Pakistan’s Exports SectorChallenges and Response

Shahid Hussain RajaIndependent Consultant-Public Policy

www.shahidhussainraja.comJanuary 15,2015

Introduction

Pakistan’s Exports Profile

SWOT Analysis

Suggested Strategy

Conclusion

Sequence

Pakistan has done fairly well economically since her independence more than six decades ago and is the 27th largest economy in the world with a per capita income of more than US$3500 in Purchasing Power Parity .

However its exports performance has been lackluster and far below her potential, constituting a meager 0.15% of total world exports.

It becomes all the more depressing if compared with other countries which started their development process at the same time as Pakistan and with almost the same initial conditions

During the last two decades China’s exports have increased over six fold, India's exports have grown over five times. Similarly Vietnam, Turkey and even Bangladesh have also done well in their efforts to promote their exports.

Introduction

In comparison, Pakistan’s exports have increased only 2.7 times over this period, reflecting its less than satisfactory performance, placing it among the low achievers on this score.

What went wrong and why is the topic of discussion in this presentation, along with a set of recommendations for boosting exports potential of Pakistan

Its article version is available at my website under the following URL

http://www.shahidhussainraja.com/pakistans-exports-sectorchallenges-and-response

Introduction

Pakistan’s Exports Profile

Years Exports (Billion US $ )

2005-06 15.43

2006-07 16.91

2007-08 19.07

2008-09 17.68

2009-10 19.20

2010-11 25.34

2011-12 24.61

2012-13 20.14

2013-14 20.99

2014-15 (projected) 24.55

Pakistan’s Exports Performance

2010/2011 2012/2013 2013/2014

Food Group 3.3 4.5 4.7

Textile Group 10.2 13.8 14.0

Petroleum Group

1.1 1.4 1.5

Other Manufactures

3.8 4.5 4.9

Engineering Goods

0.2 0.3 0.3

Pakistan’s Major Exports-Composition

Countries Percentages

Unites States of America 17

United Arab Emirates 9

Afghanistan 8

China 7

United Kingdom 5

Germany 5

Turkey 3

Italy 3

Bangladesh 3

Belgium 2

Others 38

Pakistan’s Major Exports- Destinations

SWOT Analysis

Pakistan has a strong comparative advantage in agricultural commodities due to its soil endowment, climate, irrigation network and human force.

Growing pool of skilled human resource particularly in finance, information technology and engineering is becoming a sound base for exports of services

Extensive network of Pakistani business Diaspora with strong ethnic ties is a solid demand which needs to be scientifically cultivated

Ninth largest English speaking nation in the world

facilitating its integration with global trading system

Pakistan’s Exports-Strengths

Heavy concentration on traditional resource-base and low value added products mainly produced for domestic captive market for selling at high prices, dampening the urge to export by improving quality

Relying on labor-intensive technology with limited production base of high quality manufactures due to lack of R&D culture and facilities in industrial sector of Pakistan

Increasing costs of production making our products expensive in the world markets. Delayed delivery due to energy crises and law and order/security situation

Exports of few items to limited destinations resulting in cut throat competition among our exporters fetching lower prices

Absence of a clear long-term strategy with regard to export promotion over the past six decades.

Pakistan’s Exports-Weaknesses

Increasing world population and growing global prosperity fueling the demand for new products

Globalization with attendant expansion of markets, ease of communication and rapid transportation of goods and services

Increasing outsourcing opportunities from developed countries because of increasing costs of production there

Greater possibility of acquiring competitive advantage by importing raw material not available locally

Pakistan’s Exports-Opportunities

Award of the Generalised System of Preferences Plus(GSP+) status on 1st January 2014 is expected to provide a further boost to the country’s growth prospects through increased trade and foreign investment with the EU.

Relocation of industries from developed countries to developing countries in the wake of global restructuring

Joint venture agreements with businessmen of the

countries having raw material but lack expertise and resources

Growing prosperity of Pakistani Diaspora keen to buy goods and services of Pakistan

Pakistan’s Exports-Opportunities

Pakistan’s image as an exporter of low quality, low prices of selected goods and services, restricting demand for high quality products from Pakistan, a Catch-22 position

Law and order/security situation deterring the importers to visit Pakistan or participate in our trade exhibitions

Energy crises creating crises of confidence among the importers about the certainty of timely delivery of exports orders

Pakistan’s Exports-Threats

Emergence of strong competitors in the region in the same groups where Pakistan has the comparative edge

Increasing concerns of the importing countries about social and environmental issues- the green technologies, child labour, gender balance, bonded labour etc

Shifting of Pakistani industrialists to other countries due to push/pull factors

Pakistan’s major export markets – the United States, the European Union, China and the Middle East – are experiencing an economic slowdown

Pakistan’s Exports-Threats

How to increase the foreign exchange earnings of Pakistan by increasing the volume and range of exporting high quality goods and services in the face of increasing competition in a rapidly globalizing world

Challenges

Formulation of business friendly national economic policies(multi-sectoral as well as sectoral) which encourage creation of exportable surplus of high quality goods and services with incentives for R&D and value addition. These policies should be reinforcing each other and any anti-export bias found in any policy be removed.

Formulation of a comprehensive trade policy which should

indicate the broad direction for this sector, create institutions and define their respective roles, make rules for coordination, set safety and quality standards and provide an incentive and rewards system for various stake holders

Within this framework, Government's role should be confined to legislation, policy development, regulation, capacity building and facilitation, while the private sector should take the lead in investment and value chain development on its own.

Broad objectives of this policy could be ;

Response

Increase productivity by increasing efficiency in all those sectors geared towards exports

Increase profitability of all stakeholders by providing them appropriate incentives and rewards

Making exports competitive in the rapidly globalizing world

Ensuring sustainability by promoting environment friendly good manufacturing practices

Ensuring equitable distribution of gains from enhanced productivity to all stakeholders

Response-Policy Objectives

Accelerating the growth rate of Pakistan by improving its foreign exchange earnings through increased exports of goods and services

Poverty alleviation and reduction in income inequalities through creation of job opportunities in exports sector

Attracting foreign investment by reducing costs of doing business, giving appropriate incentives and creating an investment friendly environment

Modernisation of all economic sectors by introducing new technologies and techniques

Response-Strategic Objectives

The best export promotion strategy reinforces a country's existing strength and /or creates the basis for establishing new competitive advantage.

Our strategy therefore should be to not only increase the quantum of our exports but also to expand their range, selecting higher value added goods for exporting to the existing or new markets.

Once we have selected the desired components of our export basket and the markets in which focused attention would be paid and strategies laid out for their implementation, we must ensure that the overall competitiveness of exports is achieved and maintained.

For this purpose, it must address following broad economic and trade related issues, which play crucial role in affecting the overall competitiveness of a country's exports in the global export market

Response-Suggested Strategy

Increasing Exportable Surplus Capacity Utilization Capacity Expansion Productivity Growth Enforcing Quality Control Facing Challenges of WTO Regime Encouraging Private Public Partnership Reducing Transaction Costs Attracting Foreign Investment Rationalising Import Policy Maintaining Rational Exchange Rate Reinvigorating Economic Diplomacy Social and Environmental Compliance Encouraging SMEs to Export

Suggested Strategy

Obviously you cannot increase your exports without creating substantial exportable surplus in the country.

This in turn means increasing the production of goods and services in all the sectors in general but in exportable sector the most

Consequently it translate into devising policies and strategies to increase the production through all the three ways-surplus capacity utilization, capacity expansion and productivity growth

Increasing Exportable Surplus

Thanks to past policies there is a lot of capacity in every industrial unit which cannot be utilized for one reason or other-costly imported raw material ,lack of finance, inadequate BMR, shortage of expertise etc

There is thus need for carrying out a comprehensive analysis of all the export oriented industrial units and find solutions for optimum utilization of their excess capacity

If there are some industries which have lost their relevance or competitive edge, we should take bold steps and let them die their own death

Surplus Capacity Utilization

Related to above is the need for increasing the capacity-either of existing units or building new ones. Without diversifying the production base we cannot improve our exports profile.

We should select goods and services to be promoted for exports on the basis of their comparative advantage, global demand and growth potential-the sun rise industries

Some of these sunrise industries are electronic and telecommunication equipment, automotive parts, biological pharmaceuticals, renewable energy, petrochemicals, aerospace etc

Capacity Expansion/Diversification

An economic measure of output per unit of input(the ratio of GDP to total hours worked in the economy during a measuring period), productivity gains are vital to the economy because they allow us to accomplish more with less.It comes from three major sources

Investment- in physical capital and promoting innovation i.e. successful exploitation of new ideas.

Skills formation- needed to take advantage of investment in new technologies and organisational structures by increasing labor productivity through education, on the job training, skill up gradation and dissemination of new knowledge and techniques.

Competition- when enterprises compete with existing firms It ensures that resources are allocated to the most efficient firms and forces existing firms to organize work more effectively

Accelerating Productivity Growth

There is a need to promote the culture of quality at every stage of value chain and even among the consumers through awareness campaign, appropriate legislation, institutional mechanism etc

There should be strict quality control measures even for domestic sale of goods and services to make our producers quality conscious

Compulsory quality certification along with subsidy to the manufacturers of high quality products

Establishment of facilitation centers to reduce the costs of production and ensuring quality of finished products

Enforcing Strict Quality Control

Globalisation is a two edged weapon-it provides opportunities but also poses challenges. Only those countries will be able to profit from this phenomenon which accept the challenges and come up with appropriate responses.

It is therefore essential to conduct constant research about the issues raised in the new WTO regime in order to provide useful information for taking market-friendly measures

Regional trade agreements(RTAs) may work as an effective industrial policies, increasing opportunities to export through the reduction of various trade costs while simultaneously promoting market-friendly reforms.

However there is need to conclude such RTAs in consultation with the stakeholders to ensure that interests of our manufactures are fully protected

 

Facing Challenges of WTO Regime

Private sector has become an active partner and player in development especially in export sector. However it needs incentives like easy accessibility to loans, better infrastructure, tax concessions etc

Most of all it demands good governance, consistency of fairly formulated policies, level playing fields and quick dispute resolution mechanism

We should encourage our private sector to help Pakistan becoming a trade corridor for the regional countries, particularly Central Asian Republics which are witnessing phenomenal growth with a fast expanding market for which we need to develop our ports and other transportation network under a long term plan

It is here where private public partnership could yield handsome dividends to the country as well as to the private sector

Encouraging Private Public Partnership

Pakistan is ranked 110th by the World Bank in its Ease of Doing Business Index. Measures are needed to improve this ranking by improving country’s physical infrastructure.

This includes reliable and low cost supplies of power, water, gas telecommunications, cutting down long delays in shipments, clearances, cargo space, handling at the ports and airports etc for export industries.

We should encourage domestic investment in shipping to save $1.5 billion annually being paid to foreign shipping companies. Pakistan has a small shipping fleet which carries less than 10% of our trade as compared to 40% permitted under international law

Similarly there is need to improve its financial infrastructure for which long term financing and hedging products need to be developed by the financial institutions

Reducing Transaction Costs

The opportunities arising from increased global trade are accompanied by numerous challenges both for manufacturers and exporters. One of these is meeting strict quality and compliance requirements

Pakistani exporters should equip themselves to become fully compliant with these requirements of the advanced economies buyers and governments.

Government will have to come with a heavy hand

to ensure the social and environmental compliance through appropriate policy formulation, creating institutions and providing an attractive incentives and rewards regime

Social /Environmental Compliance

Small and Medium Enterprises (SMEs) play a crucial role in any economy but they are hampered by their limited access to finance, technology, management practices and information.

However without integrating the export oriented SMEs into an organized production network for exports, we cannot give quantum boost to our exports.

Here state will have to play a very proactive role to ensure their easy and affordable access to information, finance and create facilitation centers in cluster areas.

Encouraging SMEs to Export

No one can deny the role of foreign investment in accelerating the growth rate and promoting exports by bringing much needed capital, technology and management practices to the country.

We should therefore attract foreign investors for export oriented joint ventures in Pakistan and also establish joint ventures abroad.

For this purpose we should target brand name merchandisers and large retailers of standardized products. Foreign joint ventures can provide marketing, design, logistics, financing while the production can be handled by domestic firms.

However it will require greater transparency and disclosure by Pakistani firms aspiring for joint venture relationships and a reliable dispute resolution mechanism to redress grievances

Attracting Foreign Investment

No country practices absolute free trade; the US protects its steel, autos and heavily subsidises agriculture and the defence sector while the European Union has provided hundreds of billions in subsidy to its “inefficient” agriculture.

We should therefore follow a cautious liberalisation of imports, restricting freer imports to the export sector via bonded warehouses and export processing zones.

Secondly, reducing the level of protection to domestic industry and agriculture at a time of severe challenges is not a good policy formulation.

Rationalising Import Policy

A country in order to grow has to expand its market; if local market is not large enough to absorb the expansion in output, it has to find external markets  for which its exportable surplus must be competitive.

For this, either your costs of production should be lower or your cost of exchange (value of your currency) should absorb the increased costs and must be devalued to that extent.

That means maintaining appropriate effective exchange rate to ensure certainty, not necessarily rigid stability

Chinese learnt the lesson from Japanese and kept their currency undervalued. Americans failed to do so and lost their manufacturing, first to Japan and and later on to Chinese.

Maintaining Rational Exchange Rate

Every country strives hard to enhance its exports capabilities. However that is not enough if not matched by equally important measure- economic diplomacy

We need to reinvigorate economic diplomacy in our

foreign relations, especially through our embassies. The role and effectiveness of the Commercial Counselors in improving the relations with trading partners have to be strengthened.

All the institutions tasked with export promotion must be converted into an effective marketing organizations by involving the private sector and inducting professionals.

Pakistan is also a member of regional arrangements i.e. SAARC and ECO, which have yet to contribute to the promotion of intra-regional trade.

Reinvigorating Economic Diplomacy

Despite massive strides made by Pakistan in the field of economic development during six decades of existence, her export profile is not as impressive as it should have been.

Her reliance on too few exportable items and too few trading partners have made the country vulnerable to external as well as internal shocks.

Pakistan will have to expand her production base, diversify it on need basis and craft an aggressive long term export strategy

She also need to rationalize her economic policies in sync with this strategy making concerted efforts to enhance our exports by diversifying them, finding new markets and encouraging value addition to our exportable items.

Conclusion

Thanks