New auto policy should focus on cost, quality and global integration

Javed Hassan

In his seminal work ‘The Wealth of Nations’, Adam Smith proposes that in efficiently functioning economies “the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.” In stark contrast to such an approach, Pakistan’s prevailing auto sector policies protect the interests of the few producers at the expense of the many consumers. As was recently observed by Federal Minister of Science and Technology, the vehicles being assembled in the country are not up to international standards despite their ever-increasing prices.

The minister’s dissatisfaction reflects the failure of three decades of auto-sector policies, which despite providing over 140 percent effective rates of protection, skewed in favor of the end-product, have failed to develop local assemblers with state-of-the-art production capabilities or a market size necessary to achieve internationally competitive economies of scale. Although policies were meant to encourage allocation of resources such that it led to improved affordability and quality for consumers as well as the global integration of the sector, their design fell short at both providing a mechanism to bring down prices on a sustainable basis or ensuring the development of Pakistan’s industrial capabilities necessary for competing in international markets. In effect, they have not provided the incentives and competitive environment to encourage producers to focus on segments where it would leverage the country’s latent comparative advantage.

The industry’s lack of success is largely due to the design and implementation of policies without analyzing and quantifying the requisite pre-conditions, which is standard practice in most trading blocs such as the European Union (EU) or Association of Southeast Asian Nations (ASEAN). Empirical efficiency measures like the Mill and Bastable tests are respectively applied to determine the period of protection required for an infant industry to become viable without it, and evaluate the welfare implications of incentive structures. In Pakistan on both these, the auto industry and, implicitly, auto-policies fail. The absence of rigorous analysis of the long-term implications of providing incentives at the expense of consumers explains why the industry continues to struggle to meet international standards, yet produces vehicles that are more expensive than those available globally.

More perversely, the policies have encouraged the allocation of the country’s precious resources in production activities where Pakistan may have an inherent disadvantage. If instead, the focus would have been toward developing areas where Pakistan enjoyed intrinsic advantages, businesses are likely to have concentrated resources in acquiring necessary capabilities in segments of the auto-industry supply chain where it could compete internationally. For example, an auto-policy that moved away from specializing on vehicle assemblage, and instead focused on sub sectors could be better suited toward achieving policymakers’ objectives of consumer welfare as well as increasing industrial capabilities.

The evolution of trade has prompted other countries to already focus on pursuing such strategies and realize their inherent comparative advantage. Countries specialize in the different stages of the supply chain such that it is impossible to say where a car is manufactured. Data shows Pakistan is likely to have a comparative advantage in auto-parts and two/three-wheel automobiles for which there are significant primary/secondary markets in Africa and Asia. This would also enable the redeployment of the 1.8 million people currently employed throughout the supply chain.

Keeping in mind the failure of previous policies, the upcoming auto policy should aim to promote integration of segments of the auto sector with global value chains through two measures. First, it should liberalize the trade regime to give market access to international automobile manufacturers in exchange for integrating domestic parts manufacturers in their value chains. Second, it should help stakeholders in identifying and engaging with key auto markets across the world with the aim of reducing frictions to cross border trade, and thereby provide certainty to international auto players to set up their supply chains from Pakistan.

The policies should also focus on securing access to African and Asian markets to expand exports to primary/secondary markets, which can be accomplished through actively seeking free trade agreements with the African Union, The Regional Comprehensive Economic Partnership (RECP), and Central Asian countries. All this should be done concurrently with investment toward enhancing domestic capabilities for the expansion of potential areas of comparative advantage.

A central plank of transformation must be to incentivize businesses in the sector to invest in research and development as well as explore manufacturing new products. The standardization of both products and production processes also has to be coordinated between relevant business associations, domestic manufacturers, and global players. Finally, it is imperative to identify emerging skills’ requirements and liaise with engineering universities and other vocational skills institutions such as National Vocational and Technical Training Commission (NAVTTC) to ensure appropriate intervention and availability of manpower at the earlier stage.