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Troubled exports

January 22, 2018


WHAT ails Pakistan’s exports? The key causes are well known. These include: increase in domestic cost of production, erosion of the small- to medium-scale manufacturing sector in the country, contractionary fiscal policy pursued under the last IMF programme, prioritisation of revenue generation over business facilitation, high energy prices and shortages, security crisis and decline in global commodity prices.

Most economists concede that an overvalued rupee has been encou­­raging imports and adding to Pakistan’s burgeoning trade deficit for some time. But the extent of overvaluation and its negative impact on export growth are sticking points subject to inconclusive technical controversies.

For sceptics, too much emphasis on an overvalued rupee and its downward adjustment to push exports is misplaced. To them, historical evidence demonstrates that devaluations are temporary fixes and their impact usually peters out without sustained export growth. Reinforcing this view are Pakistan’s exports which increased in the first quarter of FY2018 sans devaluation.

Pakistan should take advantage of the global trade regime.

The above reasons, however, cannot explain why Pakistan’s exports in goods and services have grown only 36 per cent or so from 2005 to 2015 but those of Bangladesh, Vietnam, India, and Mexico have increased by 313pc, 473pc, 277pc and 175pc (World Development Indicators) respectively.

Why in terms of percentage share of GDP, have Pakistan’s exports slumped from 15.7pc in 2005 to 10.6pc in 2015 and those of Bangladesh risen from 14.4pc to 17.3pc, India from 19.8pc to 19.9pc, Vietnam from 63.7pc to 89.9pc and Mexico from 26.6pc to 35.1pc in the same period?

Why has Pakistan, the fourth largest producer of cotton, been trumped in textiles by Vietnam and Bangladesh who import all their raw materials?

To understand the underlying dynamics, one needs to look beyond supply side factors in Pakistan and identify global catalysts which have propelled comparable developing economies into becoming export engines of the world in the past decade. One can identify at least four key reasons.

First is the steady inflow of Foreign Direct Investment into export-oriented sectors of these competing economies. From 2005 to 2015, Vietnam, India, Mexico and Bangla­desh have respectively received $82 billion, $326bn, $308bn, and 16bn as net FDI. These inflows have been divided into export sectors including textiles and others. Pakistan received almost $29bn, but this investment was concentrated in local communications, oil and gas, power, and financial sectors with negligible inflows in export sectors of the economy. FDI in export sectors of recipient countries is usually driven by and tied to pre-arranged market access, and it scuttles competition with suppliers from other countries. This has been one of the reasons for the stagnation of Pakistan’s textile exports to countries like the United States.

Second, the mushrooming of free/preferen­tial trade agreements (FTAs) amongst countries reduces the incidence of tariff on member countries, putting non-members at a competitive disadvantage. According to the WTO statistics, the current tally is around 453 with most signed in the past 15 years. Some such agreements, including the US FTAs with Bahrain, Jordan and Oman, Nafta and Asean have directly eaten into Pakistan’s potential textile exports; others have simply driven Pakistan out from the market or squeezed its share due to higher incidence of tariffs on its products. A recent case in point which reflects the beneficial impact of such arrangements is the spike in Pakistan’s own exports to the EU after it was granted GSP Plus status and related tariff concessions.

Third is the regionalisation of trade in the past decade and a half, which is also an outcome of preferential trade agreements. This has led to promotion of inter-regional trade amongst countries at the expense of their global partners. For example, Nafta, Asean and the EU accounted for almost 58pc of the world’s merchandise trade in 2016. West Asia where Pakistan is located has lagged behind, and failed to grow as a regional trade hub due to intra-state rivalries.

Finally, Pakistan’s economy has not been integrated into cross-border production value chains of multinationals and other large corporates. Such networks guarantee market access without competition to beneficiary economies and their intermediate products now account for a large share of global exports and imports.

Pakistan’s inability to take advantage of structural shifts in the global trade regime has stunted its exports no less than other domestic factors. The country’s greatest weakness lies in its continued perception amongst foreign buyers as an unpredictable and unsafe place to do long-term business. It is necessary to see competitiveness and stability as two sides of the same coin to achieve sustained export growth as witnessed by Pakistan’s competitors.

The writer, a civil servant, works at the Pakistan embassy in Washington DC.

Published in Dawn, January 22nd, 2018