ISLAMABAD:

The Fourth Industrial Revolution (FIR) is taking shape. Technological innovation, artificial intelligence (AI) and the application of new methods are reshaping the basic contours of the economy. It has challenged traditional economic wisdom and production models.

The FIR has triggered changes in total factor productivity as well as in the factors of production themselves. AI is transforming both total and industrial productivity by reshaping skill sets, altering production costs and redefining competitiveness. Estimates suggest that AI can reduce costs by up to 25%, improve efficiency by 10-50% and save time required to solve complex issues and make decisions. However, AI will also exert pressure on traditional labour markets, leading to job enhancement, elimination, or new opportunities.

At the same time, the global economic order is changing. US President Donald Trump’s trade war and the West’s insistence on maintaining hegemonic control have fast-tracked these changes. The Global South, led by China, has refused to accept hegemonic practices. Therefore, the global economic order is adjusting and remains in a state of flux.

The most visible change is taking place in global trade structures. The multilateral trading system built around the World Trade Organisation is under strain. The so-called rules-based order is weakening, while unilateralism and protectionism are increasingly becoming the norm.

These changes call on every country, including Pakistan, to reimagine its economic and trade strategies. For Pakistan, this task is challenging given that inflation has begun to rise again. The financial crisis, including circular debt and foreign debt, remains unresolved. Agricultural growth is declining due to policy distortions and governance failures. The rebasing of the economy in 2021-22 revealed that the industrial sector’s share of GDP declined from 20.9% to 19.5%. The incumbent government has been unable to reverse this trend.

The social development situation is equally troubling. According to the Labour Force Survey 2024-25, unemployment among educated youth remains high. The unemployment rate stands at 11.9% among master’s and PhD holders, 10.9% among graduates and 12.5% among those with intermediate education. In education, 26.2 million children are out of school, while millions more are enrolled in madrassas without access to formal or technical education. These challenges reinforce poverty levels, which the World Bank has estimated at 44.5%.

Against this backdrop, Pakistan must revive its economy. Conventional reform approaches and incremental policy adjustments will not suffice. The changes underway are structural and unprecedented. How? Historically, technological innovation has complemented human labour rather than competing with it. AI, however, is the first major invention to pose a direct challenge to human employment by disrupting job markets. Pakistan therefore needs to fundamentally reimagine its economic model. Policies must address current challenges, revive growth, ensure sustainable development and enable Pakistan to enter the FIR with confidence and dignity.

Exports have traditionally been prescribed as the primary engine of growth and economic revival. Pakistan continues to rely on this approach to generate employment and ease financial stress. However, under current global conditions – characterized by protectionism, unilateral trade measures and tariff wars – this strategy faces serious constraints. Structural weaknesses, including a narrow industrial base, weak branding capacity and a deteriorating agricultural sector, further complicate the task.

In this context, Pakistan’s most viable option lies in deeper integration into global supply chains, particularly those linked to advanced economies. This requires addressing structural deficiencies. Pakistan has an excellent opportunity to execute this policy through the China-Pakistan Economic Corridor (CPEC) and the recently signed Action Plan with China. Several sectors, including textiles, minerals and small and medium enterprises (SMEs), offer scope for supply-chain integration.

The textile sector illustrates this potential. Despite being a major export industry, it remains heavily dependent on contract manufacturing for foreign brands and lags behind in brand development and global market presence. China, by contrast, has developed a complete textile supply-chain ecosystem. Collaboration with China offers Pakistan an opportunity to move up the value chain. A recent example is the establishment of a textile-focused special economic zone in Lahore by a Chinese firm, which has invited other Chinese companies to invest. These firms will manufacture products currently imported by Pakistan, including synthetic fibres and chemicals. Chinese companies also bring expertise in modern machinery, the Internet of Things and AI-enabled production systems, which can help Pakistan conserve foreign exchange and expand industrial capacity.

The mineral sector presents another strategic opportunity. Pakistan possesses vast mineral resources but lacks the technical capacity for exploration and processing and remains dependent on imported machinery. China dominates global mineral and machinery supply chains, making it a natural partner for supply-chain integration or joint ventures. Encouragingly, cooperation agreements in this sector have already been signed, providing a foundation for progress. Agriculture also has the potential to drive growth, generate employment and reverse development challenges. However, poor governance, low-quality inputs, structural inefficiencies and limited modernisation continue to constrain productivity. While many countries have moved beyond basic mechanisation to adopt AI, drones and precision agriculture, Pakistan remains among low-productivity agricultural economies.

To unlock this potential, Pakistan must reverse current trends. Building strong linkages with China’s agricultural sector, particularly in inputs, is essential. Access to high-quality seeds alone can substantially increase output and exportable surplus. Similar cooperation can be extended to farm mechanisation, livestock development and AI-based agricultural applications.

At the same time, Pakistan must prepare for the broader demands of the FIR. This revolution will be driven by scientific advancement, digital technologies and AI. Innovation will be the key determinant of competitiveness. Countries with strong innovation ecosystems will be better positioned to benefit. Unfortunately, Pakistan lags behind on most indicators of AI and innovation. It lacks an AI hardware industry, including semiconductors and related components, while software development remains limited. In global innovation rankings, Pakistan consistently performs poorly due to weak human capital and an underdeveloped research ecosystem.

Investment in these areas is therefore critical. Through CPEC and the Action Plan, Pakistan has an opportunity to build a technological and innovation base with Chinese support. Cooperation should be implemented without delay, particularly in agriculture, research and development and technology deployment. However, caution is required. The adoption of AI and advanced technologies can disrupt labour markets, especially in agriculture, textiles and SMEs.

THE WRITER IS A POLITICAL ECONOMIST AND VISITING RESEARCH FELLOW AT HEBEI UNIVERSITY, CHINA