Balance of Payments and

Trade Regimes
 Commercial Policy
 Commercial Policy is the art of managing the
exchange of goods and services between countries
 Objective of policy makers: efficient allocation of
resources
 Choose between:
 Import and local production
 Export and domestic production
 Advantages of foreign trade:
 Remove domestic shortages of scarce FOP
 Overcome diseconomies of a small domestic market
 Exchange goods with less growth potential for those with
more growth potential
Commercial Policy
 Developing country characteristics w.r.t
trade:
 Bulk of the exports are primary commodities
 Vulnerable and unpredictable production levels
 Terms of trade deteriorate over time
 Access to markets of advanced countries is limited
by tariff and non-tariff barriers
 Depend on advanced industrialized countries for
most of their development needs
Commercial Policy
 Objectives of comm. policy in LIC’s:
 Maintaining equilibrium in the balance of payments
 Attaining favorable terms of trade
 Promoting exports to derive the full benefits of
comparative advantages
 Import substitution to protect domestic production
 Ensure adequate availability of imported goods for
development purposes
 Keeping the internal and external values of the
national currency at desired levels.
Commercial Policy

 Instruments of commercial policy:

 Tariff structure
▪ Import duties
▪ Export duties
 Non-tariff barriers (NTB’s)
▪ Direct trade restrictions
▪ Indirect trade restrictions
Pakistan’s Foreign Trade: Basic Facts
 The most critical factor to affect industrialization
in Pakistan has been the trade regime:
 Non-devaluation decision in 1948
 Export-led Korean war
 ISI in the 1950’s and 60’s
 Devaluation decision by Bhutto in 1972
 De-linking the rupee from the dollar by Zia
 Trade reforms taken under the SAP’s: reduction in
tariffs and subsequently, revenues raised by the govt.
 WTO
Pakistan’s Foreign Trade: Basic Facts
 Table 9.2
 Table 9.4
 Table 9.5
 Table 9.9
 Table 9.10
 Table 9.11
Trade Policy and Trade Regimes: the
Early Years (1947 – 58)
 1947/48: India and the UK together accounted for
67% of Pakistan’s trade
 Pakistan a member of the sterling area
 1949: the ‘Non-Devaluation Decision’
 Pound sterling was devalued by 31%, and most countries
linked to it also devalued
 By deciding not to devalue, Pakistan made imports from
the UK and India cheaper
 Trade deadlock between India and Pakistan
 Quantitative controls imposed on imports and exports
Trade Policy and Trade Regimes: the
Early Years (1947 – 58)
 Korean War:
 Trade regime liberalized
 Demand for Pakistan’s exports increased by 109%
 Prices of exports appreciated
 BOP situation improved substantially
 Found other trading partners and trade with India
also restored
Trade Policy and Trade Regimes: the
Early Years (1947 – 58)
 Collapse of the Korean boom:
 Decided not to devalue to increase exports
 Instead, chose licensing and quantitative controls
to deal with the BOP situation
 Created excess demand for imports at duty paid
prices
 Policy of high tariff walls and controls on imports
initiated rapid industrialization in the country
Trade Policy and Trade Regimes: the
Early Years (1947 – 58)
 Salient features of the trade policy after 1952:
 Over-valuation of the rupee with respect to other
countries
 Use of uantitative controls on imports to regulate
the level and the consumption of imported goods
 Highly differentiated structure of tariffs on
imports and export taxes on just and cotton
Trade Policy and Trade Regimes: the
Early Years (1947 – 58)
 Import controls became a powerful tool in the hands
of the govt. to affect and influence resource
allocation:
 Favored mainly the establishment of consumer goods
industries by restricting their import
 Hindered the establishment of capital goods and
intermediate goods industry, since their import was freely
allowed
 Gave import licenses to those who had imported during
1951-52, enabling the development of a monopoly of
‘category holders’.
Trade Policy and Trade Regimes: the
Early Years (1947 – 58)
 Although the system was effective initially
 Over time, these control mechanisms
 Failed to keep pace with basic economic changes
 Became a source of corruption and bribery
 Resulted in importers making monopoly profits
 Became a source of economic disparity between
East and West Pakistan
Trade Policy and Trade Regimes: the
Early Years (1947 – 58)
 Opposing view by Lewis: the tariff structure played
a ‘relatively minor role’ in directing resources
 The principle determinant was the import licensing
system
 Despite numerous interventions and distortions
made by the govt., the structure of production
would have been quite similar without them
 The restrictive trade policy only ‘speeded the process’
Trade Policy and the Decade of
Development
 Dismantled the system of direct controls on
imports, prices, profit margins and investment and
moved towards indirect controls
 Most important component of trade policy: Export
Bonus Scheme
 Open General Licensing system (OGL) to liberalize
imports
 Free List for selected raw materials
Trade Policy and the Decade of
Development
 Effects of the Bonus Voucher scheme:
 Total imports increased much more rapidly than exports or
GNP
 Composition of imports shifted towards the import of
capital goods
 Market forces were relied upon to determine the
commodity composition of imports
 Increase in the flexibility of entrance into the import trade
 Substantial increase in the duties on imported goods, to
reduce excess demands for imports.
Trade Policy and the Decade of
Development
 The scheme compensated for an over-valued
exchange rate
 Increased exports of manufactured goods
 Export of raw jute fell from 60% of total exports to 20%
 Export of cotton and jute textiles increased from 8.5% to
35% over the same period
 Made the import of raw materials and machinery
much easier
Trade Policy and the Decade of
Development
 Saeed: the scheme was an ingenious incentive for
both export expansion and import substitution
 Criticisms by Amjad and Ahmed:
 Gave wrong signals and caused distortions
 Rise in exports of processed goods was at the expense of
raw materials that could otherwise have been exported
 Some rise in exports may have taken place even if this
scheme was had not been introduced
 Exporters sold their goods in the foreign markets at lower
prices, sometimes even below cost
Trade Policy and the Decade of
Development
 Open General Licensing system:
 Expanded to allow new-comers to enter
 Give wider distribution from gains of processing
an import license
 Attempted to break the monopoly of the category
holders of the 50’s
Trade Policy and the Decade of
Development
 Generous import policy:
 Increased items on the Free List
 Decreased items that needed a license to import
 Reasons behind it:
 Large amount of foreign aid which the military
government was getting
 More than 40% of imports were financed by aid
 When aid was curtailed in ’65, the govt. reimposed a lot of
controls
A New Country: 1972 – 77
 The loss of the Eastern wing was a major structural
break because in 1969/70:
 Almost half of W. Pak’s exports went to E. Pak
 18% of the western regions imports came from the East
 E. Pak earned over half of United Pakistan’s export
earnings for it
 Many of the reforms of Ayub’s regime were
perceived to be the cause of income concentration
A New Country: 1972 – 77

 May 1972:
 import licensing system was abolished
 Also abolished the EBS and hence the multiple
exchange rate system
 import of all luxury items banned
 Rupee devalued by 56%
A New Country: 1972 – 77

 Liberal import policy:

 Done to increase the availability of all type of
goods so that industries could improve their
capacity utilization
 Increase production in anticipation of a higher
demand of exportable goods following the
devaluation
A New Country: 1972 – 77
 ‘a prominent feature of the Bhutto era was the
absence of an explicit export policy’, Adams and
Sabiha
 The devaluation was the main means of
encouraging exports.
 Export boom was short-lived due to the oil price
shock
 A sequence of bad crops, together with the rise in oil
prices, worsened the BOP situation
A New Country: 1972 – 77

 Positive outcome:
 Boom in the Middle East due to a rise in oil prices
 Exported labor and commodities to the M. East
countries
 Partly made up for the loss of E. Pak’s exports
 Remittances went up sharply => transformed the
social structure of Pakistan to a great extent
The Beginning of a Liberal Trade
Regime: 1977 – 88.
 Steps taken by the Zia govt. to liberalize trade:
 Reduced the number of banned goods
 Most NTB’s were removed
 The number of items on the free list was increased
 The procedure for importing goods was streamlined and
made much easier
 Despite all these measures, the World Bank in 1980
argued that Pakistan’s import regime reached its
most restrictive stage.
The Beginning of a Liberal Trade
Regime: 1977 – 88.
 Further steps taken by the govt.:
 Removed explicit import quotas on non-capital
imports
 Previously banned and restricted goods were
liberalized
 Import policy for 83-84: whereas previously all
items not specifically permitted were banned,
now all items not specifically banned were
importable
The Beginning of a Liberal Trade
Regime: 1977 – 88.
 Measures taken to boost exports:
 Export rebates
 Concessionary credit for exports
 Income tax facilities for exporters
 Delinked the rupee from the dollar, and introduced a
flexible exchange rate
 1988: the World Bank felt that the trade regime that
existed then ‘still seems to be biased in favor of
import substituting production. Domestic markets
were insulated from foreign competition through
NTB’s and high tariffs’.
Trade Liberalization under
Structural Adjustment
 Trade was further liberalized under a series of
agreements between the IMF and the Pakistani
govt.:
 Improving the tariff structure
 Reduce the no. of items in the banned list
 Narrow down the dispersion of duty rates
 Remove NTB’s and replace them with tariffs.
 Abolish import licensing
 Resident Pakistani’s allowed to open FCD accounts
Trade Liberalization under
Structural Adjustment
 Speedy reduction of tariffs or a phased
reduction?
 Example of Mexico (1985 – 89)
 Geo-political importance
 NAFTA
 Crash of the economy in 1994
The Debate over Efficiency and
the Trade Regime
 Asad Sayeed: ‘protection through tariffs, quotas and
exchange rate distortions is deemed to distort
allocative efficiency and hence reduce growth and
productivity of the economy over time’
 60’s: inefficient resource use in the industrial sector
due to the highly graduated tariff structure
 Resources attracted to high cost industries
 Negative value added in some industries
 Industries were using economically inefficient processes
 Excessively capital-intensive technologies used
The Debate over Efficiency and
the Trade Regime
 The World Bank and IMF, as the greatest
champions of free trade, recommend:
 Drastic cut in tariffs
 Removal of all NTB’s
 Constant devaluation
 ‘liberalized’, ‘neutral’ trade regime based on the
‘rationalization’ of the tariff structure, with lower
average tariff rates and the elimination of
exemptions
The Debate over Efficiency and
the Trade Regime
 A group of scholars believed that the extent of
inefficiency was grossly exaggerated.
 High average tariff rates have no direct relationship with
the growth performance of the manufacturing sector
▪ High dispersion of tariffs was central to Taiwan’s success
 Productivity growth is more critically determined by other
policies and the political economy of the sector, and tariffs
cannot be singled out as the causal factor
The Debate over Efficiency and
the Trade Regime
 Criticisms on the Ayub regime are also incorrect:
 There was ample growth and huge diversification of
exports under Ayub
 The trade regime during the ’80’s is also wrongly
called ‘anti-export’, because aggregate exports
were 9% of GDP during Zia’s time
 Although there is need to further diversify exports,
trade policy in Pakistan does not have an ‘anti-
export bias’.