Industrial policy with teeth

For thirty years, Pakistan's automobile industry has enjoyed among the highest tariff walls in the region. In return, it has given us expensive cars, shallow localisation, negligible exports, and no global competitiveness. The world economy, however, has moved on. Yet our industrial debate remains trapped in an old vocabulary: protection versus openness, tariffs versus free trade, subsidies versus markets.

That vocabulary is now obsolete. It is being rewired. Supply chains are shifting across geopolitical lines, advanced manufacturing is gaining ground. AI-related goods - semiconductors, servers, data-centre infrastructure, robotics and cloud systems - have become among the fastest-growing engines of global commerce. The new geometry of trade carries a hard message: the world no longer rewards countries that merely shield domestic industry. It rewards reliability, technology, logistics efficiency, policy predictability and integration into global value chains.

Pakistan continues to spend much of its policy vim defending legacy sectors through tariff walls, selective incentives and periodic bailouts. The result is an industrial structure that survives but does not transform.

Much of Pakistan's industrial policy remains disproportionately focused on protecting sunset sectors while underinvesting in sunrise industries. While the world competes in semiconductors, AI infrastructure, batteries, advanced electronics. digital services, Pakistan remains preoccupied with defending low-productivity sectors that struggle to export competitively even after decades of support.

For decades, we have tried to build industry through protection, subsidies and import restrictions. But protection alone does not create competitiveness. The critical question is whether state support builds capability, or merely preserves inefficiency.

East Asia showed the way. South Korea tied industrial support to export performance. Vietnam combined industrial upgrading with integration into global value chains. China protected strategically but simultaneously pushed firms toward scale, learning and international competition. In every case, support was conditional. Firms were expected to perform, export, innovate and eventually compete globally.

Pakistan's experience has been different. Protection gradually became permanent insulation. Once rents are created, beneficiaries acquire incentives to preserve them. Over time, industrial policy shifted from building competitiveness to managing claims for privilege. The resistance comes not from workers, but from well-organised incumbents - auto assemblers, sugar millers, cement cartels - who benefit from import compression. captive markets. Regulatory discretion expands, transparency weakens and reform becomes politically difficult.

The consequences are visible. Pakistan has achieved notable phases of growth, but much of it has been consumption-led rather than productivity-led. Domestic demand, supported by remittances and credit expansion, creates the appearance of momentum without structural change. Imports surge while exports remain weak, producing repeated balance-of-payments crises.

Consider the automobile industry. After decades of policy support, domestic assembly exists. But prices remain among the highest in the region relative to incomes. Localisation remains incomplete in critical components. Exports are negligible. Protection helped create an industry, but not a globally competitive one. Firms remain profitable domestically but lack sufficient incentive to innovate, cut costs, or export.

The problem is that the global economy is now changing faster than our industrial strategy. Global firms are reorganising supply chains around resilience, geopolitical alignment and trusted production networks. Industrial competition today is no longer factory versus factory. It is ecosystem versus ecosystem.

Vietnam, Malaysia,. Indonesia have gained manufacturing share not simply because of lower wages, but because they built logistics efficiency, policy coordination and integration into global value chains. An exporter competes not only through labour costs, but through electricity reliability, customs efficiency, logistics speed and policy predictability.

Pakistan does not need to abandon industrial policy. It needs to redesign it - with teeth.

First, protection must be time-bound and transparent. Tariffs and incentives should include sunset clauses, not become permanent entitlements. Protection must remain conditional on performance.

Second, state support must link to measurable outcomes: exports, productivity improvements, technology transfer, localisation targets and quality employment generation. Not promises. Not political connections.

Third, domestic competition must be strengthened. Dynamic economies require contestable markets, not protected monopolies. That means addressing concentrated market structures where rent-seeking has replaced innovation.

Fourth, trade and tariff policy must become simpler and more predictable. Pakistan's complex tariff structure creates distortions, rent-seeking and anti-export bias. A simpler and broader tariff regime with fewer discretionary exemptions would encourage investment and competitiveness.

Fifth, industrial policy must become explicitly export-oriented. Our domestic market matters, but it is not large enough to sustain high-productivity industrialisation on its own. Global markets provide scale, discipline and learning opportunities that inward-looking strategies cannot replicate.

Consider a concrete test: announce that automobile CBU tariffs will fall from their current levels to 15% by 2030 - but only for firms that achieve 50% localisation. $100 million in annual exports by 2027. No exports, no tariff reduction. That is conditionality with teeth.

But the rewired world is not only about hardware. Manufacturing alone cannot absorb Pakistan's young population. The next generation of industrial policy will be defined not only by factories, but by the ability to identify. nurture sunrise sectors before they become globally dominant.

Pakistan must therefore also target globally traded services - IT exports, AI data services, cloud logistics, business process outsourcing. digital freelancing ecosystems - where barriers to entry are lower and scale can expand rapidly. And yes, no industrial policy can work without reliable electricity, efficient logistics and a stable macroeconomic environment. But fixing tariffs without fixing incentives is equally futile. Both are needed.

The lesson of Pakistan's industrial history is that protection without competition does not work. The future will not belong to economies that protect firms forever. It will belong to those that prepare them to compete in global markets. That is what industrial policy with teeth looks like.

Comments are moderated and generally will be posted if they are on-topic and not abusive.

For more information, please see ourComments FAQ