EXPORT POLICIES NEED NEGATION OF THE PARETO PRINCIPLE

SHAMSUL GHANI
(feedback@pgeconomist.com)
Aug 29 - Sep 11, 2011

The Pareto principle based on cause and effect philosophy states that for majority of the events, roughly 80 percent of the effect is generated by 20 percent of the causes. The principle is also known as "80-20 rule"; "Law of the vital few"; and "The principle of factor sparsity".

The principle was evolved by the Italian economist Vilfredo Pareto who noted that 80 percent of the Italian land was owned by 20 percent of the population.

He developed the principle by observing that 80 percent of the peas were held in 20 percent of the pea pods in his garden. Business management consultant Joseph M. Juran established the principle and named it after the Italian economist. Surprisingly, this principle has vital applications in the world of business where management policies are influenced by this "rule of thumb" which manifests itself in certain assumptions: 80 percent of company sales revenue comes from 20 percent of the customers; 80 percent of bank deposits are held by 20 percent of depositors; etc. The management of a number of companies is known to have based its policies on the theme of "Pareto efficiency" by committing company resources to the 20 percent 'elite' customers at the expense of 80 percent of its ordinary customers.

In fact the number 80, in more sophisticated propositions, takes the form of 'k' which could be any number between 50 and 100 to give such hypothetical conclusions as: k% of anything is owned by (100-k)%, etc. Some stunning confirmations of this rule have been observed.

Here are two of them: taking the case of world's 10 wealthiest people, we observe that the total wealth of first three (Warren Buffet, Carlos Slim and Bill Gates) approximately equals the total wealth of the rest seven; in 2010, the leading twenty nations gave a cumulative output that was equal to 80.8 percent of the total world output. There are certain manifestations of this rule in Pakistan's economy as well. Our four major crops (wheat, rice, cotton, sugarcane) account for 75 percent of the total crop output.

Around 60-70 percent revenue is contributed by a single city, Karachi which is denied the benefit of "Pareto efficiency". According to a legend, 90 percent of country's wealth is owned by just 5 percent of its people. The Pareto efficiency principle is effectively used in this case as the ruling elite is invariably found serving the cause of this five percent wealthy minority.

The Pareto principle is equally relevant to our external sector economy, particularly exports. What we need is the total disregard of this principle through a policy shift that diversifies our exports both on product and market basis. More products, more value addition and more markets should be the mainstays of our policy framework. Our export data for the last decade amply reflects this policy shift which is a welcome sign.

What is needed is a relentless policy follow-up. Our export dependence on developed countries has steadily tapered down from 58.1 percent in 2001-02 to 43.9 percent in 2009-10. Similarly, the focus on developing economies has increased our export to these countries from 41.4 percent in 2001-02 to 54.9 percent in 2009-10. Not that we hold any bias against developing economies.

The shift is seen favorable as most of the developing economies form part of the region we are located in. This enables us to economize on cost and time factors. The emerging trends in the external trade lay much emphasis on gravity model of trade that warrants minimization of distance between the importing and exporting countries besides their output compatibility.

EXPORTS BY DESTINATIONS (%)

EXPORT DESTINATIONS 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 *2009-10
Developed Countries 58.1 56.1 58.2 55.9 54.7 54.7 51.0 46.4 43.9
**CMEA 0.5 0.6 0.7 0.7 0.9 0.9 1.0 0.9 0.9
Developing Countries 41.4 43.3 41.1 43.2 44.4 44.2 47.8 52.4 54.9

* Figures for nine months; ** Council for Mutual Economic Assistance

Our export shift from developed to developing economies could well be the result of compelling circumstances rather than any conscious effort on part of our policy designers.

Low quality of our products (rendering us uncompetitive in international markets), protectionist policies of buyer-countries and similar factors might have driven us out of the developed markets.

Even if it is true, the swift adjustment and regrouping are commendable for which credit should go to the policy makers. In the Asian region, Pakistan (GDP $175 billion) has such business partners as China (GDP $5,878 billion), India (GDP $1,538 billion), which though highly incompatible on GDP basis, are nearest to it in the region.

The other nearest countries with disparate GDP size are Russia (GDP $1,465 billion), Iran (GDP $407 billion) and Afghanistan (GDP $17 billion. Pakistan needs to establish and deepen trade relationship with these neighbor countries. South Korea (GDP $1,007 billion), Turkey (GDP $742 billion), and Indonesia (GDP $702 billion) are other regional trade partners with comparatively higher GDP.

The other regional countries with not much pronounced GDP size disparity are Thailand (GDP $319 billion), UAE (GDP $302 billion), Malaysia (GDP $238 billion), Hong Kong (GDP $225 billion), Singapore (GDP $223 billion), Philippines (GDP $189 billion), Kuwait (GDP $131 billion), Qatar (GDP $130 billion), Bangladesh (GDP $105 billion), and Vietnam (GDP $104 billion). Trade relationships with all these countries should be improved and strengthened.

PAKISTAN'S REGION-WISE EXPORTS (JULY-APR 2011)

EXPORT REGION AMOUNT (MILLION RS) % OF TOTAL AMOUNT
US / Canada /Europe:
United States, Germany, United
Kingdom, Italy, Belgium, Spain
Netherland, France, Canada
657 38.3
Asia:
Afghanistan, United Arab Emirates,
China, Bangladesh, Turkey
Hong Kong, Saudi Arabia, South
Korea, Sri Lanka, India
669 39.0
Africa:
South Africa
20 1.1
Others:
Detail not available
371 21.6
Total 1,717 100