Key Takeaways
- The World Bank's new report on industrial policy suggests a need for calibrated ambition.
- Pakistan faces significant state capacity and fiscal constraints in implementing industrial policies.
- High customs duties and circular debt burden the power sector, limiting government effectiveness.
A recent World Bank report has challenged Pakistan’s approach to industrial policy, suggesting that the country must carefully consider its institutional and financial capabilities before implementing more ambitious measures. According to Chief Economist Indermit Gill, the bank's previous stance on industrial policy is now seen as outdated, emphasizing instead the importance of aligning policy instruments with state capacity.
The report advises governments to start by addressing market failures through low-cost interventions such as establishing industrial parks and improving infrastructure before moving towards more intensive measures like tariffs and subsidies. For Pakistan, this means focusing on areas where it can realistically make a difference given its current administrative bandwidth, market size, and fiscal space constraints.
Pakistan’s industrial policy landscape is marked by high customs duties and significant circular debt in the power sector. Approximately 7,476 out of 7,589 customs tariff lines have additional duties, contributing to one of the costlier industrial-policy regimes in developing countries. Additionally, federal tax expenditure, which includes exemptions and concessions, amounted to about Rs2.35 trillion last fiscal year—almost double the federation’s spend on subsidies.
These financial burdens are compounded by a state that struggles with administrative effectiveness. The Government Effectiveness score in Pakistan ranks it among the bottom one-third of countries globally, further limiting its ability to manage and monitor industrial policies effectively. Furthermore, Pakistan's federal tax-to-GDP ratio is locked at around 10%, well below the 14% considered necessary for sustainable growth by the finance ministry.
The impact of these constraints can be seen in manufacturing data. Manufacturing accounts for less than 12% of GDP, and large-scale manufacturing has experienced a decline for three consecutive years. The biggest contributor to this trend is the high cost of implementing industrial policies without adequate state capacity and fiscal resources.
While the report acknowledges that Pakistan’s situation requires careful consideration, it also highlights potential areas where the country can make progress. By focusing on low-cost interventions and addressing market failures first, Pakistan could potentially improve its industrial landscape without overburdening its already stretched government finances.
In conclusion, the World Bank's new report underscores the need for a more pragmatic approach to industrial policy in Pakistan. It suggests that while there is room for improvement, the country must prioritize actions that are feasible given its current state capacity and fiscal constraints.
