A STRATEGY TO BOOST EXPORTS
By HUSSAIN H. ZAIDI
Mar 29 - Apr 04, 2004
For appreciable increase in exports, Pakistan needs an effective strategy. This article pinpoints the main components of such a strategy, which are product and market diversification, cluster development, competitiveness and effective marketing of both products and national image.
Export promotion brings a number of benefits to a country. These include job creation, improvements in the balance of payment (BoP) position, accelerated economic growth and increase in the level of incomes and standard of living. Like other developing countries, Pakistan is also looking for ways and means to boost exports. The present level of exports, however, is not satisfactory. The share of exports in GDP is less than 18 per cent. Though the country's exports have exceeded $11 billion, they still constitute less than 0.2 per cent of total world exports.
For effective export promotion a country needs to broaden its export base, which can be done in two ways: by increasing the number of products exported — product diversification — or by increasing the number of export markets — market diversification. By broadening its export base, an economy safeguards itself against international price and demand fluctuations.
In case a country has a narrow export product base, reduction in unit price of export commodities may adversely affect its export earnings. However, if a country exports a large number of products none of which has a major share in its total export receipts, reduction in international market price of a few export items will not much affect the monetary value of its exports. The same is true of a narrow market base. In case a country exports only to a few markets, reduction in demand for its products will substantially affect the volume of its exports. However, in case a country has a large number of export markets, the repercussions of fluctuations in international market demand can be minimised.
Pakistan, however, has a narrow export base with regard to both products and markets. This is well revealed by an analysis of the country's exports performance during last five years. To begin with, our exports are overwhelmingly dependent upon one product category, as nearly 64 per cent of exports consist of textiles & garments only. Just five product categories — textiles, leather, rice, sports goods and carpets & rugs — constitute more than 82 per cent of our exports. As for lack of market diversification, fifteen countries account for two-thirds of Pakistan's total exports. More than 54 per cent of our exports are destined to two regions: the EU and North America. Even within these two regions, we lack market diversification. More than 91 per cent of our North American exports are purchased by the USA, which is the single largest buyer of our exports accounting for nearly 25 per cent of the total export earnings. Within the EU, five countries — UK, Germany, Italy, France and the Netherlands — account for nearly 74 per cent of the total exports to the region. Pakistan's exports to the Middle East are 13.96 per cent of its total exports. However, even within the Middle East market, there is lack of diversification as in our total exports to the Middle East, the share of only Dubai is nearly half. Regrettably, the share of the South Asian region in Pakistan's exports is merely 2.86 per cent of its total exports. The share of Eastern Europe and Central Asian Republics (CARs) in our exports is almost negligible.
What are the implications of these facts? Pakistan 's exports are open to the above-mentioned risks associated with lack of diversification. Take lack of product diversification first. Textiles make up nearly 64 per cent of the country's exports. Textile trade has so far been subject to quantitative restrictions or simply quotas, which ensures a specific share of Pakistani products in the markets of North America and EU. However, under the Agreement on Textile and Clothing (ATC) of the World Trade Organization (WTO), all quotas will be phased out by December 31, 2004 and from January 1, 2005, there will be open textile trade. It means our textile exports will face competition from other textile exporters, particularly our neighbours India and China. Both these countries are more price competitive than Pakistan because of lower input, particularly labour and electricity, costs. Hence, successfully facing competition from textile exporters of India and China will be a big challenge for our exporters.
Thus instead of relying merely on what are called core or traditional products, avenues for the export of non-traditional products, such as engineering goods, cutlery, furniture and ceramics, for which we have a lot of potential, need to be explored. This should be accompanied with search for new markets.
Cluster development, the second element of the strategy, can be of great help in broadening the export base. A cluster is a sectoral and geographical concentration of small and medium enterprises (SMEs) producing relating goods. Individually due to their limited resources and high cost of production, these enterprises find it difficult to exploit market opportunities. Cluster development, however, enables these SMEs to complement each other's resources and expertise and achieve collective efficiency through economies of scale and specialization. This gives the enterprises competitive advantage and helps them capture markets beyond their individual capacity.
Cluster development has been introduced with success in several developing countries including Malaysia, Indonesia, India and Mexico. In India, for example, clusters account for nearly 60 per cent of the country's manufactured exports. In Pakistan as well cluster development has an ample scope. A case in point is the light engineering industry of Gujranwala and Gujrat. The industry comprises a number of SMEs, which have a lot of export potential provided their individual resources and expertise are pooled. Another example is the cutlery industry of Wazirabad.
The next element of the strategy is competitiveness. A product is competitive if it has an over-riding advantage over the products offered by competitors. There are two principal means to achieve competitiveness: price and quality. By being price competitive, that is, by offering its products at a price lower than that charged by competitors, a firm can successfully sell its products. The alternative is to produce better quality products, which justifies a higher price, than offered by competitors.
However, in the present highly competitive international trade regime, a firm needs to be both price and quality competitive. Unlike in the past, in the present scenario merely offering cheaper but low quality products or high quality expensive products is no guarantee that a firm will increase or even maintain its market share. What the consumer wants is a quality product at an affordable price. Competitiveness thus means both high quality and low price.
Price competitiveness depends in large measures on the cost of production. The higher the cost of production, the higher the price. In order to curtail the cost of production and thus to increase price competitiveness, it is imperative to bring down the cost of inputs. Interest rates in Pakistan are also comparatively high. The higher the interest rate, the higher the cost of doing business and thus less the price competitiveness.
As for quality, it needs to be defined in terms of the customer. A product is good only if it satisfies customer needs.
This brings us to the final component of the strategy — marketing. In order to understand the importance of marketing for export promotion, it is better to understand the difference between marketing and selling. An enterprise engaged in mere selling produces what it is best at without identifying what the customer wants. In contrast, marketing is customer-oriented. A firm first identifies the needs and wants of potential customers and then makes products which satisfy the same.
Selling thus defines quality in terms of the producer; marketing defines quality in terms of the customer.
Contrary to popular opinion, marketing does not begin after the product has been produced. Rather it precedes the production process. A product must satisfy customer needs and wants, which are determined by factors political, cultural, economic, demographic, geographic, and technological. These factors differ from country to country and even within the same country thus making for different consumer preference for taste, colour, size, weight, material, product package, and performance. Thus the same product cannot be sold in all export markets. Rather for each market, the product has to be modified. This is called product adaptation. It is by researching the target markets that an exporter identifies customer needs and offers products that best satisfy those needs.
Another important characteristic of marketing is that it is a long-term activity. The relationship between the firm and the customer does not end once the product has been sold. Rather it continues as the firm seeks constant feedback from the customer. In the light of this feedback, the firm makes changes in its product or pricing strategy.
In case of Pakistan, one of the major causes of slow export growth is that most of the exporters do selling rather than marketing. Instead of first identifying customers and their needs and than offering goods that satisfy them, our exporters by and large try to sell whatever they have produced usually in excess of domestic capacity. As their products are not fully tuned to customer needs, they fail to impress the customers. Some exporters even cheat customers by selling substandard goods.
This may help them earn profits in one deal but makes it impossible for them to strike another deal with the same importer or even in the same market.
Owing to resource constraint, it is difficult for small exporters to conduct foreign market research. Such exporters need the assistance of Export Promotion Bureau and Pakistan's commercial officers in foreign missions to get the required commercial intelligence.
In international markets, both products and the exporting country's image are sold. An otherwise competitive product may not find a large number of buyers simply because of a poor image of the exporting country. This makes building and marketing a good national image very important.