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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.