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PAKISTAN’S EXPORT IMPERATIVE By Mirza Qamar Beg These remarks represent the personal views of the author, and should not be construed as necessarily reflecting the position of the Government of Pakistan. Over the last decade Pakistan’s exports have doubled. Growth was particularly marked during the last five years (until FY 06) with a CAGR of 16%. A combination of domestic reforms and favourable external environment contributed to this significant growth. 2. The domestic scene was marked by res
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  PAKISTAN’S EXPORT IMPERATIVE By Mirza Qamar Beg These remarks represent the personal views of the author, and should not be construed asnecessarily reflecting the position of the Government of Pakistan. Over the last decade Pakistan’s exports have doubled. Growthwas particularly marked during the last five years (until FY 06) with a CAGRof 16%. A combination of domestic reforms and favourable externalenvironment contributed to this significant growth.2.The domestic scene was marked by responsible leadershipcommitted to an economic turn – around. A well implemented program of ambitious reforms, fiscal discipline, political stability, and a fair internalsecurity situation helped strengthen the macroeconomic framework. Thetextile sector invested $ 4 –5 billion to meet the post MFA challenges. Untilatleast 2004 the Real Effective Exchange Rate remained stable. Theextensive trade and tariff reforms lowered the implicit tax on exports,reduced the anti-export bias, and enabled higher import content.Simultaneously, some ‘internal liberalization’ – improvements in regulatoryenvironment and factor markets - also took place.3. On the external front the global demand for Textiles remainedfavourable. Pakistan enjoyed duty free access to its biggest market, the EU,for most of its products during 2001 – 2005; and Post 9/11 and with sometrade policy adjustments Afghanistan emerged as a ‘new’ market becomingPakistan’s third biggest buyer. Debt rescheduling and sizeable capitalinflows kept the external sector healthy and provided greater fiscal space.4. This doubling of exports, however, masked certain weaknesses.During the same period Pakistan’s competitors fared much better, as apercentage of GDP Pakistan’s exports actually declined, and there wasimperceptible product and market diversification. There was little movementup the value chain, unit prices decelerated, and sufficient technologicalchange and technology diffusion was not evidenced. Share of exports intotal trade declined from 43% to 36% and export growth rate has beenfalling: from 22% in FY03 to 16.8% in 05 to 13.8% in 06 to less than 6% thisyear.5. A multitude of explanations is offered for Pakistan’s exports notfaring better: unfair competition (subsidies, undervalued exchange rates,preferential market access), higher costs (impoverished infrastructureincluding unreliability of power supply, higher shipping costs, poor tradelogistics and fecilitation, diseconomies of scale, unofficial payments), weak  supply base (lack of diversification, export bias, insufficient attention toquality). Each of these explanations is plausible but unfortunately there arefew objective studies available to establish the extent to which theycontribute to Pakistan’s export disadvantage. The temptation to ‘prove thepoint’ – find the data to support the perception – is quite prevalent. Howdoes one, for instance, explain Pakistan’s lower prices on internationalmarkets compared to the countries accused of enjoying ‘unfair’ competition?6.The suggested ‘ solutions’ are as varied as the explanations.Market access (more FTA’s), better exchange rate alignment,‘compensatory’ subsidies, regional integration (euphemism for open tradewith India), deeper tariff reforms, and product diversification (i.e. de-emphasize textiles) are offered as the main elements of a response matrix.7.These proposed solutions, like the explanations, meritconsideration but it is uncertain if they will launch Pakistan’s exports on asustainably high growth trajectory. FTA driven market access is unlikely toensure significant trade creation: with the smaller economies gains will bequite limited, and with the EU and US, where there is promise of substantialgains, it is unlikely to materialize and even then at high public welfare costs.While the Rupee is currently overvalued a sudden correction could havegrave macroeconomic implications without ensuring commensurate exportgains as our past adventures with exchange rate adjustments havedemonstrated. Subsidies can never be a substitute for lowering costs; in factthey do more harm than good as entrepreneurial focus shifts from efficiencygains to rent seeking. Regional integration has its advantages but it issubordinate to political realities and risks a shift in investment bases thatmay be inimical to long term merchandise export prospects especially of themore value added products. Any further lowering of tariffs (except the glaringpeaks and dispersion anomalies) will have limited export growth effect andwill be ill advised unless preceded by other reforms (capital and riskmarkets, tax: GDP ratio, savings and investment rates, exchange rateregime, skills, social protection). (India’s greater emphasis on internalliberalization, as it gingerly pushes external liberalization, is instructive).Product diversification certainly needs to be pursued but it can not be doneat the cost of textiles and will not happen unless there is substantial new andtechnology based investment in the non-textile sectors.8.Absence of objective and evidence – based studies challengesappropriate institutional policy responses. It adds to the hazard of dominantinterests trumping sustainable solutions.9.It is also uncertain if the importance of exports to nationaleconomy and welfare is fully recognized and shared across the policy-making spectrum. It is not enough for an Export Strategy to be well 2  designed. It has to nationally owned and export interests protected whenmaking tough policy choices.10. Export led growth strategies have lost some of their appeal.Prof. Stiglitz is not alone in questioning the universality  of trade-welfareenhancement linkage. There are many in Pakistan, and not just theWashington Consensus contrarians, who question the wisdom of an exportled growth strategy. Some because they do not think exports can stimulategrowth : how can 10 to 15% of the GDP, and that too largely cotton-based( ‘  cottonomics ’  as Amjad labels it), be the locomotive? Or, as Hamid argueswith respect to merchandize exports, the days of flying geese model withspillover effect and neighbourhood advantages are over. Others becausesuch growth has high adjustment and implementation costs, and even if achieved, it does not ensure significant welfare gains. Indeed, they argue, itaccentuates income inequalities and with imperfect risk and capital marketstrade liberalization may be Pareto inferior.11.On the other hand it can be argued that in terms of maximizingwelfare gains Pakistan’s export profile, dominated by agri-based products, ispart of the solution. Agriculture contributes, directly or indirectly, to aboutthree fourths of exports; and bulk of poverty and underdevelopment isdomiciled in agriculture. There appears to be a viable case for exportgrowth : poverty reduction nexus, with some agricultural policy adjustments – more than a tweak – to ensure greater efficiency and a more equitablesharing of gains. For instance, correction of policy bias in favour of major crops will promote agricultural diversification, especially into horticulture andlivestock that are more pro-poor. An important by-product will beempowering women who are more active participants in the rural economy.12. It has also to be recognized that Pakistan’s present level of trade openness risks being rolled-back unless there is a significant jump inexports. There are limits to privatization, concessionary capital flows andremittances. If exports do not grow substantially at the very least it will jeopardize the next generation of reforms; at worst it could fan forces thatwould like to see Pakistan a more closed economy and indeed a moreclosed polity.13.The way Pakistan’s economy is posited today exports appear tobe the best bet to attract new foreign and domestic investment, trigger thebadly needed infrastructural and human capital upgrades, and prompttechnological change and knowledge diffusion, the most importantdeterminants of growth.14.Some also question the ‘costs’ of greater exports, especially interms of labour welfare, gender equity, and environmental health. These are 3  valid areas of concern. However, there is sufficient evidence to suggesthigher exports and social and environmental compliance can be mutuallyinclusive where the Governments have the political will to enforce their ownlabour, gender and environmental laws. Indeed, a good ‘social compliance’regime supports export growth. Buyers’ message is increasinglyunambiguous: comply or we don’t buy. It will be short-sighted for agovernment to promote exports at the cost of labour, gender andenvironmental interests. The ‘competitive edge’ will have to foundelsewhere.15.If the export imperative is indeed accepted what will it take toachieve a quantum jump in our exports within a reasonable period of time?16.Unfortunately, there are few stroke-of-the-pen-type solutionsand compelling as the case is for Amjad’s shift to knowledge economy, or Hamid’s to services, or Lall and Weiss’s to technology intensive, it is unlikelyto stand the reality check of resources and time.17. Over the short term it is the triumvirate of macroeconomicstability, a conducive investment climate, and atleast an equitable access tomajor markets that is of the essence. And all three have to move in tandem.None on its own can secure significant gains.18.Pakistan’s macroeconomic situation is reasonably well poisedbut needs to be carefully watched because of concerns like overheating of the economy, monetary overhang and the still uncomfortably high debtburden, Fiscal discipline and improved savings and investment rates, tax :GDP ratio, and optimal interest rates will be required to address theseconcerns, even if it means a somewhat lower GDP growth rate.19.It is our competitiveness disadvantage that is at the heart of theproblem. The main drivers – human resources, technological inflows,supporting institutions – are weak and not improving fast enough. For improved competitiveness focus now clearly needs to be onmicroeconomics.20.Economic governance, regulatory quality, trade facilitation,reform of factor markets, all necessary ingredients of a favourableinvestment environment, are more a function of political will and indeed thereis already a lot of work in progress. It has to be prioritized, expedited andmainstreamed – and not just in Islamabad.21.Tariff reforms, especially tariff dispersion and tariff escalation,where we have been seen some recent back-sliding, is another short term 4
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