The review of historical and contemporary case studies in Chapters 3 and 6 revealed some important lessons for Pakistan. An industrial policy is crucial to promote both domestic economic spillovers from infrastructure investment and local industrialisation from SEZs. An industrial policy can help ensure that spillovers remain within the domestic economy rather than leak out abroad. This chapter examines the economic theory regarding relevant market failures; reviews some historical and contemporary examples of industrial policy; studies the recent calls in Pakistan for an industrial policy to complement the CPEC investment; inspects whether the state in Pakistan has the capacity to implement developmental-type interventions; looks at the politics of infrastructure; and examines how the CPEC will be financed.

FROM MARKET FAILURES TO AN INDUSTRIAL POLICY

The economics of neoliberalism are structured around the assumption of an efficient, spontaneous and self-organising market economy. The state should preserve free markets from any inclinations towards monopoly, issue a currency and protect property rights according to clear rules rather than discretion. The government is likely to act according to political motivations and will lack the necessary information to intervene efficiently (Wade 2012). Neoliberal thinking does not pay particular attention to economic structure, such as the share of industry in the economy, which it argues will reflect the free functioning of efficient markets. The implicit view is that with macroeconomic stability and well-functioning markets, structural change will be governed by comparative advantage. When an economy is open to international trade, comparative advantage directs resources to where their contribution to national product is maximised and there is no rationale for a policy which favour some economic activities over others (Rodrik 2006).

Contrary to the assumptions of neoliberal economics, market imperfections are likely to be pervasive. Any entrepreneur who invests in a new area of manufacturing provides a demonstration of its success or failure to other potential entrepreneurs; the pioneer will generate learning in production and, with new technology, train workers and managers and provide inputs for other firms or retail outlets. The social value will exceed the private return of such investment (Rodrik 2006). The training labour needs to work in manufacturing (remember the shortages of skilled labour in Pakistan discussed in Chapter 5) is unlikely to be solved in a free market. If one expends time and energy in training labour, another firm can save training costs by poaching those workers.