With its foreign shipments dropping by almost a quarter — from over $25 billion to above $20bn in three years — Pakistan’s exports have been going under for a number of reasons.
The declining exports are bringing enormous pressure on the external sector with the current account deficit expanding from $4.8bn in 2015/2016 to more than $12bn last fiscal year, triggering calls for immediate policy interventions and cash support.
“Key to making export-friendly policies from the government’s side is to better understand the nature of exporting firms in Pakistan,” says a recent report – Trade Costs and Trade Composition: Firm Level Evidence from Pakistan – authored by Salamat Ali, a senior trade associate at The Commonwealth’s Trade Division, for the International Growth Centre.
The study investigates the impact of trade costs on the composition of Pakistan’s exports and the behaviour of its exporting firms.
The study documents key characteristics of export-oriented businesses, including their prevalence, the proportion of their exports relative to imports, their longevity, and their destination markets.
It finds the distribution of Pakistan’s export-oriented firms to be highly skewed: the top one per cent of firms handle around 46pc of exports and the top five per cent mediate around 76pc because exporting is a costly activity and only more productive firms enter into export markets.
The number of exporting firms is highly skewed towards a single market as more than half the firms export to only one destination; while overall export volume is skewed towards multi-market firms. These large firms are two-way traders, and they export multiple products to multiple markets.
Most small firms appear to export a single product to a single market. This predominance of small exporters indicates a huge potential for reallocation of resources across firms
Alongside this universe of large firms, the study notes, the economy has a large number of small exporters whose combined contribution to overall exports is relatively small: these constitute around 95pc of the cohort but their contribution to exports is hardly around 25pc.
Most of the small firms appear to export a single product to a single market. This predominance of small exporters indicates huge potential for reallocation of resources across firms.
Information barriers, supply-side constraints, infrastructure or lack of competition in the domestic market could be preventing small firms from entering other export markets.
As in most developing countries, it reveals, “exporting is quite a rare activity in Pakistan. Of the total universe of 50,518 firms in the year 2012/13, only 17,258 (or 34pc) entered into exporting. This proportion further drops to 6,699 firms (or 13pc) if small occasional exporters (10,559) are excluded from the analysis.
Moreover, around a third of these firms are engaged in two-way trade (export and import) and appear to be major drivers of overall exports, constituting 32pc of the population of exporting firms but dealing with 81pc of overall export volume.
This concentration of large export volumes in the two-way traders implies these firms may face lower trade costs, as they may possess superior information about the foreign markets and international trade procedures.
“Pakistan has the potential to become a major exporter. But high trade costs and an unsupportive policy environment keeps that from happening.
“Policy interventions could invigorate this sector but they need to be informed by a deep understanding of how Pakistan’s exporting firms work,” notes Ghazan Jamal, a Pakistan country economist at the IGC, in a blog he has co-authored with Ali for the Consortium for Development Policy Research. The study, which defines trade costs as the costs associated with transporting the product from the factory to its destination, shows as trade costs increase, exports go down.
A regional breakdown of the same indicates that Pakistan’s trade costs are lowest with North America and East Asia and these correspond to two major destinations for Pakistani exports as well.
On the other hand, Pakistan’s trade costs are highest with Southern Africa and the Caribbean and these correspond to some of the lowest export destination for Pakistani products.
In 2015, Pakistan’s border-related costs associated with exporting and importing a 20ft container was much lower than some other countries in the region like India and Bangladesh. However, bilateral trade costs are comparatively much higher, putting exporting firms at a disadvantage.
“The concerning trend for Pakistan is that as there is a clear downward trend in bilateral trade costs globally as well as in the cases of India and China. In the case of Pakistan trading costs have fluctuated without much improvement, showing policy inconsistency and lack of a concerted effort to improve export regime.
“These high costs mainly pertain to relatively large input tariffs on imports of intermediate inputs used for manufacturing for exports, poor transport network to connect manufacturing regions in the North with seaports in the South and high costs of other inputs such as electricity and natural gas,” according to the study.
Due to the high cost of exporting and a lack of competition in the domestic market, on average, even exporting firms sell 70pc of their output domestically.
The study also reveals a very low export intensity of existing exporters and large untapped potential of non-exporters.
“It appears that supply is not a major constraint but the challenge is to increase the export intensity of existing exporters and incentivise non-exporters to engage in international trade. Export promotion strategy and policy has to focus on market entry of firms and products, rather than quantity of subsidy.”
Published in Dawn, The Business and Finance Weekly, September 11th, 2017