PAKISTAN'S EXPORTS LATELY GROWING AT A FAST PACE
There is an urgent need to evaluate Pakistan's comparative advantage, strengths and weaknesses to formulate policies
By SHABBIR H. KAZMI
Oct 03 - 09, 2005
Pakistan's exports have been lately growing at a fast pace. However, growing import bill of POL products, plant and machinery and raw materials are eroding foreign exchange reserves of the country. It is feared that if concerted efforts are not made to boost the exports, erosion of reserves will also lead to exchange rate volatility as well as may cause many other problems. Therefore, there is an urgent need to evaluate Pakistan's comparative advantage, strengths and weaknesses to formulate policies, which can help in boosting exports. This will encourage new investment, help in poverty reduction and above all improving the sovereign status of the country.
Many critics say "Pakistan enjoys an enormous potential, which has not been exploited as yet" is a cliche. However, others say it is only because the critics still do not have faith in Pakistan's potential. If proper efforts are made Pakistan can have the bench mark of US$ 20 billion exports in next five years. However, this can only be achieved when all the stakeholders make a joint effort and no preference is given to any one group over rest of others.
In order to boost the exports a few things have to be kept in mind. These are availability of exportable surplus, competitiveness and a complete change in the mindset. The aim should not be to produce goods of acceptable standards. The target should be to produce goods according to international standards. Some people also say, "The ultimate objective should be to set new standards, achieve those and keep on raising the bar." The success story of many countries substantiates this belief. At one time exports of some of the countries, which are classified Asian Tigers, were far below compared to Pakistan. Now they are far ahead of Pakistan only because they developed a strategy and implemented it. Most of these countries are not blessed by those gifts of God, which Pakistan has. The only conclusion one can drive, after going through economic development of Pakistan is that incoherent policies, changes in stance and poor implementation of the successive policies are the reasons for Pakistan's disappointing performance.
One example of the outcome of focused policy is growth of textiles and clothing industry in the country over the last five years. Huge investment has been made, production and exports have increased only because support policies were followed. Contrary to general perception textiles and clothing exports have increased after phasing out of textile regime. The policies boosted the confidence of investors and they made huge investments. Unlike past the investments were not driven by SROs but out of free will of the entrepreneurs. Companies have used a lot of internally generated cash for BMR and expansion.
In the nineties a lot of investment was made through borrowing, which did help in creating new capacities. However, very soon most of the sectors started suffering from poor capacity utilization. The reason for poor capacity utilization was not any lack of demand but un-competitiveness of the products produced by these units. As the units were built on borrowed money sponsors were also least bothered about the profitability of these companies.
The other serious issue has been that local industry aimed at domestic market only and exported whenever surplus was available. As against this other Asian countries aimed at international market. Some of the entities export even 100% of the total production. In this endeavor they were also fully supported by their respective governments. As against this Pakistani policy planners were always scared that exports may cause shortage in the domestic market.
An analysis of refining industry of Singapore shows the pragmatic approach of the government. Singapore does not produce even a single drop of crude oil but the largest and most efficient refineries are operating there. Another example is Bangladesh, which does not produces a gram of cotton but has emerged to be one of the major competitors of Pakistan. This clearly shows that Pakistan's policy managers lacked vision.
Till recently Pakistan's international trade has been concentrated in a few products and a few countries. In order to enhance the diversity the government has adopted a multi-tier strategy. To enhance Pakistan's share in the global market the existing products' focus will be on ten major markets. Another list of second 10 best countries has been prepared to achieve greater penetration.
Bulk of Pakistan's exports mainly comprise low value-added products or intermediate products, which yield low unit price realization. Therefore, the new strategy is aimed at achieving higher value addition. This also includes improving the competitiveness of the local exporters. Here the main focus will be on core products, as they enjoy the highest growth potential.
In order to achieve greater diversification a list of products enjoying the highest growth potential has been prepared. This list could be divided into two parts one, products which are being exported but the volume is low. Second, the products where exportable surplus is available but these could not be exported due to various impediments. The efforts would be to remove the hurdles as well as to create enabling environment to boost the volume.
Historically, Pakistan's exports have been concentrated in textiles and clothing, mostly governed by the recently phased out textile quota regime. Incidentally government's efforts also remained focused on these products. The reason being that export proceeds were not sufficient to finance the import bill and the logical focus was the industry, which could yield immediate return. The country also enjoys the strongest infrastructure for the manufacturing of textiles and clothing.
With the phasing out of textile quota regime the immediate concern is to maintain Pakistan's share in the global trade of textiles and clothing. The developed countries are now allowed to buy as much quantity as they like from any particular country. Pakistan has to redefine its strategy. In this regard while the focus should remain on developed countries, as they offer attractive terms, new markets have to be explored.
Many markets ignored in the past offer significant opportunities. The general awareness about these markets was its size considered too small. However, many analysts are of the view that it is a perception only because relevant data about these markets is not available. The data could not be gathered only because these markets were never given the due attention. With the fast changing global economic scenario it has become necessary that each country should be studied in detail. It is not sufficient to find out the size only but all the pertinent factors affecting the trade volume have to be studied.
With the formation of World Trade Organization and initiation of removal of trade barriers the concept of regional blocs is also emerging. These blocs follow two tier policy agreements for concessional tariffs and agreements for free trade . The philosophy is based on the ground realties that each country enjoys certain strengths as well as may suffer from certain weaknesses. The concessional tariffs help in understanding each other and achieving the ultimate objective of free trade.
With the trade liberalization many countries have realized that they often face a situation where the countries falling in a particular region offer almost similar product range if not the identical products. Therefore, the first step is to promote inter regional trade and then intra regional trade. The similarity in products is partly due to similarity in climate, industrial base and above all the psyche of entrepreneurs. However, the level of development may differ due to the policies being followed by the respective governments.
Ironically Pakistan is not a member of any large bloc. One may say that the country is a member of SAARC, ECO and OIC. However, it is also on record that these entities have their own agenda and peculiarities, the worst being that most of the member countries are too small in size, still at early stages of development and the worst being that they produce similar products, be it agriculture or manufacturing. They also enjoy the biggest potential of complementing the economies of each other. However, very often they become victim of internal politics or effort of one country to dictate its terms on others.
In the past Pakistan's economy suffered because of frequent shift in policies. At one stage the policy was to give preference to agriculture on manufacturing but the policy never remained constant with persistent shift from one area to another. Similarly, at one stage the focus was to promote indigenous industries to attain self-sufficiency. In this endeavor the basic concept was ignored, whether the establishment of these industries was economical or not. The result was that a lot of industrial units were allowed to establish, which were inefficient, suffered from lack of economies of scale and above all high tariff on import of plant and machinery as well as raw materials.
The desire to bring various areas at par was perfectly legitimate but the policy to achieve the target was completely misplaced. Effort to establish industries in less developed areas, through tariff exemption, created uneven playing field. While the government lost the revenue it also failed in creating economically viable units. However, tariff exemptions to these specialized zones created a lot many problems for the units operating in the tariff areas.
There is no doubt in the sincerity of the government for promoting industrialization in the country as well boosting exports. However, neither of the objectives can be achieved without taking into account the strengths and the weaknesses. It is necessary to understand the strengths to capitalize on comparative advantage and without taking into account the weaknesses a pragmatic policy cannot be developed.
In each industry there is a number of stakeholders and it cannot survive, flourish and grow without protecting the interest of each stakeholder. However, it is also true that some of the stakeholders enjoy the power to influence the government policy and some are never given the due attention. The worst example is that for decades spinners were given preference over cotton growers. Spinners were offered cotton at prices much below its international prices. However, the policy resulted in inefficiency in the spinning sector rather than facilitating its growth on sound footings.
It may not be wrong that now preference is being given to sugarcane growers over sugar mills. The policy makers are completely ignoring the fact sugar industry is the driving engine of rural economy and if sugar mills are closed, who would buy the sugarcane? The specific mention of sugar industry is necessary because it operates at around 50% capacity utilization. If operation of this industry is ensured at the optimum capacity utilization it could help in earning millions of dollars. On top of this it could also help stop wastage of precious foreign exchange on import of sugar as well as bring down sugar prices in the country.
It is also necessary to highlight another important issue, the import of refined sugar. Pakistan's policy makers failed in learning a lesson from its next door neighbor, India. The Indian government allows the local mills to import raw sugar only on a condition that they would export the refined sugar. The policy helps in achieving two objectives - keep the mills running for longer duration and lessening the import burden. As against this, despite the advice of sugar mills the policy makers chose to allow import of refined sugar at the nick of the time, a little ahead of commencement of Ramadan. One tends to draw the conclusion that the policy makers do not fully comprehend the fine details of the sugar industry.
Therefore, it will not be wrong to say that if the policy makers want Pakistan to become another Asian tiger they have to formulate pragmatic and comprehensive policies and then implement those in letter and spirit. To be able to come up with good policies they will have to follow consultative approach without extending favor to one group and usurping the rights of others.