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PAKISTAN’S EXPORT IMPERATIVE

By Mirza Qamar Beg

These remarks represent the personal views of the author, and should not be construed as
necessarily reflecting the position of the Government of Pakistan.

Over the last decade Pakistan’s exports have doubled. Growth
was particularly marked during the last five years (until FY 06) with a CAGR
of 16%. A combination of domestic reforms and favourable external
environment contributed to this significant growth.

2. The domestic scene was marked by responsible leadership
committed to an economic turn – around. A well implemented program of
ambitious reforms, fiscal discipline, political stability, and a fair internal
security situation helped strengthen the macroeconomic framework. The
textile sector invested $ 4 –5 billion to meet the post MFA challenges. Until
atleast 2004 the Real Effective Exchange Rate remained stable. The
extensive trade and tariff reforms lowered the implicit tax on exports,
reduced the anti-export bias, and enabled higher import content.
Simultaneously, some ‘internal liberalization’ – improvements in regulatory
environment and factor markets - also took place.

3. On the external front the global demand for Textiles remained
favourable. Pakistan enjoyed duty free access to its biggest market, the EU,
for most of its products during 2001 – 2005; and Post 9/11 and with some
trade policy adjustments Afghanistan emerged as a ‘new’ market becoming
Pakistan’s third biggest buyer. Debt rescheduling and sizeable capital
inflows kept the external sector healthy and provided greater fiscal space.

4. This doubling of exports, however, masked certain weaknesses.
During the same period Pakistan’s competitors fared much better, as a
percentage of GDP Pakistan’s exports actually declined, and there was
imperceptible product and market diversification. There was little movement
up the value chain, unit prices decelerated, and sufficient technological
change and technology diffusion was not evidenced. Share of exports in
total trade declined from 43% to 36% and export growth rate has been
falling: from 22% in FY03 to 16.8% in 05 to 13.8% in 06 to less than 6% this
year.

5. A multitude of explanations is offered for Pakistan’s exports not
faring better: unfair competition (subsidies, undervalued exchange rates,
preferential market access), higher costs (impoverished infrastructure
including unreliability of power supply, higher shipping costs, poor trade
logistics and fecilitation, diseconomies of scale, unofficial payments), weak

7. 8. in fact they do more harm than good as entrepreneurial focus shifts from efficiency gains to rent seeking. explain Pakistan’s lower prices on international markets compared to the countries accused of enjoying ‘unfair’ competition? 6. is instructive). as it gingerly pushes external liberalization.e. FTA driven market access is unlikely to ensure significant trade creation: with the smaller economies gains will be quite limited. Regional integration has its advantages but it is subordinate to political realities and risks a shift in investment bases that may be inimical to long term merchandise export prospects especially of the more value added products. 9. The suggested ‘ solutions’ are as varied as the explanations. Absence of objective and evidence – based studies challenges appropriate institutional policy responses. exchange rate regime. ‘compensatory’ subsidies. de- emphasize textiles) are offered as the main elements of a response matrix. These proposed solutions. and product diversification (i. (India’s greater emphasis on internal liberalization. social protection). The temptation to ‘prove the point’ – find the data to support the perception – is quite prevalent. insufficient attention to quality). Market access (more FTA’s). like the explanations. Subsidies can never be a substitute for lowering costs. and with the EU and US. better exchange rate alignment. export bias. How does one. It is not enough for an Export Strategy to be well . where there is promise of substantial gains. Each of these explanations is plausible but unfortunately there are few objective studies available to establish the extent to which they contribute to Pakistan’s export disadvantage. for instance. tax: GDP ratio. it is unlikely to materialize and even then at high public welfare costs. 2 supply base (lack of diversification. While the Rupee is currently overvalued a sudden correction could have grave macroeconomic implications without ensuring commensurate export gains as our past adventures with exchange rate adjustments have demonstrated. Product diversification certainly needs to be pursued but it can not be done at the cost of textiles and will not happen unless there is substantial new and technology based investment in the non-textile sectors. regional integration (euphemism for open trade with India). skills. deeper tariff reforms. savings and investment rates. It adds to the hazard of dominant interests trumping sustainable solutions. Any further lowering of tariffs (except the glaring peaks and dispersion anomalies) will have limited export growth effect and will be ill advised unless preceded by other reforms (capital and risk markets. merit consideration but it is uncertain if they will launch Pakistan’s exports on a sustainably high growth trajectory. It is also uncertain if the importance of exports to national economy and welfare is fully recognized and shared across the policy- making spectrum.

as Hamid argues with respect to merchandize exports. especially into horticulture and livestock that are more pro-poor. It has also to be recognized that Pakistan’s present level of trade openness risks being rolled-back unless there is a significant jump in exports. Stiglitz is not alone in questioning the universality of trade-welfare enhancement linkage. There are limits to privatization. Some because they do not think exports can stimulate growth : how can 10 to 15% of the GDP. with some agricultural policy adjustments – more than a tweak – to ensure greater efficiency and a more equitable sharing of gains. is part of the solution. and that too largely cotton-based (‘cottonomics’ as Amjad labels it). For instance. If exports do not grow substantially at the very least it will jeopardize the next generation of reforms. and bulk of poverty and underdevelopment is domiciled in agriculture. concessionary capital flows and remittances. and environmental health. It has to nationally owned and export interests protected when making tough policy choices. who question the wisdom of an export led growth strategy. These are . especially in terms of labour welfare. There are many in Pakistan. gender equity. On the other hand it can be argued that in terms of maximizing welfare gains Pakistan’s export profile. to about three fourths of exports. Agriculture contributes. Prof. they argue. directly or indirectly. correction of policy bias in favour of major crops will promote agricultural diversification. be the locomotive? Or. it accentuates income inequalities and with imperfect risk and capital markets trade liberalization may be Pareto inferior. and even if achieved. 3 designed. and not just the Washington Consensus contrarians. There appears to be a viable case for export growth : poverty reduction nexus. 11. The way Pakistan’s economy is posited today exports appear to be the best bet to attract new foreign and domestic investment. Others because such growth has high adjustment and implementation costs. 12. 14. it does not ensure significant welfare gains. Indeed. Export led growth strategies have lost some of their appeal. An important by-product will be empowering women who are more active participants in the rural economy. trigger the badly needed infrastructural and human capital upgrades. at worst it could fan forces that would like to see Pakistan a more closed economy and indeed a more closed polity. Some also question the ‘costs’ of greater exports. 10. the most important determinants of growth. 13. dominated by agri-based products. and prompt technological change and knowledge diffusion. the days of flying geese model with spillover effect and neighbourhood advantages are over.

However. Economic governance. technological inflows. Pakistan’s macroeconomic situation is reasonably well poised but needs to be carefully watched because of concerns like overheating of the economy. 17. there are few stroke-of-the-pen-type solutions and compelling as the case is for Amjad’s shift to knowledge economy. gender and environmental laws. 4 valid areas of concern. 19. It is our competitiveness disadvantage that is at the heart of the problem. Indeed. regulatory quality. tax : GDP ratio. For improved competitiveness focus now clearly needs to be on microeconomics. a conducive investment climate. The ‘competitive edge’ will have to found elsewhere. where we have been seen some recent back-sliding. it is unlikely to stand the reality check of resources and time. supporting institutions – are weak and not improving fast enough. None on its own can secure significant gains. reform of factor markets. monetary overhang and the still uncomfortably high debt burden. all necessary ingredients of a favourable investment environment. especially tariff dispersion and tariff escalation. and optimal interest rates will be required to address these concerns. Over the short term it is the triumvirate of macroeconomic stability. The main drivers – human resources. 21. And all three have to move in tandem. or Lall and Weiss’s to technology intensive. and atleast an equitable access to major markets that is of the essence. Tariff reforms. gender and environmental interests. Fiscal discipline and improved savings and investment rates. 15. or Hamid’s to services. Unfortunately. Buyers’ message is increasingly unambiguous: comply or we don’t buy. there is sufficient evidence to suggest higher exports and social and environmental compliance can be mutually inclusive where the Governments have the political will to enforce their own labour. 20. expedited and mainstreamed – and not just in Islamabad. It has to be prioritized. a good ‘social compliance’ regime supports export growth. It will be short-sighted for a government to promote exports at the cost of labour. is another short term . If the export imperative is indeed accepted what will it take to achieve a quantum jump in our exports within a reasonable period of time? 16. 18. trade facilitation. even if it means a somewhat lower GDP growth rate. are more a function of political will and indeed there is already a lot of work in progress.

26. and governance. and better and greater cluster development. Without greater enterprise involvement it will be difficult to make a difference. As a short term measure import of skilled manpower would need to be encouraged. Without a genuine empowerment of professional management efficiencies and economies of scale will not be possible. The high cost and unreliability of utilities is unsustainable. 27. 22. The urgency. The real challenges are infrastructural. and not just textiles – have to be genuinely zero rated. especially in factor markets (land and labour). all exports – and not domestic sales. which is critical to improved competitiveness. WAPDA unbundling and privatization has to be accelerated along with correction of price signals. largely because of design defects. and the rewards. and a persuasive case based on economic as well as geopolitical grounds. If Pakistan has failed to find favourable market access for what it produces an answer could be to produce what markets that Pakistan has preferential access to want. . Enterprises must invest in skills development and they will only do so if the disincentives to having a stable work force and recourse to contract labour are removed. however. 5 ‘doable’ area. The mushrooming of preferential market access arrangements. Despite its concerted efforts. Meanwhile. It is high time that the entrepreneurs accelerated the shift from family to professional management. which is not likely over the short term. Islamabad has to ensure greater Provincial motivation by protectively engaging them and giving them more policy space. 23. Also. especially is its principal markets. there is no sign of materialization of Pakistan’s FTA with either the U. who are major players. 24.U. The skill deficit seems to show no signs of narrowing despite the large sums spent by EPB. does not seem to have percolated down to the Provinces. The short term solution could well be special economic zones. except for the services sector which clearly needs to be focused on. both physical and social. For the medium term of- course we can not do without a drastic revamp of our educational system so it produces more ‘employable’ and more ‘trainable’ manpower. places Pakistan at considerable disadvantage. 25. of a favourable investment climate. Measures to ensure labour market flexibility must be balanced with a degree of stability of the work force. and subsidies. This. or the E. even when one is not unmindful of their fallout effects. would require a significant change in the export mix. regulatory quality.S. theft and losses.

and the E.S. 29. exports are important to public welfare enhancement but the real solutions reside outside the Ministry of Commerce. Efforts to accelerate the non-agricultural market access (NAMA) negotiations have to be prioritized. 30. are subsidizing Pakistan’s competitors more than protecting their own industry. if it shifts its demand from a preferential arrangement to an equitable one. 6 28. and E.U.U. An over all reduction of tariffs will serve Pakistan’s interests best.S. There is enough evidence to establish that even for the sensitive textile and apparel sector in effect the U. To conclude. Pakistan is likely to find a friendlier ear with the opinion markers in the U. . with their growing bilateral preferential arrangements. It appears Pakistan’s only real prospect of mitigating the access disadvantage is through the WTO. Significant and sustainable export growth is unlikely without an intragovernmental acceptance of the export imperative.