From time to time, Dawn will invite a key stakeholder in business and economic matters to share his or her views about a large issue facing Pakistan’s economy. This week we invite Ehsan Malik, CEO of the Pakistan Business Council, a think tank and business advocacy body composed of the largest private sector businesses in Pakistan, including multinationals, to share his thoughts on the views expressed by Secretary Commerce last week about the benefits of an expanded trade relationship between China and Pakistan.
Last week we heard Mr Younus Dagha, Secretary Commerce, argue in this space that attracting Chinese investors to Pakistan can be an important way to correct the large trade deficit. He stated that Pakistan was among many countries that had a trade deficit with China on account of the latter’s superior productivity and competitiveness, adding that there was nothing wrong in nations entering into trade agreements. I read into this argument an implication that the terms of the specific agreement with China were not ideal.
Domestic industry, through various platforms including the one that I head, has consistently called for a renegotiation of the China Pakistan Free Trade Agreement (CPFTA). It is, therefore, encouraging to see the government pursue the renegotiation with greater resolve.
The Ministry of Commerce has been given a list of export items for which Pakistan should strive to obtain parity with ASEAN on import tariffs into China. It has also received a list of items for which Pakistan should move slower in granting reduced tariffs and for which it should seek Chinese investment to produce in Pakistan.
Finally, the ministry has also been advised to seek electronic exchange of trade information with China to help curb under-invoicing, estimated to be around $3.5 billion every year in imports. Again, the body that I head, is one among other industry bodies that have advanced these positions.
There are four key criteria that should be met in all trade agreements. A positive impact on domestic employment; value-added exports, not just export of commodities; import substitution; and a broadly neutral impact on tax revenues, with the impact of reduced import tariffs being offset by tax on enhanced profits from local production. In no FTA to date (nor, to the best of public information, in any currently being negotiated) has Pakistan factored any of these objectives in a clear and explicit manner.
Not surprising then, that what is not targeted or measured is not managed. The focus has primarily been on exports and that too of commodities, such as cotton and yarn, which importing countries, especially China, add value to, resulting in added competition for our own finished products in key markets like the EU and USA.
Certainly the impact on jobs is never clearly mentioned as an objective in its own right. Import substitution, if intended in the CPFTA, was not enabled through cascading tariffs — a case of misalignment between trade and fiscal policies. The result is wholesale export of jobs in industries like footwear, imports of which have tripled since 2006, with 90 per cent coming from China. Raw and intermediate materials for shoes are subjected to the same import duty as the finished product. Regulatory duty on raw and intermediate items has further undermined local production.
Manufacturing’s role in the economy in Pakistan has declined over the years and its growth is well below India, Bangladesh and Vietnam. The country is rapidly losing its share in world exports, whilst Bangladesh more than doubled its share in the last 15 years. We need to learn from this experience as we approach other trade agreements. But foremost we must identify and reverse the factors undermining domestic industry. Whilst desirable in any case, unless we address these impediments, we certainly cannot expect the Chinese to invest in Pakistan when they already enjoy high productivity, derived from scale, in their own country. China also has the choice of relocating its labour-intensive industries in countries like Ethiopia, Vietnam, Cambodia and Bangladesh.
The foremost objective of socio-economic policy should be livelihoods for the three million people that reach the age of employment each year in Pakistan. A market of over 200 million people provides domestic manufacturing and service industries the opportunity to acquire scale and become competitive. With this advantage, Pakistan can reduce its reliance on imports and find markets for value-added exports abroad.
Pakistan has been to the IMF on 12 occasions in the last 28 years. It is becoming increasingly vital to end this repeated return to the Fund for support, which will require that we address some of the fundamental fault lines in the economy. Essential enablers of scale and competitiveness are: energy at costs competitive with countries like Bangladesh; a realistic exchange rate; level playing field with the informal sector; more equitable and broader tax base; cascading tariffs that promote manufacturing over heavily under-invoiced commercial imports; fiscal policy which facilitates capital formation, accumulation and consolidation; and tax rates which encourage more transparent corporate structures over unincorporated entities.
Pakistan’s agriculture, livestock and dairy potential is vast but yield and quality are below global standards. This denies farmers adequate returns. The government’s support price for sugar-cane and wheat results in uneconomic surpluses of both sugar and wheat, at the expense of cotton, which the textile industry needs for value-added exports. A heavily taxed broadband internet limits penetration and growth of e-commerce and the digital economy, marring the potential for jobs and exports.
An FDI policy that does not differentiate in favour of net job creation, export generation, import substitution, infrastructure investment and the induction of technology, will lead only to short term gains, more than offset by long term repatriation. Like trade agreements, we must explicitly target, measure and skew our concessions to FDI which maximizes jobs, leads to value-added exports and import substitution and has a positive and sustained impact on net tax revenue and foreign exchange flows.
The likes of Del Monte Foods, for example, would add jobs, contribute technology to handling and packaging of vegetables and fruits and generate exports. Due to exports, it would also sustain a neutral impact on foreign exchange flows.
Industry needs long term policies to promote transformation rather than short term transactional packages.
The textiles industry in particular, needs to address the shift in demand from cotton to man-made fibres, upgrade and add sophistication to its products and diversify export destinations beyond the USA and the EU. Ease and cost of doing business, another impediment, can be addressed by simplification, unification and reduction of business-to-government interfaces, such as through digitisation to take one example.
Provinces and the federation must come together to facilitate this. There are multiple taxation authorities and more than 50 different types of taxes. Businesses are forced to act as unpaid tax collectors. They have to buy water from private suppliers often, produce their own power, arrange for their own security. All the while manufacturing, which represents 13.5pc of GDP is subjected to 58pc of the direct tax burden.
What is needed is a comprehensive alignment of all the polices that impact industry. These include trade, fiscal, energy, labour, industry and agriculture policies. Often polices of different ministries work in their respective silos, sometimes even at variance from each other, to the confusion, complexity and detriment of industry. Also there is a tendency to pursue short-term rather than long-term objectives. To give the outgoing government credit, withdrawal of the full and final presumptive tax regime for commercial importers and the gradual reduction in tax rates are positive moves. But a lot remains to be done.
Ultimately it is about taking control over our destiny. Yes, that is how high the stakes are in this debate. When leading global powers prioritise employment in their own countries, Pakistan, in its current stage of development, can least afford to outsource jobs. We should not become a nation of traders. Pakistan’s geo-strategic location must be fully leveraged in our commercial relations. Recurring external account imbalances put us into a compromising state. At some point we must learn to break that cycle, before it breaks us.
Published in Dawn, May 20th, 2018
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