National Innovation Policy

Pakistan stands today at an unwieldy position in its economic history. After a decade of slow growth the challenge is to launch Pakistan on a new growth path characterized by a sustained high GDP growth of 7 to 9 percent combined with a change in the composition of growth. To ensure rapid poverty reduction requires different performance from the economy by focusing more on productivity rather than just adding factor inputs. The drivers of growth that are generally focused in Pakistan’s growth strategy are aimed at breaking the key bottlenecks, increasing the investment rate, creation of infrastructure, and opening up of the economy. What seems to be missed out in the growth strategy is the national innovation policy for the purpose of increasing total factor productivity.

The national system of innovation in which a firm is embedded matter greatly, since they strongly influence both the direction and the vigor of its own innovative activities. The main reasons why Pakistani firms have low rate of technological innovation are increasingly protectionist trade policies, little competencies in production and research, and the poor institutions of corporate governance.

Innovation is considered as one of the key ingredients in determining a country’s overall competiveness, productivity and hence economic growth. It must be essential part of growth strategy of developing countries to catch up with developed countries as it is also important for improving global competitiveness of a country. Therefore, the World Economic Forum considers innovation as one of the twelve pillars of its widely disseminated Global Competitiveness Index.

Pakistan’s position in this domain continues to deteriorate over the years. According to the Global Competitiveness Report 2013-2014, Pakistan has dropped further nine places and ranks at 133^rd out of a total of 144 countries. Given the crucial importance of innovation for competitiveness on the one hand, and Pakistan’s poor performance on the other, the innovation policy must be central to growth strategy.

Local demand opportunities and competitive pressures will not result in innovation unless firms have the competencies that enable them to respond. Corporate and national competencies in production and in research are essential. Using patents as an indicator of innovation, innovation at the national level is positively influenced by the size of the economy, foreign competition in the domestic market, public expenditure on R&D and the availability of venture capital; it is negatively influenced by the presence of a relatively large number of small and medium-sized firms, high company tax and a high level of economic prosperity [1].

Firstly, the research and development expenditures in Pakistan have always been low. Secondly, there have never been notable efforts to enhance the collaborative leaning and technological development with the help of foreign firms and networks. The model of collaborative learning and collective efficiency is not only confined to Italy, Spain and Germany, but diffused around the world – and under certain conditions, extremely effective for process and product innovation at firm level [2]. For example, Sialkot in Pakistan plays a dominant role in the world market for specialist surgical instruments made of stainless steel. From a core group of 300 small firms, supported by 1500 even smaller suppliers, 90% of production (1996) was exported and took a 20% share of the world market, second only to Germany. In another case the Sinos valley in Brazil contains around 500 small-firm manufacturers of specialist, high quality leather shoes. Between 1970 and 1990 their share of the world market rose from 0.3 to 12.5% and they now export some 70% of total production. In each case the gains are seen as resulting from close interdependence in a co-operative network. The big question is what types of collaborations are most appropriate in case of Pakistan?

Developing innovation culture necessitates establishment of supporting organizational context in which creative ideas can emerge and be effectively deployed. Building and maintaining such organizational conditions involve working with structures, work organization arrangements, training and development, reward and recognition systems and communication arrangements. Above all, the requirement is to create the environment within which a learning organization can begin to operate, with shared problem identification and solving and with the ability to capture and accumulate learning about technology and about management of the innovation process.

____________________

[1] Faber, J., & B., A. H. (2004). Innovation capabilities of European. Research Policy, 33 , 193-207.

[2] Tidd, J., Bessant, J., & Pavitt, K. (1997). Managing Innovation : Integrating Technological, Market and Organizational Change. John Wiley & Sons, Ltd.

Modern Industrial Economy and Structure of 2008 Financial Crisis

The interdependence of key industries of the economy, have made the participants to realize their inter-reliance of profits, prices, sales, etc. Over time the recognition of such technological and economic interdependence has rapidly changed the meaning and function of stocks, debt, and corporate management structures. The stocks, debt, and boards of directors are part of central planning process and their use as instruments in the planning process rests with exercise of power and coercion over other important economic, social and political organizations. This is because of corporate leaders and their inherent powers to affect the planning process; can change and affect other social, economic and political organizations.

The market system has turned into a large measure, a centrally planned system. And instead of the forces of supply and demand and self interest that leads the important free market outcomes the economic planners in large economy’s units actually coordinate these market outcomes in terms of price, quantity, and resource allocation, from a system wide perspective instead of individuals’ perspective as in case of Adam Smith’s Economy. That is why the inter industry coordination and cooperation within the economy's centrally planned sector bears a closer resemblance to autarchic power than to firm or industry market power.

Veblen’s depiction of modern enterprise is also that companies depend on each other, just like a giant machine, where the processes are very interlinked to each other. Because these companies are very closely interlinked and dependent on each other; the standardization is ensured in a way that irregularity or departure from standard measurements brings fault and thus delay industrial process, it detracts from its ready usability in the nicely adjusted process into which it is to go; and a delay at any point means a more or less far-reaching and intolerable retardation of the comprehensive industrial process at large.  But Veblen does not talk about anything related to central planning in such an interlinked machine process. However, Veblen does talk about the pursuance of profits by the companies and generating high returns but he also warns that it may result in over production in the industry and thus may go against overall socially desirable outcome.

The financial crisis of 2008 are mainly rooted in the banking and financial institutions that are closely linked, while sharing the risk, through instruments like securitization . The interdependence of these institutions not only caused the profit and growth to spread over whole financial system but the risk also spread through securitization. However, corporate leader in financial system have operated in structures that led to an underestimation of risks and excessive risk taking. The regulatory framework overestimated the capacity of banks to manage risk and, as a result, underestimated the level of capital that they should hold. The corporate leadership started influencing the political environment to get bailout plans; and got their support because of attached externalities. The crisis peaked in September/October 2008 when the American authorities decided not to bail out the investment bank Lehman Brothers.

Efficient Retirement Policy

Fundamental laws of economic efficiency suggest that individuals that are more productive should work more and retire later than their less productive peers. While from practicality point of view, there must be some methods to evaluate the employment history to determine how early an employee must retire. However, in the bigger picture, the government cannot use policies contingent only on productivity and cost of retaining employees. As these policies, have wide range implications on unemployment, public expenditures and the welfare goals of the government.

Repeatedly, at least over the past few decades, there have been proposals from the bureaucracy for increasing the retirement age to 62 years from 60 but federal and provincial governments have turned down such proposals mainly because of political incentive in providing jobs to growing younger population. On the top of it, along with other stringent measures in the new budget government is reluctant to increase the salaries to appease the impact of 100 percent raise in salaries by PPP government.

As part to reform program IMF has advised government to increase the retirement age to 62 and to contain pension bills. As Pakistan’s federal expenditures on salaries and pensions is estimated about Rs 450bn, including pension expenses of about Rs. 171bn for the current financial year. The provincial pay and financial bills are much higher than the federal bill. 

“Public wage bill reforms should target the structural change that strengthen the link between pay and productivity, improve hiring process and ultimately raise efficiency in the provision of public services” said the IMF, adding that the increase in wage bill must commensurate with the provision of public services and growth.

In order to contain government expenditures, the pension component of an optimal policy should be based on the present value of lifetime retirement cost linked to the age of retirement. Such a policy may undo part of pension expenditures provided by government but at the same time, there must be careful analysis of the labour distortions and income tax distortions.

In private sector, though retirement behaviour is affected by multiple factors, the average effective age in private sector can be taken as efficient retirement age in public sector. One indicator of retirement behaviour in private sector is the average effective age at which older workers withdraw from the labour force. The effective age depends on multiple factors like old-age benefits, pensions and so on.

Average effective age of retirement versus the official age, 2007-2012

The effective age of retirement in most of these countries is well below the official age for receiving a full old-age pension. The difference between the age for receiving a full old age benefit and age of retirement can because of decrease in employees’ productivity and that create space for other productive employees.  However, Japan and Korea are notable exceptions where the effective age of retirement is close to 70 for men despite an official retirement age of 60.

The roots cause of present situation of salaries and pension expenditures lies in ever increasing number of employees in public sector, particularly that of provincial governments. The incomes of provincial governments are not increasing at rate commensurate to the increase in salaries, pensions and overall expenditures. The increase in retirement age from 60 to 62 years, though in line with the retirement age in most of the countries, would bring only momentary cut down in the salaries and pension expenditures. More distressing is the rapid increase in number of employees, wage rates and other largesse that has been characteristic of every new government that took office.