Strong public-private partnership is the key to success
By AMANULLAH BASHAR
Jan 05 - 11, 2004
The success of Pakistan's export sector last year when it crossed the psychological barrier of $11.2 billion for the first time in history was actually the outcome of the combined efforts of the public-private sector which was backed by a strong political support of the government policies to be a frontline state against the campaign lodged the United States against terrorism.
Official figures indicates that during the first quarter of the current financial year, Pakistan's exports rose to $2.97 billion, not only was this 1.8 percent above the target for the period, it represented a robust 14.2 percent growth over the corresponding period of the previous year. With the exception of the first month of the current financial year i.e. July 2003, the monthly exports are consistently above the $1 billion mark. It appears that the country's exports are likely to surpass the target of $12 billion at the end of the year.
Currently, the export sector is moving on the same pattern which is reflected in the overall performance in the first half of the year which is almost matching to the previous one. It is reassuring to note that despite noticeable hike in cotton prices during the current year, the textile products sustained in the world market as the cotton prices registered a phenomenon growth around the world due to shortfall of the products in the cotton producing countries.
Besides cotton and textile products which constitute over 65 percent of our total exports, the non-traditional items also have performed extremely well during the first half of the year showing an overall growth of 17 percent in the first six months.
A break up of different non-traditional items indicates that the major increase was registered in fish and other sea food items which was estimated at 22 percent, fruit and vegetable 25 percent, engineering goods 40 percent, marble and granite 2 percent, Information Technology 31 percent, poultry and eggs 31 percent while the cement sector emerged prominently with an increase of 204 per cent during the first half of the current financial year. The outstanding performance shown by the cement sector was obviously due to overwhelming increase of cement in neighboring Afghanistan where the process of reconstruction has started gaining a momentum. Besides the export of cement at a massive scale, the demand for POL products has also been increased during the year as the overall export of the petroleum products to Afghanistan was estimated over $88.24 million in first five months of the financial year.
Region-wise break of exports from Pakistan has also shown impressive figures during the current financial reflected in the increase of exports to Western European Countries by 22.4 percent during the period and in terms of value the total exports in the first five months was estimated at $1.2 billion while 22 percent increase was noted in the Eastern Europe, 22 percent in the Middle East Region and the newly tapped market of African region has also shown an increase of 22 percent and in terms of value it is estimated at $669 million during the first five months up to November this year. As far as the United States was concerned this region has shown a 9 percent increase in the exports while the overall increase of exports last year was not much impressive and was indicated at 30 percent last year.
In fact, it is the Industrial and Agricultural Sectors which provide a strong support in creating the export surplus for the country. Luckily these two sectors have started pickup and have shown impressive results.
The latest review of the industrial production shows that the pace of industrial activities accelerated during the first quarter of the current financial with the index of Industrial Production rising by 10.1 percent as compared to the 4.3 percent growth in the same period of the preceding year. During the period under review the industrial production has remained well above the corresponding levels for previous year, throughout the quarter. In the light of the strong performance shown by the industrial production, it is probable that the current financial annual industrial growth target will be met.
The Large Scale Manufacturing (LSM) growth was an exceptionally strong 11.7 percent, compared to a mere 3.7 percent increase during the previous year. This represents the strongest first quarter performance by LSM for at least the last fifteen years. The growth in LSM is remarkable broad-based not only did all 14 sub-sectors record higher out put, most witnessed acceleration in growth.
As usual, textile sector led the export growth, contributing approximately three-fourth of the total increase in exports during the first quarter of the year. This was strongly supported by a rebound in exports of other manufacturers as stated above. Precisely speaking, textile sector consequently improved its share from 73.6 percent to 78.2 percent in the total exports of the country.
After registering a record growth in the previous year, wheat sector witnessed a sharp fall which about 88.9 percent in the first quarter of the current financial year mainly due to below target production for the last two successive years. The wheat exports since financial year 2001 were possible only due to the bumper crop in 2000.
The fact that some wheat was export in the first quarter of the current financial despite the obvious shortfall in production, owes to a deliberate policy to retain a presence in the world markets in anticipation of an exportable surplus after the financial year 2004 harvest.
Rice exports recorded a 39.9 percent growth in the first quarter of the current financial year over the same period last year. As the period from July to September marks the end of rice marketing season in Pakistan, the export growth in this period was largely due to fulfillment of old contracts. The annual exports at the end of the year are expected to continue to depict robust growth following the good harvest and a small rise in international prices. The unit values for both basmati and non-basmati varieties witnessed improvement in this period due to tightening supplies in some major exporting countries, particularly Australia, India and the United States.
Exports of par boiled rice (Joshi) are a new phenomenon in the rice sector of Pakistan. Recently, the Export Promotion Bureau has entered into a deal through which 45000-35000 tons of Joshi rice is likely to be exported to a party in Saudi Arabia.
Textile exports recorded a 17.3 percent growth over the same period last year, contributing 78.2 percent of the growth in overall exports during the first quarter.
Encouraging, this growth was caused by higher unit prices for major categories as well as an increase in the quantum of exports for most major categories (other than cotton yarn and ready-made garments).
The trend is infact shifting towards value-added textiles, compared to combined cotton yarn and cotton cloth, was discernible as the former accounted for 70 percent of the textile manufacturers in the first quarter compared to 67 percent in the corresponding period of the previous year.
A positive aspect of the current financial year was that the textile performance posted impressive growth in non-quota exports. Bed-wear exports were the highest earning category in the textile sector, registering a 32 percent rise over the last year. Exports to non-quota destinations made the highest contribution to this growth. While most of the quota exports were directed towards EU, the US remained the major destination for country's non-quota bed-wear export. The rising share of non-quota exports is positive sign for the long export growth of this category, as it mitigates the concerns regarding loss of fixed market access after phasing out of quota restrictions 2005.
Cotton yarn exports continued to declining trend that started in 2003 and registered a 6.7 percent fall in the first quarter of the current year. This fall was caused by falling export quantum i.e. 17.2 percent, while unit values for cotton yarn continued the upward trend of the last year. The fall in the cotton yarn exports can be attributed to the rising domestic consumption of cotton yarn that has caused the exportable surplus to fall as well as the declining external demand. Hong Kong, South Korea and China are major markets for country's yarn exports accounting for around 52.3 percent share in the total yarn export quantum. Yarn exports to China and Korea have declined since last year after the outbreak of SARS. The decline of export volume of Korea is however alarming, although Korea imported lower volume of yarn from almost all its suppliers in 2003, but the fall recorded for Pakistan was the highest in absolute terms in the period of January-July 2003. As a matter of fact, Pakistan was the largest supplier of cotton yarn to Korea in 2001, seems to have lost its market share to India.
MEASURES TO STREAMLINE EXPORTS
For sustaining and enhancing Pakistan's export competitiveness in the global markets, a strong public-private sector partnership is the key to success.
Dr. Ishrat Hussain, Governor State Bank of Pakistan suggests measures to increase labor productivity through education, on-the-job training, skill up-gradation and dissemination of new knowledge and techniques. This will translate into higher value-added and low unit labor cost.
Measures to attract foreign investors for export-oriented joint ventures in Pakistan and establish joint ventures in countries such as China.
Foreign partners have played a role in production relocation in clothing sector through outsourcing. Brand-name merchandisers and large retailers of standardized products are the ones to be targeted.
Foreign joint ventures can provide marketing, design, logistics, financing while the production can be handled by domestic firms.
This will require greater transparency and disclosure by Pakistani firms aspiring for joint venture relationships.
Measures to improve physical and financial infrastructure including overcoming in shipments, clearance, cargo space, handling etc at the ports and airports. Reliable and low cost supplies of power, water, gas telecommunications etc. should be assured for export industries. Long-term financing and hedging products need to be developed by the financial institutions.
Measures to ensure compliance with environmental standards and labor standards agreed under international codes and agreements.
Pakistani exporters have been adopting a wait and see attitude so far but they should equip themselves to become fully compliant with these requirements of the advanced economies buyers and governments.
Worldwide Responsible Apparel Production (WRAP) and Apparel Industry Initiatives (AIP) are some of the global movements likely to affect trade in textile and clothing sector.
Measures to diversify the export base by moving to develop engineering goods and chemicals industry. As steel and auto industry are beginning to look efficient other downstream and upstream industries should be established. Within textile sector clothing and value-added products should be expanded as the economics of conversion makes it obvious. One pound of cotton converted into finished fabric fetches $ 1.61 on the world market while the same amount of cotton converted into woven garments raises the earnings to $ 4.17.
Increasing demand for blended fabrics calls for investment in this sector. Domestic costs of manufacturing synthetic fibers and yarn should be aligned to international prices by exploiting scale economies and rationalizing plant sizes.
MEASURES TO SIMPLIFY THE TAX AND TARIFF REGIME FOR EXPORTERS
The recent episodes of delays in the sales tax refund regime have left bad taste both for the Government as well as the exporters. A more simplified procedure without involving any prior financial outlays by the exporters should be developed to overcome this long standing problem. This will free up the exporters' time to focus on marketing and product development rather than spending their energies in chasing the sale tax refunds.
MEASURES TO IMPROVE THE ORGANIZATION AND MANAGEMENT OF EXPORT FIRMS
Most of the firms are family owned and managed by a close circle of family members and associates. This lack of professionalism in the organization and management limits both expansion in the size of the firm but also results in poor organization of functions and tasks contributing to low productivity. There is an urgent need to bring in professional managers and skilled manpower to operate these industries and thus lead to higher overall productivity.
MEASURES TO INTEGRATE THE EXPORT-ORIENTED SMALL AND MEDIUM ENTERPRISES (SME) INTO AN ORGANIZED PRODUCTION NETWORK FOR EXPORTS
The SMEs in Pakistan are playing a key role in production of exports but in a haphazard manner creating problems of perceived quality, delivery slippages, reliability and deviations from specifications. Their technological base is also rudimentary and the specialized level of technical, administrative and financial expertise leaves much to be desired. The formal sector, through strategic alliances, subcontracting, outsourcing can bring the SMEs into the production network and lead to overall productivity gains.
INTEGRATION INTO GLOBAL MARKETS
During the last fifty years, the volume of world exports has raised twenty fold and volume of world manufactured exports almost forty fold. World output growth, on the other hand, has grown only seven fold. By 2001, world trade accounted for 24 percent of World Gross Product. If we look at the last three decades, merchandise exports of developing countries (DCs) have grown at an average rate of 12 percent per annum. Manufactured exports accounted for 70 percent of DCs exports at the end of the 1990s and 30 percent of world manufactured exports. These global markets therefore presents an excellent avenue for developing countries to participate in the benefits of a buoyant trading environment.
Today, the global exports amount to US$ 6.4 trillion and the entire national income or GDP of Pakistan is only $ 64 billion or 1% of world exports.
It does not take more than simple arithmetic to realize that if we had maintained the average growth rate of developing country exports i.e. 12 percent annually in the 1990s where we would have been today. Had we simply maintained our historical share of 0.22 percent in the world markets we would have exported merchandise goods worth $ 17.5 billion this year. Our economic growth rate would have been much higher than the 3.5 to 4 percent with which we were stuck during the last decade. Employment generation and poverty reduction would not have haunted as grave issues as they do today. In my view, integration into global markets offers the best potential for Pakistan to achieve rapid growth and poverty reduction compared to reliance on domestic markets. Enhancing the share in the ever enlarging pie of world markets puts us on fast track which is hard to achieve by relying on our domestic economy as the engine for growth. It also permits the realization of greater economies of scale and scope which then benefits domestic consumers in form of lower prices.
If we depend on domestic markets we won't be able to generate the foreign exchange needed for imports to provide raw materials, components, machinery, equipment to our industry and pay for petroleum products to keep our transport, railways, electricity and other economic activities running. Even if we keep on borrowing from external creditors we won't have sufficient foreign currency to repay them. Thus those who look inward for growth and poverty reduction are sadly mistaken and suffer from romantic idealism rather than practical realities.
There is a genuine concern among many quarters that Pakistan will not be able to compete with the giant size economies of China and India because they possess economies of scale and are endowed with superior technological and human resource base. It is a fact that the fear about China is not only prevalent in Pakistan but among all developing countries.
There is no doubt that China has been the most aggressive among the developing countries to penetrate global markets and become the fifth largest exporter of the world. But we should not forget that China is also one of the fastest growing economies in the world with per capita incomes doubling every ten years and the real effective purchasing power rising significantly every year. China is a large market which absorbs more than $250 billion of merchandise exports from all over the world every year and the bulk of it from the Asian countries. Our share in China's market is less than 0.2 percent. As close ally and friend there is no reason as to why we cannot increase this share to at least 1%. This will translate into $ 2.5 billion of additional exports and an assured growth of 15-20 percent every year.
In six years time we will be able to double the value of exports to China to $ 5 billion annually. There are two ways to follow this route. China is encouraging foreign direct investment and joint ventures for establishing a commercial presence. The direct import content of exports by foreign joint ventures (FJVs) in China is high, estimated at some 50 percent and intra-firm trade accounts for as much as 30 percent of import of FJVs. The ownership structure of these enterprises and the high import content of their manufacturing have contributed significantly to strengthening the trade links between China and the East Asian economies. Foreign direct investment (FDI) from investors in East Asia uses China as an export platform for the western markets and that their home countries provide the inputs needed in such operations. Removal of subsidies, reduction of tariffs and non-tariff barriers and elimination of preferential treatment will exert considerable pressure on the state-owned enterprises to improve efficiency and competitiveness.
Pakistan can create a window of opportunity by establishing joint ventures with these enterprises. The main suppliers of textiles to China are Taiwan (25% of China's textile imports), Korea and Japan (about 20% of each). The relocation to China of clothing plants from Japan, Korea and Taiwan has contributed to China's imports of textiles from these economies. If Pakistani export houses can provide high quality and lower priced textiles to these clothing plants our exports can partially replace those from Japan, Korea and Taiwan which are likely to become high cost suppliers of these goods.
Unlike clothing, textile industry China was characterized by obsolete machines, low quality products and excess labor. It was dominated by loss making State Owned Enterprises (SOEs) with low labor productivity. In 1998, about 40 percent of SOEs were on the verge of bankruptcy. The performance of SOEs will further deteriorate as a result of significant reductions in tariffs and the reduction or removal of subsidies following accession. The short to medium term impact of accession could favor a rapid growth in import of textiles. The high ratio of textile imports to domestic production (22 percent) signifies the dependence of clothing exports on imported textiles. About 55 percent of China's exported apparel is made from imported fabric. There is no reason as to why Pakistan cannot capture a large share of these imports.
Empirical studies made by US International Trade Center (USITC) have also concluded that China will lose its competitive advantage in outer garment, textiles and cotton fabrics while it will have strong performance in sectors with high technology intensity. The changes in the composition and direction of China's imports and exports have important implications for other economies.
Pakistan can take advantage of this opportunity by aggressive marketing of its products and engaging the SOEs in long-term relationship as partners. China's market can thus be accessed directly and indirectly through intra-firm sales, production sharing arrangements, licensing, brand name outsourcing and strategic alliances for marketing, design or technology transfer.
Low wages do not necessarily give a competitive advantage when labor productivity is also low. It is the unit labor cost which is critical to competitive advantage.
Pakistan's low unit labor costs in textiles are the main source of its static competitive advantage at present. But static advantage is of little consequence in a rapidly changing global economic environment and it is dynamic comparative advantage which should be taken into account.
It is in the larger economic interest of Pakistan to integrate into the global markets and derive maximum benefits offered by these new opportunities. It is also clear that the fears about deindustrialization resulting from integration and liberalization are whimsical and unfounded.