The possibility that Pakistani society might undergo the process of deindustrialization before being fully industrialized to start with seems to be rising steeply. Deindustrialization is a process that has caused entire American states like Michigan, which was once the industrial and manufacturing heart of the American state, to have been deprived of its industrial base. Due to the process of deindustrialization, major manufacturers are forced to relocate their industrial manufacturing plants and go elsewhere, as business wrangles with its inability to produce profit. Cities in the American rust belt are emblematic of the changes that deindustrialization tends to bring about. Unemployment became the fate of entire cities and once vibrant economies lay in ruin.
Deindustrialization is a process which the United States and Western Europe have undergone, as big industrial conglomerates in these regions relocated their manufacturing units to Eastern Asian countries, where labor was cheap. There are political commentators in the west who attribute this deindustrialization process as the main cause behind the rise of hate-oriented politics that manifested in the rise of extreme right wing political forces.
How is all of this even relevant to Pakistani society? How can Pakistan be looking at the possibility of deindustrialization even before it has become fully industrialized in the first place? The way Pakistan’s automobile sector is facing a government induced production crisis points towards a situation where multinational companies that have invested so heavily, in conjunction with domestic investment partners, in the domestic production of the latest models of vehicles will likely be forced into withdrawing their investment from Pakistan. Pakistan society might therefore undergo a process of deindustrialization before it gets the chance to become fully industrialized. This is precisely the reason why the Pakistani government cannot be described as business friendly.
The economic history of fully developed economies of the western world clearly shows that industry in these societies grew under the protective walls of high tariffs against imports and tax rebates to the local industry.
Pakistani governments always fail to protect industrial endeavors where foreign investments in the billions of rupees have been made, and where a large segment of society is employed in meaningful industrial activity – the segment of society comprising of the middle class that acts as a source of social and political stability. An enhanced level of business and industrial activity is something our economy —which has been long stuck in the transitory socially and economically regressive agrarian stage — needs for making the jump towards an industrial and modern society, to move out of the vicissitudes and uncertainties of being nearly fully dependent on agriculture to power the country’s economy.
According to one estimate, around one million workers and laborers are engaged in the auto sector in Pakistan—this includes car manufacturers as well as the vendors industry that provide locally produced parts used in the manufacturing process of vehicles. This labor force is highly skilled and highly paid. According to one leader in the vendor industry, Amir Allahwala, the real transfer of technology takes place when the local labor force is trained in the manufacturing of the finished product or the parts that are used in manufacturing. In other words, this highly skilled and highly paid workforce adds one million families to the Pakistani middle class—a sizable number if seen from the perspective of how effective a role this class of trained workers and labor plays in the social and political stability of Pakistani society.
For auto manufacturers, the calculation may be simple: they are doing business and they will continue to do it as long as they don’t suffer big losses. For the government of Pakistan, the calculation could not and should not be as simple. In other words, they cannot and should not judge the performance of any industry on the basis of financial revenues the industry is expected to generate. As governments are not supposed to be devising economic policy and running the state as if it were a business enterprise. A government should examine the worth of an industrial or business sector from the role it plays in social and political stability. Adding one million people to the middle class is a substantial contribution towards the cause of social and political stability.
In March 2023, the present government made revisions to the Import Policy 2022, easing restrictions on the import of used and unregistered vehicles.
The economic conditions created by government policies have already put a lot of pressure on the car manufacturing industry to lay off their labor force or part of their labor force. Is the government ready for such a sudden jump in the rate of unemployment in Pakistani society?
No modern society can function without a substantial and broad technological base. Pakistan’s auto industry is the source of a continuous flow of state-of-the-art technology. Transfer of technology that takes place from Japan under the auspices of the auto industry not only involves material technology itself, but the immaterial technical know-how and training that is imparted to the local labor force employed in the auto industry; auto industry experts are clear that the real transfer of technology takes place when the locals of any society are trained in use, assembly and manufacturing of technology that is being transferred. A slow down, or cessation of this process will affect the process of transfer of technology from Japan.
Pakistani governments seem to enjoy the epithet of being business friendly, but that doesn't reflect the true situation on the ground. They are rather more inclined towards facilitating the luxurious lifestyle of the elite. Promoting industrial activity in society has never been a central objective of our governments. The economic history of fully developed economies of the western world clearly shows that industry in these societies grew under the protective walls of high tariffs against imports and tax rebates to the local industry. This is a permanent theme in the industrial history of the United States, Western Europe and Japan—the three most industrialized regions of the world whose governments now harp on the virtues of free trade.
The present Pakistani government could at best be described as friendly towards the luxury lifestyle of upper and upper middle classes in our society. This is best reflected in how the government hurt car manufacturers' interests and promoted importing used cars.
In May 2022, the State Bank of Pakistan issued a circular imposing a restriction on Pakistani banks to seek prior approval from the State Bank before proceeding with dollar payment against any import of CKD (completely-knocked-down) units of cars that are being manufactured in Pakistan.
In March 2023, the present government made revisions to the Import Policy 2022, easing restrictions on the import of used and unregistered vehicles. According to the updated policy, the government now permits the importation of used cars with a mileage of up to 2,000 kilometres, contrasting with the previous regulation which restricted imports to vehicles with a maximum mileage of 500 kilometers. These imports significantly impact the country’s economy, primarily because payments are predominantly made in foreign currency, affecting foreign exchange reserves. This supports the luxury lifestyle of the upper middle classes and upper classes, with clear disadvantages for the local industry.
In May 2022, the State Bank of Pakistan issued a circular imposing a restriction on Pakistani banks to seek prior approval from the State Bank before proceeding with dollar payment against any import of CKD (completely-knocked-down) units of cars that are being manufactured in Pakistan. This meant that auto manufacturers will now need the permission of the State Bank of Pakistan as to what type and model of vehicle they will be manufacturing. Most Pakistani auto manufacturers and associated vendor industries are producing nearly half of the parts used in the manufacturing process locally.
But still, they have to import around 40% of the parts from the automaker’s home country. Right now, the SBP is trying to micromanage the auto manufacturing industry. They are telling Suzuki how many Swift CKDs they can import and how many Cultus CKDs they can import, while telling Toyota how many Yaris and Corolla CKDs they can individually import. The crux of this is that the government is trying to fight the current account deficit and in doing so, has sought to curtail the imports of cars into the country through the SBP.
The SBP will now decide on a case-to-case basis how many and which components needed to make a car are imported. This will do no good to the government exchequers, but will surely hurt the industrial production process in Pakistani society and especially the auto industry. Eminent Pakistani economist Dr. Ishrat Hussein has severely criticized this move, as in his opinion, foreign exchange reserves could be recouped with the help of duties that are imposed on the import of CKD and increased duties would have been a better policy than imposing import restrictions on the industry.
Deindustrialization before full industrialization is the worst fate that can befell Pakistani society in this economic downturn. Pakistan has a small market for vehicles. To make car manufacturing a viable business, the government needs to facilitate the industry towards living up to its export potential in the region. Billion rupees of investment will go to waste. No government can afford a steep rise in the unemployment rate in case a million people are laid off over the closure of car manufacturing units.
Compared to the local manufacturing industry, the import of used cars does not employ many people. The import process involves a few people, often from the same family, with one sitting in Japan and other sitting in any Pakistani city engaged in a black-market business that only seeks to serve the luxury lifestyle of the upper middle classes. Car manufacturing, on the other hand, is a valuable economic asset. It is a source of revenue for the state, it is a source of employment, and it is a source of technical know-how for the domestic labor force. According to import data, the influx of used vehicles has soared to 25,098 units, marking a staggering 641% increase during the first eight months of the current fiscal year, compared to around 3,386 units imported in the same period last year. The majority of these imported vehicles fall into categories such as SUVs, and luxury vehicles. In February 2024 alone, 3,213 used vehicles were imported, compared to 396 units during the same period last year.