Make things people will buy
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PRIME MINISTER Nawaz Sharif has declared developing Pakistan’s external economy a national priority. He should be applauded for focusing on tackling a major weakness. However, Pakistan’s interest in trade is not new, and is a case study in lost opportunities.
Pakistan was less than a year old when in 1948 it became a founding member of the General Agreement on Tariffs and Trade (GATT) with just 22 other countries. Aside from influencing global policy when the foundations of the modern global economy were being built, Pakistan enjoyed access to the most important developed economies — the US, the UK, France, the Netherlands, Australia and Canada, for example. Privileged access to these markets today is highly competitive.
When the World Trade Organisation (WTO) replaced GATT in 1995, Pakistan was again a founding member. Like GATT, the WTO then was still a relatively exclusive club with 76 members. China only joined the WTO in 2001, a decision that transformed China and the global economy. Today, the WTO has 163 members and supplementing it are dozens of bilateral or regional arrangements. Aside from the WTO, Pakistan is a member of one of the least successful and most politically toxic groups, the South Asia Free Trade Agreement, and has a smattering of other bilateral agreements that add little export value.
Pakistan has remained, for half a century, a ‘parchoon ki dukaan’.
Pakistan’s position is even more dire given that over the decades, the global economy has become highly connected and interdependent with international merchandise trade rising to $19 trillion in 2014 from $5.168tr when the WTO was created. Irrespective of the current slowdown, the global economy will continue to become more interconnected.
So, how has this particular founding member of GATT and the WTO fared from this international architecture it helped create? Not so well.
Pakistan’s share of this $19tr worth of global merchandise exports is a tiny 0.13pc and its share of global imports is 0.25pc, according to WTO data. More worryingly, exports remain concentrated in sectors where competition is increasing — textiles — and a majority of imports are either energy-related or simply for domestic consumption. Latest official data from July 2015 to January 2016 show exports fell 14.4pc to just $12.1 billion. Meanwhile, a new three-year trade policy is already late.
Know more: Cloud looms over textile exports
Trade policy is a political issue worldwide — just mention rice to the Japanese — and is subject to exchange rate, red tape and other factors. There’s a more fundamental problem: Pakistan is unconnected to all the major — and valuable — export value chains such as electronics, pharmaceuticals, auto, construction and building materials and consumer goods, for example.
In the global marketplace, Pakistan has remained, for half a century, a parchoon ki dukaan where customers can buy some rice, new underwear, fresh bedsheets and maybe a nice football. No surprise then that Pakistan’s entire annual exports of about $25bn is about half of China Telecom’s annual revenue. To add perspective, China Telecom is only the 16th largest Chinese company by revenue.
Where Pakistan currently sits — somewhere inconsequential — it has no other option but to look up. While working on improving the enablers — safety in the country, weak revenue collection, poor education — Pakistan can consider framing developing the external economy in three “plays.”
The China play: Pakistan does have a competitive advantage, thanks to its long-standing close relationship with the world’s second-largest economy, most recently solemnised by the China-Pakistan Economic Corridor.
For CPEC to be a success — for Pakistan — its explicit goals must include:
— A substantial increase in Pakistan’s domestic manufacturing capabilities, and minimising the hollowing out that has been experienced when trade ties with China deepened.
— New manufacturing capability must include an export element and linking Pakistan to not just the Chinese but also the China-linked global supply chains. Non-Chinese companies must be included in industrial infrastructure that is being developed with Chinese loans.
CPEC would be another missed opportunity if all it does is turn Pakistan into a highly barricaded truck ka adda.
The MNC play: Along with capitalising the China linkage, Pakistan has some 200 global companies already operating in Pakistan. Many have served the domestic market for decades and also benefited from tax and other incentives — and paid taxes.
Most importantly, their supply chains are global – if not regional — and highly sophisticated, focused on delivering quality goods and services. Other countries have taken advantage of that connectivity by plugging into these supply chains. Turkey, for one, used the Customs Agreement with Europe to become a major exporter of vehicles and auto parts. Recently, Toyota said it will make hybrid cars in Turkey for export to 58 markets.
Beyond just seeking feedback from MNCs — feedback that at times is simply ignored — the government should incentivise the MNCs to export from Pakistan. Every time Mr Sharif travels abroad, he should engage the CEOs of MNCs operating in Pakistan and seek solutions to boost the external economy.
The private equity play: While the supply chain issues can be addressed, how can Pakistan upgrade manufacturing to make things people overseas would buy?
Private equity is one business model that can help resolve this issue. Private equity works because their financial returns and their ability to raise funding — and the bonuses of their managers — are directly aligned to how quickly the companies they acquire improve and increase sales of product and services.
In China, when state-owned companies were being sold or shut down, many private equity players purchased small state-owned companies, kept existing staff and turned these companies into medium-sized companies that became suppliers to larger companies. Once out of the government’s control and in a commercial environment, many of these companies flourished. In Turkey, private equity helped consolidate sectors too fragmented to be efficient by buying controlling stakes and giving the founder-owners good financial returns once the companies were subsequently sold or listed on the stock market.
China, MNCs and private equity are not the only options to boost exports. But Pakistan doesn’t have the luxury of time to sit back and continue to watch the world pass it by.
The writer is founder & MD of a Singapore-based investment and country assessment advisory company.
Published in Dawn, February 22nd, 2016
