20 September, 2014 / Ziqa'ad 24, 1435

Pakistan’s trade strategy

Updated Mar 07, 2014 11:06am
- File Photo
- File Photo

What higher-order development objectives does Pakistan’s trade strategy and policy seek to achieve? For the past four decades or so, many developing countries have latched onto the coat-tails of the boom in global trade and leap-frogged the development ladder by pursuing an export-led growth strategy.

This strategy has more often than not been embedded in a wider “industrial policy” which has sought to fast-track industrialisation while engineering a structural transformation of the economy — moving initially from agriculture to industry, and later from labour-intensive low value added exports to capital-intensive production involving innovation and technological sophistication.

With very few exceptions — in fact perhaps none at all — most successful emerging economies of today have followed an export-led path to development. While this growth strategy has entailed myriad policy interventions, with each successful exporter-nation following a range of policies tailored to its specific needs, broadly, the common elements have been:

• A regime of export incentives

• An under-valued exchange rate

• Subsidised credit

• Selective liberalisation of imports

While India may be cited by some as an example of an economy that grew without an explicit export-led strategy, the phenomenal increase in its manufactured exports over the past two decades has been an important driver of growth. As an illustration, while China’s exports have increased over six-fold since 2000, India’s exports have grown over five times, placing it second in the list of top-performing export nations during this period. Other strong performers have been Vietnam, Turkey, Cambodia and Bangladesh.

In comparison, Pakistan’s exports have increased 2.7 times over this period, placing it among the low achievers on this score.

Clearly, Pakistan has not fared well on this count. Barring the Ayub-era push towards rapid industrialisation, where industry and the export sector were provided a range of incentives, it is difficult to discern a clear long-term strategy that Pakistan has pursued with regard to export promotion over the past three decades.

If anything, a visible — and bizarre — pattern emerges when Pakistan’s trade regime and performance over the recent past is critically examined: the country’s policymakers have had a distinct import-bias rather than an explicit export-bias!

The most egregious example of the anti-export policy bias — and a near-wanton emphasis on imports — is from the Musharraf-Shaukat Aziz period. The nominal exchange rate was kept stable for several years, resulting in a real appreciation of the rupee precisely at a time when almost all the successful exporter nations were actively using a weak currency as a policy tool to promote their exports. In addition, the State Bank of Pakistan (SBP) opened the monetary taps and began flooding the economy with cheap credit. A large part of this credit was used to finance import-based consumption (and resulted later in the writing off of hundreds of billions of consumer loans from the balance sheets of banks as the myriad SBP-engineered credit bubbles burst).

Furthermore, import tariffs were reduced drastically — with Pakistani negotiators signing up to lower ‘bound’ tariffs under the World Trade Organisation than most other developing countries. And to top it all, Pakistan also went ahead and signed up to a Free Trade Agreement (FTA) with China in 2006 — only the third or so country to have done so.

As a consequence of these misplaced policies, Pakistan’s imports surged, far outstripping exports, setting the stage for the biggest balance of payments crisis in the country’s history. To put this in perspective, by 2008, the country’s imports had crossed US$ 40 billion, with exports financing less than 50pc of import payments.

More disastrously, the opening up of all manner of imports stunted the country’s manufacturing sector. At a time when the share of manufacturing in GDP increased for many countries in Asia, the share of Pakistan’s manufacturing sector in GDP declined, as did its share in employment and new investment. During this period, a number of industries either shut down or came under pressure, including manufacture of tyres, ceramics, and footwear, to name a few. (Rampant under-invoicing and unchecked smuggling have compounded the problems of industry.)

While Pakistan has gone the route of whole-scale opening of imports across the economy, the successful exporter-nations have adopted a much more cautious liberalisation of imports, restricting freer imports to the export sector via bonded warehouses and export processing zones.

Some proponents of “free trade” believe that the economy requires efficiency-enhancing “creative destruction”, and opening up to imports is a good way to achieve this. Despite the appeal of the argument for free trade, no country practices this approach. Hence, the US protects its steel, autos and financial services industry, among others — and heavily subsidises agriculture and the defence sector. Japan protects agriculture, steel etc. South Korea for years protected ship-building, while the European Union has provided hundreds of billions in subsidy to its “inefficient” agriculture.

Secondly, reducing the level of protection to domestic industry and agriculture at a time of severe challenges in the form of the internal security situation and the energy crisis of the past seven years, and expecting these sectors to improve their efficiency under such conditions — and in some cases against heavily-subsidised competition — is a recipe for disaster.

Pakistan should learn from the policy experience and current practice of other countries — including India — and move towards greater liberalisation in a phased and well-planned manner.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.


Do you have information you wish to share with Dawn.com? You can email our News Desk to share news tips, reports and general feedback. You can also email the Blog Desk if you have an opinion or narrative to share, or reach out to the Special Projects Desk to send us your Photos, or Videos.

More From This Section

The day Srinagar sank

The story ceased to be about the victims, or the breakdown of official machinery. Instead, it became a stream of...

Comments (6) (Closed)


nimesh
Mar 07, 2014 09:31am

Please do not use India as the example to justify this premise. We're a spurious example. 2013 Indian exports: $317 bn 2013 Indian imports: $ 515 bn. Balance of payments deficit: $198 bn. Sure the Indian economy is much bigger than Pakistan's but its not even remotely an example of an exports led economy. Almost every manufactured item here in delhi is Chinese or Korean.

kanakasabhai
Mar 07, 2014 10:36am

@nimesh: You are absolutely wrong. India has a trade deficit of $120 billion of which oil and gold imports contribute over $100 billion. There is no Chinese presence in Automobiles,Software, bulk goods like steel, cement, textiles, precious stones and jewellery etc. India like any other country imports a lot of electronics and cheap electrical products from China. The main contributor is cell phones, computers and components.India has a CAD of less than 2% now. India also has over $75 billion exports in software which has no Chinese presence.Pakistan should emulate a knowledge based economy like software.Is has a lot of inward remittances as well. That needs more investment in education and infrastructure apart from the vital security.

cameo
Mar 07, 2014 03:58pm

@nimesh: Just because there is a trade deficit does not mean that $317 bn of exports are not substantial. If you cater for the cost of energy imports as a percentage of import bill you will notice that India has not done any worse the other export led economics. In my opinion trade deficit is not necessarily a bad thing in short run if there are other options of capital inflows such as remittances and FDIs.

David_Smith
Mar 07, 2014 07:42pm

@nimesh: these figures are for goods only. add export of services, you'll get a more balanced figure. Explains why India's forex exchange reserves hover near the $300 billion mark.

Manzoor Ahmad
Mar 07, 2014 10:38pm

Did not expect such an ill-informed and poorly researched article. Exports of India and China started growing when they liberalized their imports. During Parverz Musharaf's govt, exports were growing at 20% per annum. It was only during the PPP govt that our exports started stagnating as their policy makers and advisors were very poor. Pakistan did not sign any low bound tariffs at the WTO. In fact, we have the highest "water" between our applied and bound tariffs in the whole world. May be US and other countries protect one or two industries but except for some African countries there is no one who is so protectionist as Pakistan.

Ali
Mar 08, 2014 04:54am

Trade is a crucial sector that will need a higher degree of scrutiny in the coming years. After reading the article, I still do not see what policies the author is recommending and why.

Pakistan - a founding member of the parent of ECO - should conduct a careful analysis of how to enhance and significantly boost trade with member countries of this organization. A long-term plan should be developed to ensure specialization of key industrial sectors and trade liberalization should occur only within this trading bloc. India should not be given MFN status until resolution of the Kashmir conflict, and trade with Iran, Afghanistan (+other ECO members) and China should be grown considerably.

Musharraf et al were trying to preserve Pakistani savings and catalyze internal growth by keeping the rupee stable and interest rates low. I believe that this did not happen because Pakistan lacks credible institutions to foster the right environment for entrepreneurs to flourish. A stronger government could have attained a whole lot more with the same policies.