Industrialization is the backbone of the modern economic system and uplifts the standard of living of the masses. Elaborate causes for the hindrance of industrial development in Pakistan.

Introduction

The United Nations' Sustainable Development Goal 9 calls on every country to "build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation." Industry creates jobs, raises productivity and earns the foreign exchange that pays for imports. Countries that rose from poverty in recent decades, such as South Korea, China and Vietnam, did so through manufacturing. Pakistan began with promise but has fallen behind: manufacturing's share of GDP has stagnated, exports are narrow, and many factories have closed. The causes are structural and political, and they must be addressed if Pakistan is to raise the living standards of its people.

Overview

At independence Pakistan inherited only a few industrial units, as most industry was located in India. Through the Pakistan Industrial Development Corporation (1952) and private enterprise, industry grew rapidly, and the Ayub era of the 1960s saw manufacturing growth of nearly 9 percent a year. The nationalisation of 1972 under the Economic Reforms Order shook investor confidence. Later decades brought privatisation, but also energy shortages, security problems and repeated balance-of-payments crises. Manufacturing now contributes only about 12 to 13 percent of GDP, and textiles account for more than half of exports, which is a sign of premature deindustrialisation.

Causes hindering industrial development

1. Policy inconsistency and the legacy of nationalisation.

The 1972 nationalisation of 31 major units in ten basic industries, followed by later reversals, created lasting fear among investors. Frequent changes in tariffs, taxes and incentives with every government make long-term investment risky. (Reference: Economic Reforms Order 1972; Ishrat Husain, Pakistan: The Economy of an Elitist State, Oxford University Press, 1999.)

2. The energy crisis.

Load-shedding from 2007 onwards closed thousands of factories, and now some of the region's highest electricity and gas tariffs make Pakistani goods uncompetitive. Power-sector circular debt exceeded Rs 2.3 trillion in 2023, driving tariffs higher. (Reference: NEPRA, State of Industry Report 2023; Ministry of Energy (Power Division), circular debt data.)

3. A distorted tax system.

The narrow tax base places a heavy burden on the formal manufacturing sector, which pays a large share of taxes despite a small share of GDP. High corporate tax, super tax, withholding taxes and refund delays drain working capital. (Reference: Federal Board of Revenue, Year Book 2022-23; World Bank, Pakistan Development Update, 2023.)

4. Weak human capital.

Low literacy and a shortage of technical skills mean that workers are less productive and industries cannot move into complex products. Technical and vocational training reaches only a small share of young people. (Reference: NAVTTC, National Skills Strategy; Pakistan Bureau of Statistics, Labour Force Survey 2020-21.)

5. Low technology and research.

Pakistani industry relies on old machinery and low-value products, and research and development spending is well below 0.5 percent of GDP. As a result, the country remains stuck in basic textiles, leather and food processing. (Reference: UNESCO Institute for Statistics, R&D expenditure data; World Intellectual Property Organization, Global Innovation Index 2023.)

6. Limited access to finance.

Banks prefer lending to the government, and private-sector credit is among the lowest in the region as a share of GDP. Small and medium enterprises, which make up most firms, find it especially hard to borrow. (Reference: State Bank of Pakistan, Financial Stability Review 2023; SMEDA, SME Policy 2021.)

7. Insecurity and red tape.

Terrorism and urban violence in the 2000s and 2010s deterred investors, while complex licensing, multiple inspections and slow courts raise costs. Pakistan ranked 108th in the World Bank's last Doing Business report. (Reference: World Bank, Doing Business 2020; Pakistan Economic Survey 2017-18, annex on the cost of the war on terror.)

8. Macroeconomic instability and import dependence.

Boom-and-bust cycles, sharp devaluations and high interest rates, which reached 22 percent in 2023, disrupt planning. Industry depends heavily on imported raw materials and machinery, so import restrictions during crises halt production. (Reference: State Bank of Pakistan, monetary policy statements, 2023; Pakistan Bureau of Statistics, Large-Scale Manufacturing Index data.)

Way forward

1. A long-term industrial policy.

A national industrial policy agreed by all parties and protected from political change would give investors confidence for decades. (Reference: Ministry of Industries and Production, draft National Industrial Policy; Charter of Economy proposals by the Pakistan Business Council.)

2. Affordable and reliable energy.

Reducing circular debt, cutting transmission losses, shifting to cheaper local and renewable sources and setting competitive industrial tariffs are essential. (Reference: Alternative and Renewable Energy Policy 2019; NEPRA, State of Industry Report 2023.)

3. Tax reform.

Broadening the tax base to retail, real estate and agriculture would allow lower taxes on manufacturing, while faster refunds would free working capital. (Reference: IMF, Pakistan Extended Fund Facility staff report, 2024; Federal Board of Revenue reform plans.)

4. Skills for industry.

Linking technical institutes with industry, apprenticeships and programmes such as Hunarmand Pakistan would supply skilled workers. (Reference: NAVTTC, Hunarmand Pakistan programme; National Skills Strategy.)

5. Technology and innovation.

Incentives for research, technology parks and partnerships with universities would help industries move up the value chain. (Reference: Higher Education Commission, Offices of Research, Innovation and Commercialisation; Ministry of Science and Technology, National Science, Technology and Innovation Policy 2022.)

6. Finance for SMEs.

Credit guarantees, digital lending and schemes such as the State Bank's refinance facilities can open finance to small firms. (Reference: State Bank of Pakistan, SME Finance Policy; SMEDA, SME Policy 2021.)

7. Special economic zones and ease of business.

Completing the CPEC special economic zones, such as Rashakai and Dhabeji, and offering one-window facilitation through the SIFC would attract investment. (Reference: Board of Investment, Special Economic Zones Act 2012; CPEC Authority, SEZ progress reports.)

8. Export diversification.

Moving into engineering goods, pharmaceuticals, IT hardware and high-value textiles, and seeking new markets in Africa and Central Asia, would reduce dependence on a few products. (Reference: Ministry of Commerce, Strategic Trade Policy Framework 2020-25.)

Conclusion

At the opening of the State Bank of Pakistan on 1 July 1948, Quaid-i-Azam urged the nation to "work our destiny in our own way and present to the world an economic system based on true Islamic concept of equality of manhood and social justice." A strong industrial base is the means to that end, because it creates jobs and spreads prosperity. Pakistan's industry has been held back by policy uncertainty, costly energy, a distorted tax system, weak skills and macroeconomic instability. With a consistent industrial policy, affordable energy, fair taxation, skilled workers and export diversification, industry can once again become the backbone of a prosperous Pakistan.