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
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supply base (lack of diversification, export bias, insufficient attention to
quality). 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. The temptation to ‘prove the
point’ – find the data to support the perception – is quite prevalent. How
does one, for instance, explain Pakistan’s lower prices on international
markets compared to the countries accused of enjoying ‘unfair’ competition?

6. The suggested ‘ solutions’ are as varied as the explanations.

Market access (more FTA’s), better exchange rate alignment,
‘compensatory’ subsidies, regional integration (euphemism for open trade
with India), deeper tariff reforms, and product diversification (i.e. de-
emphasize textiles) are offered as the main elements of a response matrix.

7. These proposed solutions, like the explanations, merit

consideration but it is uncertain if they will launch Pakistan’s exports on a
sustainably high growth trajectory. FTA driven market access is unlikely to
ensure significant trade creation: with the smaller economies gains will be
quite limited, and with the EU and US, where there is promise of substantial
gains, it is unlikely to materialize and even then at high public welfare costs.
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. Subsidies can never be a substitute for lowering costs; in fact
they do more harm than good as entrepreneurial focus shifts from efficiency
gains to rent seeking. 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. 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, tax: GDP ratio, savings and investment rates, exchange rate
regime, skills, social protection). (India’s greater emphasis on internal
liberalization, as it gingerly pushes external liberalization, is instructive).
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.

8. Absence of objective and evidence – based studies challenges

appropriate institutional policy responses. It adds to the hazard of dominant
interests trumping sustainable solutions.

9. It is also uncertain if the importance of exports to national

economy and welfare is fully recognized and shared across the policy-
making spectrum. It is not enough for an Export Strategy to be well
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designed. It has to nationally owned and export interests protected when
making tough policy choices.

10. Export led growth strategies have lost some of their appeal.
Prof. Stiglitz is not alone in questioning the universality of trade-welfare
enhancement linkage. There are many in Pakistan, and not just the
Washington Consensus contrarians, who question the wisdom of an export
led growth strategy. Some because they do not think exports can stimulate
growth : how can 10 to 15% of the GDP, and that too largely cotton-based
(‘cottonomics’ as Amjad labels it), be the locomotive? Or, as Hamid argues
with respect to merchandize exports, the days of flying geese model with
spillover effect and neighbourhood advantages are over. Others because
such growth has high adjustment and implementation costs, and even if
achieved, it does not ensure significant welfare gains. Indeed, they argue, it
accentuates income inequalities and with imperfect risk and capital markets
trade liberalization may be Pareto inferior.

11. On the other hand it can be argued that in terms of maximizing

welfare gains Pakistan’s export profile, dominated by agri-based products, is
part of the solution. Agriculture contributes, directly or indirectly, to about
three fourths of exports; and bulk of poverty and underdevelopment is
domiciled in agriculture. There appears to be a viable case for export
growth : poverty reduction nexus, with some agricultural policy adjustments
– more than a tweak – to ensure greater efficiency and a more equitable
sharing of gains. For instance, correction of policy bias in favour of major
crops will promote agricultural diversification, especially into horticulture and
livestock that are more pro-poor. An important by-product will be
empowering women who are more active participants in the rural economy.

12. 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. There are limits to privatization, concessionary capital flows and
remittances. If exports do not grow substantially at the very least it will
jeopardize the next generation of reforms; at worst it could fan forces that
would like to see Pakistan a more closed economy and indeed a more
closed polity.

13. The way Pakistan’s economy is posited today exports appear to

be the best bet to attract new foreign and domestic investment, trigger the
badly needed infrastructural and human capital upgrades, and prompt
technological change and knowledge diffusion, the most important
determinants of growth.

14. Some also question the ‘costs’ of greater exports, especially in

terms of labour welfare, gender equity, and environmental health. These are
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valid areas of concern. However, 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, gender and environmental laws. Indeed, a good ‘social compliance’
regime supports export growth. Buyers’ message is increasingly
unambiguous: comply or we don’t buy. It will be short-sighted for a
government to promote exports at the cost of labour, gender and
environmental interests. The ‘competitive edge’ will have to found
elsewhere.

15. 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. Unfortunately, there are few stroke-of-the-pen-type solutions

and compelling as the case is for Amjad’s shift to knowledge economy, or
Hamid’s to services, or Lall and Weiss’s to technology intensive, it is unlikely
to stand the reality check of resources and time.

17. Over the short term it is the triumvirate of macroeconomic

stability, a conducive investment climate, and atleast an equitable access to
major markets that is of the essence. And all three have to move in tandem.
None on its own can secure significant gains.

18. Pakistan’s macroeconomic situation is reasonably well poised

but needs to be carefully watched because of concerns like overheating of
the economy, monetary overhang and the still uncomfortably high debt
burden, Fiscal discipline and improved savings and investment rates, tax :
GDP ratio, and optimal interest rates will be required to address these
concerns, even if it means a somewhat lower GDP growth rate.

19. It is our competitiveness disadvantage that is at the heart of the

problem. The main drivers – human resources, technological inflows,
supporting institutions – are weak and not improving fast enough. For
improved competitiveness focus now clearly needs to be on
microeconomics.

20. Economic governance, regulatory quality, trade facilitation,

reform of factor markets, all necessary ingredients of a favourable
investment environment, are more a function of political will and indeed there
is already a lot of work in progress. It has to be prioritized, expedited and
mainstreamed – and not just in Islamabad.

21. Tariff reforms, especially tariff dispersion and tariff escalation,

where we have been seen some recent back-sliding, is another short term
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‘doable’ area. Also, all exports – and not domestic sales; and not just
textiles – have to be genuinely zero rated.
22. The real challenges are infrastructural, both physical and social.
The high cost and unreliability of utilities is unsustainable. The short term
solution could well be special economic zones, even when one is not
unmindful of their fallout effects, and better and greater cluster development.
Meanwhile, WAPDA unbundling and privatization has to be accelerated
along with correction of price signals, theft and losses, and subsidies.

23. The skill deficit seems to show no signs of narrowing despite

the large sums spent by EPB, largely because of design defects. Without
greater enterprise involvement it will be difficult to make a difference.
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. Measures to ensure labour market flexibility must be balanced
with a degree of stability of the work force. As a short term measure import
of skilled manpower would need to be encouraged. 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.

24. It is high time that the entrepreneurs accelerated the shift from
family to professional management. Without a genuine empowerment of
professional management efficiencies and economies of scale will not be
possible.

25. The urgency, and the rewards, of a favourable investment

climate, which is critical to improved competitiveness, does not seem to
have percolated down to the Provinces, who are major players, especially in
factor markets (land and labour), regulatory quality, and governance.
Islamabad has to ensure greater Provincial motivation by protectively
engaging them and giving them more policy space.

26. The mushrooming of preferential market access arrangements,

especially is its principal markets, places Pakistan at considerable
disadvantage. Despite its concerted efforts, and a persuasive case based on
economic as well as geopolitical grounds, there is no sign of materialization
of Pakistan’s FTA with either the U.S. or the E.U.

27. 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. This, however, would require a significant
change in the export mix, which is not likely over the short term, except for
the services sector which clearly needs to be focused on.
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28. Pakistan is likely to find a friendlier ear with the opinion markers
in the U.S. and E.U. if it shifts its demand from a preferential arrangement to
an equitable one. There is enough evidence to establish that even for the
sensitive textile and apparel sector in effect the U.S. and the E.U, with their
growing bilateral preferential arrangements, are subsidizing Pakistan’s
competitors more than protecting their own industry.

29. It appears Pakistan’s only real prospect of mitigating the access

disadvantage is through the WTO. Efforts to accelerate the non-agricultural
market access (NAMA) negotiations have to be prioritized. An over all
reduction of tariffs will serve Pakistan’s interests best.

30. To conclude, exports are important to public welfare

enhancement but the real solutions reside outside the Ministry of
Commerce. Significant and sustainable export growth is unlikely without an
intragovernmental acceptance of the export imperative.