TRADE POLICIES AND

ECONOMIC GROWTH OF
PAKISTAN
Name: Muhammad Nawaz
SEAT NO: EH-1957080
COURSE: MONITORY ECONOMICS
 RESEARCH PAPER
TRADE POLICIES & ECONOMICS GROWTH OF PAKISTAN
Introduction:
Pakistan's economy has grown steadily over the past decades and, despite
the constraint of a relatively weak infrastructure, the country has taken
substantial steps to open its economy to the outside world. Tariff levels and
non-tariff protection measures have been reduced significantly as has state
intervention in trade, according to a WTO Secretariat report on Pakistan's
trade policies and practices.
Pakistan's medium-term trade policy programme includes further
liberalization of the trade and exchange system and, during the period
1994-97, tariff rates and other taxes on international trade are to be cut
substantially. "Import liberalization is expected to increase competition
between imports and domestic production and contribute to more efficient
resource allocation and the development of a more efficient export sector,"
says the report.
In spite of the recent tariff reductions, Pakistan is still a high-tariff economy.
At present, says the report, "the simple average of statutory duty rates is 50
per cent, with the highest standard tariff rate of 70 per cent. Tariff
escalation is substantial in areas such as food, textiles, leather, paper and
petroleum." Pakistan actively participated in the Uruguay Round
negotiations as a developing country with a very substantial interest in the
textile and clothing sector. While the country had only a very small number
of tariff bindings before the Uruguay Round, Pakistan is now to bind about
33 per cent of its tariff lines and 81 per cent of its tariffs for agricultural
products. Most agricultural products will have ceiling rates of 100 per cent.
In the industrial sector, Pakistan will bind 25 per cent of its tariffs, most at
ceiling rates of 40 to 50 per cent. At the end of the implementation of the
tariff reform programme scheduled for 1997, the tariff structure is expected
to improve not only because the still high taxes on international trade will
be reduced, but also because of further simplification of the tariff structure
through the elimination of most tariff exemptions.
While Pakistan has made progress in eliminating or reducing non-tariff
barriers to trade such as import licensing requirements, other non-tariff
measures continue to apply to products whose import is banned for
religious, health, safety, security or other reasons.
The scope of state trading has been reduced substantially. The report says
that currently, the Trading Corporation of Pakistan does not seem to have
any exclusive or special trade privileges but that the state-owned Rice
Market Corporation and the Cotton Export Corporation "still enjoy some
inherited advantages over their private competitors, despite the fact that
they do not enjoy exclusive rights." Exports of raw cotton and rice are
subject to export taxes, either for revenue reasons or to serve as a
disincentive to exporting raw materials. The scope of such taxes, however,
has been reduced in recent years.
In conclusion, the report says that Pakistan's economy is vulnerable to
external trade barriers and that the textile and clothing sector, its main
export, has been subject to a restrictive trade regime - in the form of the
Multi-fibre Arrangement - for decades. "Pakistan has paid a high price in
terms of export losses for this derogation from the GATT discipline. It is
thus very important that Pakistan's trading partners assume their
responsibilities" and implement the results of the Uruguay Round. The
report says that by establishing a favorable trading environment, Pakistan
will be further motivated to continue its trade reform and overall
liberalization
Abstract:
Pakistan's economy has grown steadily over the past decades, despite the
constraint of a relatively weak infrastructure. Nevertheless, in the 1980s, a
number of structural weaknesses undermined the sustainability of growth
and heightened Pakistan's vulnerability to external shocks. To address
these constraints and attain stable, sustained growth with financial stability,
Pakistan initiated a comprehensive macroeconomic and structural reform
program, including measures to liberalize both domestic activity and the
payments system.
Since the introduction of this program, Pakistan has made substantial steps
towards greater reliance on market forces and opening its economy to the
outside world. The levels of tariff and non-tariff protection, and of state
intervention in trade, have been reduced significantly. This new direction is
in sharp contrast with Pakistan's previous economic policies, which were
characterized by import-substitution and widespread state intervention in
economic life.
The beginning of the reform process was accompanied by increasing
domestic and external imbalances. The fiscal deficit widened and domestic
liquidity expanded, contributing to higher inflation. The 1990-91 Middle East
crisis put additional pressure on Pakistan's external current account
position. In 1992/93, Pakistan was affected by widespread floods and plant
diseases. The growth rate of GDP declined to 2.3 per cent, exports
stagnated, the current account deficit widened to 7.1 per cent of GDP and
gross official exchange reserves declined to a critically low level by mid-
1993. In 1993/94, in response to continuing domestic and external
imbalances, Pakistan intensified its medium term (1993/94-1996/97)
adjustment and structural reforms. These are aimed at sustaining annual
economic growth at about 7.0 per cent over the period 1993/94 to 1996/97;
reducing inflation to 6 per cent by the end of the period; raising official
reserves to over three months of imports; and reducing the burden of
domestic and external debt.

Review of Literature:
Export led hypothesis have been examined by many researchers and it
explains trade And economic policy with the aim to boost up the
industrialization process by exporting the goods in which the country
enjoys the comparative advantage. Export led growth implies open
domestic market for foreign competitors and get an access in international
market. This economic strategy has been adopted by many developing
countries. After the great depression and Second World War, when
every economy was closed for another, the import substitution policy had
been adopted. In the 1950s and the 1960s,some Asian countries along
with Taiwan and South Korea had focused export led growth for their
development. And hence the emergence of Asian Tigers has supported the
export led growth strategy for development.

Plenty of studies have highlighted the export led growth hypothesis in 1981.
William G. Tyler (1981) has analyzed the empirical relationship between
economic growth and export growth for the period of 1960 to 1977
from cross-section data of 55 middle income developing countries He
applied Vicariate tests and results shown the significant positive
relations between growth and other economic variables in which the growth
of manufacturing output, investment, total exports, and manufacturing
exports are included. In the case of Pakistan, Khan et al (1995) tested this
casualty for the period of 1972:II to 1994:II, using the Granger Causality
Approach. They have found that there is a stable, long-run two-way
relationship between exports and output, and the one-way stable
relationship between output and primary exports. Moreover, they have
found that there was a bi-directional relationship between exports of
both primary and manufactured growth and economic growth.
Ekanayake (1997) analyzed the causal relationship between export growth
and economic growth in eight Asian developing countries using data
from 1960 to 1997 for, Korea, India, Pakistan, Indonesia, Sri Lanka,
Thailand and Malaysia by using co-integration and error-correction models.
The results shown that bi-directional causality exists between export growth
and economic growth in case of India, Indonesia, Korea, Pakistan,
Philippines, Sri Lanka and Thailand. Furthermore, there was also
evidence for export-led growth in Malaysia. Rahman and Mustafa (1997),
test the causality of export and economic growth of 13 Asian countries
including Bangladesh, India, and Pakistan etc. They used co-integration
and ECM and determined that bidirectional causality between real GDP
growth and real export growth have experienced by China, South Korea
and Malaysia in both short and long run. But in case of Bangladesh,
Thailand and Philippines there was an indication of bidirectional causality in
the short-run and unidirectional causality in the long run from real export
growth to real GDP growth. Moreover, Pakistan and Nepal have
advantage from bidirectional causality in the short run while unidirectional
causality in the long-run flows from real GDP growth to real export growth.
India, Sri Lanka and Indonesia experience unidirectional causality from
real GDP growth to real export growth in both the short and long run.
 METHODOLOGY
1988-1999
General Zia’s death in 1988 saw the return of democracy to Pakistan.
However, the ’90s were marred with political instability as the PPP and the
PML-N ruled the country. External deficits rose and worker remittances saw
a huge decline. Frequent government changes meant that no decisive
policies could be made.

 The GDP growth saw its worst increase of only 1.7% in 1996 and the
second-worst inflation of 14.5% in 1995.
 Poverty rose, and foreign debt tripled.
 Pakistan’s nuclear program drew further sanctions and left the country on
brink of bankruptcy.
Agricultural growth: 4.4%
LSM growth: 4.8%
GDP growth: 4.05%

1999-2008
1999 saw the implementation of another martial law. General Pervez
Musharraf took the reins this time. The era of General Pervez Musharraf
and General Ayub Khan are considered as the golden era’s for the
Pakistani Economy. The economy along with the financial status of
Pakistan was immensely balanced and a great economical outcome was
observed.

 Growth rates saw increases until 2004-2005’s peak of 8.6%.

 Debt to GDP ratio saw a decrease from 100% to 55%.
 Foreign exchange reserves increased by $9 billion.
Agricultural growth: 5.4%
LSM growth: 8.8%
Average GDP growth: 6.3%
 2008-2013
When General Pervez Musharraf resigned, the PPP took control in 2008,
and the country once again suffered economically. The growth saw
masssive decline either agricultural or overall economical growth.

 Economic growth slowed down to 4.09%, and the yearly growth fell to 2%.
Agricultural growth: 2%
LSM growth: 4.4%
Average growth rate: 4%

2013-2018
PPP rule continued until 2013, after which the PML-N took charge. The
PML-N managed to fix a crippled economy by using IMF loans. GDP
growth saw an increase year-on-year and inflation dropped for most of their
rule. Macro-economic stability ensued and Moody’s declared Pakistan’s
economy stable.

 Average GDP growth rate: 5%

2018-2020
In 2018, the PTI was elected for the first time. Prime Minister Imran Khan
was confident that his party will bring all the statistical success for the
Pakistani Economy. However, the party introduced various economic
reforms that had the wrong effect.

 GDP growth rate fell to a historic low of 0.99% in 2019, much below the
5.55% in 2017.


Changes in GDP proportions 1947-2019

SECTOR 1947 2019 CHANGE-PERCENTAGE
AGRICULTURE 53% 22.04% NEGETIVE -30.96%(MINUS)

INDUSTRY 9.6% 18.34% POSITIVE +8.74% (PLUS)

SURVICES 37.2% 53.86% POSITIVE +16.66% (PLUS)

Conclusion:
This study re-investigated the relationship between exports and economic
growth in Pakistan with variables like FDI and import. The results of the
ARDL to co-integration test indicate the existence of the co-integration
between two variables and have a long run equilibrium relationship. They
may be in disequilibrium in the short-run. The independent variables such
as imports and exports are positively related with GDP. Therefore, the
government should make efforts and take steps to enhance the exports as
well as imports in order to promote economic growth. There should be no
trade barriers in the form of import and export quotas and tariffs or
some other kind of trade restrictions. The import should be based on
more capital goods which could contribute to increase more production of
goods. While exports should be based on more manufacturing goods
rather than the primary good which have low terms of trade.

Due to high trend of consumption, Pakistan is trying to attract foreign

and direct investment in the country. FDI can contribute to increase the
GDP growth because it shows significant values. Government of Pakistan
can adopt more transparent Structural Reforms to accelerate and expedite
liberalization, privatization and de-regulation activities within the country. In
order to facilitate the investment activities protective duties/taxes on the
industry should be removed to promote competition and raise exports.
For the last few months, due to low level of inflation, expansionary
monetary policy is being followed which can reduce the cost of production
and increases the competitiveness of exports. Low levels of interest rate
can help those industries in which investment is needed to promote and
enhanced the export industries. Stable exchange rates are the first and the
best policy options for the increase in exports and manage the imports.
Exchange rate also encourages the FDI in both terms, whether increasing
or decreasing. The costs which is imposed behind the border should be
managed because it declines the competitiveness of potential export. The
transaction costs of export in developing countries are two to three
times higher than that of the developed countries. Export diversification
is broadly known as an encouraging trade policy for supporting economic
growth. It helps to make countries less vulnerable to face the problems of
terms of trade, shocks of export earnings and increase in returns to scale.
Recently many developing countries are adopting product diversification

policies to avoid expected or unexpected changes in term of trade.

References:

Khan, A.H., and N. Saqib(1993)

“Exports and Economic Growth:
The Pakistan
Experience”, International Economic
Journal, Vol. 7, No. 3, 55-64.s.
Khan, A.H., and N. Saqib(1993)
“Exports and Economic Growth:
The Pakistan
Experience”, International Economic
Journal, Vol. 7, No. 3, 55-64.s.
Khan, A.H., and N. Saqib(1993)
“Exports and Economic Growth:
The Pakistan
Experience”, International Economic
Journal, Vol. 7, No. 3, 55-64.s
Khan, A.H., and N. Saqib(1993)
“Exports and Economic Growth:
The Pakistan
Experience”, International Economic
Journal, Vol. 7, No. 3, 55-64.s
 World Trade organization
 Khan, A.H., and N. saqib(1993) “Export and Economic Growth: The Pakistan
Experience”, International Economic journal, vol. 7,No.3,55-64.s.
 www.researchgate.net/publication/
328290222_IMPACT_OF_TRADE_ON_ECONOMIC_GROWTH_OF_PAKISTAN
_AN_ARDL_TO_CO-INTEGRATION_APPROACH
 www.economy.pk/economic-status-of-pakistan-from-1947-2020/