Import substitution industrialization in Pakistan (ISIIP) is a strategy of economic development that aims to reduce dependence on foreign imports by promoting domestic production of goods and services. ISI was widely adopted by many developing countries in the post-World War II era, including Pakistan, which embarked on an ambitious program of industrialization in the 1950s.
The Rationale and Implementation
The main rationale behind Import Substitution Industrialization in Pakistan was to overcome the balance of payments problems that many developing countries faced due to their reliance on primary exports and imported manufactured goods. By substituting imports with domestic production, ISI was expected to save foreign exchange, stimulate domestic demand, create employment, and foster technological learning and innovation.
Pakistan implemented Import Substitution Industrialization in Pakistan (ISIIP) through a combination of policies, such as high tariffs and import quotas on consumer goods, low tariffs and subsidies on capital goods and intermediate inputs, preferential credit allocation and tax incentives for domestic industries, exchange rate overvaluation, and public sector investment in infrastructure and strategic sectors.
The Outcomes and Limitations
The Import Substitution Industrialization in Pakistan strategy resulted in a remarkable growth of manufacturing output and value added in Pakistan, which averaged about 16% per annum in the 1950s and 1960s. Pakistan also achieved a degree of diversification and structural change in its industrial sector, as well as some technological upgrading and skill development.
However, ISIIP also had several limitations and drawbacks that became evident over time. Some of these were:
- ISIIP led to a distorted pattern of industrialization that favored consumer goods industries over capital goods and intermediate goods industries, resulting in a low level of backward and forward linkages and a high import dependence for key inputs.
- ISIIP created a rent-seeking and protected environment for domestic industries, which reduced their competitiveness, efficiency, and innovation. ISIIP also discouraged exports by making them less profitable than domestic sales due to the overvalued exchange rate and high tariffs.
- ISIIP increased the fiscal burden on the government, as it required large public expenditures on subsidies, tax exemptions, and public enterprises, while reducing the revenue from import duties. ISIIP also widened the income inequality and regional disparities in Pakistan, as it benefited mainly the urban industrial elites at the expense of the rural agricultural masses.
- ISIIP failed to address the structural constraints and bottlenecks that hindered industrial development in Pakistan, such as inadequate infrastructure, low human capital, weak institutions, political instability, and corruption.
The Need for a Reconsideration
In light of these limitations and drawbacks, many economists and policy makers have questioned the validity and viability of ISIIP as a strategy of industrialization for Pakistan. They have argued that Pakistan should shift its focus from import substitution to export orientation, as the latter would provide more dynamic benefits for economic growth and development.
Export orientation would enable Pakistan to exploit its comparative advantage in international trade, access larger markets, benefit from economies of scale and scope, enhance its productivity and competitiveness, diversify its export basket, attract foreign investment and technology transfer, and improve its balance of payments position.
However, some scholars have also cautioned against a wholesale rejection of Import Substitution Industrialization in Pakistan in favor of export orientation. They have pointed out that ISIIP still has some relevance and potential for Pakistan’s industrial development, especially in light of the changing global context and challenges.
Some of these challenges include:
- The rise of protectionism and trade wars among major economies, which threaten to disrupt global trade flows and market access for developing countries.
- The emergence of new technologies and digitalization, which require higher levels of technological capabilities and innovation for industrial competitiveness.
- The increasing environmental concerns and sustainability issues, which demand more efficient use of resources and lower carbon emissions from industrial activities.
In view of these challenges, some scholars have suggested that Pakistan should adopt a more balanced and pragmatic approach to industrialization that combines elements of both import substitution and export orientation. They have proposed that Pakistan should pursue a selective import substitution strategy that targets strategic sectors and products that have high potential for export growth, technological learning, value addition, employment generation, environmental protection, and social welfare.
Such a selective import substitution strategy would require a careful identification of priority sectors and products based on criteria such as market size and demand potential, technological feasibility and spillovers, resource availability and efficiency, environmental impact and sustainability, social benefits and equity.
It would also require a coherent set of policies that support domestic production without creating excessive distortions or protectionism. These policies could include:
- A competitive exchange rate that reflects the true value of the currency
- A moderate tariff regime that provides some protection but also encourages exports
- A rational subsidy system that targets specific sectors or products based on clear objectives
- A flexible credit allocation mechanism that facilitates access to finance for domestic producers
- A conducive tax regime that provides incentives for investment
- A robust infrastructure network that reduces transaction costs
- A strong human capital base that enhances skills
- A sound institutional framework that ensures good governance
- A vibrant innovation system that fosters research