Benefiting from Foreign Direct Investment
January 02, 2014
Khalil Hamdani*
1.
Introduction
It is commonly
held that foreign direct investment (FDI) has played an insignificant role in
Pakistan’s economic development.[1] Certainly, the aggregate data supports this view: FDI
inflows have accounted for less than 1 percent of gross domestic product (GDP)
in most of Pakistan’s 60-plus years, and less than 4 percent in the peak year
of 2007 when the country ranked among the 10 largest recipients of FDI in Asia.[2] At the same time, FDI has been more important in
Pakistan than in India: annual inflows have been larger in most years from 1947
to 1993, and even now, while our larger neighbor receives four times more inflows,
the share of FDI in capital formation is three times as large in Pakistan. Such
comparison, while superficial, suggests the relevance of FDI.
This chapter considers
the role that FDI can play in moving the economy forward by improving its technological
base and placing production on a more dynamic growth path, as other countries
have done with great success. It begins with a brief history to remind readers
that Pakistan’s economy has always been open to foreign investment, even in the
heyday of nationalization. Next, it looks at the particular type of investment
and technological profile that has evolved: weighty, but largely insular,
statist, and low on competiveness. Finally, the chapter assesses the potential
for a more ambitious industrial trajectory: private sector-led, fueled by FDI,
and supported by policies and institutions that encourage technological
deepening.
2.
Foreign Direct Investment
Foreign companies have operated in Pakistan since even before
independence. Standard Chartered Bank claims a heritage of over 140 years, to
operations set up in Karachi in 1863. Shell
Petroleum dates its operations back to 1903, and Imperial Tobacco to 1905.
Siemens opened an office in Lahore in 1922; Grindlays Bank opened branches in Lahore in
1924 and in Peshawar in 1926; Imperial Chemical
Industries (ICI) set up a soda ash manufacturing facility in Khewra in
1944; and there were still others.
Pakistan’s
formative years were a particularly dynamic period. Economic growth was driven
by private investment. The government’s policy of import substitution provided
a profitable environment for Muslim migrant families from pre-Partition India
with capital to invest and set up their businesses anew.[3] Many were motivated by patriotic zeal. A vibrant
domestic private sector, in turn, attracted foreign participation.
FDI was
initially permitted in manufacturing, and large investments had to be in the
form of joint stock companies with local equity participation.[4] One of the first foreign investments in the new country
was a vegetable oil factory built by Lever Brothers in Rahimyar Khan in 1948;
today, Unilever is the largest consumer goods manufacturer. The Lakson Group
collaborated with several multinationals, such as Colgate-Palmolive, which established operations in 1954. In
pharmaceuticals, Glaxo Laboratories was incorporated in 1948 and is today, as
GlaxoSmithKline, the largest in the industry; other early entrants were Abbott
Laboratories in 1948, Pfizer in 1961, and Searle in 1965.
The domestic Batala Engineering Company (BECO) attracted KSB (a German
multinational manufacturer of machines, pumps, and valves) to locate its first
subsidiary in the Asia-Pacific market in Pakistan in 1953; today, the KSB Pakistan
foundry at Hasan Abdal produces submersible pumps, automotive components,
and supplies castings for cars and tractors.
The motor vehicle industry began modestly in 1949, with distributorships
of Vauxhall cars by General Motors & Sales, a domestic company, and of Ford
trucks by Ali Automobiles. Exide commenced the production of batteries in 1953.
Allwin Engineering was manufacturing precision automobile parts by 1961, and
Bedford trucks were being assembled by Ghandara Motors in 1962. The Atlas Group
set up a Honda motorcycle plant in 1962 among other investments with Japanese
partnership.
In the
services sector, the banking, insurance, and air transport industries quickly gained
prominence. In 1951, Habib Bank became Pakistan’s first multinational
corporation with operations in other countries. American Life Insurance Company
(ALICO) entered Pakistan in 1952. The precursor to Pakistan International
Airlines (PIA) was Ispahani’s privately owned company, Orient Airways, which,
in a leasing arrangement with the British Overseas Airways Corporation
established a flight service between Karachi and Dhaka in 1954.
Although
annual FDI inflows were less than 6 percent of total private industrial
investment, FDI was crucial for the success of import substitution and infant
industry policies in the post-independence period. There were a number of joint ventures or licensing, franchising, and
distribution arrangements between startup Pakistani firms and foreign
companies. Some were launched with World Bank lending, such as the 1968 joint
venture between the Dawood Group and Hercules Chemicals to manufacture
fertilizer. An indicator of the welcoming attitude toward foreign investment
was the bilateral investment treaty signed between Pakistan and Germany in 1959—the
very first in the world.[5]
FDI inflows
increased at an average annual rate of 10 percent between 1965 and 1969 (see
Figure 11.1), contributing to investment and facilitating technology transfer.
During these years, manufacturing value-added (MVA) grew at 9 percent, and
total factor productivity (TFP) is estimated to have increased at 4.3 percent (Kemal,
Din, & Qadir, 2002). The relatively good performance in the country’s formative
years reflects the infancy of manufacturing and the low initial level of the
technological base, but also a dynamic period of technology acquisition,
application, and learning through equity and nonequity ties between domestic
and foreign companies.[6]
This golden
era of Pakistan industry lasted 25 years. A feature of the 1947–1972 expansion
was the rapid rise of family businesses into industrial conglomerates,[7] favored with privileged access to financial credit and
foreign exchange for the import of industrial inputs (Amjad, 1982).[8] These conglomerates were not very different from those
of other countries—the robber-barons of the US, the zaibatsu and keiretsu of
Japan, and the chaebols of Korea—and perhaps they might have propelled Pakistan
alongside Korea into a newly industrialized country, but this was not to be.
Figure 11.1: FDI inflows in the early
years (USD million)
Source: State Bank of Pakistan.
Pakistan’s
resort to nationalization in the 1970s was not uncommon at the time.[9] The duration was brief (1972–77) but the impact was
widespread and long lasting. A great many different units were seized.[10] The focus was mainly on domestic companies, although
some FDI was affected. ALICO, with an investment of more than USD 36 million, was
nationalized in 1972. Esso’s petroleum operations were purchased in 1976 and its
gas operations in Mari, one of the largest in the country, were acquired in
1983. Some foreign companies, e.g., Shell, reduced shareholdings to below 50
percent in locally registered affiliates. Although nationalization was reversed
as early as 1977 in the agro-processing industry, it was slow to unwind in
other industries. Banking was not denationalized until 1991. ALICO was
denationalized in 1994, and a further decade passed before Habib Bank was
denationalized in February 2004.[11] To this day, a number of enterprises remain
slated for denationalization, for reasons not unique to Pakistan.[12]
The main
effect of nationalization on foreign investment was the lapse of nonequity arrangements
and the shelving of investment proposals, such as the proposed collaboration
between BECO and Toyota to manufacture textile machinery in Pakistan—a venture that
would have kept Pakistan at the forefront of a fiercely competitive global
industry.
When private
investment subsided, so did foreign investment: FDI inflows fell to zero in
1973, became negative in 1974, and did not recover for a full decade, until
1982 (see Figure 11.1). The Foreign Private Investment (Promotion and
Protection) Act of 1976 was enacted to (i) protect foreign investments from
nationalization and expropriation, (ii) guarantee capital repatriation and the remittance
of profits and dividends, and (iii) encourage investment in capital goods
industries. These assurances, however, had little effect on FDI inflows.
Public
enterprise and public investment dominated Pakistan’s industry for the next
three decades (1972–2002). Although aggregate investment never quite attained its
earlier levels, this period was not without expansion and growth. An
unanticipated windfall after 1976 was the substantial inflow of overseas workers’
remittances, which sustained consumption and invigorated private investment.[13] In the food industry, Nestlé acquired a 40 percent
share in Milkpak in 1988. In transport, Indus Motor was formed as a 1990 joint
venture between the House of Habib and Toyota, and in 1992 Atlas Honda
expanded production from motorcycles and batteries to cars, among yet other
examples.
In the public
sector, too, there were a variety of technology-intensive joint ventures
between Pakistan’s parastatals (public enterprises) and foreign companies. An
example is the 1978 nitrogen (urea) fertilizer project between the quasi-public
Fauji Foundation and Haldor Topsoe A/S of Denmark; it further expanded
manufacture in 1993, with Jordan Phosphate Mines to include phosphate
fertilizer. The fertilizer industry also attracted parastatal investment from
China, Saudi Arabia, and the United Arab Emirates (UAE).
Pakistani-Arab
joint ventures tapped into the capital of the oil-rich states. A particularly
successful joint venture with the Emirate of Abu Dhabi established the Pak-Arab
Refinery Ltd. in 1974, which is now active in refining, transportation, storage,
and marketing, and has technology partnerships with French, Dutch, Austrian,
and American multinationals. A parastatal collaboration with China established
the Heavy Mechanical Complex Ltd. in 1979, with fabrication and machining
facilities for the design, engineering, and manufacture of industrial plants
and machinery.[14] In transport, the state-owned Pakistan Automobile
Corporation formed joint ventures with Japanese companies to establish Pak
Suzuki Motor Company in 1983, and Hinopak Motors (also with Arab
involvement) in 1985.
FDI inflows, attracted both to the private and public sectors, increased
at an average annual rate of 22 percent in the 1980s (see Figure 11.1), while MVA
grew at 8.1 percent, and TFP is estimated to have increased at 5.4 percent (Kemal
et al., 2002). It was an altogether remarkable recovery after the 1970s, though
the worst decade was yet to come.
The Achilles’
heel of public enterprise was the inability to generate sufficient earnings for
reinvestment. A few publicly owned or managed enterprises flourished into
conglomerates—the Fauji Group[15] and Askari Group[16], for instance—but the totality of public enterprises
and nationalized banks required government support of some USD 1.7 billion
annually.[17] This proved unsustainable, and given the constraints
on the public budget, investment (and technology acquisition) in public
enterprises slowed significantly in the 1990s. The growth of public investment
decelerated from 4.6 percent in the 1980s to 0.5 percent in the 1990s (Hyder &
Ahmed, 2004, table 1).
The investment
slowdown in the 1990s had a serious impact on growth and productivity. In
contrast to the previous decade, growth in MVA slipped from 8.1 percent to 4
percent, and TPF grew by only 1.6 percent (Kemal et al., 2002). FDI inflows
grew at an average annual rate of only 8 percent in the 1990s in spite of
policy reforms and generous incentives. During this decade, India, which had
generally trailed behind Pakistan in FDI inflows, took the lead and went on to
become a major investment destination (see Figure 11.2).
Pakistan’s
policy liberalization was gradual but comprehensive. In trade policy, the
Export Processing Zones Authority was established in 1980, import quotas were
largely removed in the 1980s and tariffs were significantly lowered in the
1990s. In foreign exchange policy, currency convertibility was guaranteed in
1994. In FDI policy, the Board of Investment was established in 1990 and
restrictions on entry, equity ownership, and royalty payments were eliminated.
By 1997, Pakistan had a fully open and progressive foreign investment policy
regime—the most liberal in the Subcontinent.
Figure
11.2: FDI stock in Pakistan and India (USD million)
Source: UNCTAD FDI/TNC database.
A major pickup
came in 1995/96 when FDI inflows doubled in a year and exceeded USD 1 billion
for the first time (see Figure 11.3). The centerpiece was the
build-operate-transfer infrastructure project on the Hub River, HUBCO.[18] However, the bulk of new investments were made by some
two dozen independent power producers (IPPs) lured by an overly generous
incentive scheme that allowed them to acquire fuel to generate power on
favorable terms (low taxes, duty-free import of plant and equipment, financing
of capital costs, and foreign exchange risk-insurance on external loans) and
also guaranteed the purchase of the power produced at a pre-set, dollar-indexed
tariff structure for 15–30 years (for details, see Khan & Kim, 1999).
The incentive
scheme quickly proved unsustainable for the public sector: Pakistan State Oil
(PSO) had difficulty supplying the fuel to the power producers and the Water
and Power Development Authority and other utilities had difficulty purchasing
the power generated. This meant significant foreign exchange outflows in excess
of USD 1 billion per year well into the next decade. Trouble maintaining the
set payment schedule disrupted production and built up so-called “circular
debt” between the state utilities, IPPs, and PSO.[19] The larger legacy is continuing power shortages, which
have adversely affected all industry.
Figure 11.3: FDI inflows in recent years (USD
million)
Source: UNCTAD FDI/TNC database.
It took
another ten years before annual FDI inflows topped USD 1 billion again, in 2005—this
time driven mainly by privatization in banking and telecommunications. Banking
attracted FDI from the Arab states (Bahrain, Kuwait, Oman and UAE) and other
countries (Malaysia, the Netherlands, UK, US, and Switzerland). These
investments infused the industry with fresh capital and managerial know-how—modernizing
the now denationalized United Bank, Muslim Commercial Bank, and Habib Bank—and
provided competition in the shape of new entrants such as Faysal Bank, Bank
Alfalah, and Meezan Bank (Islamic banking).[20]
In
telecommunications, Motorola (US) started the first cellular mobile service
with Mobilink in 1994, which was subsequently acquired by Orascom (Egypt) in
2001. Telenor (Norway) also acquired a mobile license (GSM) in 2004 and
has since made investments in excess of USD 2 billion. The privatization of the
Pakistan Telecommunication Company Limited (PTCL) in 1991 bore fruit in
2006, with an investment by Etisalat (UAE) to acquire a 26 percent equity share
valued at USD 2.6 billion.[21] China Mobile established its first overseas
subsidiary, Zong, in 2008 with investment commitments of USD 1.7 billion. There
was also FDI from Oman (to acquire WorldCall), Japan, Singapore, and Qatar. While
these investments have generated dividend payments and profit remittances
overseas, the significant improvement in the availability, quality, and cost of
communication services is also visible throughout the country.
As a consequence of the power and privatization policies, the
composition of FDI has shifted from manufacturing to services. Manufacturing
was predominant in the early years—receiving 75 percent of the FDI inflows in
1980—but from 1995 onward, the services sector has attracted significant FDI.
By 2008, the share of manufacturing in the stock of FDI had fallen to 31
percent, while the share of services had risen to 58 percent (see Table 11.1). Three
industries—utilities, financial services, and telecommunications—therefore, account
for nearly half the entire FDI stock.
The extractive industries (mining
and quarrying) have received a small but steady amount of FDI over the years
and account
for 10 percent of the FDI stock. At present, they are foreign investors’ main
attraction: their share in FDI inflows rose from 13 percent in 2008 to 34
percent in 2010. The government is aggressively awarding concessions for oil
and gas exploration. A dozen foreign companies have invested in the country,
including BP and Premier Oil (UK), ENI (Italy), BHP Billiton (Australia), OMV
(Austria), Petronas (Malaysia), and Petrobras (Brazil), which specifically
plans to explore offshore. There were also
investments from Canada, China, Hungary, Switzerland, and the UAE.
Table 11.1: FDI by economic sector and
industry, 2002, 2008
(USD
million or percentage share)
FDI
|
Flows
|
FDI stock
|
|
Industry/sector
|
2002
|
2008
|
2008
|
All sectors/industries
|
823
|
5,437
|
16,472.9
|
Extractive (%)
|
35.2
|
13.2
|
10.4
|
Mining
|
4.7
|
39.2
|
13.0
|
Oil and gas exploration
|
285.2
|
675.9
|
1,706.5
|
Manufacturing (%)
|
18.0
|
9.8
|
30.5
|
Food
|
-5.1
|
69.3
|
847.5
|
Chemicals
|
87.6
|
102.3
|
711.8
|
Petroleum refining
|
4.5
|
79.2
|
481.2
|
Pharmaceuticals
|
5.6
|
41.9
|
711.3
|
Transport equipment
|
0.6
|
103.6
|
823.3
|
Other manufacturing
|
54.7
|
140.2
|
1,449.9
|
Services (%)
|
45.1
|
75
|
58.0
|
Power
|
25.0
|
112.7
|
1,563.0
|
Trade
|
45.3
|
170.5
|
1,284.6
|
Communications
|
24.2
|
1,678.2
|
2,593.3
|
Finance
|
192.9
|
1,877.6
|
3,831.1
|
Other services
|
83.8
|
237.1
|
277.2
|
Unspecified (%)
|
1.7
|
2.0
|
1.1
|
Source: State Bank of Pakistan.
Pakistan has
attracted FDI from a variety of sources (see Table 11.2), traditionally from
the UK and US, followed by Switzerland, Japan, the Netherlands, and Germany. Newer
sources are from Asia, Latin America, and the Middle East, with the UAE being
the single largest investor during 2006–08. A third of the inward FDI stock in
2008 originated from developing countries, and was diversified in a range of
industries, including telecommunications, financial services, cement, textiles, construction,
real estate, logistics, airlines, and oil and gas. FDI from developed countries is relatively more concentrated
in manufacturing, while that from developing countries is relatively more so in
services.
Table 11.2: FDI by geographic origin,
2002 and 2008
(USD
million or percentage share)
FDI
|
Flows
|
FDI stock
|
|
Country
|
2002
|
2008
|
2008
|
All countries
|
823
|
5,437
|
16,472.9
|
Developed economies (%)
|
68.5
|
43.5
|
65.4
|
Australia
|
1.9
|
75.5
|
212.0
|
France
|
-5.7
|
5.4
|
172.7
|
Germany
|
9.0
|
73.4
|
436.5
|
Japan
|
13.3
|
108.5
|
812.9
|
The Netherlands
|
-6.4
|
140.7
|
787.3
|
Switzerland
|
3.7
|
169.0
|
1,707.8
|
United Kingdom
|
194.6
|
458.8
|
4,241.7
|
United States
|
348.7
|
887.9
|
1,638.5
|
Others
|
4.5
|
445.1
|
770.3
|
Developing economies (%)
|
24.3
|
48.1
|
32.8
|
Bahrain
|
29.9
|
32.0
|
183.3
|
China
|
1.0
|
6.2
|
694.8
|
Hong Kong
|
5.6
|
368.2
|
254.6
|
Kuwait
|
2.0
|
20.0
|
258.9
|
Malaysia
|
1.3
|
862.3
|
353.0
|
Mauritius
|
0.0
|
312.7
|
608.1
|
Oman
|
9.0
|
115.8
|
196.3
|
Saudi Arabia
|
21.5
|
40.8
|
148.9
|
Singapore
|
3.6
|
228.3
|
201.2
|
United Arab Emirates
|
114.1
|
432.5
|
1,663.9
|
Others
|
11.6
|
195
|
839.1
|
Unspecified (%)
|
7.2
|
8.4
|
1.8
|
Source: State Bank of Pakistan.
Pakistan also
has FDI in other countries: the stock of outward FDI in 2008 was some USD 2
billion. Two thirds (67 percent) is located in developing countries, mostly in
trade and financial services (96 percent), and the largest destinations are the
UAE (20 percent), the UK (7 percent), and Bangladesh (6 percent). Pakistani
investments in the latter have risen in recent years and Bangladesh is now the
second most popular destination, accounting for 12 percent of Pakistan’s
outward FDI in 2011.
Overall, FDI
inflows averaged USD 4 billion annually during 2005–09—a level commensurate
with the size of Pakistan’s population (175 million) and its economy. During
this period, FDI comprised 15 percent of gross fixed capital formation compared
with an average for developing countries of 12 percent. Pakistan ranked briefly
among the top ten FDI recipients in Asia.
FDI flows to
Pakistan have since receded by more than half to well below USD 2 billion per
year. While current levels are still respectable in the present context of the global
downturn and domestic instability, Pakistan can, and should, do better.
3.
FDI and Technology
It is common to
value FDI for its contribution to capital inflows but its importance lies more
in its accompanying benefits. In addition to the financial capital that supplements
savings and adds to investment, jobs, and economic growth, FDI brings
technology, skills, technical know-how, and access to inter-industry trade and
foreign markets. These other benefits are particularly important in Pakistan’s case;
unlike many developing countries, it has had recourse to alternative forms of
resource inflows, such as official capital flows (development assistance) and
income transfers by migrants (remittances), which have also been substantially
greater than FDI inflows.[22]
As already
discussed, Pakistan has been reasonably successful in attracting FDI. For many
years, it attracted as much or more FDI than its larger neighbor. In more
recent years, Pakistan’s stock of inward FDI increased at an average annual
rate of 12.5 percent between 1990 and 2009, rising from USD 1.9 billion and
reaching USD 18 billion. This marks a reasonably good performance, comparable
to that of a number of developing countries that have opened up in an expansive
period of worldwide FDI growth.[23]
Pakistan has
attracted resource-seeking and, mainly, market-seeking FDI in a wide range of
industries, initially in marketing as well as manufacturing and more recently
in services. These investments were often undertaken with local partners; at
first, some were marketing arrangements and others involved simple
manufacturing. Over time, however, marketing expanded to production, and
manufacturing expanded into new product lines and more complex assembly
operations. In this way, FDI has facilitated the transfer of technology
necessary for industrial development.
There are many
examples of sequential investment and technological upgrading. In
pharmaceuticals, Abbot Pakistan was established in 1948 as a marketing
affiliate, and now operates a couple of manufacturing plants. In automobiles,
as already noted, the Atlas Honda joint venture began with the assembly of
motorcycles (in 1963), diversified to the manufacture of batteries (in 1966)
and, with the acquisition of Allwin Engineering (in 1981), became a
manufacturer of motorcycle parts and components for other local manufacturers (OEM)
and the replacement market.
In addition to
this vertical integration, the Atlas Group expanded horizontally into the
manufacture of motor vehicles (in 1992), into power generation (taking
advantage of the 1997 incentive scheme in a joint venture with the German
company, MAN Diesel), and into financial services (with the acquisition of
Muslim Insurance in 1980). Such expansion creates value-added and jobs, and
deepens the technological base of industry.
The link between
FDI and technology is visible in the manufacturing sector’s growth trends. Several
studies on TFP in Pakistan typically observe a cyclical pattern in growth
rates.[24] Kemal et al. (2002), for example, show that MVA grew
at 6.4 percent during 1965–2000 but varied between periods, while the physical
capital stock in manufacturing grew at a steady rate at around 2 percent,
implying higher (or lower) output growth with about the same input of capital
at higher (or lower) levels of productivity.[25] Therefore, TFP in manufacturing followed the pattern
of MVA, which also paralleled the trend in FDI inflows (see Figure 11.4). The
broad pattern, as previously discussed, is one of:
-
A dynamic 1960s,
with high rates of manufacturing expansion, FDI inflow, technology acquisition,
and productivity growth (all from an admittedly low base).
-
A regressive
1970s, disrupted by nationalization: negative growth in FDI and slower
manufacturing activity.
-
A revived 1980s,
with resurgent economic activity, significant FDI, and technological learning
in the public and private sectors.
-
A weak 1990s, with
declining public sector investment, FDI mainly in services (power), and a
relatively sluggish manufacturing sector.
Overall, the trends suggest that FDI contributed to
technology transfer and growth in TFP. S. U. Khan (2006) shows TFP, during 1960–2003,
to be inversely related to the budget deficit and positively related to
government consumption, private credit, domestic investment, and FDI.
Figure 11.4: Growth of manufacturing
sector (percent)
Source: Growth rates of manufacturing value added (MVA),
capital (K), and total factor productivity (TFP) as presented in Kemal et al.
(2002). FDI growth rates are for aggregate inflows and based on data from the State
Bank of Pakistan.
The link between FDI and technology is also visible in its industrial
concentration. About a third of the entire FDI stock in Pakistan in 2008 was
concentrated in manufacturing (30.5 percent; see Table 11.1), which, when disaggregated
by technology category according to the standard industrial classification,[26] shows the following:
-
44 percent of the
FDI in manufacturing involved resource-based manufacturing (food, beverages,
tobacco, sugar, paper, rubber, cement, and petroleum refining).
-
4 percent was in
low-technology manufacturing (textiles, leather, ceramics, and metal products).
-
52 percent was in
medium- and high-technology industries (chemicals, basic metals,
pharmaceuticals, cosmetics, fertilizers, machinery, electrical goods,
electronics, and transport equipment).
In the first and last of the categories above, for resource-based and
medium- and high-technology industries, managerial efficiency and technology
absorption contributed to TFP gains for most years during 1998–2007 (Raheman,
Afza, Qayyum, & Bodla, 2008). Overall, FDI appears to have deepened the
technology base of manufacturing production.
FDI has also
deepened the technology base in key services industries. In telecommunications,
the economy leapfrogged from sparse, dysfunctional landlines to mobile
telephony almost overnight, with 120 million subscriptions by 2012 and a
million new connections a month. In finance, new technologies and managerial
practice have modernized banking, reducing costs and nonperforming loans,
improving customer service, and extending lending to small enterprises and
other inadequately reached segments (Husain, 2005). In port management,
transport costs and delays have lessened. In trade, there has been a diffusion
of new methods of inventory control, supply chain management, packaging and
product development, and advertisement targeting a growing urban middle class.
Domestic firms have participated in the growth and spread of these services.
However, FDI has
been mainly market seeking and so, its benefits of technology transfer have not
flowed directly into the export industries. Ahmad et al. (2003) examine the
causal relationships between FDI, MVA, and exports over 1972–2001 and observe
that causality runs from FDI to MVA but not from FDI to exports.[27] Weiss and Lall (2004) also observe that, during 1990–2001,
technological upgrading in manufacturing was slow but occurred in domestic
production rather than in exports. Raheman et al. (2008) find that low
technology absorption contributed to a decline in TFP in the textiles sector (a
major exporter) during 1998–2007.
A general
failure of the foreign manufacturing affiliates operating in Pakistan in all
industries has been their reluctance to develop an export-oriented approach,
even within the global network of their parent companies. This, in part, is
attributable to the protected markets within which they have operated—the
downside of the earlier trade and industrial policies that worked so well to
attract FDI.[28] However, the experience of other countries is that,
over time (as much as a decade), market-seeking affiliates can and do graduate
to become world players.
This has begun
to happen in Pakistan. Pak Suzuki Motor Company, established in 1983, began
exporting pickup vehicles in 1997 to Bangladesh, Nepal, and Afghanistan, and
now exports sheet metal parts to Europe. Hinopak Motors began exporting school
buses to the UAE in 2010. ICI Pakistan exports to regional markets in
the Middle East and Central Asia. Pak Elektron Limited,
established in 1956 to manufacture transformers (in collaboration with the
German AEG in 1956), added to its product line air-conditioners (with General
Corporation of Japan in 1981), refrigerators and freezers (with Iar Siltal and
Ariston of Italy in 1986), and now exports its appliances.
The cement
industry, set up with FDI, is a major exporter within the Subcontinent and to
East Africa and the Middle East. Similarly, the pharmaceutical industry, which
includes two dozen multinationals, has begun to export with overseas sales of USD
100 million in 2007. The food industry (beverages, tobacco, etc.) also exports.
The national Pakistan Aeronautical Complex (PAC), established in the early
1970s, has had various technical collaborations with China, France, Sweden, the
Netherlands, and the US, and now exports aircraft to the Middle East and
overhauls those of other countries. Recently, as part of an offset deal for the
purchase of aircraft by PIA, Boeing transferred technology to enable PAC to
manufacture spare parts in Pakistan for its global supply chain.[29] Weiss and Lall (2004) show that total exports
increased at an annual rate of 7.9 percent during 1985–2002, while exports of
medium- and high-technology products increased at 8.3 percent, of which automotive
exports increased at 14 percent and electronic exports at 16 percent.
The
relationship between FDI and technology begins with the acquisition of
technology (through capital goods and licensing) and the transfer of skills and
know-how to the local workforce (through the use of technology in production).
Technology transfer through FDI enhances labor productivity. Based on a 1981
sample of 25 of Pakistan’s large-scale manufacturing industries, Mahmood and
Hussain (1991) observe that foreign affiliates have higher labor productivity
than domestic firms (of equal capital size and producing similar products). Din,
Ghani, and Mahmood (2009) also note that foreign affiliates demonstrate better
export performance than local firms.[30]
FDI also
diffuses technology through the economy—to competitors, consumers (e.g., mobile
phones), and suppliers. An example of the latter is Nestlé Milkpak’s provision
of technical assistance to farmers to increase animal feed stock, improve milking
techniques, prevent livestock disease, and develop the cattle breed. Such
improvements benefit all dairy producers and, as a result, milk production per
animal (cattle/buffalo) in Pakistan is the highest in the Subcontinent.
Other benefits include the expansion of the intermediate capital goods
industry: the stainless steel milk transport tanks that used to be imported are
now manufactured in Pakistan through a joint venture between a Dutch company
and a local manufacturer. Burki and Khan (2007) provide evidence that dairy
farmers receive higher prices for their milk supplies and earn higher income; concomitantly,
girls’ school enrolment is higher in milk-producing districts. The nutritional
benefits for consumers are better-quality milk and other food products, as well
as bottled water.
An example of
industrial maturity is Engro, which started as a USD 43 million fertilizer
investment by Esso in 1965/66—at the time, the largest FDI in Pakistan—and grew
in technical and managerial competence to the point that, in 1991, it was
bought by its own local employees (and financial partners), when the parent
company divested out of fertilizer globally. The new owners also acquired
fertilizer plants in the UK and US and relocated them to Pakistan. Over the years,
Engro’s farmer education programs have improved farming practices and raised
crop yields. Engro has also expanded into food, energy, chemical storage, and
other industries, and in the process transformed from a turnkey plant into a
holding company.
While there are other success stories, two caveats are in order. First,
when technology transfer occurs outside a parent–affiliate FDI relationship as
a joint venture or technical collaboration between domestic enterprises and
foreign companies, greater effort is needed to develop technological
capabilities. Without such effort—to move from simply using turnkey technology
to learning how that technology works—the domestic enterprise remains reliant
on further acquisitions for technological upgrading. In such cases, additional
investments are necessary to keep up with technological progress, and a slowing
down of investment means falling back technologically and consequent
uncompetitiveness.[31] This appears to have been the
fate of many of Pakistan’s public enterprises when public investment
decelerated in the 1990s.
The second
caveat is that the share of FDI in the country’s total investment has been
small—2 percent in 1980 and 6 percent in 2000—and so its potential contribution
to improving the economy’s technological base has also been small.[32] Therefore, broader economy-wide efforts are needed to
build learning capabilities, particularly through human resource development.
Pakistan has lagged in this respect.
All the various studies on TFP cited earlier attribute low growth
performance to low rates of human capital formation. This is evident in the low
levels of our human development indicators (education, health, income) and our
low overall ranking relative to other countries.[33] It is also reflected in our low
levels of research and development (R&D) expenditures and personnel (Rahman
et al., 2005, table 3.5) and in low intensity of technical skill creation
(measured in terms of student enrolments in science, mathematics, computing,
and engineering at the tertiary school level).[34] Moreover, technical education has
few linkages with industry, and there are not many institutions to diffuse technical
knowledge (Rahman et al., 2005). It is, therefore, not surprising that the
benefits from FDI inflows and technology transfers have not permeated the
economy.[35]
One
consequence is that Pakistan has a smaller manufacturing base with far less
technological content than the average developing country (see Table 11.3). The
manufacturing sector grew at 6.8 percent during 2000–10, which was average for
developing countries (6.9 percent). However, the share of MVA in GDP was just
19 percent in 2009 and only 25 percent involved medium- or high-technology
production. In comparison, the share of MVA in GDP for developing countries as
a whole was 22 percent, 43 percent of which consisted of medium- or
high-technology manufactures. Also, while Pakistan exports relatively more
manufactures than the average developing country, its manufactured exports
involve relatively less medium or high technology—only 11 percent as opposed to
56 percent for all developing countries.[36]
Table 11.3: Technological content of manufactures (percent)
Pakistan
|
Developing countries
|
|||
Year
|
1990
|
2000
|
2009
|
2009
|
Manufacturing value added
to GDP
|
15.5
|
13.8
|
18.8
|
21.8
|
Of which medium- or high-technology
|
31.9
|
29.7
|
24.6
|
43.0
|
Manufactured exports
in total exports
|
88.8
|
87.0
|
83.3
|
79.2
|
Of which medium- or high-technology
|
8.1
|
11.0
|
11.3
|
55.8
|
Source: UNIDO (2005, 2009, 2011).
Such
comparison suggests that Pakistan is reasonably well industrialized relative to
other developing countries, but that its technological base is weak,
particularly for engaging in world trade. A ranking of Pakistan’s industrial-technological
profile places it as a distant follower to the high performers of East Asia
(UNIDO, 2005, table 10.1). Pakistan is also a laggard in trade performance: the
share of trade in GDP has stagnated over the past two decades at around 32
percent while neighboring countries have raised their trade shares multiple
times (Bangladesh raised its trade share from 18 percent in 1990 to 54 percent
in 2011, while India raised its share from 13 percent to 40 percent). Pakistan
should be trading twice as much as it does currently, given its economic size.[37] The technological sophistication of its exports, and
the intensity of factor use should also be improving faster and in pace with
other countries (Waglé, 2011).
Pakistan can, and should, do better.
4.
Policies and Prospects
Pakistan has a
planned economy but the extent of government involvement has varied over the
years. The private sector played a leading role in the first 25 years after
independence; during the next 25 years, the public sector was dominant. Throughout
this period, FDI has been both welcome (often with generous government support)
and forthcoming: both foreign and private investors helped build the country’s industrial
base in the 1960s; foreign investors and public enterprises deepened it in the
1980s. FDI was indifferent to the ownership of the host enterprise, whether
public or private; the choice between market and planned economy is, therefore,
a false one.
However, Pakistan’s experience also shows that FDI inflows have risen
and subsided with domestic investment (usually through joint ventures and
technological collaboration); and that the country’s public enterprises have
generally not been able to sustain high levels of investment. Looking to the
future, it is clear that the economy has reached a size, complexity, and degree
of openness where it must be driven largely by the private sector with public
institutions providing a supportive role.
The government’s
role in industry has evolved over the years: at various times, it has been a
player, a coach, and a referee. Looking to the future, the government needs to
be less of a player—Pakistan’s public enterprises need to be autonomous and
self-sufficient or privatized—and more of a referee to ensure that markets run
efficiently, laws are well administered, and policies are implemented. Moreover,
the government needs to be a different type of coach—providing protection and
subsidies to domestic enterprises is inferior to providing support to improve
efficiency and help build up their technological infrastructure; providing
incentives to foreign companies is inferior to providing a stable economic
environment and world-class infrastructure. In these several ways, a range of
policies and priorities need to be rethought. Some change is in process;[38] more is needed.[39]
It is particularly desirable that the government divest its assets in the
financial sector. Pakistan’s early experience and that of other countries
underscores the importance of fostering a dynamic relationship between finance
and industry, rooted in the private sector with public institutions ensuring
appropriate regulatory compliance and fiduciary oversight. More generally, a
revival of privatization—revamped and made more transparent[40]—would significantly improve FDI
prospects, as it did in 2005–07.
While support to
industry is desirable, industrial policy should focus on developing
technological capabilities and export competitiveness. The era of import
protection and export subsidies has run its course, but there is much else that
the government can do to improve conditions for production and investment.
Various studies have suggested that manufacturing efficiency is low.[41]
A major constraint to efficiency is the high cost and poor quality of
infrastructure, particularly in the power sector. According to one survey of
small and medium enterprises, production-time losses due to electricity outages
average 33 hours per week (State Bank of Pakistan, 2008); larger enterprises have standby
power generators but still suffer disruptions and incur added costs. Transport
and communications infrastructure are important for export efficiency. The
functioning of institutions—administrative, financial, and judicial—affects
transaction costs and industrial efficiency. Kemal (2007) notes that Pakistan
ranks low, relative to other countries, on most indicators of market
efficiency. There has been some improvement in recent years, notably in the
ease of doing business, but further efforts are needed, particularly to
alleviate the unsatisfactory power situation.
The government
could also do more to build technological capabilities. Weiss and Lall (2004)
note that Pakistan’s performance in skill creation has worsened since the
mid-1980s and is below that of other South Asian countries. They observe that
per capita R&D expenditure is low, enterprise-financed R&D is
insignificant, and that Pakistan lags behind its neighbors in R&D capacity
(e.g., in the per capita number of scientists, technicians, scientific and
technical journals, and royalty and technical fees). In order to begin to
rectify these shortfalls, the government should accord higher budgetary
priority to the social sectors (basic education and health) and invest more in
higher education.
Human resource
policy and training programs should promote linkages between industry and
technical education, which includes some 57 technical colleges and over 700
vocational technical institutions. Public R&D should support industrial
clusters in partnership with industry associations and market leaders. The key
point is for government to facilitate technological interaction and cooperation
between industry, the public sector, and learning institutions nationally and
internationally. Rahman et al. (2005) have proposed an ambitious agenda for
technology development that deserves serious consideration by policymakers.[42]
An overall context of a private sector-led economy supported by
policies and institutions that encourage technological upgrading, provides a
fertile basis for attracting and benefiting from FDI. Given Pakistan’s economic
size, its natural resource endowments and the experience of other comparator
countries, there is every reason to expect annual FDI inflows of at least USD 10
billion, or twice the highest levels attained in the past. The official target
is more modest—to attract USD 5.5 billion in FDI inflows per year.[43] Nevertheless, even that goal
appears ambitious in the current circumstances of a protracted global downturn
and domestic instability: FDI inflows have declined by 70 percent since 2008.
Arresting this decline and putting it on an upward trajectory will not be easy.
In the immediate future, Pakistan can expect to continue to receive FDI
in extractive industries (which tend to be impervious to the investment
climate), and also from the more resilient economies of developing Asia.
Market-seeking investment is also likely, particularly in urban areas.[44] However, these inflows are offset
by an overall fall in reinvested earnings. Thus, the immediate prospects of reversing
the current decline of inward FDI hinge on the government’s efforts to retain
investors’ confidence. These include potential as well as existing investors, a
number of who have been operating in Pakistan for many years. They also include
domestic investors, whose actions shape the perceptions of new investors.
FDI strategy, therefore, should be shaped around the country’s ample
natural resource endowment and its considerable market potential, with
threefold efforts to (i) retain investors’ confidence; (ii) target new
investors; and (iii) work with existing investors, both foreign and domestic.
4.1.
Retaining Investor
Confidence
Pakistan has a
fully open and progressive foreign investment policy regime as good as that of any
developing country, and an incentive structure more generous than most. It also
compares well on the ease of doing business, although in recent years (2009–11),
the country has slipped nine positions in the global ranking, and within the Subcontinent
has dropped from first to third place.[45] A major foreign investor concern is political risk,
and Pakistan is ranked among the five riskiest investment destinations (World
Bank Group, 2009).
However, risk
can be mitigated by investor confidence. A 2009 business perception survey by
the Pakistan Overseas Investors’ Chamber of Commerce and Industry shows that
more than three quarters of its 124 respondents were willing to invest in 2010/11.
Similarly, a 2010 survey by the American Business Council of Pakistan showed
that 71 percent of its participating firms had investment plans in the next 12 months,
and that 41 percent of them planned to invest USD 250,000 or more.
Nevertheless, in both surveys, investors raised similar concerns: law and
order, political uncertainty, energy deficiency, the high cost of operations,
and infrastructure bottlenecks. In the American survey, 79 percent were
pessimistic about short-term prospects but, more importantly, 86 percent were optimistic
about long-term prospects.
American
investors have reason to be positive: earnings on their equity in Pakistan
amounted to 33 percent in 2009. This return is better than in other countries
that have received more investment (see Table 11.4). However, incomes appear to
fluctuate from one year to the next in Pakistan: earnings on equity were only 7
percent in 2008. A more stable and predictable business environment would align
expectations closer to the higher end of actual rates of return and attract
large investment inflows as in other comparator countries.
Table 11.4: Income on US direct investment, 2009
Host country
|
Income/FDI (%)
|
China
|
13.6
|
India
|
12.3
|
Indonesia
|
21.6
|
Malaysia
|
20.7
|
Pakistan
|
33.1
|
Thailand
|
19.0
|
Source: US Department of Commerce,
Bureau of Economic Analysis, Survey of Current Business Online, US Direct
Investment Abroad Tables (September 2011), table 14.
It is
important, therefore, to solicit the industry perspective in any discussion of
measures to move the economy from the short to the long term. Some business
groups, such as the Pakistan Business Council, have position papers on
fostering economic growth. The channels for public-private dialogue should be
utilized fully to engage business involvement and support for future policies,
thereby sustaining investor confidence.
4.2.
Targeting New Investors
Pakistan has
been successful in diversifying its sources of FDI and attracting investment
from developing countries. The most recent data suggests that their share has increased
further,[46] indicative perhaps of continuing growth in Asia and
also of the greater affinity that Asian investors may have with the country’s investment
environment. Efforts to target FDI toward the textiles industry have attracted
FDI from the UAE, and the government is also seeking investors from China and
other countries with the Special Economic Zones Act 2012. The Haier Group of
China has made an initial investment of USD 35 million (in a joint venture with
the Ruba General Trading Company) to manufacture household appliances,
including for export, in a 63-acre zone in Lahore that will enclose a plant and
workers’ colony.
Such proactive
FDI promotion efforts are desirable, though it should be noted that Pakistan
already has some 82 industrial zones and the majority perform below capacity (Asian
Development Bank, 2001). Additionally, incentive schemes should be time-bound
and not too generous. A revival of privatization would ignite huge investor
interest.
4.3.
Working with Existing
Investors
FDI involves
long-term commitment to a host location, ideally to expand output, upgrade
production, and increase market presence, which frequently justifies
reinvesting short-term profits for longer-term gains. When opportunities sour
or become uncertain, a greater portion of profits and dividends are repatriated
to the parent company, and sometimes investors—“voting with their feet”—disinvest
and relocate.
Sizeable
investments, such as those in telecommunications in 2004–08, generate
commensurate profits that can be retained and reinvested or repatriated. The
good news is that companies are making profits;[47] the bad news is that these profits are being
repatriated rather than reinvested. Repatriations out of Pakistan have
increased in recent years (see Figure 11.5); in 2011/12 (FY2012), foreign
investors repatriated USD 1.1 billion in profits and dividends. In some
industries, such as textiles, firms are in the process of relocating to
Bangladesh (attracted by the prospect of access to continuous, uninterrupted
power supply and other promised benefits). In such circumstances, it is
important for the government to work with existing investors (foreign and
domestic) to encourage and facilitate greater reinvestments.
Figure 11.5: Repatriation of profits and
dividends
Source: State Bank of Pakistan. Data given for fiscal years
(e.g., FY2012 = July 2011–June 2012).
The experience
of other countries should be emulated, particularly policies and programs to
support the creation of local supply chains and linkages with domestic firms;
R&D projects with universities, science institutes, and technology centers;
and the development of export markets. There are many examples, including in
Pakistan, of public-private partnerships for building infrastructure and
industrial clusters, giving effect to corporate social responsibility—for training
workers and disseminating technical advice to farmers—as well as support
services and finance for small and medium enterprises.
Pakistan’s private sector has responded generously in helping earthquake
and flood victims, and would likely join “win-win” partnerships to accelerate
economic growth and deepen industrialization. Their current healthy profits
provide the basis, and the prospect of future profits the incentive, to do so. The
country’s public institutions should intensify its efforts to work with the
private sector to enlarge opportunities and overcome business bottlenecks in
the current difficult environment.
5.
Conclusion
FDI can
contribute significantly to moving Pakistan’s economy forward. The country’s FDI
strategy and policies correctly emphasize the importance of a modern investment
framework and regulatory regime, and a conducive, business-friendly
environment. There is also a case for special economic zones and time-bound
fiscal incentives. However, these efforts must be pursued within a resolute
attack on the basic malaise gripping the economy—the energy crisis, the
security situation, and the immobilized privatization program. Hopefully, one
outcome of the 2013 election will be a renewed willingness on the part of the
country’s key institutions to work in unison.
At the same
time, there is a longer-term challenge. Although capital inflows can alleviate
the external resource constraint and bolster the balance of payments, the real
benefits of FDI are longer-term, involving second-order economic impacts that
improve the technological base, diversify the export structure, and place
production on a more dynamic growth path. These positive spillovers gestate
slowly but can be nurtured by a supportive public policy.
Successful
examples abound in other countries. Yet, Pakistan has been slow to devise such
‘second-generation’ FDI promotion policies that capture the synergy between
investment and trade, and production and technology. Malaysia and other Asian ‘tigers’
have been able to deploy such policies to attract FDI and extract from it
substantial technological and other economic benefits. Pakistan’s failure to do
so has handicapped its industrial development.
Pakistan must,
therefore, arrest the dramatic decline in FDI inflows of recent years, but also
seek to benefit from future inflows with greater drive and ingenuity. Other
countries are doing so with success and there is every reason to think that it
can do the same in a relatively short span within the current decade.
* The author was director of the Investment Division at
the United Nations. He is grateful to Faizullah Khilji and Rashid Amjad for
comments on an earlier draft of this chapter.
[1] See, for example, A. H. Khan (1997). Even advocates of
market-led growth, such as Papanek (1991), have neglected the role of FDI.
[2] The top ten Asian recipients of FDI were China, Hong
Kong, Singapore, India, Thailand, Malaysia, Taiwan, Indonesia, Vietnam, and
Pakistan (see United Nations Conference on Trade and Development [UNCTAD],
2008, p. 48).
[3] The import substitution experience has been widely
debated; for a thoughtful review, see Noman (1991).
[6] The International Monetary Fund
(2002) attributes the strong economic growth performance in the 1960s to factor
accumulation rather than TFP; physical capital stock (which embodied
technology) expanded at an annual average rate of 13.1 percent in 1961–71.
[7]
Mahbub ul Haq, chief economist of the Planning Commission, noted in April 1968
that Pakistan’s industry was owned largely by just 22 families. Equally, it
could also have been noted that agriculture was concentrated among relatively
few landowning families. Ownership of large farms (of more than 15 hectares of
land) is concentrated among 1 percent of all households (see Anwar, Qureshi,
& Ali, 2004).
[8] Subsidized credit and inputs were also provided in
agriculture (see M. H. Khan, 1983, table 6).
[9]
Industry was also nationalized in India (banking, coal, and petroleum) and Sri
Lanka (mining, petroleum, and plantations) during this period.
[10]
The largest 31 manufacturing firms (in cement, engineering, electrical goods,
iron and steel, metals, motor vehicles, petrochemicals, and utilities) and 13
insurance companies were nationalized in 1972. Others included the emerald
mines in Swat in 1972; the vegetable ghee industry in 1973; banking, shipping,
cotton ginning, and some 2,000 units in rice-husking and flour-milling in 1974;
and some 3,000 private colleges and schools in 1972 (see Junejo, 1996, chap. 16,
pp. 79–80).
[11]
The original owners reopened operations in Pakistan in 1989 through branches of
their bank in Switzerland. The irony of the Habib family operating as a
multinational in their own country was commemorated with a five-rupee postage
stamp issued by the Pakistan Post Office in March 2001 displaying the logo and
headquarters of the Swiss multinational, Habib Bank AG Zurich.
[13] Remittance inflows began in 1976 and averaged USD 1.8
billion per year during 1976–2002; in the 1980s, remittances amounted to 11
percent of private consumption and 8 percent of GDP (see Siddiqui & Kemal,
2006).
[14] The facility is also a key component of Pakistan’s
military-industrial complex.
[15] The Fauji Foundation, a military welfare trust, owns
or controls 19 commercial and industrial enterprises in such industries as oil
and gas, power, fertilizer, cement, cereals, sugar, and financial services. The
enterprises are limited companies listed on stock exchanges, and the general
public may also buy and sell shares; however, their chief executive is always a
government nominee.
[16] The Askari Group, an army welfare trust, runs 17
business enterprises in agriculture, aviation, banking, cement, insurance,
petroleum, and real estate, among others.
[17] “Almost PRs 100 billion a year were spent out of the
budget annually on plugging the losses of these corporations, banks and other
enterprises,” says Husain (2005).
[18] HUBCO, a limited-liability company privately financed
with 13,000 shareholders, was developed during 1985–95 with technical support
from the World Bank, loans from 43 offshore banks, guarantees from France,
Italy, Japan, the UK, and the US, and equity participation by Saudi Arabia and
the UK.
[19] The amount of circular debt reached PRs 382.5 billion
or USD 4 billion in July 2012 (see State Bank of Pakistan, 2013, chap. 1, Box
1.1).
[20] For a study on the improved
performance of privatized banks, see Khan and Kamal (2006).
[21] Some USD 800 million is pending in the resolution of
legal and property issues.
[22] The only year in which FDI and remittances were close
to par was 1996: FDI was USD 1,102 million and remittances were USD 1,284
million. In all other years, remittances have been several times larger.
[23] For additional background, see Hamdani (2011).
[24] In addition to Kemal et al. (2002), see H. A. Pasha,
Pasha, and Hyder (2002); International Monetary Fund (2002); Sabir and Ahmed
(2003); Mahmood and Siddiqui (2000); and S. U. Khan (2006), among others.
[25] Kemal et al. (2002) also control for other factor
inputs, namely labor which grew at 0.9 percent during 1965–2000.
[26] United Nations Industrial Development
Organization [UNIDO] (2009, Annex II). The technology classification is rough:
some segments in each category may involve more (or less) sophisticated skills
and complex production. The same classification underpins Table 11.3.
[27] For other studies showing how FDI has had a positive
impact on growth, see Shabbir and Mahmood (1992); Atique, Ahmad, and Azhar
(2004); Mohey-ud-din (2007); and Rahman and Salahuddin (2010).
[29]
The USD 1.8 billion purchase order was made in 2002, the aircraft were
delivered over 2004–08, and the manufacturing facility for spare parts was
operational by 2006.
[30]
Rehman and Wizarat (2010) find that there is significant potential for
learning-by-doing in Pakistan’s large-scale manufacturing sector.
[31] There is an extensive literature on technological
learning: see, for instance, Lall (1997); UNCTAD (1996); Lall and Urata (2003);
and UNIDO (2005).
[32] Even in 1995/96, when FDI surged in the power
industry, its share in total investment was only 14 percent.
[33] In a ranking of 186 countries,
Pakistan is at 146 on the human development index, with a score below the
average for South Asia (see United Nations Development Programme, 2013).
[34] In 1995, Pakistan ranked below India, Bangladesh,
Nepal, and Sri Lanka (see Lall & Urata, 2003, Table 2.7).
[35] The food and transport equipment industries have had
some positive spillovers, as previously mentioned, but there are few backward
linkages in the chemical and pharmaceutical industries.
[36] The findings of Weiss and Lall (2004) are similar.
[37] Waglé (2011) finds that
Pakistan’s trade-to-GDP ratio is half its “predicted” ratio of 62 percent when
trade shares are estimated in a linear cross-country regression using 2010/11
data for 159 countries and controlling for income, market size, and distance from
world markets.
[38]
In the budget speech for the fiscal year 2010/11, the government committed to
restructuring public enterprises to make them financially solvent. The eight
major public sector enterprises (railways, airlines, highways, trading,
storage, utilities, power, and steel) incurred an annual loss of USD 2.8
billion in 2009/10.
[39] The Planning Commission recently issued a constructive
framework for growth (see Pakistan, Planning Commission, 2011a, 2011b).
[40] During 1991–2008, 167 enterprises were privatized but
the process was set back in 2006 when the Supreme Court, citing irregularities,
annulled the divestment of Pakistan Steel Mills.
[41] See, for example, Mahmood and Siddiqui (2000); Burki
and Khan (2005); Mahmood, Ghani, and Din (2006); Din, Ghani, and Mahmood (2007); Kemal (2007); Raheman et al. (2008); and others.
[42]
The Rahman et al. (2005) report was commissioned by the Higher Education
Commission, COMSTECH, and the Pakistan Institute of Development Economics,
in consultation with experts and the private sector.
[43] The Investment Policy 2013, prepared by the Board of
Investment, was approved by the federal Cabinet on 13 March 2013. It aims to
increase annual FDI inflows by 40 percent in 2013 to USD 2 billion, and then
onward and upward to USD 2.5 billion in 2014, USD 2.7 billion in 2015, USD 3.25
billion in 2016, and USD 4 billion in 2017.
[44] A feature of the current global crisis is the
increased market-seeking activity of multinationals in emerging economies (so
as to sustain revenue growth through worldwide sales). Examples in Pakistan
include the expansion of Coca-Cola (through its affiliate in Turkey), Yamaha
motorcycle assembly, Metro Cash & Carry (Germany), and similar greenfield
investments from Saudi Arabia and the UAE in retail and wholesale trade,
hotels, and shopping complexes.
[45] Pakistan scores low on starting a business, acquiring
electricity, and paying taxes (see World Bank Group, 2011).
[46] The share of developing countries in the stock of FDI
increased from 33 percent in 2008 to 46 percent in 2009, while that of
developed countries declined from 65 percent to 53 percent. The changes also
reflect reinvestment.
[47]
As noted
by Rashid Amjad in Chapter 3 of this volume, companies appear to be doing well
with increasing retail sales of consumer goods and food products, and corporate
profits growing some 15 percent annually in recent years. For earlier years,
Lorie and Iqbal (2005) note that the increase in the after-tax profits of the
700 companies listed on the Karachi Stock Exchange in 2001–03 amounted to more
than 1 percent of GDP.
Labels: Pakistan, Pakistan Economy, Pakistan: Moving the Economy Forward, Publications
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