Aug 10, 2009

Trade secrets

What Pakistan needs is a facilitating social and physical infrastructure for economic development since trade is a collective action of an economy

By Zubair Faisal Abbasi

The Strategic Trade Policy Framework 2009-11 has recently been announced by the Ministry of Commerce. Initial reactions about the trade policy are mixed. Some analysts and stakeholders have termed the framework a welcome step which shows a medium term perspective for a structural transformation of the economy. However, there are others who claim that the framework is anything but strategic since it does not show a radical break from the past. It still carries the baggage of export-led growth of previous Rapid Export Growth Strategy (REGS) followed by the Ministry and did not prove to be successful.

The biggest danger, some experts argue, lies in not accepting the scale of the problems that both the global and Pakistan's economy faces at the moment. While there is a global recession and consumption is not picking up to the scale which can recreate 'trade an engine of growth' for developing countries, too much emphasis on external trade than domestic commerce is being criticised. It has been mentioned that the economy needs to focus on increasing the size of domestic demand market through expansion of wages (i.e., creating more buyers for consumption of local brands) and sectoral articulation for backward and forward linkages of local small scale and large scale industrial set-ups.

Notwithstanding, in the trade policy, the Ministry has set the export growth target of 6 percent for 2009-10 and 10 and 13 percent for each of the successive years. A casual look at the results of REGS makes it clear that Pakistan has actually seen growth in imports much faster than exports which is manifested in the increasing trade deficit. At a certain level, the basic assumption of trade strategy, which the officials of the Ministry of Commerce have been following, stands challenged. They based their big-bang tariff liberalisation strategy along with kicking away the industrial policy design on the assumption that in order to increase export Pakistan needs to remove import barriers and become a neoliberal economy. This assumption needs a thorough revision with the help of growth and development theory rather than trade theory.

In fact, the trade deficit, which Pakistan is witnessing has similarities elsewhere as well. A recent study by famous economists Amelia Santos and A.P. Thirwall shows that liberalisation in 22 developing countries stimulated export growth but raised import growth more, leading to a worsening of the balance of trade and payments. They argue that despite taking all measures such as removing anti-export-bias, import control, including non-tariff barriers, and exchange rate distortions, liberalisation raised export growth by some 2 percent and import growth by 6 percent with the result that trade balance worsened by 2 percent of GDP. Most astonishingly, their research finds that this has constrained the growth of output and living standards. This means that the findings have important implications for the sequencing and degree of liberalisation for Pakistan as well.

If we look at economic liberalisation processes in Pakistan, then the average tariffs seem to have fallen sharply during the last two decades. These were 120 percent in 1985 and now stand at around 12 percent in 2007-08. The reduction in tariffs also coincides with increase in trade deficit. For example, as compared to the trade deficit being at US $ 1.2 billion in 2001-02, it has reached around US$14 billion in 2008-09. Therefore, it seems that Pakistan has to rely more on private income flows to finance the deficits since reallocation of human, financial, land, and technological resources is not easy and cannot be abrupt. However, other than the remittances, there is a slowdown in foreign capital inflows and investment as well. The total investment fell from 22.5% of GDP in 2006/07 to 19.7% of GDP in 2008/09. In fact, private investment has fallen each year since 2004/05, from 15.7% of GDP in 2004/05 to 13.2% of GDP in 2008/09. These indictors put a question mark before many targets of the trade policy.

In addition, if we look at the growth prospects, the government forecasts that the economy will grow by 3.3% in 2009/10, with growth rising to 4% by 2010/11. While, the agricultural sector is expected to grow by 3.8% in 2009/10, the manufacturing sector by just 1.8% and the services sector by 3.9%, the prospects of a turn-around in production for exports seem not very promising.

According to the Economist Intelligence Unit report on Pakistan, though there has been some form of product diversification in Pakistan with 25% increase in food exports and good performance on cement sector; textile exports continued to decline, falling by 9% year on year. However, rice has shown around 8.2% increase in exports. An interesting development is that engineering sector exports have shown increase of around 26.1%. Therefore, emphasis of the trade policy on engineering sector revitalisation and support must be welcomed though performance monitoring has to go side by side. The use of Pakistan Institute of Trade and Development resources is a good sign of linking research with policy and planning.

However, areas of concern lie in shift of the textile sector to lower value-added production. Data shows that exports of raw cotton grew by 40%, but exports of readymade garments fell by 14%. This deterioration of competitiveness should raise some eyebrows somewhere and such downside risks have implications for longer-term stability of the balance-of-payments position, argues the report by the Economist. India, a major competitor of Pakistan in the textile market, is providing subsidies on textile exports with massive incentives and as a result the Indian textile sector growth rate is 11.6% while Pakistan circles around 3 to 3.5%. The argument is not that Pakistan should also provide subsidies but actually it needs to conduct serious research earmarking priority sectors for product differentiation and also on how the use of subsidies and other incentives should be monitored leading to both production and productivity growth. The need to improve practices and vigilance regarding Afghan Transit Trade is as important as ever for the lifeline of our textile sector.

It is worthwhile to mention that Pakistan has slipped 9 points downwards on the Global Competitiveness Index which listing 134 countries and Pakistan stands at 101 now. The deterioration has been in all of 12 indicators which the index uses to analyse performance showing financial market losing much more. It also shows that the country is poor in higher education and training where it stands at 123 in the comity of 134 nation-states and not so surprisingly the labour market efficiency is low also with standing at rank 121.

While establishing new indicators for performance for monitoring, the strategic framework claims that "by 2012 the competitiveness ranking of Pakistan will improve from 101 to 75". This is easier said than done while looking at the absence of a 'national system of innovation' which connects the triad of education, industry, and policy.

Last but not least, apart from being a strategic ally and a good friend, Pakistan should learn from China and the USA. Looking at the global recession and fall in global consumption which has impacted the trade balance of China as well, the countries are stimulating local production and consumption. 'Buy America' is one instance. In fact, the 7.9% increase in GDP for China will come from increase in domestic consumption which means that it is seriously increasing linkages between local production and consumption. What Pakistan needs is, to make the framework as success, focus much more on domestic commerce and build local brands, wages, production, consumption – in a nutshell a facilitating social and physical infrastructure for economic development since trade is a collective action of an economy and not only about tariff and subsidy manipulations.

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