THE annual report produced by the State Bank of Pakistan has cast valuable light on a number of vexing economic issues that have been the subject of debate for a while now. There is too much in the report to cover in one article, so I’ll focus on one specific subsection that deals with exports.
First a bit of advice. This report, as with all other annual reports produced by the bank should be required reading for anyone dealing with Pakistan’s economy, including in university classrooms. It provides the only objective and balanced assessment of the economy produced by an institution of some gravitas and credibility.
Before reading the report, though, make sure you discard the accompanying press release, and skip completely past chapter one. Both of these are basically window dressing. The real part begins with the detailed chapters, starting with chapter two. Of particular interest are the three “special sections” at the end.
If our industries are now struggling to remain alive, what is the plan for diversifying the export base?
One deals with export performance, and another with declining bank advances to the private sector.
The report keeps a close eye on global developments to frame its discussion of Pakistan’s economy throughout, reminding us that many of the ailments that we like to focus on are in fact global in nature, and every country in the world is dealing with them. The way it weaves global and local developments together is skilful, and a healthy reminder that many of our economic problems are in fact structural in nature, reflecting how our economy has adapted to a changing world environment. In many cases, the policy failures that explain the malignant adaptations span across decades, and will take more than the efforts of one government to reverse.
Pakistan’s export performance as been “patchy and volatile” since the 1970s, says the report, arguing this is the result of “inconsistency in our trade policies, and the fact that Pakistan’s exports have always been, and still are, very much resource-based”. Cotton and rice have dominated our exports for decades now, and the global appetite for these products determines the ebb and flow of our external account in significant ways.
The roots of today’s stagnation are traced back to 2005, and the emergence of a quota-free trade regime around the world. Some countries were able to adapt to this new world and quadrupled their exports. India, Bangladesh, Cambodia and Vietnam are the examples given. Other countries could not adapt, and struggled to keep their heads above water — Pakistan, Indonesia and the Philippines.
The failure to adapt to a changing world goes back further than the emergence of the WTO. There has been the legacy of import substitution, which has hampered any trade policy thinking beyond bread and butter issues like “rebates, subsidised credit, duty drawbacks, R&D fund allocation, etc” that took the bulk of the focus in successive trade policies, rather than a comprehensive shift towards incentivising exports. A lack of investment in education meant that the talent pool required for new industries did not exist, absence of intellectual property rights hampered knowledge-based industries, and the concentration of foreign investment in serving the domestic market only meant FDI played no role in boosting exports.
Instead, Pakistan simply revved the engines of cotton and rice harder and harder to try and generate foreign exchange. One could add that an important consequence of this failure to adapt meant that Pakistan went searching to fill its foreign exchange needs from multilateral and bilateral channels alone, becoming a bit of a bargain hunter in the global economy of aid and assistance rather than a competitive player in a globalising world.
The growth of the informal sector is also cited as a major constraint to exports, with dairy being the example. Despite being the fourth largest milk producer in the world, Pakistan’s dairy exports are negligible, largely because the bulk of dairy production is informal.
The menu of items holding back our exports gets longer and longer when you start taking a longer view. It’s worth asking why cotton and rice have remained the chief exports in spite of massive changes in the world economy. The lack of standardised products, absence of local brands, no quality assurance mechanisms and “snags in tax machinery” can all be identified.
But at the end of the day, the explanation for the downward trend in exports in the last couple of years is found elsewhere in the report. The structural bottlenecks identified in the special section are a useful reminder of the bigger picture, but coming around to the present all that the section can say is that with an improving image abroad, and hopeful revival in energy shortages given the scale of the investment going into this sector, exports are likely to benefit.
In the chapter on external sector developments, the authors start a very interesting train of thought on shifting consumer preferences in the US and EU, some of the largest markets for Pakistani products, where synthetic fibres are becoming more popular and cotton-based textiles are struggling to keep market share. For cotton-exporting countries like Pakistan, this could be an adverse development, since it could imply that the downward trend in exports is actually not a temporary thing but a new normal.
If that is true, there is a serious challenge ahead of us. If our own export industries are now struggling to remain alive, what is the plan for diversifying the export base, especially given that foreign exchange “is the most (or perhaps the only) binding constraint on Pakistan’s economic growth”?
The list presented in the report makes a start towards this conversation, but going by the implications of what the report is saying, that the declining exports is in fact a movement towards a new normal, the conversation around how to rectify that needs to begin quickly, and be far more substantive.
The writer is a member of staff.
Published in Dawn, December 17th, 2015