In my previous article appearing in the EBR October 18-24, I dwelled more on what is meant by competitiveness and what could be done to increase it. It however did not statistically answer the question raised in the title. This paper will attempt to quantify the competitiveness of Pakistan's export product, particularly textiles and clothing and also attempt to use the constant market share model for Pakistan's export to the EU and the USA and use some non-conventional elements of competitiveness which are more important than rates of electricity and wages.
Competitiveness can be determined by many factors including quantitative measures (comparative advantage, export/import ratios, relative market shares); price measures (relative export and import prices, wholesale prices etc.); and cost measures (unit labour cost comparison, cost of production etc.). In the constant market share analysis model, various contributory factors is summed up in a residual factor.
This model attribute increment in exports is due to resultant standard increment in global change in product composition, improved market distribution and cost competitiveness effect. What is of relevance to Pakistani export policy framers is to note that Pakistan would not be able to maintain its export shares relative to the average world growth if it's export is dependant on products whose demand is growing relatively slowly or if the exports are directed towards stagnant markets or if the exports are unable to compete effectively with other countries.
It is equally important to analyze whether the increment in exports was a result of "normal " trends or some exception which cannot be hoped to be repeated like generous temporary market access due to post 9/11 reasons. It is not the purpose of this paper to technically go into the calculations and limitations methodology but it will aim to draw major calculations by analyzing Pakistan's export within the global and specific market context over a reasonable period of time. Since it has drawn on data from several sources and is not basically a research document, it will not burden the readers with unnecessary dumping of figures and would simply draw conclusions from data rather reproduce them.
If Pakistan's recent export data are analyzed, it becomes evident that increment in exports are primarily driven by the textile sector. The encouraging trend is growth in minor products but the major stars are yarn, fabric, bed-linen, knitted garments and ready-made garments, the so-called $1 billion club. These 5 products alone account for over 50 per cent of Pakistan's total export and all come from the textile sector. A partial reason for this increment as pointed out in an earlier article was due to better market access deal with the USA and the EU. Looking back 10 years, opportunities have been lost in the leather and leather product and footwear sector, which by all account should have been more than $ 2 billion today.
Similarly seafood should have crossed the $ 1 billion mark by now. Lost opportunity can also be seen in food processing and engineering goods, the success of automotive parts export notwithstanding. Other notable failures are in sport goods, surgical instruments, hand-knotted carpets, etc. But as pointed out there are silver lining in some minor exports as well wrongly claimed as non-traditional items. Not much new products have been added in our export basket in the last 10 or for that matter 20 years.
Pakistan's export trend in the last five years in some key markets that are analyzed to draw conclusion about competitiveness. The most important example is of Japan where Pakistan's export has fallen sharply. From the data not reproduced here obvious conclusions can be drawn. The decline in Pakistan's export to Japan was sharper than Japan's reduction in imports. The main reason for decline was relocation of Japanese towel and other textile units to China , thus adversely affecting Pakistan's export of yarn-the major export item to Japan.
What was missed by the policy framers and the exporters was the issue of relative competitiveness, that Japanese textile units--Pakistan's major buyers -recognizing their own lack of competitiveness, relocated to China. Pakistan's yarn competitiveness was not great enough to offset Japanese inefficiency in this sector. Ironically, the issue of competitiveness of Pakistan's yarn became irrelevant. The non-price competitiveness, i.e lack of ability to foresee this and prepare for product substitution was the factor in loosing out from this market.
In the case of the USA and the EU , while Pakistan's export increased sharply, there was a serious problem in product diversification and improving product composition. These increments were to some extent on account of better market access post 9/11. What little increment in fetching better prices occurred was due to international rise in the price of raw material. Other competitors like India increased their competitiveness by exporting IT related services and products.
Let us now see competitiveness from the product composition point of view. It is not possible to look at each sector ; the sector contributing 67 per cent to exports have thus been chosen. Let us look at the cost structure of Pakistan's textile and clothing sector both for cotton and poly-cotton. Figures have been used for standard 20/1 carded yarn ring spun for weaving. Because the price keeps varying for phutti and thus for the whole chain percentages rather than absolute figures are used. Major components of conversion are indicated; the rest being common like depreciation, administrative, financial cost etc.
The starting point is seed cotton (phutti). Pakistan has come a long way from subsidizing cotton for the local textile industry. Today, generally, the phutti constitute 45 per cent of lint cotton cost implying a 55 per cent conversion ( net ginning cost ) cost. The major problem, ironically is in the starting point and ginning remains the weakest link in the textile chain. When it is converted to the standard yarn, the waste factor is at least 20 per cent .
The net cost of lint cotton is 75 per cent in the yarn. In the 25 per cent conversion charge, 10% is for power and 4.5 per cent for salary. As we move to higher quality of 40/1, the net cost of cotton despite a high waste of 30 per cent comes to 60 and of the 40 per cent conversion charge, 16 to 17 per cent is for power. In 30/1 PC 52/48 per cent yarn, wastage is reduced to 10 per cent as there is no wastage in PSF conversion to yarn for trash/contamination)This heavy baggage of ginning and high cost of electricity is carried on by the downstream industry.
In the weaving sector, projectile looms are more efficient for the environment in Pakistan. Our yarn of above example assuming the same unit of lb ends up giving a standard fabric 20/20, 60/60 and 63 inch with value addition (selling price) of 35 per cent. The net yarn yield is 75 per cent of the cost and 25% is conversion rate. Of this power and steam account for 9 to 10 per cent.
In the fabric processing and dyeing, the fabric cost is 75% and of the remaining one-quarter, dyes/chemicals is 12 per cent and power, steam and water is 5.5-6 per cent
When fabric is converted to bed-sheet, the processing cost is around 50 Per cent of selling price and this sector has one of the highest profit margin. Paradoxically, these are subjected to anti-dumping. Of the 50 per cent conversion cost, 5.5 per cent is for power and steam and 6 per cent for wages and salary.
From the fabrics, an example of one of the best selling basic denim jeans is taken. The fabric cost is slightly over 50 per cent. In conversion major cost is of water (7 per cent) wages (9-11 per cent) and accessories (13-13%). For knotted garments, the component of yarn is 65 per cent, dyes/chemicals 12 Per cent and steam and labour 10 per cent.
The conclusion for textile sector that can be drawn from competitiveness ( price and non-non-price) point of view and some consequential recommendations are: ginning remains the weakest link. Growers don't get the major share of the cake as ginning industry in Pakistan instead of being a service industry plays a role directly or indirectly through additional tier of middlemen in the change of ownership cycle. Big growers and spinners should join hand and set up model ginning service units.
They should not by-pass the present ginners and give a chance to join up on a corporate basis to make the whole chain more cost effective. Alternatively, the government should rent existing ginneries and use them as service industry. Ideally, the TCP instead of drawing huge credit line and incur loss in its intervention should use this money to set up model ginning units, purchase the phutti and use the lint in the stock-pile the government is so keen to build. This will not only help improve ginning and reducing contamination level but also play a pivotal role in price stabilization and keep it within desired bands.
The high cost of electricity, although it has peaked and may reduce subsequently is still a problem in the textile chain. The government should consider giving drawback on the duties and taxes collected in the fuel chain. Subsidy can also be provided in products where countervailing investigation is not likely such as for the garments sector.
Lack of infrastructure, particularly water and effluent treatment plants needs to be addressed. The Trade Policy 2004/2005 has incentivized treatment plants and rehabilitation of industrial estates but the government, whether federal or provincial or district has yet to commit money in this important area.
Dyeing process have to be improved in Pakistan. There are vast opportunities for collaboration with major international players here.
Synthetic and MMF sector potential is yet to be fully unleashed but it is estimated that by 2010, this sector will grow in Pakistan.
Wastage has to be controlled : The key to competitiveness in Pakistan's context is innovation and automation in the production place. To illustrate as example: Sialkot is still stuck on soccer balls and gloves. There is a vast market for leisure but leadership is clearly missing. Similar is the example of Gujrat. If they have built a motor, fan is not the only product that is run by motor. Once mastery over motor is achieved, as many products as imagination can perceive can be made. Clear leadership has been sadly missing. We have yet to realize that this and not the cost of electricity, steam or gas is the real component of competitiveness
Automation in the industrial place is important for increasing productivity. Often the exporters restrict the definition of increased productivity to Human Resource Development. While this is a pre-requisite, Pakistan labour force on a person to person basis is more productive than perhaps even China, lack of discipline not withstanding. What is required is productivity of his tools leading to automation.
To strike the concept home a crude example is given: a Pakistani labour may be able to carry a load of bricks 50 times to the tenth floor in an hour; a Chinese may tire out at the 20th turn making the labour more productive ;however the Chinese management will equip the labour with a primary tool, an elevator and he may do it 200 times in the hour.
This is the productivity advantage other nations have over us. The problem is that now this phenomenon is not restricted to China. We can see the same happening in Vietnam and soon in Cambodia. Pakistan can not afford to lag behind. This is an element of competitiveness the exporter has to worry about and not wages and over-time charges of labour with which he is currently obsessed.
It is easy to compare labour and electricity charges etc of Pakistan with those prevailing in China, India Bangladesh, Sri Lanka etc. Pakistan is not doing bad in some of these indicators and is in fact cheaper than most in labour and surprisingly even for electricity and steam generation. But these data are meaningless and misleading as a Chinese labour is 70 per cent more productive than Pakistani labour because of the tools placed at his disposal.
Let me conclude by saying that the most important element of competitiveness is the true realization and true translation of this realization into national policy that our survival lies in export led growth and for the government to shed and get rid of all redundant rules and impediment and invest in an export culture.
The exporters on the other hand must provide his management and labour with the most effective tool. Not only will he and his labour gain but failing to do so may result in export order for him as social and fairness to labour compliance is becoming a major issue.