Role of DFIs in Industrial Growth and Transformation How East Asian Countries Succeeded and Pakistan did not?

Abstract

In this paper we explore how development finance institutions, DFIs helped to promote industrial growth with active role of public sector in emerging market economies – Korea, China, India, Malaysia, Brazil, Mexico, Turkey. The DFIs provided long term credit financing which led to structural transformation of their economies of a type never witnessed before. These countries succeeded in spectacular fashion at this transformation over the past four decades but Pakistan did not; why? There always has been an endless debate concerning role of public sector vis-à-vis private sector in promoting economic growth in industrial countries. This debate is still raging on amongst rich countries caught in the trap of almost zero interest rates, low inflation but hardly any growth. These economies have not responded to monetary mechanisms as anticipated. (see Paul Krugman, Noble Laureate in NY Tribune columns). This has shaken to the core the faith of many adherents of Friedmanesque type market mechanisms alone to deliver economic recovery and growth. Perhaps neo-Keynesians were right after all, in their call for old fashioned public sector spending to invigorate and restart engine of economic growth; be it a developing country or an advanced country. We have come back full circle. Let us wait while they discover which Economics to embrace. We shall stay away from this debate and leave it for academics to sort out how long rich countries will keep fumbling with market levers to resuscitate their moribund economies. Instead, we shall begin by asserting that historically public sector has been in the forefront in starting and sustaining economic growth. No two ways about it, and it is not a leap of faith. This has been the experience of emerging economies, while they have gone through structural adjustment, ushering market-based policy regime via economic reforms, liberalization, and opening up foreign trade and capital flows. Within this framework, the role of DFIs has been exemplary that I would like to speak of, based not only on piles of researched evidence available, but from my own field experience of East Asian economies during much of 1980s, where one could literally touch the outcome of public sector supported, World Bank (WB) funded DFI lending which nurtured industrial transformation, unfolding in front of all to behold. When industries of advanced countries began leaving in droves, WB had to endure full weight of their pressure to shut down industrial financing; which it did, and I am witness to it, but this could not help stem departure of foot-loose industries, exporting jobs overseas enabled by massive outflows of foreign direct investment for nearly four decades. It is a fascinating saga and a relevant one to discover why Pakistan did not succeed at the type of industrial transformation which occurred in emerging economies, most of them comparator countries of Pakistan. This happened in spite of similar type of DFI lending for a long time and almost a manic devotion of government to the role of public sector, particularly in the era of nationalization cheered on by Fabian Socialists in Pakistan, and thereafter by reformers and redeemers of all hue and variety. Reforms and privatization is still going on; but industrial transformation remains as elusive as ever.