. The main drivers of its export expansion are 4 and 3, containing the dynamic HT products that have been relocating to the developing world. Latin Americas main market presence is in levels 6, 5 and 3, but with a more even spread than in East Asia. Its main drivers have again been levels 3 and 4, with strong support from level 5. Figure 8 illustrates the world market share (WMS) picture for these regions by three broad sophistication categories: high (levels 1 and 2), medium (levels 3 and 4) and low (levels 5 and 6).
Figure 8: Regional shares of world manufactured exports by sophistication High 60% 50% 40% 30% 20% 10% 0%
1 990 S A sia 2000 1 990 East A sia 2000 1 990 LA C 2000
Medium
Low
Total
4.5 Concentration in exports at the national level
ranks 20 in 2001.
xport success in the developing world is highly concentrated in the leading developing country exporters (Figure 9). These countries now account for over 85 percent of developing country exports and their dominance has been rising over time. Pakistan is not shown in the table but
th
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Figure 9: Ten leading exporters of manufactures in the developing world ($ m.) 300 250 200 150 100 50 0
Singapore Indonesia Thailand China Korea Brazil India Philippines Mexico Taiwan Malaysia
1990 2000 2001
4.6 In sum
ndustrial competitiveness is evolving rapidly. Technical change, changing patterns of demand, falling transport and communication costs and policy liberalization are changing the structure of production and trade. The globalization of production is changing the geography of international competitiveness
at a pace unimaginable, say, three decades ago. The dynamos of change are technology based products, in particular electronic products related to information technology. These products enjoy very
high income elasticity of demand and have pervasive links through the industrial and technological system. While highly complex and technology intensive in their design, development and core manufacturing processes, these products also have labour intensive segments that make them prime candidates for relocation to lower wage countries. However, low wages per se are not the main determinants of their location. The MNCs that dominate their production have only integrated a small handful of developing countries into their global production systems, predominantly in East Asia and (after NAFTA) Mexico. While high technology electronics products have led the export drive of the most competitive developing countries, they are certainly not the only element. Resource based and low and medium technology products also figure prominently in their export growth. Thus, East Asia dominates the export scene in the whole range of manufactured products, the result of a systemic ability to build new capabilities, attract export-oriented FDI, capture the spillover and learning benefits of export activity and sustain sensible macroeconomic policies. Note, however, that setting a market friendly environment may not be enough to dynamise competitiveness some other parts of the world have done the former without doing the latter. LAC is perhaps the most prominent example.
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Turkey
South Asia is a weak performer in the competitiveness stakes. Its world market shares remain small and its export structure dominated by low technology and low sophistication products. As shown below, its economies have not tapped the mainsprings of export dynamism in a globalising world.
5. Pakistan: the current policy environment for manufacturing

5.1 Trade policy
nternational competitiveness requires ready access to international inputs at close to world prices and a domestic market subject to competitive pressure, between domestic producers and between them and imports. Experience in Pakistan and elsewhere suggests that highly protected domestic markets
not only reduce the incentive to export, but also penalise the economy by allowing inefficient domestic producers to extract policy-induced rents from domestic consumers. While there is a plausible theoretical
case for infant industry support of activities with strong learning effects and positive externalities, experience suggests that if such a policy is to be pursued it should be time-bound and performance linked. Theory also suggests that tariff protection is not the most economically efficient means of providing such support, although in practice it has been by far the most common. Pakistan has liberalised its trade policies significantly over the last decade or so. At the present it is one of the more open trade regimes in South Asia, although South Asia itself remains relatively protectionist by international standards. Pakistan has unilaterally reduced import tariffs so that its applied rates are often below the bound rates to which it is committed by WTO membership. Table 6 shows average manufacturing tariffs for selected economies and Pakistan circa 2001/02. The average for Pakistan has fallen since then as the maximum tariff was reduced from 30% to 25% in 2002 and most tariffs are now in one of four tiers from 5% to 25%, but a few sensitive items (like motor vehicles and certain textile goods) continue to have higher rates. There has also been a phasing out of quantitative import restrictions for balance of payments purposes and a running down of the system of exemptions from tariffs (the Statutory Rules Orders). The simple average applied tariff of around 20% in 2001/02 must be compared with an average of 56% in 1995 and nearly 80% 1985.6 Exporters meeting minimum local value-added ratios are eligible for import duty drawbacks for imports of raw materials and plant and equipment, which face modest tariffs of 5% or 10%. Full access to imported inputs duty-free and other fiscal concessions are available to firms located in EPZs (at Karachi, Risalpur
The figure for 1995 comes from WTO (2002) and for 1985 (of 77%) from World Bank (2002) Table 2.7.
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and Sialkot) and the two Special Export Zones that are to be established (at Karachi and in one of the industrial cities of the Punjab). 7 However, despite these policy shifts export performance remains dominated by textiles (currently twothirds of total exports) and there have been losses of world market share in other product categories.
Country Bangladesh India Korea Malaysia Singapore Brazil Costa Rica Pakistan Table 6: Average tariffs on industrial products (unweighted) % Share of bound tariff Average final bound Average applied tariff lines tariff rate rate 0.9 50.0 21.9 68.2 36.2 31.0 90.6 9.4 7.5 59.0 14.9 9.9 63.6 6.3 0 100.0 29.6 13.8 100.0 43.1 4.7 36.5 36.0 20.1 Year 1999/2000 2001/02 2000 2001 2000 2000 2000 2001/02
Source: WTO Annual Report 2003 table 2.1.
5.2 FDI Policies and Inflows
nder the investment policy introduced in 1997, policies towards inward FDI to Pakistan have also become relatively liberal by regional standards. Foreign investors are guaranteed national treatment, face low import duties on plant and equipment of between 5%-10%, and receive a
first year profits tax allowance of between 50% -90% of the cost of plant and equipment. Full foreign ownership is allowed (for all but a small number of activities) as is full repatriation of capital, dividends and profits and there is no restriction on the level of royalty payments. Measures have also been taken to introduce an Intellectual Property Rights regime compatible with the WTO. The Board of Investment in Pakistan has contrasted the FDI regime in Pakistan with that in other parts of the region, and argues that in no sense is it more restrictive than elsewhere. However, as discussed below, the investment climate and the uncertain national and regional political situation have kept FDI inflows into Pakistan low; in recent years domestic investment has also been disappointing. This is brought out clearly in the indices of FDI performance and FDI potential calculated by UNCTAD (2002). The FDI performance index relates a countrys share of global FDI to its economic size and is taken as the ratio of a countrys share in global FDI to its share in global GDP. Hence a value of above unity for the index implies a country attracts more FDI than is warranted by its share in total economic activity and conversely for a value of below unity. Pakistans value by this index for 1998-2000 is low at 0.2. Moreover it has fallen over the period since the late 1980s. On the other hand, South Asia as whole attracts much less FDI than its economic size would suggest and Pakistans position by this index is similar to that of India, superior to that of Bangladesh and inferior to
There will need to be amendments to some policies governing exports and EPZs to bring them in line with WTO restrictions on export subsidies under the Subsidies and Countervailing Measures Agreement. Essentially developing countries wishing to retain a subsidy element in the policy towards EPZs need to ensure any such subsidy is not available only for exports (UNCTAD, 2002: 218).
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that of Sri Lanka. Performance in attracting FDI is markedly different in parts of S.E and E. Asia, where a number of countries (principally Malaysia, Thailand, PRC and Singapore) attract more FDI than would be implied by their economic size (see table 7). However figures for Southeast and East Asian economies in the late 1990s are distorted by the impact of the 1997-98 financial crisis and its aftermath (this is particularly acute for Indonesia).
Table 7: UNCTAD FDI Performance index (FDIPI): Pakistan and other countries Country FDIPI 1988-1990 (country ranking) FDIPI 1998-2000 (country ranking) India 0.1 (121) 0.2 (119) Bangladesh 0 (127) 0.1 (122) Sri Lanka 0.5 (85) 0.4 (103) South Asia 0.12 0.16 PRC 0.9 (61) 1.2 (47) Indonesia 0.8 (63) -0.6 (138) Malaysia 4.4 (8) 1.2 (44) Korea 0.5 (93) 0.6 (87) Taipei, China 0.9 (58) 0.3 (112) Singapore 13.8 (1) 2.2 (18) Thailand 2.6 (25) 1.3 (41) East and South East Asia 1.73 1.20 Pakistan 0.6 (77) 0.2 (114) Source: UNCTAD (2002) World Investment Report, Table 2.1
Over 1999-2001 FDI inflows to Pakistan averaged around $400 million per year, of which a little less than 50% of this went into manufacturing (about $2 per capita).8 These low figures are consistent with Pakistans poor score on the other UNCTAD index, which covers FDI potential. This index is a simple average of a number of performance and capability indicators and by this score Pakistan is ranked 132 out of 140 countries for 1998-2000. the lowest ranking in South Asia, behind even Nepal. The index of FDI potential is only a very crude means of judging the competitiveness of countries as a location for FDI and below we explore some aspects of this in more detail.
5.3 Investment Climate of Pakistan
allowance for differences in labour and capital productivity suggests that on average Pakistan may not be a lower cost location than its neighbours.9
P
8
akistan is a low wage, labour surplus economy. However, while wages in Pakistan are low by international standards they are not low relative to near neighbours, India and particularly Bangladesh. Furthermore actual cost competitiveness will be determined by productivity and
Figures on FDI inflows come from the State Bank of Pakistan as reported in Pakistan Investment Guide, Chamber of Commerce and Industry, Karachi, 2002. Figures in the UNCTAD database over the same figure are lower by approximately $15 million annually, so the discrepancy is not great 9 It is difficult to obtain consistent comparative data, but UNCTAD (2003) table 5.7 shows unit labor costs in Pakistan rising much more rapidly than in India since the early 1980s.
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It is widely acknowledged that slow growth in private investment, particularly in large-scale manufacturing, has been one of the key constraints on Pakistans economic growth. Part of the explanation lies in the uncertain political scene, but more narrowly economic and institutional aspects of the general investment climate have also had a negative impact on investment decisions. It is a comon complaint from the private sector that Pakistan still has a heavily regulated business environment. A particular cause for concern is the lengthy delay in customs clearance. The average time to clear customs, it is argued, is both higher than in neighbours and little different to what it was a decade ago. Delays at customs make it very difficult for business to keep optimal levels of inventories and undermine the notion of just-in-time planning. However there is an awareness of these problems and in particular of the need to streamline tax administration and measures have been introduced to reform the Central Bureau of Revenue. For example, a system of self-assessment has been introduced with a view to minimizing contact with tax officials, and there has been an experiment with a new form of customs documentation designed to minimize the number of forms to be completed with a view to speeding up customs clearance. One way of looking at the degree of regulation is to the time and cost required to start up a new business expressed as a proportion of GDP per capita (see table 8). Pakistan fares poorly by this criteria relative to East and South East Asian economies and Sri Lanka, but not relative to India. For the late 1990s on average it had an average of 8 procedures to start a business, taking 50 days, at a cost of 55% of national income per capita. Changes introduced in 2002 appear to have improved this situation with a fall in Stamp Duty reducing the cost of start up; also simplifications in the requirements of the Registrar of Companies and the establishment of an electronically-linked tax administration should save the days required for business start-up. Table 8 Starting a business: comparative data
Country India Sri Lanka Indonesia Thailand Malaysia Pakistan Note a) cost includes allowance for time of investor Number of procedures 10 8 11 9 7 8 Time in days 77 23 128 35 42 50 Cost as % of national income per capitaa 88 29 105 20 43 55
Source: Djankov et al (2001) High cost and poorly functioning infrastructure can clearly impede the operation of enterprises, which may be efficient in terms of mastery of their own production processes. There is evidence from enterprises themselves that infrastructure, in particular the power sector, has been a key bottleneck. Unreliability of and difficulty in accessing the grid will force enterprises to invest in their own generators, which will
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normally be a high cost source of power supply. In the telecom sector there is a shortage of fixed line connections. The time taken to get a telephone connection is still high by international standards and waiting times for connections have not fallen over recent years. Connection costs for phone lines are also high by international standards and are very much below those in India. These constraints and high costs in telecoms are a contributory factor in the relatively low internet usage amongst enterprises in Pakistan. Transport has also been discussed as a potential bottleneck, particularly in relation to exports. In relation to ports, for example there are informal estimates that suggest that port handling costs in Karachi and Qasim are 50% higher than in Bombay. These infrastructure deficiencies clearly need to be addressed to strengthen the competitiveness environment.
6. Benchmarking Pakistans performance

6.1 Manufacturing value added (MVA)
(and in the 1990s growth slipped from 8.7 percent in 1990-95 to -1.6 percent in 1995-200010). In South Asia, its MVA growth was higher than in Bangladesh but lower than in the other large economies; in terms of per capita incomes, it had the lowest growth rate in the region. In comparison to Southeast Asia, Pakistan did better than the Philippines but significantly worse than the other economies.
Table 9: Manufacturing value added and per capita GDP in Pakistan and comparators, 1980-2000 (constant dollars) 1980 GDP p.c. 265 251 365 214 427 1743 781 871 1990 GDP p.c. 361 362 472 264 627 2400 726 1559 2000 GDP p.c. 413 516 706 337 816 3810 777 2083 Growth 1980-2000 MVA/GDP 15.3 17.4 17.4 15.5 26.5 35.9 24.2 34.3 MVA 5.5% 6.7% 7.1% 4.6% 9.4% 9.9% 1.7% 8.3% GDP p.c. 2.2% 3.7% 3.4% 2.3% 3.3% 4.0% 0.0% 4.5%
M
Pakistan India Sri Lanka Bangladesh Indonesia Malaysia Philippines Thailand
VA in Pakistan grew at a compound real annual rate of 5.5 percent between 1980 and 2000, and its per capita GDP at 2.2 percent (Table 9). Performance was better in the 1980s than in the 1990s: MVA grew at 7.2 percent per annum in the former and at 3.8 percent in the latter
MVA 3,043.6 24,575.0 592.1 2,904.7 7,623.9 4,645.5 10,068.0 9,057.4
MVA/GDP 14.1 14.2 11.1 15.9 11.9 19.4 26.9 22.6
MVA 6,123.5 50,938.0 1,076.5 3,698.5 23,643.0 11,344.0 11,003.0 23,217.0
MVA/GDP 15.5 16.6 13.4 12.7 20.7 26.5 24.8 27.2
MVA 8,921.5 90,661.0 2,320.5 7,192.1 45,830.0 30,427.0 14,194.0 44,895.0
Source: UNIDO database and World Bank, World Development Indicators, 2002.
10 Industrial growth in 2001 was modest at 3.1 percent, with a slight decline in 2002 to 2.8 per cent. A very modest acceleration is forecast for 2003 to 4 per cent (ADB 2003, table A.4).
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Manufacturing
Figure 10: Structure of MVA: World and Pakistan
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
1980 1990 World 2000 1980 1990 Pakistan 2000
activity in Pakistan is dominated by
resource based and low technology but the
activities,
share of complex products has risen over time. Figure 10 compares the
distribution of these categories for the world and Pakistan.

RB LT MHT
Figure
11
shows
the share of complex activities in MVA in Pakistan and selected comparators. Pakistans manufacturing performance is clearly disappointing. It is not so much that it did not develop heavy industry India did so behind heavy protection and suffered inefficiency as a result but that it failed to get into technology-intensive activities. This has affected its export performance (below), particularly relative to the East Asian Tigers, who used insertion into high technology value chains as exporters to dynamise their production structures. This deficiency also applies to other South Asian countries: despite its high technology profile in IT exports, India has a very weak base in high technology manufacturing and exports.
70% 60% 50% 40% 30% 20% 10% 0% Pakistan B'desh Indi a China Indon Malaysia Thailand
Figure 11: Share of MHT in MVA
1980 1990 2000
6.2 Manufactured exports

6.2.1 Pakistans export performance
Table 10: Pakistan's export performance, 1985 to 2002 Technology group Primary products Manufactures Resource based RB 1 (agro-based) 1985 904.8 1,775.6 111.4 59.3 1990 1,049.5 4,456.5 144.3 88.3 1995 1,036.4 7,061.2 347.3 285.5 2000 1,178.0 7,933.3 233.7 140.3 2001 1,071.4 8,085.1 328.0 176.3 2002 1,059.2 8,774.6 388.1 214.9 Values (current dollars million)
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RB 2 (mineral based) Low technology LT 1 (fashion cluster) LT 2 (other LT) Medium technology MT 1 (automotive) MT 2 (process) MT 3 (engineering) High technology HT 1 (electronic/electrical) HT 2 (other HT) Total exports Primary products Manufactures Resource based RB 1 (agro-based) RB 2 (mineral based) Low technology LT 1 (fashion cluster) LT 2 (other LT) Medium technology MT 1 (automotive) MT 2 (process) MT 3 (engineering) High technology HT 1 (electronic) HT 2 (other HT)
52.1 1,449.0 1,372.8 76.2 210.5 0.9 139.8 69.8 4.6 1.6 3.0 2,687.3 33.7% 66.1% 4.1% 2.2% 1.9% 53.9% 51.1% 2.8% 7.8% 0.0% 5.2% 2.6% 0.2% 0.1% 0.1% 1985-90
56.0 3,915.4 3,750.2 165.2 379.0 1.3 287.6 90.1 17.8 3.2 14.6 5,511.2 19.0% 80.9% 2.6% 1.6% 1.0% 71.0% 68.0% 3.0% 6.9% 0.0% 5.2% 1.6% 0.3% 0.1% 0.3% 1990-95 -0.2% 9.6% 19.2% 26.4% 2.0% 9.0% 8.9% 11.8% 11.1% 10.8% 12.6% 5.7% 11.1% -14.5% 18.0% 8.0%
61.9 6,037.4 5,749.0 288.4 641.5 2.2 520.3 119.1 34.9 1.5 33.5 8,105.5 12.8% 87.1% 4.3% 3.5% 0.8% 74.5% 70.9% 3.6% 7.9% 0.0% 6.4% 1.5% 0.4% 0.0% 0.4% 1995-2000 2.6% 2.4% -7.6% -13.2% 8.6% 2.6% 2.5% 6.0% 3.7% 15.9% 3.4% 4.3% 3.7% 14.0% 7.9% 2.4%
93.4 6,879.9 6,494.4 385.5 768.0 4.6 616.4 147.1 51.7 2.8 48.9 9,116.4 12.9% 87.0% 2.6% 1.5% 1.0% 75.5% 71.2% 4.2% 8.4% 0.1% 6.8% 1.6% 0.6% 0.0% 0.5% 2000-01 -9.0% 1.9% 40.3% 25.6% 62.4% 0.7% 0.8% -2.0% 1.3% 65.1% -1.5% 10.7% 1.3% 316.1% -13.7% 0.5%
151.7 6,925.6 6,547.7 377.8 777.7 7.6 607.3 162.8 53.9 11.7 42.2 9,162.3 11.7% 88.2% 3.6% 1.9% 1.7% 75.6% 71.5% 4.1% 8.5% 0.1% 6.6% 1.8% 0.6% 0.1% 0.5% 2001-2 -1.1% 8.5% 18.3% 21.9% 14.1% 8.3% 7.3% 25.8% 5.8% 9.3% 3.5% 14.1% 5.8% 66.4% -3.3% 7.4%
173.2 7,503.5 7,028.2 475.4 822.8 8.3 628.8 185.8 60.2 19.4 40.8 9,842.1 10.8% 89.2% 3.9% 2.2% 1.8% 76.2% 71.4% 4.8% 8.4% 0.1% 6.4% 1.9% 0.6% 0.2% 0.4% 1985-02 0.9% 9.9% 7.6% 7.9% 7.3% 10.2% 10.1% 11.4% 8.3% 14.1% 9.2% 5.9% 8.3% 15.9% 16.6% 7.9%
Distribution (%)
Annual growth rates (% per annum) Primary products Manufactures Resource based RB 1 (agro-based) RB 2 (mineral based) Low technology LT 1 (fashion cluster) LT 2 (other LT) Medium technology MT 1 (automotive) MT 2 (process) MT 3 (engineering) High technology HT 1 (electronic) HT 2 (other HT) Total exports 3.0% 20.2% 5.3% 8.3% 1.4% 22.0% 22.3% 16.7% 12.5% 8.4% 15.5% 5.2% 12.5% 15.1% 37.4% 15.4%
Source: Calculated from UN Comtrade database
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80% of manufactured exports. Such concentration is inherently risky, but the nature of the products makes it even less desirable. These are not dynamic activities: as noted, they are among the slowest growing industrial activities in the world. Their export growth is reaching a plateau as the relocation from high to low wage countries matures. They offer limited potential for learning or technological and skill spillovers. They attract relatively little and low value FDI. Its current export structure gives Pakistan a weak competitive base that is also unlikely to drive sustained industrial growth. Pakistan in fact had a steady and significant slowdown of growth in textile and clothing exports since 1985. There was a reversal in 2001-2, but it is unclear if this is temporary or long-term. It is also difficult to forecast future performance after the end of the MFA, when highly competitive East Asian producers enter the arena without quota handicaps. Given Pakistans cotton resources and upgrading of textile facilities, it will remain a major player in world textile and apparel markets, but for long-run dynamism a diversification of exports will be necessary.
hile Pakistans exports have moved from primary products to manufactures11, in manufactures it has a heavy and growing reliance on low technology products (primarily textiles and clothing). The fashion cluster accounts for over 70% of total exports and for
6.2.2 Benchmarking Pakistans performance
igure 12 shows the share of complex medium/high technology (MHT) products in production and exports for Pakistan and comparators in 1990 and 2001. A balanced structure would have roughly similar shares for MHT in MVA and exports. In industrialized countries both are just over
60 percent, with the share of MHT in exports slightly higher than in MVA because of intense trade in high technology products. In highly export-oriented economies with a strong export-oriented FDI, as in Thailand, the share of MHT in exports is much higher than in MVA. In South Asia, the share of MHT in exports is well below its share in MVA, reflecting competitive weaknesses in complex activities. Pakistan has very low MHT shares in both production and exports and slow upgrading over time (what little upgrading there is occurs in production rather than exports).
The total export figures include special transactions like gold, works of art, electric power and so on. Their values are not shown in the table but are minuscule, accounting for around about 0.1% of total export earnings.
11
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Figure 12: Changes in the share of medium and high technology products in Pakistan's manufactured exports and MVA, 1990-2001 70
Share of MHT in manufactured exports
60 50 40 30 20 10 0 0 Sri Lanka 2001 Pakistan 1990 Sri Lanka 1990 Bangladesh 1990 10 20 Bangladesh 2001 30 40 Thailand 1990
Thailand 2001 China 2001 Balanced structures China 1990 India 1990 Pakistan 2001 India 2001
50
60
70
Share of MHT in MVA
Figure 13: Values of manufactured exports ($ m.) 1981 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Pakistan India Bangladesh Sri Lanka Indonesia Malaysia Philippines Thailand 1985 1990 1995 2000
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Figure 14: Growth rate of total manufactured exports 81-90 90-00 25%
20%
15%
10%
5%
0% Pakistan India Bangladesh Sri Lanka China Indonesia Malaysia Thailand
Figure 15: Structure of manufactured exports (%)
Pakistan
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1981 RB 2000 1981
India
China
Malaysia
Thailand
2000 LT
1981 MT
2000
1981 HT
2000
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Figure 13 shows the value manufactured exports by Pakistan and its comparators over 1981-2000 (China is not included here because its size overwhelms the chart). Figure 14 shows that Pakistan is a relatively small exporter but, despite its small base, its growth rates remain relatively low. Bangladesh and Sri Lanka record much higher growth rates even though they are, like Pakistan, predominantly apparel exporters: they are in faster growing products or have become more competitive (see below for more detailed analysis). In the 1990s, China pulls ahead of all other countries and continues this after 2000, with a momentum that belies the huge value of its exports (now over $300 billion). Its sustained export growth is raising enormous concern in its neighbours (Lall and Albaladejo, 2003). Figure 15 shows the relative structure of manufactured exports in Pakistan. While Pakistans wage levels are comparable to those of India and China, its export structure is far more biased towards LT activities. Over time, all countries apart from Pakistan and Malaysia lower the share of LT products (though in the latter the shift is tiny and the share is very low). HT products remain is negligible in Pakistans exports through the period; MT exports do slightly better because of the growth of synthetic textile exports. India has a somewhat larger presence in HT because of its pharmaceutical exports. China starts the period with a small share of HT products, lower than Indias, but raises it sharply over time with a diverse range of electronics and electrical exports. Malaysia and Thailand have far more advanced export structures, with HT products accounting for the largest segment of manufactured exports.
Figure 16: South Asia, world market shares and growth rates of manufactured exports (1990-2001)
15% Annual growth rate for manufactured exports (19902001)
Bangladesh (5,284) India (37,216)
10%
Pakistan (8,573)
Sri Lanka (3,591)
World annual growth rate for manufactured exports (1990-2001)
5%
0% -0.2% Bubble size shows values of manufactured exports in 2001 (US$ million ) -5% Changes in the world market share of manufactured exports (1990-2001) 0.3%
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6.2.3 World market shares and positioning
he standard measure of competitive performance is world market shares (WMS). Figure 16 shows WMS of manufactured exports for South Asia in 1990-2001, along with their growth rates and 2001 values and the growth of world manufactured exports. Pakistan barely retains its WMS
in this period, in contrast to the other three large regional economies. We may analyse further Pakistans competitive performance by looking at the distribution of its exports in a market positioning matrix. The matrix relates the dynamism of exports to that of world exports (Table 11). This matrix has four sets of products: champions, underachievers, achievers in adversity and declining sectors. The best position is champions, products in which the country is gaining market share and which are dynamic in world trade. The worst is underachievers, products that are losing market share in dynamic areas. In between are declining sectors (stagnant products in which the country is losing market share, a desirable form of restructuring) and achievers in adversity (stagnant products in world trade in which the country is gaining market share). Figure 17 shows the positioning of Pakistans leading 20 manufactured exports at the 3-digit SITC level.
Table 11: Market positioning matrix Share of product in world trade Share of countrys RISING FALLING export in world trade (Dynamic) (Stagnant) RISING Optimal Vulnerable (competitive) Champions Achievers in adversity FALLING Weakness Restructuring (non-competitive) Underachievers Declining sectors
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Figure 17: Market positioning of Pakistans leading manufactured exports
Peformance of Pakistan's 20 main manufactured exports

Note: bubble size indicates value of exports in 2001 (US$) (SITC 872) Medical instruments 9% (SITC 846) Under garments knitted
Champions
(658) Made-up tex tile articles
Underachievers
World manufactured trade growth %, p.a (1990-2001)
(SITC 899) Other miscellaneous manf (SITC 849) Baby carriages 7% (SITC 843)Outer garments,w omen (SITC 844) Under garments of fabric 5% (SITC 611) Leather
(SITC 655) Knitted fabrics (SITC 842)Outer garments, men
World manufactured trade grow th (1990-2001)
(SITC 847) Clothing accessories of fabric (SICT 513) Carbox y lic acids
(SITC 334) Refined petroleum products (SITC 651) Tex tile y arn
(SITC 657) Special tex tile fabrics 3%
(SITC 845) Outer garments & other articles SITC(652) Cotton fabrics
Achievers in adversity Declining sectors

(SITC 848) Articles of apparel (SITC 653) Fabrics, w ov en 0% 1% 2% 3% 4%
1% (SICT 659) Floor cov erings -1%
-2%
-1%
Change in world market share (1990-2001)
Pakistans largest export product in 2001 was made-up textile articles; this product is also a champion in that the product is dynamic in world trade and Pakistan gained world market share during the 1990s. However, its next two largest exports (cotton fabrics and textile yarn) are stagnant in world trade; Pakistan gained WMS in the former and lost in the latter. Pakistan has only 5 products above the line for the average world rate of export growth. In the large number of products below the line, Pakistan gains WMS in several but the gains have been relatively modest. Future growth is vulnerable to the slow growth of the market. Most apparel products are in the non-dynamic segment of trade, and Pakistan is unfortunate is being heavily dependent on these products. There is one product, medical instruments, where Pakistan is losing WMS in a dynamic product (in fact, this is the most dynamic in the set of its top 20 exports). The picture for Pakistan is thus one of weak product positioning within its areas of export specialisation. Sustaining rapid export growth with this positioning if world trade continues to follow recent patterns would involve Pakistan raising its market share in declining markets. Since these markets are fiercely competitive and are being liberalised, this would require massively upgrading production capabilities, quality and marketing relative to competitors. This is possible, of course, but will not be easy. After all, all the major competitors, like China and India, are also investing in modernisation, new technology, design and skills. And latecomers like Bangladesh and Sri Lanka have already shown strong competitive capabilities in similar products.
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6.2.4 Sophistication of Pakistans exports
level (Table 12).12 The four industrialized countries are, expectedly, at the top, with the US in the lead. Each has a decline in its sophistication score over time, reflecting the fact that most exports are shifting to lower wage countries. Japan has the largest relative decline (10.5) of this group, the UK the smallest (8.2). The three Asian NIEs Singapore, Taipei China and the Republic of Korea come next, also with a decline in sophistication scores. Then comes a set of second tier NIEs, led by the Philippines, which has a relatively high score in 2000 because of its overwhelming
e now benchmark the sophistication of Pakistans manufactured exports. The first indicator is the average sophistication for manufactured exports at the country
Table 12: Sophistication score Country 1990 2000
USA Japan Germany UK Singapore Taipei China Korea Philippines Malaysia Thailand China Indonesia India Hong Kong
Pakistan
84.44 85.14 83.87 81.82 74.59 73.37 69.21 60.53 68.08 65.12 65.04 57.33 61.05 67.62
55.24
74.83 74.62 74.57 73.59 68.11 67.05 66.52 64.08 63.43 61.88 56.55 55.37 55.21 53.74
41.61
specialisation in semiconductors (and has a rise in its score). China ranks ahead of Indonesia and Hong Kong. Pakistan scores low on national sophistication, coming behind India but ahead of Sri Lanka and Bangladesh. Its score falls by 13.6 points, the second largest drop in the group after Hong Kong. The low score for Pakistan reflects its dominant specialisation in low technology products, and within these on products that are in the low
Sri Lanka * Bangladesh*
54.60 46.62
41.50 35.64
Note: * data for 2001 instead of 2000
commodity end of the sophistication spectrum. This is also reflected in the distribution of exports over the sophistication scale (Figure 18), which compares the distribution of products in 1990 and 2000 in Pakistan and selected comparators. Bangladesh and Sri Lanka are not shown because their distributions are very similar to that of Pakistan. Taipei China and the USA are shown for comparative purposes as examples of an advanced NIE and the leading industrialized country. The most striking feature of Pakistans export structure is the sharp rise in the share of level 6 exports; it is the only country in the chart for which this is the case. In India, the share of level 6 falls while that of level 5 (which contains cut gems) rises. In China both these categories, while large, lose shares to levels 3 and 4. In Malaysia and to a lesser extent Thailand this trend is much more pronounced. The US structure retains a constant share of level 1 products, with a significant decline in level 2 offset by a rise in level 4.
12 This score is arrived at in the following way. The share of each manufactured product in a countrys total manufactured exports is multiplied by the sophistication score of that product (in world trade); the figure is then totaled across all products.
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Figure 18: Sophistication of manufactured exports 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 Pakistan 2000 1990 India 2000 1990 China 2000 1990 2000 Malaysia 1990 Thailand
Level 1
Level 2
Level 3
Level 4
Level 5
Level 6
2000
1990
2000
1990 USA
2000
Taipei China
Table 13 shows the values, distribution and growth rates of Pakistans exports by sophistication levels relative to various comparators and some developed countries.
Table 13: Values of manufactured exports by sophistication levels, 1990 ($ million) 1990 Level 1 Level 2 Level 3 Level 4 Level 5 Level 6 Total
India Sri Lanka Bangladesh

Pakistan
648.5 30.5 12.6

93.4
1,373.6 35.7 1.9

28.6
781.8 39.2 9.8

28.7
667.3 54.0 12.0

65.2
1,729.1 42.7 227.3

1,695.1
8,786.3 881.7 1,076.0

2,545.6
13,986.6 1,083.8 1,339.6

4,456.5
China Hong Kong Taipei China Korea Singapore Malaysia Indonesia Thailand Philippines
2,714.3 1,711.9 5,748.7 4,668.1 5,094.0 1,480.6 201.8 497.4 80.8
8,429.0 5,702.6 9,506.9 7,099.7 8,089.9 2,483.7 469.5 1,713.4 318.9
3,668.2 4,799.0 16,834.3 9,785.6 12,944.6 1,772.5 459.2 2,831.7 286.3
3,024.6 1,311.4 7,819.3 11,629.3 6,042.8 6,653.5 975.0 2,033.3 881.3
10,044.5 3,435.6 12,912.1 11,886.5 3,073.7 3,267.8 1,856.0 2,523.6 714.5
20,154.4 10,873.2 11,157.9 17,339.9 13,631.8 6,113.8 7,939.2 7,655.7 2,173.2
48,035.0 27,833.7 63,979.1 62,409.1 48,876.8 21,772.0 11,900.8 17,255.0 4,455.0
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USA Japan Germany UK Mexico World
106,416.2 101,491.3 132,158.7 39,358.1 3,473.6 657,248.2
74,118.3 75,746.1 90,655.7 40,749.8 3,381.2 556,036.7
57,341.3 52,775.6 60,837.2 27,778.2 2,068.5 443,921.6
34,204.5 28,599.3 33,566.1 22,343.1 1,355.3 307,429.8

2000
17,924.3 13,691.5 28,162.9 12,008.5 1,257.1 242,141.0
15,439.6 6,390.8 19,603.7 13,622.8 1,680.6 368,632.8
305,444.2 278,694.7 364,984.3 155,860.5 13,216.3 2,575,410.1

Pakistan
3,220.8 101.0 43.2

184.5
2,001.7 52.5 19.9

64.1
3,834.4 78.6 27.1

82.4
2,695.9 313.0 112.1

187.6
11,568.4 270.6 148.6

748.1
14,403.4 2,772.5 4,933.9

6,666.6
37,724.4 3,588.3 5,284.8

7,933.3
China Hong Kong Taipei China Korea Singapore Malaysia Indonesia Thailand Philippines USA Japan Germany UK Mexico World
12,785.7 1,539.3 10,561.5 10,222.8 12,078.2 3,212.1 1,191.9 2,257.6 1,145.8 215,219.0 106,537.6 128,421.5 72,619.1 17,363.7 981,123.2
10,719.1 1,276.6 11,956.4 21,352.3 9,594.1 2,812.7 3,745.5 3,588.2 501.8 79,775.7 99,715.8 127,982.2 37,013.6 23,830.6 788,901.5
36,390.3 2,667.6 29,534.4 29,560.2 18,696.7 16,114.7 6,180.9 12,709.0 3,601.5 122,517.6 96,766.2 96,138.3 44,406.1 37,443.0 938,816.5
51,361.6 4,254.7 66,020.3 66,988.2 72,190.4 45,735.5 7,974.1 19,977.5 24,703.0 141,338.9 124,856.8 70,207.9 52,114.9 26,634.0 1,098,440.2
41,892.6 1,475.1 13,758.7 20,536.5 15,470.9 8,055.0 8,298.7 7,552.6 2,191.7 40,586.5 16,168.9 36,332.1 23,686.9 17,940.4 583,404.1
76,097.7 10,934.7 13,070.8 17,790.5 4,655.9 11,021.5 15,120.1 12,609.9 4,428.2 23,285.9 11,447.5 20,774.4 10,390.3 20,383.5 491,371.6
229,247.0 22,148.0 144,902.0 166,450.5 132,686.1 86,951.6 42,511.2 58,694.9 36,571.9 622,723.6 455,492.7 479,856.3 240,230.9 143,595.2 4,882,057.0
Growth rates (1990-2000)
17.4% 11.5% 11.9%
3.8% 3.6% 23.6%
17.2% 6.5% 9.7%
15.0% 17.3% 22.5%
20.9% 18.3% -3.8%
5.1% 11.0% 14.8%
10.4% 11.5% 13.3%
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Pakistan
7.0%
8.4%
11.1%
11.2%
-7.9%
10.1%
5.9%
China Hong Kong Taipei China Korea Singapore Malaysia Indonesia Thailand Philippines USA Japan Germany UK Mexico World
16.8% -1.1% 6.3% 8.2% 9.0% 8.1% 19.4% 16.3% 30.4% 7.3% 0.5% -0.3% 6.3% 17.5% 4.1%
2.4% -13.9% 2.3% 11.6% 1.7% 1.3% 23.1% 7.7% 4.6% 0.7% 2.8% 3.5% -1.0% 21.6% 3.6%
25.8% -5.7% 5.8% 11.7% 3.7% 24.7% 29.7% 16.2% 28.8% 7.9% 6.3% 4.7% 4.8% 33.6% 7.8%
32.7% 12.5% 23.8% 19.1% 28.2% 21.3% 23.4% 25.7% 39.6% 15.2% 15.9% 7.7% 8.8% 34.7% 13.6%
15.4% -8.1% 0.6% 5.6% 17.5% 9.4% 16.2% 11.6% 11.9% 8.5% 1.7% 2.6% 7.0% 30.5% 9.2%
14.2% 0.1% 1.6% 0.3% -10.2% 6.1% 6.7% 5.1% 7.4% 4.2% 6.0% 0.6% -2.7% 28.3% 2.9%
16.9% -2.3% 8.5% 10.3% 10.5% 14.9% 13.6% 13.0% 23.4% 7.4% 5.0% 2.8% 4.4% 26.9% 6.6%
The conclusions of the analysis are evident: Pakistan is specialized in stagnant products and is performing poorly. The table also shows the extent of competition arising in other countries in the region, particularly in China and Southeast Asia.
7. Benchmarking Pakistans skills and technological capabilities
to sophisticated and demanding global markets. The range and level of skills required is rising, calling not just for an initial base of schooling but for constant training and retraining of the workforce at all levels, with competence in the use of information technology playing a larger role. No industrial activity or enterprise, regardless of its technological level or size, is immune to this need. The development of technological capability is a related but different process. It goes beyond creating skills, to creating technology-specific knowledge and organisational routines. It arises partly from on-the-
ompetitiveness today requires much more than adequate infrastructure, cheap labour and liberal economic policies. It needs a strong base of human and technological resources, able to support enterprises in handling, adapting and improving new technologies and selling the output
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job experience but largely partly from conscious effort to absorb, adapt, improve and create technologies and to interact with other enterprises and technology-related institutions (Lall, 2001a). Thus, it is just as crucial to competitiveness as having skilled employees: it is the glue that binds formal skills to production efficiency. A significant part of technological capability arises from informal production activity; in complex activities it also involves product and process engineering and research and development (R&D). R&D is often considered to be unnecessary in developing countries that can use technologies created elsewhere, but this is mistaken. While it is probably wasteful for these countries to invest in reinventing the wheel, formal R&D effort is often necessary for using advanced technologies efficiently in production.
7.1 Skills
y most common indicators of skill creation, Pakistan performs poorly by regional standards (themselves low relative to East Asian levels). Take, for instance, the Harbison-Myer index, a classic index of skills based on school and university enrolments, used by UNIDO (2002) to
benchmark 87 countries. Pakistan ranks below all other South Asian economies, even Nepal (Table 14).
Table 14: Harbison-Myer index of skills 1998 (country ranking) 1985 (country ranking) Korea 36.1 (10) 26.8 (6) Taipei, China 27.8 (23) 22.5 (21) Singapore 23.1 (29) 14.8 (37) Philippines 21.6 (32) 21.3 (23) Thailand 15.6 (45) 10.8 (48) Malaysia 11.1 (55) 9.2 (51) Indonesia 10.4 (56) 8.3 (57) Sri Lanka 10.1 (58) 9.1 (53) PRC 9.8 (59) 5.2 (67) India 8.1 (69) 7.1 (60) Nepal 6.4 (71) 5.4 (66) Bangladesh 4.3 (76) 4.0 (72) Pakistan 4.1 (77) 4.4 (69) Note: The Harbison-Myer index is the average of the percentage of the relevant age groups enrolled in secondary and tertiary education with tertiary enrolments given a weight of five Source : UNIDO (2002) table A.2.18 Country
What is more worrying, Pakistans score and its relative position have deteriorated since the mid-1980s, making it the only country in Asia in which the index declined over the 1985-1997 period; however, several, including all in South Asia, have declined in the rankings. The charts below compare Pakistan with other Asian countries on different aspects of education. Figure 19 shows its relative gross enrolment rates at secondary school, using the most recent data from the UNESCO website. Pakistans rate is not only the lowest in Asia, but also below levels in most Sub-Saharan African countries. This does not take into account the quality and industrial relevance of the education
India B angladesh P akistan P hilippines Sri Lanka M alaysia China Nepal F igure 19 : S e c o nda ry s c ho o l e nro lm e nt s ( % o f a ge gro up) Thailand
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-10
10
30
50
70
90
imparted, but there is little reason to believe that this would greatly improve Pakistans relative performance. Figure 20 shows a measure of high level technical skills: enrolments in technical subjects (science, computing and mathematics, and engineering) at the tertiary level, expressed as a percentage of the total population.
Figure 20: Tertiary technical enrolments (% population, 1997) 2.0% 1.5% 1.0% 0.5% 0.0%
Republic of Singapore India Bangladesh Taipei, Nepal Indonesia Philippines Sri Lanka Thailand Malaysia Pakistan
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Simple as it is, this measure seems appropriate for assessing the human capital available for handling complex modern technologies. It has, however, to be adjusted for the stock of trained engineering and scientific manpower available for industrial uses these are likely to be particularly large in countries like China and India. As they stand, however, the figures show Pakistan again as ranking below all its Asian comparators, again surprisingly even below Nepal. Figure 21 shows government expenditures on education as percentage of GDP in 2001. Pakistan spends less on human capital than its comparators China is only slightly better but its emphasis on providing universal primary education and widespread secondary education has, in contrast, given it a highly trainable and productive labour force.
Korea,
China
China
Figure 21: Public expenditure on education (% of GDP, 2001)

6 5 4 3 2 1 0 Pakistan China Bangladesh Sri Lanka India Thailand
Note: 1999 data for China and Sri Lanka, 2000 data for India
7.2 Technological effort
t is, by the nature of the phenomenon, very difficult to measure technological effort in practice, though there is universal recognition of its central role in competitiveness in all countries. It is clear that the Government of Pakistan has recognized fully the need for increasing local technological effort. The
1993 National Technology Policy, for instance, stated that Technological development and rapid economic growth are two sides of the same coin. Development planners consider technology to be one of the most important factors determining economic and social development ... Pakistan must join the world economic community as member of the group of Newly Industrialised Countries before the current century closes. The goal of the National Technology Policy is to help attain this vision by promoting the best use of international and indigenous technology in various sectors of the economy and thereby accelerating economic growth and improving the quality of life of all Pakistanis. The Eighth Five Year Plan set a target for R&D of 1% of GDP by 1998. Despite this awareness, and despite ambitious plans for improvement, Pakistan continues to lag badly in this field. There is little sign of dynamism in the technology scene; if anything, there seems to be deterioration over time. There is some investment in science and technology by the government, but it lacks coherence or relevance, and many reforms languish on paper. Technological investment by the productive sector is so small as to be practically absent. Government technological efforts are not linked to the needs of the productive sector. The infrastructure of institutions needed to provide basic services and inputs into enterprise technological activity is weak. Despite the stated intention to the contrary, policy continues to focus on the supply side of technology rather than ensuring that productive enterprises are induced to demand it and to invest more in it.
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Table 15: R&D in Pakistan and Comparator Countries Country Year R&D as % Enterprise Total R&D GNP or financed R&D per cap. ($) GDP as % GNP or GDP Pakistan 1990 0.3 0.00 0.8 India 1999 0.6 0.16 2.4 Sri Lanka 1994 0.2 0.02 1.4 China 1999 0.8 0.41 6.5 Indonesia 1993 0.1 N/A 1.0 Malaysia 1999 0.4 0.26 13.0 Philippines 1984 0.1 0.03 0.7 Thailand 1999 0.3 0.14 5.8 Hong Kong 1995 0.1 N/A 23.0 Singapore 1999 1.9 1.18 396.7 Korea 1999 2.9 2.3 261.9 Taipei, 1994 1.8 1.00 198.0 China Sources: UNESCO, Statistical Yearbooks; OECD; national sources; Brooker Group (Thailand) unpublished data.
How does Pakistan compare in technological effort? Accepting that R&D is not a perfect measure of technological effort, it is the only activity on which there are comparable data across countries. Table 15 gives the latest available R&D data (unfortunately out of date for several countries). Pakistan spends around 0.3% of its GDP on research and development, slightly more than Sri Lanka, Indonesia, Philippines, Thailand and Hong Kong. However, practically all R and D in Pakistan it is financed by the government. Enterprise financed R&D is negligible, and the lowest of the whole sample. On a per capita basis, R&D spending in Pakistan is also the lowest, even compared to Sri Lanka or the Philippines (Bangladesh data are not available). More up to date figures
Figure 22: Scientists in R&D (per million people), latest year
500 400 300 200 100 0 Pakistan Bangladesh Thailand India Sri Lanka China
Note: 1997 data for Pakistan; 1995 for Bangladesh; 1996 for the rest
for Pakistan are not available to us, but as yet there is no evidence that the 1% of GDP target for R and D, noted above, has been met or is even close to being met. There are three more figures that illustrate
Pakistans technological activity. Figure 22 shows the number of scientists engaged in R&D per million inhabitants. Figure 21 shows the number of technicians in R&D, and Figure 22 shows the number of scientific and technical journals per million inhabitants. All the figures highlight the lag that Pakistan suffers with respect to its comparators in the region. Only Bangladesh comes close in terms of an equally weak performance.
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Figure 23: Technicians in R&D (per million people, latest year)

200 180 160 140 120 100 80 60 40 20 0 Pakistan Bangladesh Sri Lanka Thailand India China Note: 1997 data for Pakistan and Thailand; 1995 for Bangladesh; 1996 for the rest
Figure 24: Scientific and technical journals per million people

11 10 9 8 7 6 5 4 3 2 1 0 1990 1995 1996 1997 Pakistan Bangladesh Sri Lanka Thailand India China
Not only are total R&D expenditures low in Pakistan, the share of the total science budget directed to industry is low and declining. In the Fifth Plan, the percentage of total scientific research for industry was 17.7%, in the Sixth Plan 14.3% and in the Seventh Plan 11.4%. The utilisation of Plan allocations to science and technology also declined, from 80% in the Fifth Plan to 39% in the Seventh Plan and to 15% in the first three years of the Eighth Plan. There are, nevertheless, a large number of institutions engaged in R&D: at the end of 1988 there were 166 research organisations (118 under the Federal government); there were also around 50 educational
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institutions that could conduct research. The technology infrastructure organisations like the Pakistan Standards Institute and a number of technical extension and training services also conduct R&D. In general, however, it appears that the structure is de-linked from the productive sector.13 Industrial firms, to the extent that they are even aware of these institutions, have a low opinion of their capabilities and services offered. Universities are even further removed from productive activity and the consciousness of industry managers than the public sector laboratories. Among SMEs, which need institutional support most, there is also very limited awareness of the technology institutions, and the institutions (with some notable exceptions) fail to reach out to them to assess and address their technical needs. One indirect indicator of technology effort relevant to export competitiveness is the number of ISO 9000 certificates awarded at the national level. While this relates to quality management rather than technical effort, and covers all activities and not only manufacturing, it is roughly in line with export performance. Table 16 shows the number of ISO 9000 certificates granted till end-2002 in Pakistan and comparators. Pakistan has enjoyed a significant rise in the number of awards, particularly since 1999, but still lags behind major competitors. Table 16: ISO 9000 Certificates: 1993 to end-2002
Countries Pakistan India Jan. 1993 June 1994 1 328 Dec. 1995 7 1023 Dec. 1996 22 1665 Dec. 1997 56 2865 Dec. 1998 145 3344 Dec. 1999 194 5200 Dec. 2000 611 5682 Dec. 2001 539 5554 Dec. 2002 795 8110
8 1 10 27 43 243 69 122 1 3
Bangladesh Sri Lanka China Korea, Republic Taipei, China Singapore Hong Kong Malaysia Indonesia Philippines Thailand 1 150 226 337 662 336 258 22 13 24 7 507 619 1354 1180 739 690 125 102 143
1 22 3406 892 1889 1808 1312 1123 340 155 182
1 38 5698 5806 2608 2909 1637 1610 1273 629 1104
4 59 8245 7729 3173 3000 1940 1707 1442 668 1236
25 82 15109 11533 3807 3140 2150 1921 1525 723 1527
25 82 25657 15424 4319 3900 2570 2355 1860 1027 2553
38 155 57783 17676 5405 3513 3814 3195 1395 961 3870
43 322 75755 14520 3182 5379 3868 3733 1947 766 4556
Source: International Standards Organization website
Finally, let us consider inflows of technology into Pakistan through licensing, as measured by payments overseas of royalties and technical fees. Figure 23 shows such payments on a per capita basis over time and Figure 24 the dollar values of the payments and their rate of growth in the late 1990s. The comparators here are India, China and Bangladesh (plus Thailand for Figure 24).
13 This is based on the (unpublished) findings of a Commonwealth Secretariat mission to Pakistan in 1998 to analyse export competitiveness. One of the present authors (Lall) led that mission. The situation may, of course, have improved significantly since that time.
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Figure 25: Royalty payments per capita (US$)

1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1990 1995 1996 1997 1998 1999 2000 India Pakistan China
Bangladesh
Technology imports by this method have largely stagnated in Pakistan on a per capita basis, though there is an encouraging rise after 1997. India has a slow but steady rise, with a setback in 1999-2000. Bangladesh stagnates at a low level. By contrast, China enters the scene in a big way after 1996 and raises its purchases of licensed technology rapidly thereafter. Since a large part of such payments are made by foreign affiliates to their parent companies, this also reflects inflows of FDI (discussed earlier).
1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0
1997 2000
Figure 26: Royalty payments (US$ million, annual growth rate 1997-2000 in brackets) (27.7%)
1997
2000
(-4.1%)
(26.7%) (13.1%) Pakistan 19.34 28.00 (-17%) Bangladesh 7.73 4.42 India 150.49 305.85 Thailand 803.95 709.87 China 543.00 1,280.97
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In sum, the picture of the main drivers of competitiveness in Pakistan human resources, technological effort, technology inflows and supporting institutions seems clear and consistent, and it is far from encouraging. Pakistan has a weak base for building competitive capabilities and there is little sign that it is improving over time in response to growing international challenges. Its long experience in textiles and clothing seems to have given it an adequate competitive base in these activities, but even here new niche markets need to be sought out to keep pace with international competition. The base of skills and capabilities in essentially low and stable technologies may not, in other words, allow Pakistan to diversify into the more dynamic and complex activities that are the new engines of export growth in the global economy. And the base may not be sufficient to attract foreign capital and technology into export-oriented activities in competition with many other low wage economies that are vying for similar investments. The indicators used here are preliminary and need much more refinement. They are very general, sometimes out of date and based on secondary information. They cannot capture the intricacies of skill creation and technological effort on the ground in Pakistani industry and it may well be the case that in reality there is more of both than they suggest. However, to the extent that they indicate, even roughly, the underlying structure of capabilities relative to competitors, they are a cause for serious concern.
8. Lessons from East Asia

8.1 Trade and industrial policy
he economies of East Asia, both the first tier newly industrialized economies or NIEs (Korea, Taipei, China, Hong Kong and Singapore) and a second tier group (Thailand, Malaysia, the Philippines, and more recently China) offer a dramatic illustration of what rapid growth of
manufactured exports can achieve. These economies are located at various positions on the ladder of comparative advantage, but to varying degrees they have each succeeded in diversifying out of traditional primary exports into more dynamic manufactured goods. The precise mechanism through countries can benefit from a greater openness to trade and a rising share of exports in total economic activity has been the subject of much discussion and several possibilities have been identified. First, there is the route of demand expansion, since by breaking into export markets firms can overcome the constraint imposed by the absolute size and dynamism of the domestic market.14 Insofar as increasing returns to scale in production are important this will reinforce the advantage
14
For example, Bhagwati has contrasted past East Asian experience with that of India (and by implication Pakistan) where growth of the domestic market was constrained by the expansion of agriculture, which cannot grow beyond 4% a year on a sustained basis (cited in Quibria 2002:28).
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of operating at higher output levels due to exporting and cost reductions can lead to gains in export market share and further cost reductions in a cumulative process. Second, exporting by exposing firms to foreign competition, technology and marketing networks can lead to productivity gains unattainable in the domestic market. For example, contacts with foreign buyers initially in the clothing sector and latterly in branches like electronics, meant that East and South East Asian firms were integrated into international production networks and received access to foreign designs and technologies. They were also under constant pressure from these buyers to remain cost competitive.15 Third, exports generate foreign exchange that allows the purchase of imports. For producers gains from imports can be static, if they are lower cost than domestic supplies, or dynamic if they are capital goods that embody a superior technology that generates future productivity gains. For consumers gains will arise if imports represent new or cheaper products.16 Fourth, insofar as an export-oriented strategy generates more FDI flows than would otherwise occur and insofar as FDI creates positive externalities, there will be additional benefits that go beyond the monetary value of exports. From a policy perspective understanding the precise mechanisms involved may be less important than formulating the policy package needed to stimulate export growth. Advice given to countries wishing to raise their export growth is based conventionally on a combination of adequate price incentives, defined as a competitive real exchange and measures to reduce any anti-export bias arising from import protection; access to imported inputs required for export production at world prices, for example through tariff reform, import duty drawbacks or duty-free access in export processing zones. As we discuss further below, these trade measures need to be combined with non-trade aspects such as investment in physical (ports, roads, power supplies) and social (an educated and trained workforce) infrastructure and support for technology upgrading. In practice amongst the high growth NIEs there were substantial national variations in the way exports were promoted with governments using a range of additional (often non-trade) measures to raise the profitability of exporting. These included ! selective import tariff protection for home market sales, the profits from which were used to crosssubsidize exports (Korea, Taipei, China);
15 There is considerable evidence from firm and plant level studies that exporting firms tend to have higher productivity as compared with equivalent domestic-oriented firms. The interpretation of this is ambiguous however since causation may run from high productivity to exporting rather than vice versa. 16 Further, theoretically if openness to trade allows a more rapid technological catch-up, for example through the import of capital equipment embodying new technology, then in endogenous growth models openness can be shown to accelerate economic growth.
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access to credits by exporters either for investment or export trade financing, often at subsidized interest rates (most NIEs);
tax concessions to investors, including exporters, in the form of tax holidays or accelerated depreciation allowances (all NIEs);
preferential allocation of licenses to exporters, for example for technology imports or investment (Korea and Taipei, China);
! !
directed finance to strengthen the position of selected and favored enterprises (most NIEs); provision of subsidized infrastructure and factory space, for example as part of EPZs (Malaysia, Thailand, Taipei, China);
provision of R and D facilities in government institutes (particularly Singapore, Korea), as well as tax credits for enterprise R and D (all NIEs);
restriction of wages through controls over union activity and wage bargaining (Korea, Taipei, China, Malaysia) or subsidization of public housing (Singapore).
This range of interventions was used at different times with varying degrees of success and with the more direct measures, such as licensing controls and import protection, most significant in the 1960s and 1970s. Their net effect was to create rents or supernormal profits for manufacturing exporters. In the NIEs, in general, such rents tended to be reinvested in further manufacturing expansion rather than wasted in luxury consumption or speculative ventures. The combination of this set of measures is what is normally described as industrial policy and its effectiveness has been the subject of considerable debate even in the context of the first tier NIEs.17 In the current context of economies like Pakistan wishing to diversity their export structure and establish links with global value chains this experience needs to be understood, but not copied simplistically. Selective bureaucratic interventions in support of individual firms in general have had a poor track record, apart from the early experience of the Republic of Korea and Taipei, China. For example, efforts in Malaysia to support heavy industry through public sector investment proved disappointing with subsequent privatization of the enterprises (Jomo 1997). In Thailand selective interventions on behalf of individual firms have been described as marked by patronage and rent-seeking rather than by a clear strategy of industrial upgrading (Christensen et al 1997). In Indonesia credit flows from banks were received predominantly by politically favoured groups and efforts at technological leapfrogging principally in the national aircraft project were judged a high cost failure (Hill 1995). Further in the South Asian context where there has been a long tradition of direct government involvement, current policy is based on withdrawal of government from direct intervention over enterprise
17 For contrasting views on the impact of industrial policy in Taipei, China see Wade (1990, 1994) and Smith (200) and on Korea see Amsden (1989) and Pack (2000).
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decisions. Nonetheless governments can influence enterprise decisions through the price mechanism for example through the main macro prices in the economy the exchange rate and the long-term real interest rate and through various corrective measures, where particular markets function imperfectly. It is this lighter form of industrial promotion, providing support not direction for the private sector that is most appropriate. Below we survey relevant experience from the region to illustrate how governments helped firms in these economies to attain their current level of competitiveness.
8.2 Skill development
different class from the second tier NIEs, which are still lagging significantly in their human resource development investments (indeed, their skill gap is emerging as the major issue in their ability to retain a competitive edge over China). Within the mature NIEs, the Republic of Korea and Taipei, China, are ahead of Singapore and Hong Kong in high level technical skill creation but Singapore is the leader in worker training and the provision of specific shop-floor technical skills. Table 17 shows broad enrolment rates in Asia and other regions. Sub-Saharan Africa lags at all, particularly the tertiary, levels of education. The four mature Tiger economies of Asia lead the developing world at higher levels, just slightly lagging the developed economies.18 The four new Tigers, Latin America and Middle East/North Africa are roughly similar in their secondary and tertiary level enrolments, just behind the levels reached in the transition economies. South Asia and China have low levels of tertiary enrolment, but China is considerably stronger at the secondary level. To the extent that these simple indicators of skill formation are valid, they show large gaps in the education base for competitiveness.
Table 17: Enrolment Ratios (percentage of age groups) Mean for group (unweighted) Enrolment Ratios (1980) Enrolment Ratios (1995-7) 1 level 2 level 3 level 1 level 2 level 3 level Developing countries 88 34 7 91 44 11 Sub-Saharan Africa 74 17 1.3 78 23 2.9 MENA 88 42 9.7 92 59 14.3 Latin America 102 45 14.1 103 53 18.1 Asia 95 44 7.4 99 54 14.4 4 mature NIEs 106 72 13.0 100 82 36.4 4 new NIEs 103 43 12.3 102 60 17.3 S Asia 75 28 4.0 93 42 4.8 China 112 46 1.3 120 69 7.0 Others 96 37 3.7 98 35 5.9 Transition economies 100 77 14.6 95 76 22.2 Developed Economies 102 84 27.2 104 113 50.6 Europe 101 82 24.5 104 113 44.6
ll the Asian NIEs were acutely conscious of the centrality of worker skills and higher technical, engineering and scientific skills to competitiveness. The extent of skill creation has, however, varied between countries and countries have used varying strategies. The mature NIEs are in a
18
For a detailed analysis of skill formation strategies in the mature Tigers, and how these relate to larger industrial policies, see Ashton et al. (1999).
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N America 101 91 49.1 102 Japan 101 93 30.5 102 Australia, N Zealand 111 84 27.0 106 Source: Calculated from UNESCO, Statistical Yearbooks, various.
102 99 132
92.0 40.3 65.0
These figures conceal differences in completion rates, quality and relevance to skill needs. While we cannot correct for these, we may consider one indicator of the quality of mathematics and science school training: the Third International Mathematics and Science Study (TIMSS) scores for 8th Grade students. Of the 41 countries in which half a million 13 year olds were tested, the position of Asian Tigers was as follows: Singapore was first place in both mathematics and science; Korea second in mathematics and fourth in science; Hong Kong fourth in mathematics and 24th in science. Japan was the best among developed countries, coming third in both. Of the other NIEs, Thailand was half way down in both. These figures confirm large quality differences in the two subjects of critical importance to technological skill development. While most developing countries, including Pakistan, are not in the test, it would not be surprising if the quality ranking was similar to the enrolment rates, with East Asia coming on top and SubSaharan Africa at the bottom. The breakdown of tertiary enrolments in technical subjects is probably more relevant to assess the capabilities to absorb technological knowledge; of this, enrolment in engineering is probably the most significant. Table 18 shows the total numbers enrolled in tertiary education and in the three main technical subjects (science, mathematics/computing and engineering) by region in 1995. This time the regional averages are weighted by population. The figures show much wider dispersion in skill creation than the general enrolment rates. The Asian NIEs enrol over 33 times the proportion of their population in technical subjects that in Sub-Saharan Africa (including South Africa). The ratio is twice that of industrial countries, nearly 5 times Latin America and the new NIEs, and over 10 times South Asia and China. The leading 3 countries in terms of total technical enrolments China (18%), India (16%) and Korea (11%) account for 44 percent of the developing worlds technical enrolments, the top ten for 76 percent and the top 20 for 93 percent.
Table 18: Tertiary level enrolments and enrolments in technical subjects (1995) 3 level enrolment Technical enrolments, numbers & % of population Total % pop. Natural Science Math's, computing Engineering All Technical subjects No. students numbers % numbers % numbers % numbers % Developing countries 35,345,800 0.82% 2,046,566 0.05% 780,930 0.02% 4,194,433 0.10% 7,021,929 0.16% Sub-Saharan Africa 1,542,700 0.28% 111,500 0.02% 39,330 0.01% 69,830 0.01% 220,660 0.04% MENA 4,571,900 1.26% 209,065 0.06% 114,200 0.03% 489,302 0.14% 812,567 0.22% Latin America 7,677,800 1.64% 212,901 0.05% 188,800 0.04% 1,002,701 0.21% 1,404,402 0.30% Asia 21,553,400 0.72% 1,513,100 0.05% 438,600 0.01% 2,632,600 0.09% 4,584,300 0.15% 4 mature NIEs 3,031,400 4.00% 195,200 0.26% 34,200 0.05% 786,100 1.04% 1,015,500 1.34% 4 new NIEs 5,547,900 1.61% 83,600 0.02% 280,700 0.08% 591,000 0.17% 955,300 0.28% S Asia 6,545,800 0.54% 996,200 0.08% 7,800 0.00% 272,600 0.02% 1,276,600 0.10% China 5,826,600 0.60% 167,700 0.02% 99,400 0.01% 971,000 0.10% 1,238,100 0.13% Others 601,700 0.46% 70,400 0.05% 16,500 0.01% 11,900 0.01% 98,800 0.08% Transition economies 2,025,800 1.95% 55,500 0.05% 30,600 0.03% 354,700 0.34% 440,800 0.42% Developed economies 33,774,800 4.06% 1,509,334 0.18% 1,053,913 0.13% 3,191,172 0.38% 5,754,419 0.69%
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Europe 12,297,400 3.17% 876,734 N America 16,430,800 5.54% 543,600 Japan 3,917,700 0.49% N/A Australia, NZ 1,128,900 5.27% 89,000 Source: Calculated from UNESCO (1997) and national sources
0.23% 0.18% N/A 0.42%
448,113 577,900 N/A 27,900
0.12% 0.19% N/A 0.13%
1,363,772 904,600 805,800 117,000
0.35% 0.31% 0.10% 0.55%
2,688,619 2,026,100 805,800 233,900
0.69% 0.68% 0.10% 1.09%
Table 18 illustrates some of the differences. The NIEs with the strongest technological ambitions, the Republic of Korea, Taipei China and Singapore, invested most in training scientists and engineers (but Korea is far in advance of Taipei China, which in turn is in advance of Singapore, see Figure 27). Their governments set up new universities and directed curricula towards technical subjects, encouraged foreign education, and attracted back trained nationals. Moreover, governments did not always provide substantial direct funding for higher education: in Korea, for instance, the bulk of higher education is funded privately, with the government playing a guiding and catalytic role. By contrast, Singapore poured enormous public resources into tertiary education.
Figure 27: Technical enrolments at tertiary levels
1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
(% population) 1985 and 1997
Philippines
Singapore
Finland
Taiwan
Japan
Korea
Indonesia
Germany
Thailand
H. Kong
Mexico
Turkey
USA
Singapores training system is of particular interest to countries seeking to develop specialised skills for attracting export-oriented FDI the provision of such skills has been one of its major selling points in targeting high technology MNCs. Countries such as Pakistan, with a large skills deficit could usefully reflect on how best to emulate aspects of this system. Box 3 describes elements of this system.
Malaysia
China
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Box 3: Singapores skill formation system

The Singapore government invested heavily in creating high-level skills to drive the targeted upgrading of the industrial structure. The university system was expanded and directed towards the needs of its industrial policy, its specialisation changed from social studies to technology and science. In the process, the government exercised tight control of curriculum content and quality, and ensured its relevance for the activities being promoted. Apart from formal education, the government also directed considerable effort to developing the industrial training system, now considered one of the best in the world for high technology production. Singapore is a regional leader in employee training programmes held outside the firm. It set up the Skill Development Fund (SDF) in 1979, along with a Skill Development Fund Levy, which collected a levy of 1 percent of payroll from employers to subsidise the training of low-paid workers. This marked the identification of a technology-intensive and knowledge-intensive industrial structure and high value-added orientation as national objectives with policy thinking focused on the importance of ensuring suitable human resources. The SDF levy is disbursed to firms that send their low-paid employees to approved training courses. Singapore has two national universities, four polytechnics and numerous public or non-profit specialised training institutes, creditable for an economy with less than 3 million people. Of its university graduates in 1996, 41 percent were in technical subjects. The polytechnics meet the needs for mid-level technical and managerial skills, again with a heavy emphasis on engineering. They cooperate closely with business in designing courses and providing practical training. Numerous Institutes of Technical Education provide blue-collar workers with secondary education with courses to upgrade skills. An Adult Cooperative Training Scheme, introduced in 1993, provides training for semi- and unskilled workers aged 20 to 40. The Vocational and Industrial Training Board (VITB) was established in 1979. It was an integrated training structure, which has trained and certified over 112,000 individuals, about 9% of the existing workforce, since its inception in 1979. The VITB administers several programmes. The Full-Time Institutional Training Programme provides broadbased pre-employment skills training for school leavers. The Continuing Skills Training Programme comprises parttime skills courses and customised courses. Customised courses are also offered to workers based on requests from companies and are specifically tailored to their needs. Continuing Education provides part-time classes to help working adults. VITBs Training and Industry Programme offers apprenticeships to school leavers and ex-national servicemen to undergo technical skills training while earning a wage. On-the-job training is carried out at the workplace where apprentices, working under the supervision of experienced and qualified personnel, acquire skills needed for the job. Off-the-job training includes theoretical lessons conducted at VITB training institutes or industry/company training centres. Unusually, the government has collaborated with foreign enterprises (Japanese, French, Indian, German and Dutch) to set up these centres, funding a large part of employee salaries while they are being trained in state of the art manufacturing technologies. Later the Singapore government also worked jointly with foreign governments (Japan, Germany and France) to provide technical training. Under the Industry-Based Training Programme, employers conduct skills training courses matched to their specific needs with VITB assistance. VITB provides testing and certification of its trainees and apprentices as well as trade tests for public candidates. The Board, in collaboration with industry, certifies service skills in retailing, health care and travel services. National investment in training in Singapore reached 3.6 percent of annual payroll in 1995. This can be compared with an average of below 2 percent in the UK in the late 1990s. The initial impact of the programme was found mostly in large firms. However, efforts to make small firms aware of the training courses and provide support for industry associations has increased SDFs impact on smaller organisations. SDF is responsible for various financial assistance schemes to help SMEs finance their training needs and to upgrade their operations. It has also introduced a Development Consultancy Scheme to provide grants to SMEs for short-term consultancy for management, technical know-how, business development and manpower training. The Training Voucher Scheme supports employers to pay training fees. This Scheme enabled the SDF to reach more than 3,000 new companies in 1990, many of which had 50 or fewer employees. The Training Leave Scheme encourages companies to send their employees for training during office hours. It provides 100% funding of the training costs for approved programmes, up to a maximum figure per participant hour. The success of the Skills Development Fund is due in part to a strategy of incremental implementation. Initially, efforts focused on creating awareness among employers, with ad hoc reimbursement for courses. The policy was then refined to target in-plant training, and reimbursement increased to 90% of costs as an additional incentive. Further modifications were made to encourage the development of corporate training programmes by paying grants in advance of expenses, thus reducing interest costs to firms. The Economic Development Board (EDB) assesses emerging skill needs continuously in consultation with leading enterprises in the economy, and mounts specialised courses. For instance, in 1998, it offered courses on wafer
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fabrication, process operation and control, precision engineering, high-end digital media production, and computer networking. The EDB also started an International Manpower Programme in 1991 to help companies based in Singapore to attract skilled personnel from around the world. There has been a significant shift in the workforce to more highly skilled jobs. The proportion of professional and technical workers has risen from 15.7 percent in 1990 to 23.1 percent in 1995.
Source: Lall (2001a)
8.3 Technological effort
T
3.0 2.5
he East Asian NIEs Hong Kong excepted have all stimulated domestic technological effort, often with a spectacular degree of success. They have been acutely aware of the need for such effort. The Republic of Korea and Taipei China emphasised local R&D because their export and
industrialization drive was led by national firms: competing in technology intensive activities required local R&D not only to absorb new technologies, but also because foreign companies refused to license new technology once their licensees emerged as direct competitors.
Figure 28: Enterprise finance R&D (% GDP), latest av ailable y ear
2.0
1.5
1.0
0.5
Singapore
0.0
Hong Kong
Japan
Korea
Taiwan
Argentina
India
Germany
Thailand
Sweden
A strong local innovation base allowed them to develop their own technologies and to offer subcontracting services to technology leaders as OEM (original equipment manufacture) services. OEM contracts were an important avenue for learning by national firms, an effective way to 'leverage' foreign technology (Cyhn, 2001, Hobday, 1995, Mathew and Cho, 1999). But even Singapore, which depends heavily on technology via FDI, found it essential to raise local R&D to retain a competitive edge with rising wages.
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Philippines
S. Africa
Malaysia
China
Brazil
Mexico
USA
UK
Figure 28 shows the world leaders in enterprise-financed R&D as a share of GDP. The Republic of Korea emerges as the second country in the world, ahead of industrial leaders like Japan, the USA and Germany. The next NIE is Taipei, China, with Singapore following. Clearly, the strategies adopted by these NIEs are of interest to developing countries, such as Pakistan. We consider these briefly. 8.3.1 Korea: The Korean government supported technological effort directly in several ways. Private R&D was promoted by a range of incentives and other assistance. The direct incentives included tax exempt Technology Development Reserve (TDR) funds, which were subject to punitive taxes if not used within a specified period. The TDR funds could, however, be used for investment in the first venture capital fund (Korea Technology Development Corporation, launched with World Bank assistance) and in collaborative R&D with public research institutes. The government also gave tax credits for 125% of R&D expenditures as well as for upgrading human capital related to research and setting up industry research institutes, accelerated depreciation for investments in R&D facilities and a tax exemption for 10 percent of cost of relevant equipment. It reduced import duties for imported research equipment, and cut excise tax on technology-intensive products. The Korea Technology Advancement Corporation (KTAC) was set up to help firms commercialise research results; a 6 percent tax credit or special accelerated depreciation provided further incentives. The import of technology was promoted by further tax incentives: ! Transfer costs of patent rights and technology-import fees were tax deductible ! Income from technology consulting was tax-exempt ! Foreign engineers were exempt from income tax. ! The government gave grants and long term low interest loans to participants in National Projects, which gave tax privileges and official funds to private and government R&D institutes to carry out these projects. ! The Korea Technology Development Corporation provided technology finance. However, the main stimulus to industrial R&D in Korea came less from specific incentives than from the overall strategy that created large firms, gave them finance and protected markets, minimised their reliance on FDI, and forced them into export markets. This is why Korea now has 25 times higher R&D by industry as a proportion of GDP than Mexico, which has roughly the same size of manufacturing value added but has remained highly dependent on technology imports. The Korean government also built an impressive technological infrastructure. In 1966 it launched KIST Korea Institute of Science and Technology (KIST) to conduct applied research for industry. In early years, KIST focused on solving problems of technology transfer and absorption. In the 1970s, the government set up other specialised research institutes related to machinery, metals, electronics, nuclear energy,
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resources, chemicals, telecommunications, standards, shipbuilding, marine sciences, and so on. These were largely spun off from KIST, and by the end of the decade there were 16 public R&D institutions. In 1981 the government decided to reduce their number and rationalise their operations. The institutes were merged into 9 under the supervision of the Ministry of Science and Technology. KIST was merged with Korea Advanced Institute of Science (KAIS) to become KAIST, but was separated again as KIST in 1989. The governments strategic thrust in this sphere was mainly a series of National R&D Projects launched in 1982. These were large-scale projects regarded as too risky for industry to tackle alone but considered in the countrys industrial interest. National Projects were conducted jointly by industry, public research institutes and the government, and covered activities like semiconductors, computers, fine chemicals, machinery, material science and plant system engineering. Centres of Excellence were set up to boost long-term competitiveness in these fields. National Projects were a continuation of policies to identify and develop Koreas dynamic comparative advantage, with the government orchestrating the different actors involved, underwriting a part of the risks, providing large financial grants, and filling in gaps that the market could not remedy. Since the early 1980s a number of laws were passed to promote SMEs, leading to a perceptible rise in their share of economic activity (over 1975-86 the share of SMEs in employment, sales and value added rose by at least 25 per cent). This policy support was crucial to the reversal in their performance: it covered SME start-up, productivity improvement, technology development and export promotion. A host of tax incentives was provided to firms participating in these programs, as well as finance at subsidised rates for using support services, credit guarantees, government procurement and the setting up of a specialised bank to finance SMEs. A number of other institutions were set up to help SMEs (such as the Small and Medium Industry Promotion Corporation to provide financial, technical and training assistance and the Industrial Development Bank to provide finance). The government raised its budget contribution to the program, though SMEs had to pay a part of the costs of most services provided to them. To promote subcontracting to SMEs, the government enacted a law designating parts and components that had to be procured through them and not made in-house by large firms. By 1987 about 1200 items were so designated, involving 337 principal firms and some 2200 subcontractors, mainly in the machinery, electrical, electronic and shipbuilding fields. By this time, subcontracting accounted for about 43% of manufacturing output and 65-77% of the output values of the electrical, transport equipment and other machinery industries. Generous financial and fiscal support was provided to subcontracting SMEs to support their operations and technology. Subcontracting SMEs were exempted from stamp tax and were granted tax deductions for a certain percentage of their investments in laboratory/inspection equipment and for all their expenses on technical consultancy. Subcontracting promotion councils were set up by industry and within the Korea Federation of Small Business to help SME contracting, arbitrate disputes and monitor contract implementation.
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8.3.2 Taipei China While the growth of R&D there has some similarities to Korea, there are important structural differences. The government had a more arms length relationship with industry and did not promote the growth of large private conglomerates. It started to promote the development of local R&D capabilities in the late 1950s, when its growing trade dependence reinforced the need to enhance local innovative effort to upgrade and diversify exports. A Science and Technology Program started in 1979, targeting energy, production automation, information science and materials science technologies for development. In 1982, biotechnology, electro-optics, hepatitis control and food technology were added to this list. The Science and Technology Development Plan (1986-95) continued strategic technology targeting, aiming at total R&D of 2 percent of GDP for 1995; it did not quite achieve this it reached 1.8 percent by that year. Around half of R&D in Taipei, China is financed by the government, though the contribution has come down over time. Private sector R&D has been weak relative to Korea because of the preponderance of small and medium enterprises (SMEs), which cannot afford the large minimum investments involved in much of industrial research. However, enterprise R&D has risen over time as some firms (like Acer and Tatung) have grown to become large multinationals. Such R&D has been encouraged over the years by a variety of incentives: ! Provision of funds for venture capital ! Financing for enterprises that developed strategic industrial products (of which 151 were selected in 1982 and 214 in 1987) ! Measures to encourage product development by private firms by providing matching interest-free loans and up to 25 percent of grants for approved projects ! Full tax deductibility for R&D expenses, with accelerated depreciation for research equipment ! Special incentives for enterprises based in the Hsinchu Science Park (with government financial institutions able to invest up to 49 percent of the capital) ! Requiring larger firms to invest (0.5-1.5 percent of sales, depending on the activity) on R&D. ! The government launched several research consortia, funded jointly with industry, to develop critical high technology products like a new generation automobile engine, 16M DRAM and 4M SRAM chips. The technology infrastructure in Taipei China holds particular interest for the way in which it supports SMEs (that account for the bulk of its hi-tech production and exports). The Medium and Small Business Administration supports SME development and co-ordinates the various agencies that provide financial, management, accounting, technological and marketing assistance to SMEs. Financial assistance is provided by the Taiwan Medium Business Bank, the Bank of Taiwan, the Small and Medium Business Credit Guarantee Fund, and the Small Business Integrated Assistance Centre. Management and technology assistance is provided by the China Productivity Centre, the Industrial Technology Research
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Institute (ITRI) and a number of industrial technology centres (for metal industry, textiles, biotechnology, food, and information). The government covers up to 50-70 percent of consultation fees for management and technical consultancy services for SMEs. The Medium and Small Business Administration has established a fund for SME promotion of NT$ 10 billion. The Centre-Satellite Factory Promotion Program integrates smaller factories around a principal one, supported by vendor assistance and productivity raising efforts. Several technology research institutes support R&D in the private sector. The China Textile Research Centre, set up in 1959 to inspect exports, was expanded to include training, quality systems, technology development and directly acquiring foreign technology. The Metal Industries Development Centre was set up in 1963 to work on practical development, testing and quality control work in metalworking industries. It later established a CAD/CAM centre to provide training and software to firms in this industry. The Precision Instrument Development Centre fabricated instruments and promoted the instrument manufacturing industry, and later moved into advanced areas like vacuum and electro-optics technology. The most important centre was the Industrial Technology Research Institute (ITRI). ITRI conducted R&D for technology projects considered too risky by the private sector. It had seven laboratories, dealing with chemicals, mechanical industries, electronics, energy and mining, materials research, measurement standards and electro-optics, but electronics was the institute's principal focus, with its Electronics Research & Service (ERSO) division accounting for two-thirds of the Institute's $450 million budget. ERSO has spun off laboratories as private companies including United Microelectronics Corporation (UMC) in 1979 and Taiwan Semiconductor Manufacturing Company (TSMC) in 1986, the countrys most successful integrated circuit makers. The Institute for the Information Industry (III) was set up to complement ITRIs work on hardware by developing and introducing software technology. The government also occasionally played a lead role in importing very advanced technologies. It entered into a joint venture with Philips to set up the Taiwan Semiconductor Manufacturing Company, the first wafer fabrication plant in the country (today one of the leaders in the world). The government strongly encouraged industry to contract research to universities, and half of the National Science Councils research grants (about $200 million per year) provided matching funds to industry for such contracts. The Program for the Promotion of Technology Transfer maintained close contact with foreign firms with leading-edge technologies in order to facilitate the transfer of those technologies to Taipei, China. The China Productivity Centre (CPC) promoted automation in industry to cope with rising wages and increasing needs for precision and quality. The CPC sent out teams of engineers to visit plants throughout the country and demonstrate the best means of automation and solve relevant technical problems, at the rate of approximately 500 visits making some 2000 suggestions per year. CPC also carried out more than 500 research projects on improving production efficiency and linked enterprises to research centres to solve more complex technical problems. The government set up a science town in Hsinchu, with 13,000 researchers in two universities, six national laboratories (including ITRI) and a huge
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technology institute, as well as some 150 companies specialising in electronics. The science town makes special effort to attract start-ups and provides them with prefabricated factory space, tax holidays and generous grants. Finally, it is useful to note a new tool of technology policy in Taipei China innovation consortia. Box 4 describes their use.
Box 4: Innovation consortia as a technology leveraging tool in Taipei China IBM unveiled its new PowerPC microprocessor, a product made by IBM, Motorola and Apple, in New York in June 1995. It was followed one day later by the unveiling in Taipei of PowerPC based products by a group of 30 firms from Taipei, China. The local firms had not done this on their own. They were part of an innovation alliance, the Taiwan New PC Consortium formed by a government research institution, the Computing and Communications Laboratory (CCL), set up in 1993 to bring together firms from all parts of the IT industry in Taipei, China. Its purpose was to transfer, master and diffuse the new PowerPC technology over the whole range of products from PCs and peripherals to software and multimedia applications as well as to semiconductor manufacturers. The firms involved were relatively small by international standards, and CCL brought them together and negotiated on their behalf with IBM and Motorola. Taipei, China is emerging as a player in the automotive industry, particularly in the expanding China market, driven by its development of a 1.2 litre 4-valve engine. Again, this is the product of a public-private collaborative research endeavour involving three companies, which have now jointly created the Taiwan Engine Company to produce the product. Thus, the R&D consortium is an inter-firm organizational form that Taipei, China has adapted to its own purposes as a vehicle for catch-up industry creation and technological upgrading. The R&D consortia were formed hesitantly in the 1980s, but flourished in the 1990s as institutional forms were found which encourage firms to cooperate in raising their technological levels to the point where they can compete successfully in advanced technology industries. Many of these alliances or consortia are in the information technology sectors, covering personal computers, work stations, multiprocessors and multimedia, as well as a range of consumer products and telecommunications and data switching systems and products. But they have also emerged in other sectors such as automotive engines, motor cycles, electric vehicles, and now in the services and financial sector as well. Several such alliances could be counted in the late-1990s, bringing together firms, and public sector research institutes, with the added organizational input of trade associations, and catalytic financial assistance from government. The alliances form an essential component of the national system of innovation. Taipei, Chinas high technology industrial success rests on a capacity to leverage resources and pursue a strategy of rapid catch-up. Its firms tap into advanced markets through various forms of contract manufacturing, and are able to leverage new levels of technological capability from these arrangements. This is an advanced form of technological learning, in which the most significant players have not been giant firms (as in Japan or Korea), but small and medium-sized enterprises whose entrepreneurial flexibility and adaptability have been the key to their success. Underpinning this success are the efforts of public sector research and development institutes, such as the Industrial Technology Research Institute (ITRI). Since its founding in 1973 ITRI and its laboratories have acted as a prime vehicle for the leveraging of advanced technologies from abroad, and for their rapid diffusion or dissemination to local firms. This cooperation between public and private sectors, to overcome the scale disadvantages of small firms, is a characteristic feature of the countrys technological upgrading strategies, and the creation of new high technology sectors such as semiconductors. All the models involve ITRI securing access to a new technology on behalf of local firms usually a technology source located overseas, in the U.S.A., Japan or Europe. This is common to the operation of all the R&D alliance organizational forms. ITRI thereby acts as the vehicle or gateway for firms to access a technology that would otherwise be beyond them. At the same time, it offers a single point of contact for a large advanced firm (such as IBM or Intel or Sun Microsystems) that can license its technology to local firms without having to deal with many small firms simultaneously. The consortia therefore are of mutual benefit. The key issues involved in forming these alliances are not so much whether they provide benefits, which may be taken as given, but how the difficulties involved in securing cooperation between otherwise competing firms are identified and overcome. Source: Mathews (2001)
8.3.3 Singapore The Singapore government launched a S$2 billion five year technology plan in 1991. A number of sectors (information technology, microelectronics, electronic systems, materials technology, advanced
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manufacturing technology, energy and water resources, environment, biotechnology, food and agrotechnology and medical sciences) were selected for development. An R&D target of 2% of GDP by 1995 was set; as with Taipei, China, however, the target was not met (in Singapores case by a larger margin). The new science and technology plan, launched in 1997, doubled Science and Technology expenditures, to S$4 billion over 5 years, of which 30% is directed to strategic industries picked by the government. There are several schemes in Singapore to promote R&D by the private sector. ! The Research Incentive Scheme for Companies (RISC) gives grants to set up Centres of Excellence in strategic technologies, and is open to all companies. ! The R&D Assistance Scheme (RDAS) gives grants for specific product and process research that promotes enterprise competitiveness, and is also open to all companies. ! The Cooperative Research Program gives grants to local enterprises (at least 30% local equity) to develop their technological capabilities by working together with universities and research institutions. ! The National Science and Technology Board initiates research consortia to allow companies and research institutes to pool their resources for R&D, and five consortia are already in existence (on marine technology, aerospace, enterprise security architecture, digital media and advanced packaging). ! The Innovation Development Scheme (IDS) provides a 50 percent grant to all promising innovation projects; the latest round provided S$130 million to 90 companies, local and foreign, in April, 1997. ! More recently, the government is promoting high tech entrepreneurial start-ups similar in spirit and style to Silicon Valley. Whereas earlier local start-ups were mainly in manufacturing and primarily as suppliers and contract manufacturers to MNCs, the new ones are more based on product innovation and focused on IT, software, Internet applications, biotechnology and life sciences. Venture capital (VC) and business angels have become increasingly important as a source for funding. The VC industry began to take off rapidly from the mid-1990s, with the funds managed exceeding S$10 billion in 2000. In 1999, 71 start-ups received S$252 million of VC funding, with 50% in information and communications/media technologies, 15% in electronics, 17% in transportation and logistics, and 12% in industrial products. In particular, spin-offs from universities and public R&D institutions are increasing in frequency. According to the government, these schemes have succeeded in raising the share of private R&D in Singapore to 65% of the total. The Singapore government also plays a catalytic role in promoting selected technologies.
These experiences in the first tier NIEs are clearly at a technological level well above that of Pakistan at present. Nonetheless they serve to show what can be achieved over a relatively brief period of time with
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well thought out initiatives of public-private collaboration. The challenge for Pakistan will be to forge suitable alliances to foster technological capability in sectors operating at a lower technological level.
Singapore is perhaps the leading example in the developing world of strategic attraction of FDI to build export competitiveness and develop a sophisticated industrial sector. Its strategy was not a passive opening up to global investment flows. It was the use of complex, detailed and finely honed interventions to build the capabilities needed to attract export-oriented FDI, promote Singapore as a desirable location for export-oriented activity and target the activities and firms that were fitted into its strategic plans. The only country that matches this achievement is not in the developing world but in Europe: Ireland. Ireland has transformed itself from a backward agricultural economy on the periphery of Europe to one of its fastest growing high technology centres, driven by export-oriented FDI in electronics, pharmaceuticals and IT services. Box 5 describes the Singapore strategy on FDI. The approach of developing clusters of related activities closely linked with FDI inflows and with a single planning body overseeing the overall competitiveness strategy offers ideas for countries like Pakistan to adapt to their own circumstances. Box 5: FDI strategy in Singapore The Singapore philosophy on foreign investment is that multinationals are to be exploited (tapped is the favourite word) for the competitive assets they bring to the country that will contribute to its industrial development. The governments goal is always to maximise learning, technological acquisition, rapid movement up the industrial ladder, and the skills and incomes of its working population. To this end it is willing to contribute capital, tax concessions, infrastructure, education and skills training, and a stable and friendly business environment. While the country is well integrated into international production networks in certain sectors, its fortunes are not tied to those of particular multinational companies, which (like local companies) the government refuses to help if they are unable to compete in the rapidly changing local environment and the world market. Thus over time many multinational factories in Singapore have closed their doors particularly in low-value, labour-intensive product lines and processes like simple electronic components and consumer goods and shut down completely or relocated to neighbouring countries, with the Singapore governments blessing. The decisions of MNCs about what new technologies to bring into Singapore are strongly influenced by the incentives and direction offered by the government. The Singapore government is the only one in the region, which, like many governments in Western countries, gives grants to firms for complying with specified requirements. These are often to do with entering particular (advanced) technologies. The government supports these incentives, acting in consultation with MNCs (or anticipating through proactive planning) by providing the necessary skilled manpower. In many instances, it is the speed and flexibility of government response that gives Singapore the competitive edge compared with other competing host countries. In particular, the boom in investment in offshore production by MNCs in the electronics industry in the 1970s and the early 1980s created a major opportunity. The government responded by ensuring that all supporting industries, transport and communication infrastructure, as well as the relevant skill development programmes, were in place to attract these industries to Singapore. This concentration of resources helps Singapore to achieve significant agglomeration economies and hence first-mover advantages, and has allowed it set up many advanced electronics related industries. An example is the disk-drive industry, where all the major US disk-drive makers have located their assembly plants in Singapore. These industries demanded not only electronics components and PCB assembly support, but also various precision engineering-related supporting industries such as tool and die, plastic injection moulding, electroplating and others. These supporting industries have been actively promoted by the government as part of a clustering approach to ensure the competitiveness of the downstream industries. As labour and land costs have risen, the Singapore government has encouraged MNCs to reconfigure their operations on a regional basis, relocating the lower end operations in other countries and making Singapore their regional headquarters to undertake the higher end manufacturing and other functions. This has often led MNCs to set up regional marketing, distribution, service and R&D centres to service the ASEAN and Asia-Pacific region. To promote such reconfiguration, various incentives
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have been offered under the regional headquarters scheme, the international procurement office scheme, the international logistics centre scheme, and the approved trader scheme. There are now some 4,000 foreign firms located in Singapore, about half of them being regional headquarters. Some 80 of these regional headquarters have an average expenditure in Singapore of around US$18 million per year The management of industrial policy and FDI targeting has been centralised in the Economic Development Board (EDB), part of the Ministry of Trade and Industry (MTI) that gave overall strategic direction. EDB was endowed with the authority to coordinate all activities relating to industrial competitiveness and FDI, and given the resources to hire qualified and well-paid professional staff (essential to manage discretionary policy efficiently and honestly). Over time the agency has become the global benchmark for FDI promotion and approval procedures. Its ability to coordinate the needs of foreign investors with measures to raise local skills and capabilities has also been critical and a feature that many other FDI agencies lack. The government conducts periodic strategic and competitiveness studies to chart the industrial evolution and upgrading of the economy: the latest was published in 1998 (Ministry of Trade and Industry). Unlike many other countries, MNC leaders are actively involved in the strategy formulation process and are given a strong stake in the development of the economy. Since its 1991 Strategic Economic Plan, the government has focused its strategy around industrial clusters. The term cluster was not used to denote geographical agglomerations (though in view of the tiny size of the economy all industry is in fact very tightly concentrated) but inter-linked activities in a value chain. In the manufacturing sector the cluster program (called Manufacturing 2000), the government analyses the strengths and weaknesses of leading industrial clusters, and undertakes FDI promotion and local capability/institution building to promote their future competitiveness. One explicit objective of the program is to avoid the kind of industrial hollowing out experienced by Hong Kong (and many other industrial countries). As an eminent Singaporean analyst, Professor Chia Siow Yue, put it, The key element of Manufacturing 2000 is the development of industry clusters, that is, the complex of vertically and horizontally linked supporting industries and resources that collectively make the end products or services competitive. The strategy is to upgrade capabilities across the entire value chain in each industry cluster, including product and process development, production, engineering and strategic marketing. The cluster approach has been adopted for major sectors including electronics. This strategy has allowed Singapore, for instance, to become the leading centre for hard disk drive production in the world, with considerable local linkages with advanced suppliers and R&D institutions. In 1994, the government set up an S$1 billion Cluster Development Fund (expanded to S$2 billion later) to support specific clusters like a new wafer fabrication park. It also launched a Co-Investment Program to provide official equity financing for joint ventures and for strategic ventures, not just in Singapore but also overseas (as long as this serves its competitive interests). The EDB can take equity stakes to support cluster development by addressing critical gaps and improving local enterprises. For instance, the EDB co-invested in a local firm SemiTech jointly with Texas Instruments, HP and Canon to make 16M DRAMs. The government also offers start-up grants to attract MNCs to particular areas thought critical to particular industry clusters. The hard-disk drive industry led to the growth of sophisticated local suppliers such as Advanced Systems Automation (making advanced wafer packaging equipment) and Manufacturing Integration Technology (semiconductor testing equipment). The government set up the Institute of Microelectronics in 1991 to conduct R&D and train highly specialised personnel. It encouraged groups of companies to undertake joint technology development (e.g. to improve packaging technologies such as ball grid array). The EDB sometimes takes equity stakes to promote particular technologies, for instance in wafer fabrication facilities. Source: Lall (2001a)
8.3.4 Thailand In recent years, there have been growing concerns about the competitive weakness of Thai industry, and more specifically about the limited intensity of technology development in industry (the technologically shallow path of industrial growth) which has contributed to competitive weakness. While Thai industry has developed considerable capabilities to implement imported technologies, there exists a persuasive case for the need to deepen and diversify its technology base, and in particular a concern about the
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limited technological capabilities in the small-scale sector which pose an increasingly important constraint on product/process upgrading and export development. Thailands science and technology development over the last 20-30 years differs significantly from that of the more technologically advanced NIEs that have already made a fundamental transition from a system focused on developing scientific and technological capabilities in public institutes to one based on firmcentered structures of innovative activities and capabilities. For example, the current intensity of R&D performed by business enterprises in Thailand lags around 10-15 years behind the level in Korea in the early 1980s when that country had a similar level of industrial and manufacturing development as contemporary Thailand, and the intensity of business-performed R&D in Thailand would need to be increased to around 20 times its present level in order to catch up with the intensity in Korea at that corresponding earlier stage of industrial development. The required scale and intensity of investment calls for a deep and pervasive learning process in industry. This must occur at two levels: (a) individual firms will need to change deeply rooted perspectives on technology that have dominated industrial investment behavior for 30-40 years, in particular to learn about the costs, risks and returns involved in investment in types of technological activity and capability with which they have very limited familiarity; and (b) groups of firms in industries, clusters and value chains will need to develop much more significant collective efforts in the technology arena in order to enhance competitiveness, and also to increase the significance of those linked structures of industrial production within the Thai economy. At present, the most important thresholds of technological capability that most Thai firms, and in particular Thai SMEs, need to cross are concerned with increasing the efficiency with which existing technologies are acquired, used and operated. Even for most larger firms and a few advanced SMEs, the thresholds involve building their design and engineering capabilities as a basis for starting significant technology development activities. Only for a few firms that have already built the requisite levels of capability is the relevant threshold about deepening it further to build up R&D capabilities and activities. The structure of institutions supporting industrial technology development in Thailand has evolved very little over the past decade. This contrasts with the considerable innovation and evolution seen in first tier NIEs. A major study on technology policy in Thailand (Arnold et al 2000) made a series of recommendations arguing, amongst other things, that
the direction of policy should shift from a situation where the majority of R&D and related activities is done in public sector institutes to one where the public sector builds up firm technology capabilities and implements policies to strengthen firms investments in their own capabilities;
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to build capability in industrial firms a grant-based incentive structure is preferable to the use of tax incentrives for technology related expenditure. A specific proposal involves the establishment of a fund to support innovative activities of the business sector in the form of matching funds or selective grants;
an extensive training support program under the umbrella of the Skill Development Fund is required.
there should be a greater emphasis on the roles of industry groups and associations, and support for the development of collective activities aimed at improving the capabilities of members and the clusters in which they operate.
policies towards inward FDI should seek to encourage technology upgrading within the local economy, since there is evidence that contrary to popularly held perspectives in Thailand, the roles and strategies of multinational corporations (MNC) subsidiaries seem to be shifting towards a more positive technology development role than in the past. This offers the potential for generating significant spillovers to the rest of the economy as local affiliates of MNCs appear to have much more flexibility with regard to their technological behavior and to the localization of deeper technological activities.
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9. Conclusions
he development of industrial strategies involves five main steps (Figure 29). The first is a detailed assessment of the industrial sector and main sub-sectors. This involves evaluating industrial performance in domestic and export markets and the main drivers of performance (the
macroeconomic and policy framework, human resources, technology, FDI, finance, physical infrastructure and supporting institutions. Where possible, the evaluation should use quantitative benchmarks against selected comparators (within the region, in other developing regions that are likely to offer direct competition to Pakistan and in more advanced Figure 29: The competitiveness strategy process
2. Build strategic vision and consensus
countries role
that
serve as
models). many
3. Design action
1. Assess performance and drivers programs and policies
However, indicators
cannot be quantified; here the benchmarks have to be qualitative a comparison with best practice in the comparators. This is
5. Monitor progress, learn & adapt
4. Implement action programs and policies
the commonly
procedure used in
competitiveness strategy analysis
throughout the developed and newly-industrialising countries (Lall, 2001b). Here we hope to have made a start in this benchmarking exercise by drawing on readily available international data. Naturally informed qualitative judgements require a much more in depth knowledge of the local industrial sector than we possess. The second stage is the development of a national strategic vision. The vision should reflect the interests of all the stakeholders, including the private sector, government, institutions, employers organisations, trade unions and so on. In this step, the government needs to define short and long-term industrial goals and start planning how to strengthen or create the capabilities to reach those goals. The third stage is to design policies and programmes. The fourth is to implement these policies and programmes. The fifth is to monitor the progress of the strategy, assessing their success and adjusting them as necessary. The development of industrial strategies is not easy if it were, all countries would have mounted effective strategies. There are several steps involved in preparing effective strategy, with continuous feedbacks and dynamic loops between each stage. Each requires different government capabilities and skills, and each faces difficulties. Some common difficulties are as follows.
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To start with, most governments are not structured for designing and mounting effective industrial strategy. The responsibilities and functions that affect industrial competitiveness are scattered over an array of ministries and institutions: finance, trade, industry, labour, education, science and technology and others. These often have different objectives and do not communicate with each other on a regular basis. International experience suggests the value of setting up an industrial competitiveness agency headed at a very senior political level that can mount a strategy to cut across competing interests and coordinate the ministries concerned. In the Pakistan context this might involve combining the work of the Export Promotion Bureau and the Board of Investment, for example. Then comes the task of allocating resources, at various levels. At the highest level, it has to be decided which generic areas education, infrastructure, finance, science and technology and so on have to be addressed. This needs a strategic vision of what the main engines of industrial competitiveness are going to be. At the sectoral and sub-sectoral levels, the government has to decide on which activities to support, not picking winners in detail, but allowing winners to emerge in the sets of activities that hold most promise of long-term economic and technological growth. These activities have to be identified from clusters of inter-linked industrial activities that share strong technological externalities, use the existing base of skills and capabilities, can develop good backward linkages and face rising competition both locally and abroad. The best way to proceed is to examine closely the experience of countries that have similar endowments but have been successful in developing competitive bases. This is an art rather than a science, and involves considerable benchmarking and policy analysis. The bottom line of all strategies is, of course, how well they can be designed and implemented in practice. Government capabilities are therefore vital. The history of development policy is replete with cases of failed policies. The failure of some interventions does not, of course, mean that all interventions are undesirable: as long as market failures exist, a wholesale reliance on free markets will be inefficient compared to a situation where policy can improve or create markets. We note that there are already various initiatives in place in Pakistan concerning competitiveness and technological upgrading (Government of Pakistan 2003). Official statements have recognized clearly the need for amongst other things export diversification development of clusters firm-level technological upgrading the encouragement of export-oriented FDI.
The key issue therefore is how to go about achieving these important objectives. As we do not presume to know the effectiveness of current measures, we would simply make a few basic points.
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First, in the light of the international benchmarks noted above adequate government support for a competitiveness strategy requires a significant commitment in terms of public investment in relevant technical and general education, as well as the strengthening of public R and D activities. Some of these problems will require long-run, not short-run solutions. Second, there are a number of obvious weaknesses in the area of physical infrastructure, particularly power, that the recent investment climate survey has highlighted. Any further measures to improve the investment climate, whether reducing bureaucratic restrictions or ensuring continued macro stability, will also help in competitiveness terms. Third, it is at the firm level that critical competitiveness problems need to be addressed and here the role of government is to facilitate and support. The issue is whether the current plans such as the measures to support technological upgrading and joint ventures with foreign investors through an Upgradation Fund go far enough. In principle support can take a range of forms including the standard tax incentives for training and R and D expenditure, cost sharing for various consultancy services (as covered by the upgrading fund), a lower level version of innovation consortia (see box 4), and the provision of finance for technology support, particularly a form of venture capital for relatively high risk initiatives or matching grants for innovative activities.
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Industrial Competitiveness - The Challenge For Pakistan

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INDUSTRIAL COMPETITIVENESS: The Challenge for Pakistan

Industrial competitiveness in Pakistan

Industrial competitiveness in Pakistan

2. Understanding Industrial Competitiveness: A Framework

Industrial competitiveness in Pakistan

M S T Q , T e c h Im p o rts , R & D su rt, Industrialpy pl oicompetitiveness in Pakistan U n iv e r s it nks E x t e n s io n s e r v ic e s , I n t e ll. p r o p e r t y la w s , I n t e r - f ir m a ll ia n c e s

Figure 1: Factors affecting enterprise technology

3. The changing nature of competitiveness

Industrial competitiveness in Pakistan

Industrial competitiveness in Pakistan

Industrial competitiveness in Pakistan

Industrial competitiveness in Pakistan

Industrial competitiveness in Pakistan

4. New dynamics of world markets

4.1 Export structure by technology

Industrial competitiveness in Pakistan

35 30 25 20 15 10 5 0 1976 1977 1978

Fastest growing 50 exports, 1990- 2000 Value 1990

Share 100.0% 16.3% 15.9% 100.0%

Value 2000 2,874,428.8 411,104.1 399,587.0 2,463,324.7

Shares 100.0% 14.3% 13.9% 100.0%

Growth rate 9.4% 8.0% 8.0% 9.7%

1,167,240.1 190,188.8 185,138.0 977,051.27

Primary o/w oil & gas Manufactured

Industrial competitiveness in Pakistan

4.2 Manufacturing value added performance

Industrial competitiveness in Pakistan

Industrial competitiveness in Pakistan

Source: UNIDO database

4.3 Export performance in the developing world

Industrial competitiveness in Pakistan

Industrial competitiveness in Pakistan

Industrial competitiveness in Pakistan

4.4 Sophistication of manufactured exports

Industrial competitiveness in Pakistan

Industrial competitiveness in Pakistan

Figure 7: Distribution of manufactured exports by sophistication levels

Industrial competitiveness in Pakistan

Growth rates (1990-2000)

Industrial competitiveness in Pakistan

4.5 Concentration in exports at the national level

Industrial competitiveness in Pakistan

1990 2000 2001

Industrial competitiveness in Pakistan

5. Pakistan: the current policy environment for manufacturing

Industrial competitiveness in Pakistan

Source: WTO Annual Report 2003 table 2.1.

5.2 FDI Policies and Inflows

Industrial competitiveness in Pakistan

5.3 Investment Climate of Pakistan

Industrial competitiveness in Pakistan

Industrial competitiveness in Pakistan

6. Benchmarking Pakistans performance

MVA 3,043.6 24,575.0 592.1 2,904.7 7,623.9 4,645.5 10,068.0 9,057.4

MVA/GDP 14.1 14.2 11.1 15.9 11.9 19.4 26.9 22.6

MVA 6,123.5 50,938.0 1,076.5 3,698.5 23,643.0 11,344.0 11,003.0 23,217.0

MVA/GDP 15.5 16.6 13.4 12.7 20.7 26.5 24.8 27.2

MVA 8,921.5 90,661.0 2,320.5 7,192.1 45,830.0 30,427.0 14,194.0 44,895.0

Industrial competitiveness in Pakistan

activity in Pakistan is dominated by

resource based and low technology but the

distribution of these categories for the world and Pakistan.