A Case for Domestic Commerce-Led Growth
A Case for Domestic Markets and Domestic Commerce Led Growth
Though presented in different garbs over the years, Pakistan’s growth policy has been informed by the Haq/HAG[1] model of the 1950s. The Haq/HAG model is based on chasing industrial production, creating foreign exchange surplus through export promotion, and a large government footprint with a suspicion of the market and the private sector (Haque, 2006). The government’s footprint, according to an estimate by Haque and Ullah (2021), is approximately 67% of GDP. As a result of these policies, domestic commerce that caters to domestic consumers and markets, domestic markets, and private sector development has been neglected. The negligence of domestic commerce and too much focus on exports have stifled domestic trade and market development.
However, domestic commerce, which includes the services sector and several activities including the wholesale and retail sector, is too important a sector to be ignored. According to Haque (2006), the development of domestic markets and commerce is the key to economic growth. However, a growth strategy based on production for mercantilist goals has stifled domestic commerce in Pakistan. Unleashing the potential of domestic commerce may be the path to high sustainable growth in the country. A vibrant domestic commerce sector is the core of the economy facilitating intermediation between supply and demand, entrepreneurial development, risk-taking, innovation, and competitive markets. Such an economy transitions from commodity exports to brand names, process and capital exports, all of which command a higher rate of return.
However, in Pakistan, historically the focus has been on import substitution and production for exports rather than focusing on domestic market development. Thus, exports are subsidized, while imports are heavily taxed for import substitution. It means that inadequate investments are made in domestic market development. Interestingly, a PIDE and Ministry of Planning study (Faraz, Siddique, and Saeed, 2023) shows that despite several incentives for decades, Pakistan’s export-oriented industries have not performed as expected in terms of productivity. On the other hand, Pakistan’s services-oriented industries, which operate predominantly in the domestic market and are open to competition, have performed considerably better in terms of productivity growth.
Markets are like the nervous system of an economy because it is in these markets that consumer demand is clearly articulated (Hayek, 1945). Well-functioning markets clear demand and supply through price adjustments, which convey relevant market information to all agents. Consumer markets are, therefore, the ‘front end’ of the economy where the demand and supply of many products, brand names, new products and new services are all equilibrated through the price system. In such markets, innovations and entrepreneurship thrive through risk-taking and understanding of consumers’ tastes and markets. Innovation and entrepreneurship taking place in the domestic market later will move out and lead to higher exports and foreign exchange earnings. Entrepreneurs and innovators need neighborhood markets to perfect their products, brands and recipes, which they will then export. Multinationals like Coke, McDonald’s, and Ford all started as domestic industries. Their testing ground was the domestic consumer market.
[1] HAG stands for the Harvard Advisory Group.
