ISLAMABAD:
In my last article, I argued that competition is the engine of growth and prosperity and any industrial policy which protects incumbent firms from competition is bound to fail. I also argued that the government and business should co-evolve industrial policy, echoing Dani Rodrik (2004) seminal paper.
As one of the key proponents of a new industrial policy, Rodrik emphasised the need for “interactive process of strategic cooperation between the private and public sectors” in the context of industrial policy. He suggested that we need to appreciate the limitations of both market and state in industrial policy and rather than looking at these institutions as adversaries, we need to look at them as collaborators.
He further wrote that the analysis of industrial policy should not focus on policy outcomes but rather on policy process. He also uses the term “discovery” in this phrase: “Hence the right way of thinking of industrial policy is as a discovery process – one where firms and the government learn about underlying costs and opportunities and engage in strategic coordination.”
Following the applications of complexity on public policy, I developed the idea of “policy discovery” as an open and complex system in which policy actors compete and cooperate to co-create public policy through experimentation, learning and adaptation.
How do we translate this policy discovery mechanism in the field of industrial development? First, we should not limit this exercise to only manufacturing industries; it can apply to products from agriculture, engineering and knowledge economy.
As I argued in the previous article, the public sector investment in the railways system in the 19th century helped in creating an organic and entrepreneurial industrial base in Lahore. This was in some ways similar to the dizzying progress in Silicon Valley after the 1950s, which was kick-started by the US government procurement, and in particular by the US Department of Defence, that worked closely with the research departments in US universities.
It is well known that the internet is an advanced form of Arpanet, which was developed first as a tool of communication for the US Navy in the 1960s. There are countless examples of such products.
The role of state remains pivotal but insufficient for developing new products; it needs the profit-maximising spirit of entrepreneurs.
In the 1990s, Malaysia experimented to create the Silicon Valley of the East in the form of a new city, Cyber Jaya, but it failed badly. Cyber Jaya is a thriving township today but is not known for innovation, research and development, for which it was originally developed.
It is easy to list down the ingredients of a new industrial policy, however, it is very hard to visualise the actual process through which a successful industrial policy evolves. I will now attempt to visualise this process in Pakistan’s context.
This entails three mutually interlocking pathways. The first path is to determine the product mix where we can enhance complexity and value addition by investing the least – or where the opportunity cost is the lowest. The second path is estimating demand in the domestic and international markets for the product mix which can yield maximum profits. The third path is to remove barriers such as regulatory, financial or knowledge barriers. This process of visualisation and mapping needs cooperation and coordination between the public and private sectors, as Rodrik has suggested.
Consider one case: The public sector in Pakistan, especially in the defence or security-related sectors, has invested heavily over decades. This is notably visible in a cluster of around 70 sophisticated aerospace-related industrial units, which has emerged around Islamabad over decades largely as contractors and vendors for the Pakistan Air Force.
These industries have developed organically without a formal process of “technology transfer”. However, security regulations do not allow wider application or learning opportunities for the private sector. Many potential inventions cannot be legally registered due to the same reason. Thus, the public and private sectors are interacting but there is no platform of learning. In other words, policy discovery is not taking place.
To give one example of a regulatory barrier, we still do not allow free import of 3-D printers, which is vital for product development. Another example is that institutions like PCSIR employ hundreds of capable scientists but do not offer incentives to work on industrial assignments openly. If we can decentralise and formalise the process, it can open up several new ventures and opportunities.
Pakistan needs a new framework for industrial policy. However, it cannot be successful, if we remain stuck with the selection of certain sectors on an arbitrary basis and then directing public resources through tariff-based protections or fiscal exemptions without any evaluation.
The state and business need to work together collaboratively, however, the first step is the exit of the state from business itself. While the state must not create businesses, it can help nurture them through a supportive framework. Re-setting the incentive structure should be the first step.
The writer is the founder and executive director of Policy Research Institute of Market Economy (PRIME), an independent economic policy think tank
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