Export
competitiveness of Pakistani Industry
Introduction
Pakistan has repeatedly ended up with an increasing level of debt,
a balance of payment crises, and a government struggling to keep the growth
spurt going. When these challenges become dire — Pakistan often ends up
getting a loan by the International Monetary Fund (IMF).This will be the
22nd occasion Pakistan will be loaned
capital by the fund since 1958. The logical argument made by analysts in
Pakistan here is that the government needs to bring meaningful reforms to our
economy. So, in due course, we are in a fiscally sound enough condition that we
not require bailouts like the ones we get from the IMF.
Since the country's independence in 1947, the economy of Pakistan has emerged as a semi-industrialized one, based heavily on textiles, agriculture and food production, though
recent years have seen a surge towards technological diversification. As of
2014, agriculture accounts for more than one-fifth of output and two-fifths of
employment. Textiles account for most of Pakistan's export earnings, and
inflation has increased rapidly, climbing from 7.7% in 2007 to almost 12% for
2011, before declining to 10% in 2012 and to 2.11 percent in April 2015. The
inflation rate in Pakistan averaged 7.99 percent from 1957 until 2015, reaching
an all-time high of 37.81 percent in December 1973 and a record low of -10.32
percent in February 1959. Pakistan suffered its only economic decline in GDP
between 1951 and 1952.
Economy
since Independence
Since independence the economic
growth has meant an increase in average income of about 150 percent over
1950–96. But Pakistan, like many other developing countries, has not been able
to narrow the gap between itself and rich industrial nations which have grown
faster on a per head basis. Per capita GNP growth rate during 1985–95 was only
1.2 percent per annum, substantially lower than India (3.2), Bangladesh (2.1),
and Sri Lanka (2.6).growth was slow during the 1950s averaging 3.1 percent per annum
but accelerated to 6.7 percent during the sixties and remained generally close
to 6 percent per annum till the early 1990s.Pakistan's above-average growth in the 1960s
and 1980s coincided with episodes of reform efforts and economic and political stability. In contrast, the 1970s
and the 90s were decades
of weak economic growth. In the 1970s, the first oil crisis, the upheaval associated
with the establishment of Bangladesh, and the populist and restrictive economic
policies of a new political
regime during 1971-77 affected the economy. While the first half of the 1990s witnessed
some, incomplete structural reform efforts, the second half of the decade was marked
by economic uncertainty associated with heightened domestic and regional political
tensions, the 1998 nuclear explosion
and consequent sanctions, unsustainable debt dynamics, and the ensuing macroeconomic instability.
Under Shaukat
Aziz's government, the country's national economic growth improved at the
rate range by 6.4% to 9.0% a year. All revenue collection targets were met on
time for the first time in the history of Pakistan, and allocation for
development was increased by about 40%.However, this economical success is
attributed largely to debt reduction and securing of the billion dollars worth US aid to Pakistan in return for the support in the US-led war on
terror. Moreover, despite a series of internal and external distresses,
economic situation of Pakistan improved significantly and reserves increased to
US$10.7bn on 30 June 2004 as compared to US$1.2bn October 1999. Exchange Rate
became stable and predictable; the inflation rate dropped to 3.5% last 3 years
as against 11–12% in 1990.
The administration of Yousaf Raza Gillani oversaw
the dramatic high rise in suicide, corruption, national security, high unemployment,
and without the sustainable economic policies along with compilation of other
factors, the country's economy re-entered in the "era of stagflation" (a
virtual period that country had seen in 1990s earlier). The Pakistan
economy slowed down dramatically to ~4.09% as compared to 8.96%—9.0% presided
under his predecessor, Shaukat
Azizin 2004–08; while the yearly growth rate has come down from a long-term
average of 5.0% to ~2.0%, though it did not reached to negative level.
Calculation performed by the Pakistan Institute of
Development Economics, it pointed out that the "nation's currency
in circulation as a percentage of total deposits is 31%, which is very high as
compared to India, where
40.0% of the population fell under the line of poverty, with 16.0% rise in the
inflation during his four years of presiding over the country. The new strict
and tight monetary policy could not tame the soaring inflation, it did stagnate
the economic growth. One economist maintained that stagflation took place when
the tight monetary policy did not encourage the strong private
sector to play a key part in growth. Analyzing the stagflation problem, the
PIDE observed that a major cause of continuous era of stagflation in Pakistan
was lack of coordination between fiscal and monetary authorities
Sharif inherited an economy crippled with many
challenges including energy shortages, hyperinflation, ( https://commodity.com/blog/
On 5 May 2015,
Standard & Poor's revised projections for
Pakistan's average real Gross Domestic Product (GDP) growth for 2015 to 2017 to
4.6 per cent from 3.8 per cent and also upped its outlook on Pakistan's
long-term 'B-' credit rating to ‘positive’ from ‘stable’. S&P attributes
the largely positive projections to diversification in income generation, the
government's efforts towards fiscal consolidation, improvement in external
financing conditions and performance, and stronger capital inflows and remittances.
Forbes on 4 March 2016, termed Pakistan's economy is on track to become an
emerging market in Asia. Claiming that Pakistan’s growing middle class, which
will expand from an estimated 40 million people in 2016 to 100 million people
by 2050 is key to countries economic prospects. On Jun 19, 2016, Reuters claimed
that Pakistani stocks are soaring, improved security is fuelling economic
growth and the South Asian nation will be upgraded to "emerging
market" status by index provider MSCI.
Pakistan's GDP is projected by the World
Bank to grow by 4.5%. In its South Asian Growth report, the World Bank said,
"In Pakistan, gradual recovery to around 4.5 per cent growth by 2016 is
aided by low inflation and fiscal consolidation. Increases in remittances and
stable agricultural performance contribute to this outcome. But further
acceleration requires tackling pervasive power cuts, a cumbersome business
environment, and low access to finance. In FY2016, the current account deficit
has widened marginally due to increase in trade deficit. Nevertheless, exports
are expected to increase only slightly after 2 years of stagnation,[as
manufacturing continues to suffer under energy shortages and low cotton prices
saw only a modest increase.[56] In
his 2016 book, The Rise and Fall of Nations, Ruchir
Sharma termed Pakistan’s economy as on a 'take-off' stage and the future
outlook till 2020 has been termed ‘Very Good’. Sharma termed it possible to
transform Pakistan from a "low-income to a middle-income country during
the next five years. On Oct 31, 2016, Standard & Poor's, by
citing improved policymaking resulting in improved macroeconomic stability,
raised Pakistan's rating to B from B-. It also revised upward its forecast of
average annual GDP growth to five per cent over 2016-2019 from its earlier
estimate of 4.7 per cent. In response to S&P's upgrade, PSX's benchmark-100 index posted its largest gain in
history, increasing 1,406.03 points (or 3.52%) over a single day. On November
1, 2016, hundreds of Chinese trucks loaded with goods rolled into the Sost dry
port in Gilgit-Baltistan as the first shipment of China–Pakistan Economic Corridor.[On
3 November 2016, the Sharif government announced that Renault is
expected to start assembling cars in Pakistan by 2018, a source earlier in May
6, 2016 had told Reuters that Pakistan was under consideration for new
production investment. On November 7, 2016, Bloomberg
News claimed that the economy is expected to grow around five percent
annually for the next three years and claimed that "Pakistan is on the
verge of an investment-led growth cycle.On January 10th, 2017, The
Economist forecasted Pakistan's GDP to grow at 5.3% in 2017,
making it the fifth fastest growing economy in the world and the fastest
growing in the Muslim world.
Low exports a drag on economic growth
Pakistan’s economic
performance has been less than expected, in brief periods the economy grew
briskly but economic growth rates have been much below other comparable
developing countries. Low
export growth has remained a persistent drag on economic growth. Thus,
improving the country’s export performance to match that of other rapidly
growing economies is pivotal to achieving and sustaining accelerated economic
growth. Unsatisfactory export performance, rather than untoward rises in the
import bill, has generally been the underlying cause of Pakistan’s
unsustainable trade deficits. The country’s problem is not just one of
financing the trade deficit but also that such financing supports an extremely
low investment rate. In other words, it is really noninvestment expenditures
that are behind Pakistan’s trade deficits. Thus, measures aimed at cutting
investment in order to improve macroeconomic imbalances have tended to fail
while dampening economic growth. This was amply evident in the aftermath of the
2008 crisis Pakistan’s foreign trade problem is one of lagging export performance combined with surges of imports during periods of rapid economic growth and easier availability of foreign exchange
The reasons for macroeconomic instability are lack
of exports and the increasing cost of imports. Pakistan imports nearly twice as
many products and services than it exports. In turn, there are many causes for
low exports, some are macroeconomic determinants Pakistan has developed little
comparative advantage over the years. Which means that we mostly export basic
textiles, cotton and rice and other related products? Most of them are
low-value items in the global value chain, so we earn little revenue from
exporting them, and are hence unable to cover our import bill.
Structure of
exports
Pakistan’s poor export performance has
often been attributed to the structure of its exports, i.e., concentration on a
few traditional products, a failure to diversify and move up the value chain,
and an absence of domestic technology-intensive industries. The reasons for
this state of affairs are diverse but low fixed investment, low skill
accumulation, lack of competition, poor infrastructure, and government policy
are usually cited though with differing emphasis.
A closely related explanation for Pakistan’s poor export performance is the low-technology intensity of its exports. Lall and Weiss (2004) observe that, in contrast to the East Asian economies, Pakistan’s medium- and high-technology products occupy a very low share of production and exports. Although the country has moved from primary exports to manufactures over time, textiles and clothing—which are regarded as low-technology products—have a preponderant
weight in total exports. Such concentration is inherently risky, but the nature of the products makes it even less desirable. These are not dynamic activities … they are among the slowest growing industrial activities in the world. Their export growth is reaching a plateau as
the
relocation from high to low wage countries matures. They offer limited potential for learning
or technological and skill spillovers. They attract relatively little and low value FDI. Its current export structure gives Pakistan a weak competitive base that is unlikely to drive sustained industrial growth
The share of Pakistan’s top ten exports declined from over 60 percent in 1986 to 50 percent in 2004, nine of these exports consisted of textiles and apparel Pakistan appears to be stuck in exporting products that are exported largely by other low-income countries, suggesting that the possibilities for technological upgrading or improving productivity are more limited
Traditional and low-technology products, of course, dominate
Pakistan’s export basket, but whether that is a principal cause of its poor
export performance is less obvious.
This is not to deny that it would be desirable for Pakistan to produce and export technologically more sophisticated products with a higher value-added, but enhancing the efficiency of its existing industries would greatly help to improve its performance in the world market and should take precedence.
The picture for Pakistan is one of weak product positioning within its areas of export specialization. Sustaining rapid export growth with this positioning if world trade continues to follow recent patterns would involve Pakistan raising its market share in declining markets. Since these markets are fiercely competitive and are being liberalized, this would require massive upgrading of production capabilities, quality and marketing relative to competitors.
Quality of
Infrastructure
Pakistan
is notorious for its poor infrastructure, power shortages have been mitigated
but the cost of delivered power remains high, similarly natural gas shortages
have been bridged by LNG imports but this effectively raises Industrial gas
prices in Punjab to two times the gas prices elsewhere in the country. Industrial
efficiency has suffered seriously while production costs have risen. The state of
road transportation and ports— never good—has also deteriorated and added to producers’
woes.
Taking into account the costs associated with its poor physical infrastructure leaves Pakistan with an enormous competitive disadvantage in the world market. The World Bank (2006) has compared the manufacturing cost of a pair of jeans in Pakistan and certain other countries
in 2005 (that is, when the situation was not as dire as it is today). The wage cost in Pakistan is found to be just 60 percent of China’s but
the former’s much lower productivity and higher cost of assembly still give China an
enormous cost advantage in the world market.
Main Cause of lack of competitiveness
Unlike the areas of trade openness and government burden where significant improvements in recent years have moved Pakistan fairly close to the top 25 percent of the developing
country distribution, the country lags substantially in the areas of education, public
infrastructure, and financial depth. Bringing Pakistan
to the same level of achievement as this group of countries would require 228 percent improvement in education,
375 percent in infrastructure, and over 100 percent
in financial depth. Only a 12-percent improvement in trade openness would be necessary.
Remaining weaknesses
in the level and quality
of economic governance, of education,
of electricity services,
factor markets, trade policy,
transport logistics and trade facilitation, and
of food quality and safety
standards handicap Pakistan in the global
trading arena and in realizing her full growth potential.
The evidence also underscores the need to further strengthen the macroeconomic framework
to assure sustained stabilization.
We find that
even in products which we do export, we face structural problems — such as
lack of capital, whether it is human or financial Hence, exporters struggle to
grow, move up the value chain, compete with foreign firms, and boost
productivity.
The principal source of Pakistan’s lack of competitiveness, therefore, comes down to its dismal productivity growth. Pakistan registered the lowest growth of all economies during 2000–11: just a little over 1 percent a year in contrast to China’s 10 percent and India’s 8 percent. With respect to productivity in manufacturing, Pakistan’s performance at 2.3 percent, while not at the very bottom, is among the weakest performers
The reasons
for low growth in exports are: low productivity in Pakistan’s; power and energy prices; and other infrastructure weaknesses. But extremely low investment in fixed as
well as human capital must be considered the heart of the problem.
Pakistan’s competitiveness disadvantage
notwithstanding certain industry-specific
problems emanates
largely from its generally low and
slow-growing productivity. The key to competitiveness is for the economy to become more productive and efficient. Were it to succeed, Pakistan would begin to overcome some of the other identified handicaps (product concentration, its position in the value chain and, not least, the lack of technology-intensive industries) with time.
Industrial Policy
Policy intervention may be required to
address market failures arising from information asymmetries, scale economies,
or externalities. Markets also fail when investment decisions involve
longer-term considerations or are interdependent and require coordination when
investment in one industry is contingent on (say) a road or a power plant being
built. However, mainstream economists warn that policy interventions could do
more harm than good because of administrative incompetence, corruption, wrong
incentives, and other so-called “government
failures.”
It was the East Asian economies, however,
that demonstrated how industrial policy could be effectively employed to
accelerate growth and gain in international competitiveness. All countries, of
course, attempt to promote or regulate industry, but these are mostly ad hoc
measures aimed at specific concerns pressed upon by different interest groups,
whether businesses, labor unions, or regional politics. Where the Asian success stories differ, however, is in their
policies forming an essential component of national development programs aimed
at achieving accelerated economic growth.
The
absence of “developmental state persistence” as an important reason that
Pakistan has failed to emerge as a strong, competitive economy—a goal that
seemed within its reach back in the 1960s when it compared rather favorably
with the Republic of Korea or Taiwan. The commitment to the “developmental
state” waned, in the first instance due to the wholesale nationalization of
industry under Zulfikar Ali Bhutto in the 1970s, which was undertaken without
much planning or thought or even ideological commitment. However, before the
economy could recover from this shock, the 1980s witnessed the rise of a
neoliberal ideology that insisted on free markets, trade liberalization,
deregulation, and privatization. The economics profession—but more importantly,
the international financial institutions— embraced this ideology without
question or demur and started to push it on the developing world under the
rubric of “structural adjustment.” Pakistan, too, came under its sway and the
government’s role in economic development remains contested territory to this
day.
The UNIDO CIP index assesses comparative industrial
performance. It shows that Pakistan’s
rank fell from 47th to 49th within the group of 93 countries during 1990-2000.
It had risen from 53rd in 1980 to 47th in 1990.Pakistan’s CIP growth rate was
halved during 1990-2000. Pakistan’s CIP score as a ratio of the maximum CIP
score fell from 29 percent in 1990 to 28 percent in 2000. It had risen from 25
percent in 1980 to 29 percent in 1990.We see that policy liberalization has
seriously hurt Pakistani manufacturing competitiveness in world markets.
Policy liberalization has also hurt India
whose rank declined to 40th in 2000 from 36th in 1990. The value of India’s CIP
index rose at a faster rate during the 1980s (8 percent) than it did during the
1990s
China’s performance is outstanding but
again policy liberalization has slowed down improvement in China’s global
competitiveness. During 1980-1990 China’s rank rose from 39th (behind India) to
26th and its CIP score rose by 29 percent. The gain during 1990-2000 was very
modest in comparison, its CIP score rising by 17 percent and improvement in
rank being marginal as is the improvement in China’s CIP rank as a proportion
of the maximum CIP value. As several empirical studies have shown China’s
productivity growth would have been faster had policy liberalization not been
thrust upon China
2000
|
1990
|
1980
|
||||
CIP
Score
|
Rank
|
CIP
Score
|
Rank
|
CIP
Score
|
Rank
|
|
Maximum
Value
|
0.833
|
1
|
0.772
|
1
|
0.758
|
1
|
Israel
|
0.458
|
21
|
0.430
|
21
|
0.415
|
20
|
China
|
0.379
|
24
|
0.323
|
26
|
0.240
|
39
|
India
|
0.275
|
40
|
0.262
|
36
|
0.243
|
38
|
Pakistan
|
0.235
|
49
|
0.219
|
47
|
0.192
|
53
|
Minimum
Value
|
0.040
|
0.058
|
0.039
|
|||
1990
|
2000
|
|||||||
MVA
per
capita
$
|
MHT
in
MVA
percent
|
MX
per
capita a
$
|
MHT in
Manufactur
ing
exports percent
|
MVA
per
capita
$
|
MHT
in
MVA
percent
|
MX
per
capita a $
|
MHT in
Manufactured
exports
|
|
Israel
|
2576
|
52.7
|
2355
|
41.9
|
3444
|
56.1
|
3680
|
57.8
|
China
|
113
|
57.6
|
42
|
34.4
|
350
|
57.3
|
183
|
44.6
|
India
|
60
|
55.3
|
17
|
17.9
|
90
|
58.4
|
38
|
19.7
|
Pakistan
|
56
|
31.9
|
45
|
8.1
|
63
|
35.1
|
60
|
8.9
|
Note a MX – Manufactured exports
Source UNIDO
Tables above provide conclusive evidence
that both Pakistan and India are losing ground in global manufacturing markets.
The main reason for this loss of competitive strength by Pakistan is
productivity growth stagnation. As Shahida Wizarat has shown in her path
breaking book Rise and Fall of Industrial Productivity in Pakistan total factor
productivity growth has been declining in Pakistan manufacturing since the
collapse of the Ayub Khan regime, Econometric estimations by UNIDO shows that
the value of the CIP indicator is strongly significantly associated with
technological effort (measured by the R and D to GDP ratio and royalty
payments). Regardless of the level of economic development learning and
innovation lie at the core of the industrial productivity growth process UNIDO
estimations show that the skill index is also positively associated with
improvements in CIP, but the association between FDI inflows and CIP index
values is negative for the 1990 sample. Foreign investment inflows do not
stimulate competitiveness and productivity growth; UNIDO finds that R and D
expenditures is by far the most important determinant of the level of MVA and
of manufactured exports growth.
High R and D expenditure is associated with
growth of medium and high technology (MHT) in net manufacturing output. The
UNIDO Report explicitly notes that Indian competitiveness stagnation is a
consequence of slow MHT sector growth during the 1990s. This is largely due to
policy liberalization, which has induced firms to increase advertising
expenditure at the cost of R and D spending
Policy liberalization is destroying
Pakistani manufacturing. We continue to pursue a suicidal low, wage labor,
repressive industrial strategy that bloats profits for textile and sugar Seths.
The production of complex goods in capital goods industries is neglected and
imperialist agencies such as the ADB and the World Bank continue to laud the
immiserising and detechnologising growth in the manufacturing sector.
Promotion of complex capital industry
products is essential for the transition to industrial maturity, flexibility
and the move to activities with higher levels of income Elasticity’s’ of demand
in world markets. Abandoning policy liberalization is essential if we are to
move from globally declining industries such as textile and leather and vehicle
assembly operations. Equally important is the abandonment of the low wage,
labor repressive. Industrial strategy manufacturing growth acceleration is not
sufficient. The quality of such growth is equally important. Growth linkages
between manufacturing, agriculture and the service sector are strong but more
important as the technological linkage, which transfer knowledge and skills for
manufacturing to other sectors of the economy.
Maximizing such “ Knowledge linkage” is
crucially important and the historical experience of major industrial powers
China, South Korea, Germany and Japan has shown that this may involve a rapid
of the production of high and medium technology computer destined for use by
domestic producers, Unfortunately a liberal policy stance is fundamentally
incompatible with prioritizing the production of technology intensive goods. This means that it is almost impossible to address the basic structural weakness of the economy with the context
of the liberal policy paradigm
in a country such as Pakistan. The conclusion of the PGRF program offers
an important opportunity for reorientation one national industrial strategy
The conventional wisdom maintains that, for exports to grow, it is necessary
to remove the “bias” against them. Recommendations to that end typically
include trade liberalization, exchange rate depreciation, deregulation, and a
general opening up of the economy (Pakistan, Planning Commission, 2008; Hussain
& Ahmad, 2011; Pursell, Khan, & Gulzar, 2011). There is little evidence
to suggest, however, that such measures by themselves caused the rapid economic
growth in Asia or that they would have on their own helped Pakistan turn its
fortunes around (Haque, 2004, 2009).
A good portion of Pakistan’s imports now
consist simply of products that were once produced or could possibly be
produced domestically under proper circumstances—demonstrating successful
import substitution on the part of its new competitors. If import substitution worked for them, it
should in principle work also for Pakistan. Their success confirms that the
comparative advantage is not something endowed to a country but created (or
lost). Unfortunately, Pakistan did not respond to the new source of competition
with the required vigor, foresight, and nimbleness, but accepted passively the
new trade winds. The consequence was that it lost ground to other suppliers that
could possibly have been retained, but would now be difficult to recapture.
This suggests that what Pakistan needs to
be concerned about is not its “comparative advantage” (whatever that may mean)
but its “absolute advantage.” In other words, it will successfully compete
against such countries as China or India only by ensuring that domestic
producers are more productive and efficient and at least as good in quality.
This will not be possible, however, by merely letting the market do its magic:
it requires a vast increase in investment in physical capital and skills
development.
Indeed, active and concerted government
intervention is required to persuade, help, and support domestic industry
toward that end. Profit maximization (or cost minimization) in standard
economics textbooks is indifferent to the means adopted for its realization,
but the means do matter. It is one thing to maximize profits by compressing
wages (e.g., by means of a currency devaluation) and quite another to do so
through deliberate measures to enhance productivity. Factory owners or managers
do not seek to maximize profits in a literal sense, but rather use it to guide
their decision-making
Central to a strategy for gaining international competitiveness, therefore, is a concerted effort to raise Pakistan’s investment rate to a level comparable to other Asian economies (perhaps a minimum target of 30 percent of GDP could be set), while fostering entrepreneurship, creativity, and innovativeness in the private sector. The latter involves policies and institutions that promote learning and technological
adaptation in industry. This is the real challenge. In the context of Pakistan
This leads to another important element of the new approach to industrial policy. What Pakistan needs at this stage is not so much promotional policies for specific industries—since the lack of competitiveness is pervasive in industry—as devising a program to significantly improve firm-level performance.
Competitive pressure might induce firms to take steps to reduce costs and improve quality, but that is seldom enough, especially when the
entire economy is trapped in a malaise, as is the case in Pakistan. Government action and intervention is then required to set things in motion. Again, this is an area where the East Asian experience offers useful guidelines on how a government might reward or punish firms depending on their performance against established and transparent criteria. The Korean government, during the early phase of the country’s industrialization, relied on agreed performance targets that firms had to fulfill to qualify for various incentives on offer, notably for subsidized
Improving competitiveness
Human Resource Development:
Investing in Education and Addressing
the Skills Gap Constraint. Pakistan underperforms other countries at similar stages of development in almost all social indicators -- education, health and nutrition, and population growth. Impacts of this social gap, further reinforced
by an even sharper gender gap, on the lives of those groups who remain particularly affected It is imperative for Pakistan's growth prospects to invest more in education and
skills development., the lack of skilled manpower
is a major constraint to business activity
in Pakistan. Faster progress in educational achievements and in expanding
an educated workforce
will be critical to raising the productivity and competitiveness of Pakistan's firms and to accelerating economic growth. To be competitive in today's integrated global economy will require an increasing supply of skilled manpower
to complement rapidly changing technologies.
Pakistan need to
have in place initiatives that include: (i) improving access to and equity for 'quality universal
primary education' through improvements in infrastructure and teaching material;
(ii) increasing access
through public-private partnerships; (iii) improving the quality of secondary education;
(iv) enhancing quality through strengthening teacher training, revising
national curriculum and textbooks, and establishing a National Education
Assessment System; (v) increasing literacy through adult literacy; (vi) supporting technical education in secondary schools;
and (vii) mainstreaming madrassah education through the introduction of general education
subjects.
The wav forward: For sustained
improvements, there is a need to continue: (i) improving governance in the
education sector by further strengthening the existing mechanisms aimed at more
effective management and performance of teachers, and monitoring teachers'
competencies and absenteeism; (ii) implementing transparent procedures for
teacher training and recruitment;
Power. In the field of energy the principal issues facing the business community, particularly the larger established firms is that the sector's inadequate pricing and subsidy structure
causes the burden to fall particularly hard on manufacturers, further harming price competitiveness.
Price levels for power and LNG are high and impede competitive production of
export goods.
The way forward: Recommended actions include
accelerating reform by:
• Increase in share
of renewable energies and improving the share of indigenous energy sources in
energy mix;
• Setting an appropriate pricing
structure for distribution companies to support
sector restructuring, to facilitate better targeting of subsidies, and to strengthen operational performance by reducing theft and losses;
and
• Completing the unbundling of Water and Power Development Authority (WAPDA) into separate
transmission and distribution companies, and continuing with privatization of generation companies. Establishing a free access power
structure and introduction of competition in procurement of generating
capacity.
• Industries have
options to go for distributed generation; roof tops, buy back options have
improved the economics of these options.
• Energy efficiency
is an ignored area , there are
significant savings from use of : VfDs ; insulation , heat recovery ;
heat transfer ; use of solar heating where heat is required in the process .
etc.
Factor Markets
Pakistan's drive for modernization has made the improved
functioning of factor markets a central concern, but the attention given to financial markets has yet to be matched by reforms in the labor market
only recently set in motion--
and land markets, where limited efforts are just beginning
at the provincial level. Initial
labor market reforms to codify
antiquated legislation and start the process of liberalizing the market represent
a good start.
The way forward:
The agenda for the next round of labor-market actions
includes:
• Preparing regulations for the new Employment Services
Act, which will increase
labor market flexibility
particularly through the use of temporary labor contracts.
• Completing the legislative reform agenda, focusing first on reforming the 14laws governing
labor welfare and rationalizing the labor levies system.
Timeframe:
short- to medium-term.
Key responsible entities
include: Ministry
of Labor, Manpower, and Overseas
Pakistanis; labor unions;
and the private sector through the chambers of industries and commerce.
Due to the numerous
agencies, multiple levels of government, and entrenched traditions
involved, developing a comprehensive program
of land-market development has proven difficult. The challenge is to establish one system to ensure clear title for new transactions while conducting a delicate and complex parallel activity using a range of options
for conveying and transferring ownership
in order to settle property rights disputes.
The way forward would involve:
Transport Logistics. The ability to
move goods and people efficiently affects almost every aspect of growth and export competitiveness. Improvements to roads and port facilities, in particular the Peshawar-Lahore-Karachi corridor, have upgraded the transport network,
and with the exception of rail, services have benefited
from reduced public-sector participation and increased
competition. These improvements have supported a rapid growth in exports
in recent years.
Most of these gains, including diversification into non-traditional exports,
were achieved by reducing constraints and allowing market forces to guide growth in trade.
Significant challenges, however, remain to be addressed
in the transport sector. Long-standing problems include the age (20 years on average for trucks that carry 95 percent of all
freight) and condition
of the transport fleet, serious overloading
of trucks, restrictions on the provision of bonded transport
and the high cost for less-than-container-load (LCL) shipments. Pakistan
Railways is not allowed to operate on a commercial basis and --because
of the priority it gives to passengers-- has difficulty in organizing a competitive freight
service. For the ports, the principal problem is congestion at the terminals. Facilities have not expanded to
match the traffic resulting from trade liberalization, and although ships' turnaround time has dropped and new berths are being built, import containers' dwell time averages
about 10 days, five times as long as for export containers. There have been gains in this
area , roads have been improved and further improvements are underway, caoacity
is being added at ports .
The way forward:
Improving transport
logistics will have an important
role in enhancing Pakistan's
export competitiveness:
• Strengthening transport
logistics on the roads means, first of all,
getting newer, safer, less polluting trucks --an upgrade that could be hastened by both reduced duties on imported trucks and parts and tougher
safety and axle-limit enforcement. Making medium-term credit more available
by increasing flexibility in defining acceptable collateral and by requiring
full insurance coverage for truck operators could not only be a stimulus to modernizing fleets but also to a needed measure of consolidation in the industry.
(Longer term actions:
as trucks modernize
and shipping volume grows, Pakistan's trunk road itself will need upgrading, not only widening
but also the construction of a limited-access, Karachi-Lahore highway; exclusive port-access roads; and truck terminals on the periphery
of major cities).
• Rail transport, especially for containers moving between Karachi
and Lahore, should be encouraged, not least to lighten
the burden on highways. Creating an efficient rail-freight service requires granting
a concession to a private
operator through competitive bidding. Such a
concessionaire should carry the
responsibility of managing
goods terminals so that future shippers
can count on efficient door-to-door service, a benefit the system now lacks.
• Establishing efficient
terminal operations would also address the congestion
that is the largest problem affecting Pakistan's ports. Their excessive
overhead costs, associated with the overstaffing problem under the continuing Port Labor Board, need to be reduced. Also, congestion at parking yards can be eliminated through a combination of higher storage fees, reduced free time, and simplified procedures for movement of containers in bond to inland container depots.
A final step to reduce dwell time
is the development of a port-community information
system to track the status of cargo, integrating information from the port, terminal operators,
customs, banks, and other participants in the movement
of goods.
>-Time frame: Short- and longer-term.
Responsible entities:
Ministry of Commerce; Ministry of Railways;
Ministry of Communications; Ministry of Finance;
Ministry of Ports and Shipping;
Karachi Port Trust and Qasim Port Authority; and Port Labor Board; Central Board of Revenue (CBR); State Bank of Pakistan;
the private sector.
Trade facilitation. Pakistan has done much over the last decade to improve its trade-logistics, particularly forwarding and customs by efforts to add value in order to increase the competitiveness of exports. Domestic forwarders and clearance agents, for instance, operate in a flexible, highly competitive environment where improved management and integrated enterprises linking clearance, storage,
forwarding, and transport would do much to build effective
supply chains. Such coherence is a prerequisite for export growth where refrigeration is a concern (frozen seafood and
fresh foods and vegetables) and where bonded storage and transport facilities can cut costs and delays (e.g., garments, sports equipment and surgical goods). The next stage of progress will require better cargo
consolidation, cross-docking and inventory-monitoring services, and more efficient
data interchange between shippers and logistics
providers.
Over the last few
years, Pakistan has introduced three major initiatives for reforming customs clearance. A single administrative document replaced what had been ten; a Direct Trader Input (DTI) system
was introduced in 1995 under the management of the Pakistan
Revenue Automation Limited (PRAL).
The latter has brought computerization to the assignment
of inspection officers,
the selection of packages to be examined, and requests for duty drawback;
and preferred traders have recently
gained a green channel to have goods cleared based on documents. Although results
have been good --95 percent of imports by value now clear
within 4 days; exports are processed in 1-2 days-- a new, state of the
art Pakistan Automated Customs
Clearance System (PACCS) is due to replace the
DTI system. The pilot phase is soon to be completed.
Bringing additional risk-assessment capability and improved
support for channelization, it promises substantially to
shorten the period from the time when documents
are lodged to when cargo is cleared.
With additional measures, the change
will limit the contact between
cargo owners and customs officials
in order to reduce informal
payments.
The wav forward: Another initiative
offers short-term benefits
in improved trade facilitation, leading to reduced costs:
•
Further simplification of customs
procedures for establishing consolidation activities, bonded storage, and transport
in bond. This
initiative would reduce the constraints on setting up bonded storage
and inland, container
depots and on the competition for transport of goods in bond.
It would also allow the designation of certified factories
engaged in the production of exports as bonded
facilities. This would require a change in customs regulation, which may require at least a year and a half to be implemented.
Time frame: Medium-term. Responsible entity:
Ministry of Finance
and CBR; Ministry of Commerce.
Institutions
Institutions are important because without
them, society as we know it would collapse. But, these institutions differ from
country to country, and a persuasive strand of economic literature argues that
they are the key to understanding our development outcomes. We can also split
them between economic and political institutions. The former directly shape our
economic incentives, such as ownership rights of property, and the latter
determine the political structure, such as whether we’re a parliamentary
democracy or not.
As a society, we decide which economic and political institutions
to adopt, and these institutions shape much of our behavior through shaping our
incentives. Incentives, any economist can tell you, are fundamental to
understanding any society’s prosperity or lack thereof.
The political institutions
are
more important in
determining our prosperity. Those who control the political power determine
economic institutions. So, if political power (which in turn determines the
political institutions) is controlled by a small, extractive elite, they will
set up economic institutions which benefit them, not the majority. If the elite
benefit from an economy underpinned by clientelism and patronage rather than a
well-functioning competitive economy, they will choose the former. It is
important to remember that there is plenty of profit in poverty. It just
happens to be controlled by few.
Now, look at Pakistan. Our political economy is defined by an
embedded culture of rent-seeking and patronage. This means
we have a system which grants profits to certain players in our economy
unfairly, hence undermining the central principle of efficient market
allocation — fair competition — and creating a wrong set of incentives for businesses.
Our manufacturing sector is rife with examples of rent-seeking
practices. For example, Pakistan’s automobile sector is dominated by a handful
of Japanese manufacturers known for selling low-value cars while making a
considerable profit. Despite this, Pakistan provides them with extensive trade barriers to protect them from
foreign competition. The recent finance bill (since amended) further shows the
extent of their political patronage.
This is not by accident. Because Pakistan’s political power is
controlled by an extractive elite, it has allowed for such political
institutions to emerge which permit its government to provide these rents to
certain car manufactures with immunity, even if this negatively impacts our
shared prosperity. Direct evidence of our political structure influencing
economic outcomes comes from a paper by Asim Ijaz Khwaja and
Atif Mian.They show that politically connected firms in Pakistan receive loans
from government banks in Pakistan at lower rates despite defaulting more than
non-politically connected firms. This is evidence of unaccountable political
power translating into inefficient economic allocation.
The paper (Asim Ijaz Khwaja and Atif Mian)
constructs the topology of business networks across the population of firms in
an emerging economy, Pakistan, and estimates the value that membership in large
yet diffuse networks brings in terms of access to bank credit and improving
financial viability. The resulting
topology includes a "giant network" that is order of magnitudes
larger than the second largest network. While it displays "small
world" properties and comprises 5 percent of all firms, it accesses
two-thirds of all bank credit. We estimate the value of joining this giant
network by exploiting "incidental" entry and exit of firms over time.
Membership increases total external financing by 16.6 percent, reduces the
propensity to enter financial distress by 9.5 percent, and better insures firms
against industry and location shocks. Firms that join improve financial access
by borrowing more from new lenders, particularly those already lending to their
(new) giant-network neighbors. Network benefits also depend critically on where
a firm connects to in the network and on the firm's pre-existing strength.
Food Quality
and Safety Standards
In March, 2005, based on the findings of an EU inspection visit, the Government of Pakistan imposed a ban on exports of seafood to the EU to give the
industry time to enhance quality and safety standards and prevent an EU-imposed ban, which
could have had catastrophic results for the industry. Estimated losses range from US$1 0 - 40 million during the first months of the ban.
Since then, EU inspectors noted improvements, but have raised serious
concerns regarding the inspection and sanction system on the part of the Government coupled
with such deficiencies as inadequate processing, unhygienic fishing vessels, and poor conditions in the harbor and auction house. This episode
has underscored the critical importance
of having a strong sanitary and phytosanitary (SPS) regime to meet international standards. International competitiveness in exports of perishable foods requires such a capacity and its
strict implementation.
Pakistan presently lacks a coherent
strategy (or set of strategies) for quality and SPS management in relation to its trade. Whatever strategy
exists is pursued
independently at company
or business-to business levels. In the absence of a coherent approach,
Pakistani stakeholders are largely reacting
to events and adopting
defensive postures, seeking
to limit the apparent impact of standards
or potential damage from
non-compliance with those standards.
The way forward :
The first step toward improving food quality and safety
in fisheries, horticulture, and meat/livestock is to recognize the concern as a priority
for Pakistan's export
Conclusions
Actions
taken to improve competitiveness will strengthen
Pakistan's export performance, which in turn will support stronger, job-creating, poverty-reducing economic growth.
But action must be rapid. Since global economic
integration is certain to continue and competitive pressures to intensify, Pakistan must aim high to strengthen and diversify export production and to ensure
the safety of the food it sells abroad. The challenge is great
and multi-faceted, but the dynamism
of Pakistan's public and private-sector leadership has proved equal to many
daunting tasks in recent years.
High priority areasfor early
action. High priority areas where early actions
might have high payoffs. These include:
• Strengthening the macroeconomic framework
(and avoiding overvaluation of the rupee);
• addressing electricity pricing and structural
issues in the power sector;
• improving SMEs' access to financing;
• serious commitment to human capital development and to increased
supply of skilled manpower;
• further improvements in the efficiency
of the duty-drawback and sales tax rebate
system for new and/or small exporters and for new export activities; and
• improving
transport/trade logistics, and enhancing food quality and safety standards
capacity.
Measures with high and quick pay-offs. Also included
in the above set, some of the needed actions would lead to high and quick pay-offs. The following are specific examples:
o
Power rates.
Addressing electricity pricing issues by setting an appropriate pricing
structure for distribution
o Access to financing. Increasing access to financing
by SMEs through changes in the legal framework and judicial processes for enforcement offinancial contracts (such as with a modem, secured,
transactions regime for movable collateral) and an expansion
of credit registry coverage,
particularly for private
credit
o
Duty drawback
schemes. Shortening the processing time for
duty drawback and sales tax rebate submissions by SMEs and new exporters through
further simplification of the documentation requirements
o
Port congestion. Reducing free parking period and introducing fees that increase
with the duration of parking
at port terminals in order to reduce congestion and delays,
which are the key problems
o
Freight transport
by train. Allocate slots to container
trains
o
Rationalizing customs duties. Eliminate the existing tariff exemptions and concessions
o
In the auto industry, eliminate the existing deletion programs
o
Continue reducing
tariff peaks in the auto industry and in edible oils --after
converting the latter's
specific tariffs to ad valorem
rates
o
Enforce the netting bans (see: Chapter 3, page 59; Chapter 9, page 149).
The country’s very slow productivity growth was the single most important factor that hurt competitiveness. a coherent and articulated industrial policy is required to overcome this disadvantage.. Pakistan has come to lag behind in terms
of virtually every economic indicator and its role and place in the global
economy remains quite insignificant. For the size of its economy, it is clearly
punching well below its weight in the world market.
Pakistan’s export performance would not improve
by simply promoting new industries and exports. In other words, while the
description of the problem (limited export items) is correct, the reasons
proffered for the country’s export failure are less than convincing. Nor is
physical infrastructure shortcomings a satisfactory explanation for Pakistan’s
poor performance in the world market.
Pakistan’s
problem is fundamentally one of pervasive low labor productivity in industry
compared to its competitors in the world market. This state of affairs is
unlikely to be remedied through such conventional measures as exchange rate
adjustment, trade liberalization, privatization, or deregulation, which are
often put forward. What seems to be required is a national commitment to
improving Pakistan’s competitiveness in the
world market through a coherent industrial policy. Certain elements should underpin the design of a new industrial
policy. These elements are:
The
definition of a new industrial policy should be viewed as a political rather
than an economic or technocratic exercise. For the policy to be taken seriously
and implemented assiduously as a national action program, it must have the
support of at least the principal stakeholder, i.e., the private sector.
The new industrial policy must recognize
and be based on the fundamental change in the pattern of international trade
that has occurred over the past several decades, i.e., the emergence of some
developing countries as dominant world suppliers of manufactured goods. This is
indicative of a change in the basis of specialization in world trade from one
of “comparative advantage” derived from cheap labor to one based on deliberate,
policy-supported enhancement in the “absolute advantage.” By making a concerted
effort, Pakistan could expect both to become internationally competitive and to
bring about a sustained increase over time in its living standards. For this to
happen, it is vital that Pakistan’s investment rate (and, therefore, savings
rate) as well as expenditure on skills upgrading and innovation is
substantially raised. This calls for a fundamental rethink in the approach to
competition in the world market, from one of short-term cost-cutting measures
(as, for example, currency depreciation) to one targeted at improving
productivity and product quality.
However, since the principal agents of
technological change are business firms, the new strategy should focus on the performance
of Pakistani firms in the world market rather than promoting individual
industries. This shift in focus is also warranted because, as noted, Pakistan’s
competitive weakness is not industry-specific but pervades virtually all
sectors. The government’s role would lie in instituting a system of incentives
and penalties that encourages firms to take a longer-term view in their
investment decisions and foster a spirit of entrepreneurship, creativity, and
innovativeness. How this is to be done is at the heart of the new industrial
policy and will obviously require the private sector’s involvement in working
out the process.
Trading relations need to be suited to our
needs Pakistan needs to find ways of
taking fuller advantage of its bilateral trade agreement with China and to
ensure that its long-term commercial interests are protected as it opens up to
trade with India. Extending MFN treatment to India is not really the issue and
Pakistan could remove this hurdle without any cost to itself. What is, however,
required is that the “normalization” of trade relations be strictly based on
the principle of reciprocity, particularly with respect to NTBs
Pakistan continues to choose poorly
thought-out economic policies, sees rampant corruption and a failure to establish
a productive industrial base; these are in fact symptoms of the political
institutional structure which benefits narrow extractive governing elite at the
cost of everyone else. Our economic failure is a symptom of our collective political
choices. Once we can allocate political power more fairly, we can make better
economic outcomes
