For a developing country like Pakistan, export is a major source of providing much needed foreign exchange for economic activities in general and for economic growth in particular.
Export receipts usually cover a considerable part of the needs of developing countries for capital equipment, technical services, and other goods essential to economic growth.
An increase in exports helps to achieve greater capacity utilization, permits the exploitation of economies of scale, generates incentive for technological improvement and brings efficient growth due to comparative advantage. Therefore, the long term sustained GDP growth requires strengthening of the competitive foundations of the economy to capture a larger share of the world market.
At a very broad level, Pakistan’s export growth performance over the period 1985 to 2002 compares reasonably well with the dynamic East Asian developing countries. Export volume growth rose from 6 per cent a year during the period 1973 - 1983 to 10.3 per cent during 1984-2002, while East Asian export volumes increased from rates of 8.5 to 11.0 per cent. The volume of goods export has risen by almost 6 percentage points as a proportion to GDP.
Nonetheless, Pakistan’s share in world exports has remained small due to the fact that in terms of value the exports did not perform that well because of the declining prices for key exports, which eroded dollar earnings. As a result Pakistan’s share in global exports, since 1972-73, has not exceeded 0.2 percent.
Moreover, there has been little diversification of exports both in terms of commodities exported and the direction of exports.
It is frequently suggested that export diversification, or the progression from ‘traditional’ to ‘non-traditional’ exports, is an important component of export-led growth. Alongside the hypothesis that outward-oriented countries grow relatively fast, there is another hypothesis that the pattern of economic development is associated with structural change in exports and with increased export diversification.
The hypothesis of diversification-led growth is not necessarily tied to the outward orientation hypothesis.
Because, for example, infant industries encouraged by protection and import-substitution also increase diversification in the economy.
The ‘non-traditional’ industries are presumed to be manufacturing industries and since the protection is presumed to be temporary, diversification in production/industrialisation eventually leads to diversification in exports and an escape from the ‘primary product’ trap.
It has been widely acknowledged that Pakistan’s export base is extremely narrow. In order to empirically examine the issue an index of the level of diversification is developed. A score approaching 1 implies reliance on a single product export (a high degree of concentration), while score, approaching zero implies a high degree of export diversification. The following figure clearly shows that Pakistan’s exports badly lacks diversification. There was some movement in the direction of increased diversification in the late 1980s.
Despite efforts to expand export base during 1990s our analysis show that concentration level increased during this period. Even during the past three years when Pakistan’s export performance was quite good, the objective of diversifying the exports basket and the exports market could not be achieved. As shown in the following figure the graph showing the degree of export diversification continued to move exactly in the opposite direction i.e. towards concentration in fewer products.
Another important aspect of the Pakistani exports is that they have been concentrated mostly in primary or semi-manufactured categories of products for most of the period (1978-2002).
The analysis of the export experience reveals that even within the textile group, which is the largest industry in Pakistan, the emphasis in the early period was on low value-added and labour intensive products (such as cotton and cotton yarn).
High value-added products like (ready-made garments) have received attention only in recent years. The expanding downstream processing of the domestic cotton crop increasingly dominated Pakistan’s export developments during the last 23 years. The fact reflected in a dramatic change in the commodity composition of exports.
Primary commodities - mostly cereal, cereal based products, and raw cotton - as a share in total exports decreased from about 37 in the early 1980s to roughly 13 per cent in 2002.
At the same time the share of textile manufactures - including yarn, cloth, and other textile fabrics, apparel, and clothing accessories - more than doubled from about 35 in 1980 to more than 73 per cent in 2002. The share of most other manufacturing categories except for miscellaneous manufacturing items were small and, in some cases even decreased over the last 23 years.
The concentration on a single category of manufactures bears considerable risks, as it increases the vulnerability of exports to developments in a specific world market segments as well as to the vagaries of the domestic cotton production. The point I am trying to make is that one bad cotton crop can have multiple adverse effects on the whole economy of the country.
It is argued that a sequence of adverse productivity shocks to cotton production was an important, if not the most important, reason for the disappointing export performance in the area of textiles in the 1990s.
In addition, world market prices for cotton and some cotton-based products stagnated during the second half of the 1990s and fell in 2000, which also limited the scope for export value growth.
Recurrence of such or similar events in future can adversely affect Pakistan’s export performance.
Export volume growth was the dominant force behind the increase in dollar value of exports in the mid to late 1980s.
The improved export performance and export diversification during this period reflected the (a) adoption of more flexible exchange rate management coupled with the launch of a trade liberalization programme; (b) promotion of private sector investment; (c) expansion of output in cotton and textiles; and (d) the adoption of direct export subsidies.
The decline in the growth of export values during the 1990s reflected a fall not only in the level of export diversification but also decrease in volumes and unit value growth rates. In 1998-99, exports were hit by the East Asian financial crisis, the recession in Japan, and slowdown in both world trade and output. In 1999-2000, export volumes rebounded with the bumper cotton crop, which provided a boost to the textile industry.
Nominal export values rose somewhat less, as world prices for cotton had fallen significantly during the calendar year 1999. In other words our export performance to date is too dependent on exogenous factors like good cotton crop, prices of cotton and cotton-based products, and economic conditions in our main trading partners in the international market. Thus for Pakistani exports to perform well, these factors must behave - something very risky.
Equally risky is the concentration of exports in a few markets. With changing commodity composition of Pakistan’s exports, as discussed above, the geographical direction of exports shifted increasingly towards industrial countries’ over the past two decades. In the early 1980s, about 40 percent of Pakistan’s exports were directed to industrial countries. Over time the share of exports to industrial countries rose to more than 65 percent.
The United States became a particularly important destination of Pakistani exports. Export shares to the major European trading partners, the United Kingdom and Germany, have been stable throughout the last two decades.
During 2002-03 exports to EU markets rose by more than 27 per cent and to the USA by more than 15 per cent.
Two-thirds of Pakistan’s exports are concentrated in a group of 12 major trading partners. The index of geographical/market diversification constructed on the pattern of product diversification shows that geographical/market diversification has also worsened over the years.
After the mid-1990s the graph that follows the trend in market diversification goes up steeply. In the light of growing polarisation and ever increasing threat to the world peace in general, and to these regions in particular, the increased reliance on the US and EU markets could prove costly for Pakistan both commercially and politically. In the event of recurrence of gruesome events like 9/11 Pakistan can get badly hit especially when Pakistan does not fall very far away from the ‘axis of evil’ geographically.
Therefore the need of the hour is to search and find new markets for Pakistani products. This will not be easy and will require a lot of persistent and professionally tailored efforts (not mere announcements) both on the part of the government and the business community.
Previous governments had placed increased emphasis on expansion of exports and its diversification both in terms of export-mix and export-markets. In a number of trade policies the issue of improving diversification of exports both in products and markets was among the primary objectives of the government’s strategy to enhance exports.
A number of incentive schemes were announced to encourage exporters to search new markets and venture in export of new and non-traditional products. However, as has always been the case these incentive schemes were half-baked and proper homework was not done.
Hence these schemes could not be effectively and properly implemented and the desired objectives were not achieved.
Given the fact that the issue of improving export diversification has become all important in the fast changing political and commercial environment of the world, the Trade Policy 2003-04 has given inadequate attention to this issue. The main thrust of the policy is on advertising, marketing, and promotional measures, to be undertaken by the EPB. Very little attention has been given to correct the fundamentals (e.g. diversification and competitiveness of exports) of international trade in the country.
What is needed is to do an in-depth analysis of the situation and draw a comprehensive strategy to put the fundamentals of trade and commerce of the country in place. One possible reason for lack of diversification in our exports is the limited number of exporters in the country. These exporters have specialised in few products and have established contacts in well known traditional markets. They do not want to take the risk of entering into any new product line or new market. For exports to grow and diversify we need to increase the number of exporters and create a new class of exporters. One route of getting to greater diversification could be to encourage new, small and medium entrepreneurs by adopting a ‘hand-holding’ strategy. Countries like Bangladesh have adopted such strategy fairly successfully and have managed to develop a new class of exporter in the country. It is imperative not only to attract new firms to engage in export production but also encourage existing firms to move both towards value-addition and to new destinations.
To attract new firms, export production has to be relatively more profitable and competitive. Thus substantive reduction in anti-export bias inherent in the system is essential. A mechanism to monitor exports by destination should be developed in the Ministry.
Similarly, commercial counsellors should be trained to be proactive, vigilant, and more aggressive in the dispensation of their duties. There are few commercial counsellors whose performance has been extraordinary. But these are exceptional cases. The need is to give proper guidance, incentives, and direction to commercial counsellors so that extraordinary performance becomes a norm.
(The author is a trade and development economist)