Dec 23, 2009

Back to the basics

Pakistan needs foreign investment in the manufacturing sector to expand and upgrade its industrial base to increase exports

By Hussain H. Zaidi

Export promotion is widely regarded as a powerful instrument of job creation, improvement in the balance of payment (BoP) position, economic growth and increase in the level of incomes. Like other developing countries, Pakistan is making efforts to increase its exports. Though the country’s merchandise exports have exceeded $20 billion, they constitute only 0.12 percent of global merchandise exports of $15.8 trillion. The share of exports in GDP is less than 15 percent.

Though greater market access for Pakistan’s exports, both multilaterally (through WTO negotiations) and by means of bilateral and regional trading arrangements (FTAs, PTAs), is important for export promotion, there are some structural problems as well preventing substantial increase in exports. To begin with, the problem of a narrow export base persists. 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, called product diversification, and by increasing the number of export markets, called 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 the international market demand can be minimised.

In case of Pakistan, a narrow export base is shown by the fact that four major commodities, namely textile and clothing (T&C), leather goods, rice and sports goods account for more than 70 percent of total exports. The share of only T&C products is 60 percent. The country’s dependence on T&C sector for export revenue has an obvious disadvantage arising out of the fact that for the last many years, the share of this sector in global merchandise exports has remained less than 6 percent. Thus, our exports overwhelmingly depend on a sector which has both a low and stagnant share in global trade. This said, Pakistan’s share in global T&C exports is less than 3 percent, which shows enormous potential for increase in export of these products from Pakistan.

As for lack of market diversification, the 27-member European Union (EU) and the US account for more than half of Pakistan’s total exports. The economic slowdown in the US and Europe and high tariffs that these markets have on T&C imports also underscore the need for market diversification.

Secondly, Pakistan’s exports are heavily dominated by low technology products, whose share in total export earnings exceeds 85 percent. The share of medium technology products in exports is below 10 percent, while that of high technology products is negligible. This is in contrast to the global scenario. Developing countries, by and large, are making strides in making high and medium technology products and their share in global exports is fast increasing in these sectors.

The share of high and medium technology products in Chinese exports, for instance, is 30 and 25 percent respectively. In case of India, high and medium technology goods account for 25-30 percent of the country’s exports. The greater the value addition, the higher the prices exports bring in. Since high technology products embody the maximum value addition, countries relying on such products have high export earnings and rising market share.

A country’s export performance reflects its state of industrial development. Pakistan has a narrow export base and is primarily an exporter of low technology products, because this is what the domestic industry offers. Hence, industrial development is arguably the most important factor for substantial increase in our exports. A capital scare and technology deficient country like Pakistan needs foreign investment in the manufacturing sector to expand and upgrade its industrial base. Unfortunately, though during the last few years, Pakistan has received a lot of investment in the services sector, such as financial services and telecommunications, there have been meager FDI inflows into the manufacturing sector, particularly the T&C sector.

Another major structural problem is low labour productivity. Labour productivity is low because human resource development has traditionally been a neglected area in Pakistan. Workers are potentially an organisation’s greatest asset and no organisation can compete successfully if its most valuable asset remains under-utilised. This calls for making greater investment in the capacity building of the workforce. Here, one misconception needs to be dispelled. It is widely believed in the developing countries, including Pakistan, that low wages are key to competitiveness. No doubt, low wages may help bring down the cost of production; the advantage will be neutralised if labour productivity is also low. What really matters is the final productivity of labour. This is borne out by the example of developed countries, which have achieved competitiveness not by reducing wages but by increasing labour productivity. Thus, the focus of our entrepreneurs should shift from keeping wages low to raising labour productivity. This will reduce the real cost of labour.

Next on the list is lack of product quality. A word of warning is in order here. An enterprise may offer ‘quality’ goods but may fail to sell them, because they do not pass the test of consumer expectations. Therefore, it will be a strategic mistake to define quality in terms of the producer or supplier rather than the customer. Quality means creating value for the customer. The greater the value the customer attaches to a product, the higher its quality. Customer value is, however, relative. One customer segment may attach greater value to product design, while for another, product durability may be more important. This means an enterprise cannot create customer value or quality without identifying the potential customers and studying their needs and wants.

Ensuring product quality entails compliance with product safety and health standards. These include environment standards and those dealing with protection of human, animal and plant lives. A distinction is made between mandatory and optional standards. The former embody government regulations, while the latter embody requirements of customers. However, in practical terms, the distinction is not much relevant, because every supplier has to fulfill the requirements of his prospective buyer failing which he may be driven out of the market.

In case of Pakistan, most of the exporters believe that tariffs are the only barriers to market access and after the same have been reduced, they can sell their products. Hence, they do not attach much importance to complying with product quality and standards until their consignments are rejected for lack of compliance. No doubt, at times these standards are very difficult to understand and comply with. However, exporters need to overcome this problem with the assistance of the government, because compliance with customer requirements is necessary.

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