The economics of trade:

International trade is premised not on the ability to produce an

output with lower inputs than other nations but on the appetite
to forego the least quantum of the other commodity for the sake
of making another. So, countries direct resources towards goods
they have a comparative advantage in and import ones in which
others incur a lower opportunity cost. The net result is a
supplemental quantity of all the outputs to consume, leaving the
partaking parties better-off.

Countries have a comparative advantage in certain commodities based on

variation in weather and resources (factors of production). Some are richly
endowed with a distinct natural resource while others possess inexpensive
labour. This explains why the US exports air crafts, Saudi Arabia crude oil,
and Brazil coffee.

The opinion of academics varies immensely on the efficacy of trade. Free

trade proponents assert that trade openness effectuates economic growth in
an economy. On the flip side, protectionists consider trade
counterproductive to growth. Some also deduce a causal relationship,
arguing that trade openness is a mere by-product of growth in the
economy’s real side (growth-led trade).

While international exposure does open businesses to foreign competitors,

it also provides opportunities for them to integrate into global value
chains

In Pakistan’s case, trade openness and GDP per capita are positively
correlated though the correlation remains a meagre 0.008 from 2000 to
2019. Pakistan remains the least open country for trade in Asia (2019) and
the second-last performer in the Morgan Stanley Capital International
(MSCI) emerging markets group ahead of Brazil (2019). The average in the
MSCI emerging markets category is 72.7 per cent, while the Asian average
hovers above 100pc. The graph portrays a murky picture of Pakistan’s trade
status over the last two decades compared to China, India, and Bangladesh.

The reason for Pakistan’s appalling trade as a percentage of GDP outlook is

that imports have spiralled while the exports remain stagnant. Hence, the
overall trade ranges from 30pc to 40pc of GDP.

The trade balance shrunk recently due to a curb on imports and may be
short-lived until a long-term upturn in exports.
But, limiting imports — although inevitable — had a trade-off. It made
Pakistan compromise on growth and had trickledown adverse implications
on the employment level. It is because Pakistan imports machinery,
minerals (petroleum), electrical and electronic equipment and chemicals
that aid in industrial production. Besides, protectionist policies can have
repercussions like retaliation. This reprisal is what led to the US-China
trade war.

Pakistan adopted import substitution industrialisation to support local

industries. The policy which became famous during Ayub Khan’s era
continued until it was replaced by export-led industrialisation in the early
1980s. Pakistan still witness’s market failure resulting from this policy as it
led to rent-seeking by local players and the citizens had to get along with
inferior yet exorbitant products. An example of this is the abysmal state of
Pakistan’s Japanese automotive assemblers.

The crux of protectionists’ argument is the potential loss of market share to

the local industries, especially the small and medium enterprises. However,
their contention remains erroneous. International exposure does expose
businesses to foreign competitors, but it also provides opportunities for
them to integrate into global value chains. This prompts innovation and
accords them with a substantial market (within and beyond the borders) to
tap.

For relatively smaller economies, trade is more beneficial because the gains
from comparative advantage are proportional to relative price differentials
in the world market and relative prices in the home country without trade.
The larger the difference, the greater the benefit for a country and vice
versa.

For instance, Japan has an opportunity cost of $5,000 for producing a

vehicle while Pakistan has to forego $15,000 for the same vehicle. The
relative price for Japan to produce that car would range from $5,000 to
$15,000. On the contrary, the relative price in Pakistan’s case has to be
more than $15,000. So, Pakistan would be worse-off if it continues to
produce that car instead of importing it from Japan.

Pakistan also has minimal trade with neighbours like India and Iran unlike
what the gravity model suggests in theory. The prime trading partners
include the US, UK, and Germany which are located far away. This
augments the cost of imports. Moreover, Pakistan’s labour has a dismal
productivity level (output/input) on average. Labour productivity not only
lags behind neighbours but also parallels many African nations.
A case of trade liberalisation should be considered for an increment in
Pakistan’s real income. However, the industry competing with foreign
manufacturers will face the music and the workers employed in those
sectors may lose their jobs. In economic terms, the interest groups —
protected by the successive governments for far too long — will suffer a
decrease in their relative incomes. Hence it is for the government to decide
between siding with special groups’ interest or national interest.

Economics of poor communities:

Each development initiative pushes the poor out of their abodes, disrupts
their lives and destroys their fragile assets.

Abdul Rahim (not his real name) came to Karachi in 2012 in

search of work.

Hailing from South Punjab, he lost his livelihood and shelter on the farm
where he worked. A relative helped him find a job in Karachi and invited
him to live in his modest dwelling along Gujjar Nullah.

After three years of hard work, Mr Rahim was able to save about
Rs180,000. His family had joined him so he constructed a room atop the
dwelling of his relative through mutual agreement.

Whatever he earned, he invested in this asset that he wanted to become a

safe and secure entity for his family.

When the demolitions began, he became extremely worried. And finally,

the authorities struck and razed to the ground the cumulative investment
this small clan had made for over a decade. Despite possessing “papers and
proof” of ownership, the eviction did not stop.

Mr Rahim says he is asset-less again, with practically no possibility of

owning any abode in the future.

Development, urban management and evictions in Pakistani cities seem to

co-exist. Each development initiative pushes the poor out of their abodes,
disrupts their lives and destroys their fragile assets.

Most real estate developments in Karachi commodify land as a

commercial entity

The construction of Lyari Expressway in Karachi destroyed more than

25,000 houses and other establishments, mostly belonging to the urban
poor. Evictions and the removal of street vendors from the precincts of
Empress Market caused a loss of livelihoods to thousands of workers and
small-scale entrepreneurs.

Inappropriate choices of development schemes, anti-poor designs and

ruthless evictions have affected hundreds of thousands people. While
hollow commitments about rehabilitating the uprooted people are made,
very little implementation is observed in reality.

The poor survive on the margins of the city. Regular and formal land
supply, which is a pre-requisite for housing and other urban activities, is
rarely targeted to benefit the poor. There have been many real estate
developments taking place in Karachi and other locations with an express
objective of commodifying land as a commercial entity. These ventures aim
to attract a middle and upper-middle income clientele, overseas Pakistanis
and even those who possess undocumented capital resources. The social
process of enabling the poor access shelter is completely denied.

It is ironic to note that the trends show a rise in migrations of the poor to
cities, but no planning attempt is made to enable this vast incoming
population access decent shelter.

Even people who have survived in cities for many years find it impossible to
access formal property markets owing to very high price thresholds.
Besides, the poor cannot fulfil the conditions laid down by the formal
banking sector and mortgage markets. Formal ownership of a bankable
asset is a pre-requisite for applying for any loan, which can enable the poor
develop a liveable abode.

Faced with the dilemma, the poor resort to peripheral locations. These
include invisible places such as nullah edges or the vicinity of graveyards
where they construct dwellings. Our laws also provided a mechanism to
deal with this situation.

The Sindh Katchi Abadis Authority Act of 1987 provided for examining and
regularising informal settlements in a structured manner. Little activity is
being done by this agency to support the urban poor in their legitimate
demand for building their abodes in a legal manner. In many cases, when
the courts of law were approached by the downtrodden, little or no relief
was extended.

Owning an abode is the foremost economic and social asset that a poor
household can dream of. It is also the most effective option for combatting
poverty. An abode is not a living space alone. It is a workshop for small-
scale production, a petty warehouse and a shared lodging in case of any
emergency.
If regularised, the dwelling becomes a bankable asset, which enables the
urban poor to move up the social mobility ladder. Access to formal and
informal credit becomes possible. Large cities such as Karachi require a
sizable workforce at modest wages. This labour force can only be arranged
if access to dwelling of a very basic sort is made available.

Our state institutions have not extended large-scale housing initiatives to

benefit the urban poor. In fact, their approaches and methodologies
favoured the speculators and investors.

In other words, low-income housing ventures became an investment

opportunity for the middle and upper-middle income groups. A lack of
targeted land supply only made access to land a distant possibility for the
actual needy.

While our lifestyles thrive on cheap labour and other forms of workforce,
our policies become detrimental to the preservation of this essential human
resource. Our existing institutions should take stock of the situation,
initiate an appraisal of housing needs of our urban locations and extend
support to the deserving in a coordinated manner.

Unabated social dislocations can cause enormous damage to the peace and
tranquillity of our social fabric, eventually leading to uncontrollable social
unrest.

The writer is an academic and researcher based in Karachi

Published in Dawn, The Business and Finance Weekly, March 29th, 2021