IN South Asia there is a tradition of stated or otherwise policy for agriculture and industry. Where is the policy for our services sectors? Is it not that the services sector contributes over 50 per cent of Pakistan’s GDP?
Somehow, the people at the helm of affairs have led us to believe that growth is only sustained if the economy is led by commodity producing sectors. It is precisely this model of sector-picking which has resulted in the recent growth rate falling to well below the levels seen in sub-Saharan Africa.
It was promised that such a growth process would be export-oriented as key exports are concentrated in goods such as cotton, textile and leather. The exports have also not picked up in the same fashion as seen in other regional economies, despite an all-time weak currency which should in theory act as a catalyst to export growth.
It is assumed that any excessive tilt towards a services-led growth, opening up trade with China and India and removal of subsidies to industrialists will, in turn, result in the economy becoming heavily dependent on imports. One needs to look at our exports carefully.
Research by the State Bank of Pakistan reveals that exports have an imported content of well over 60 per cent. Can we still say that imports do not lead to growth? After the signing of free trade agreement with China, Pakistan has seen that relatively cheaper imports are beneficial to all economic agents - the producer, the trader and most importantly, the consumer.The consumer goods, by virtue of being demand-driven, have greater employment prospects. Herein lies the lesson of taking South Asian trade partners seriously. If businessmen can import cheaper machinery and raw materials from South Asian countries, why should they be forced to import (by virtue of government controls over regional trade) the same from more expensive Western markets?
If consumers can buy cheaper and better quality Indian manufactured auto sector products, why should they buy domestically produced cars that are half as efficient and twice as expensive? Is this because we want three local auto assembly entities in Pakistan to benefit at the cost of 180 million consumers? If Tata now owns and can produce automobiles such as Jaguar and Land Rover, there is no doubt that it can provide better quality and cheaper cars than what our local producers offer. If protecting our automobile industry under deletion programme for 40 odd years still hasn’t made them price or quality competitive, it’s time to move on at least for consumer’s sake.
The Pakistani automobile industry is just one example. We have spent the last few decades protecting a lot of industries (including the energy sector). These industries have not grown, have not become competitive, and are in fact selling unusually expensive and low quality products domestically.
Since they were never exposed to foreign competition, they did not innovate. Protecting them now would only incur more losses to domestic consumers, who could save money if they bought the same goods produced at cheaper prices from abroad. These savings could be spent on a range of other investments which are efficient and competitive, locally and abroad.
Assume now that the trading volumes increase because the country can afford more imports from South Asia instead of Western sources due to proximity advantages. This, in turn, creates substantial push in serviced-led jobs in sectors such as storage, warehousing, transport, communication, banking and insurance. Do we want such jobs or we still want to remain a country that boosts a large agricultural labour force, majority of which lives under the poverty line?
One should also not ignore the push that services sectors will get if Pakistan opens up its transit facility for South Asian countries in turn enabling six South-west Asian countries to reach the central Asian markets. Furthermore transit should not be seen in terms of merchandise only.
Pakistan can gain much more if it envisions itself as an energy corridor for South Asia. This is why options (usually termed expensive) such as Tajikistan-Afghanistan-Pakistan-India (TAPI) pipeline and Iran-Pakistan-India gas pipeline should be analysed in terms of backward and forward linkages they offer to other productive sectors of the economy (in particular services-sub sectors).
The law of diminishing returns, especially when the variable factor of production is land or labour, is more delayed in the services sectors than it is in the agricultural or manufacturing sectors. In other words, the services sector can absorb more labour and offer greater pro-poor opportunities. Take the example of three thousand square yards of a small farmland. Such a piece of land could at most employ five to seven labourers and one tractor. On the other hand, a warehouse built on the same size of land could employ up to 300 employees, most of them from the poor segment.
The benefits to consumers of cheaper and better quality imports than those produced domestically are enormous. Pakistani consumers, for example, could benefit from cheaper and better consumer durables from India. Before the misled patriotism for Pakistan and hatred for India kick in, one needs to realise where Indian manufacturers stand internationally today. Similarly, the access to goods and services for Pakistani consumers would also increase if barriers to trade are brought down.
The Indian Punjab currently has surplus electricity that it could export to Pakistan. Major business entities have shown the willingness to invest in Pakistan’s electricity sector as well. These ventures would only be possible if barriers to trade and investment are brought down. One also needs to learn from the business relationship between China and India where both countries continue to take a critical foreign policy stance but keep cross-border trade and investment issues insulated from politics.
Beyond India, Pakistan also needs to see why South Asia Free Trade Agreement (SAFTA) has not resulted in gains earlier anticipated. Pakistan has a free trade agreement with Sri Lanka — an arrangement which is leading to nominal results owing to overall poor trading infrastructure (e.g., exporters complaining of less than desired vessels bound to Sri Lanka, warehousing arrangements not up to the mark and non-harmonisation of documentation). The situation is completely opposite when one looks at the success of bilateral Comprehensive Economic Partnership Agreement which has provided Sri Lanka immense gained from trade and investment with India.
Writers are economists at Sustainable Development Policy Institute