Exports for Economic Growth
ARTICLE: Trade and technological advancements provide the fundamental impetus for sustainable economic growth. Nations that are more open to international trade and more advanced in technology have proactively achieved high levels of economic growth; this is evident from the progress of China, India, Malaysia, Qatar, and Singapore among others. Thus, an emerging economy must prioritize these factors as it attempts to bolster economic growth. Governments are required to regularly develop up-to-date policies regarding technological upgradation, and attract investments to enhance productivity, technology transfer and trade.
The added stress of Covid-19 means that policymakers have an additional obstacle to contend with. Numerous countries are faced with economic contraction, not only to a lower growth rate, but rather a negative rate. Over 95 percent of countries are projected to have negative per capita income growth in 2020, with export-dependent economies particularly affected (IMF).
At a time like this, exports are particularly essential for Pakistan's recovery. This is because exports provide a crucial uplift to otherwise stagnant productivity: Pakistan's export-oriented industries are 25 percent more productive than non-exporting firms, and their productivity increases as exports increase. Furthermore, exports in Pakistan are labor-intensive and thus crucial for job-creation. They also serve as an important source of foreign currency to pay for required imports. (World Bank)
Despite their oft-emphasized importance, the exports of Pakistan have exhibited weak performance for decades. Since 2010, export growth has been largely stagnant, with a growing trade deficit. Pakistan's exports continue to lose market shares due to the growing proportion of unsophisticated export goods - mainly concentrated in garments and animal products. These are characterized by low income elasticity of demand and high price elasticity of demand. Thus, the exports of Pakistan have fallen far behind the pace required for economic growth.
Back in 2006, Pakistan's textile industry was one of the best in the region, and it has now become one of the worst. While other economies have benefited from exposure to better and more modern technology, Pakistan has not been able to invest in the same resources for two reasons. The first is a curtailment in access to energy in Pakistan for the past years, and the second is the unreasonable costs of the energy that is available at present. As a result, firms have been strapped for profits since the very start, as exorbitant amounts have to be set aside for these inefficient energy costs, so upgradation and innovation prospects are left neglected.
Further issues that remain unaddressed include an anti-export bias caused by persistently high tariffs, restoration of outdated quotas such as the Multi Fibre Arrangement (MFA), an upsurge in mandatory technical standards and barriers, and an unmet need for policy measures at par with other textile economies.
Pakistan's textile and apparel industry is in need of radical measures to remain up to date with global developments, as world trade has promptly shifted from cotton to MMF. Globally, the use of man-made/synthetic fibres against natural fibres has shifted to a ratio of 70:30, with synthetic fibres having the main share. Meanwhile, Pakistan's consumption ratio of MMF to cotton is 30:70. There is currently a 7% customs duty on the import of polyester staple fibre, with total import expenses ranging up to 20%, including anti-dumping duty.
Pakistan must realign its cotton to MMF ratio, and target a fibre mix of 50:50, along with taking the following measures for a more competitive industry with greater market share:
- diversification in products and markets,
- use of technical and medical grade fibers and fabrics,
- rationalization of the tariff and regulatory regime for the MMF and apparel sector,
- renegotiation of regional and other FTAs,
- development of a long-term policy framework for attracting investment, as done in the recent past by Vietnam, Cambodia etc.
- technological upgradation.
Textile exports are a major source of revenue for Pakistan, so the lack of investments in machinery over the last decade is disconcerting. The country's textile exports have suffered greatly relative to major competitors, and the low imports of textile machinery have exacerbated this problem by leaving the country behind in terms of value-addition. The figures below show stagnant imports of textile machinery, using data extracted from UN COMTRADE.
Apart from the structural problems that have hindered Pakistan's exports for the preceding years, the new and unique trade landscape of 2020 provides additional strains. The following are recommendations for Pakistan to understand the nature of export recovery amidst this global crisis, taken from a World Bank blog titled End Poverty in South Asia.
The impacts of COVID-19 for trade are not as simple as a reduction in export flows, but run far deeper in that several buyer-seller links have been completely cut off. With international firms like JC Penney and J. Crew halting operations and filing for bankruptcy, many Pakistani exporters are left without clients. Thus, helping firms to seek new ones needs to be a policy priority. With social distancing measures set to stay in place for much of the remaining year, trade fairs and exhibitions to find clients are not an option. Buyers and sellers are likely to connect online, so the Trade Development Authority of Pakistan (TDAP) must help exporters harness the potential of digital marketing. Advances in artificial intelligence and big data are key developments which Pakistan must leverage in order to remain in competitive in the current global landscape.
Another factor is that local firms need to be able to import raw materials and intermediate inputs at world prices in order to export competitively. The argument in favor of centralized supply chains in one region is unsustainable. The risk of COVID-19 spread will not be mitigated by this measure, but can be minimized by reduced dependence on any individual supplier. Pakistani suppliers should be given incentives to expand beyond the domestic market, this is only achievable if import restrictions are eased and requisite raw materials are made accessible. The import taxes that prevail only serve as "export taxes in disguise." Absolute sunset clauses to tariff protection are crucial for the elimination of the anti-export bias.
In addition, it's critical that Pakistan help its firms comply with international standards and secure the requisite certifications. Pakistani textile and apparel firms have proactively shifted to the production of face masks, shields and PPEs to meet the needs of the hour. However, compliance is expensive and tricky, exceedingly being the reason that locally produced COVID-19 protective gear is rejected at the borders. In that context, the Ministry of Commerce needs to engage and provide information on standards and compliance.
In the past, remittances have cushioned the financing pressures related to Pakistan's trade deficit. This may be made possible again this year, as June 2020 brought in record monthly home remittance - up by 51 percent year-on-year to $2.47 billion. This provides a ray of hope for the economy, but the most sustainable way to counteract the trade deficit issue is to ensure export competitiveness.
The export competitiveness of Pakistan depends greatly upon what policies are adopted in taking the textile sector forward. The Textile Policy that has been approved for Pakistan holistically targets the revitalization of the export oriented industry, and particularly its recovery after COVID-19 has torn through the global economy.
It is imperative to note that the policy recommendations are synergistic - they can only be fruitful if implemented simultaneously. As the textile value chain is fragmented, there is a need for uniformity and facilitation at each step of the process, and any incentives that are provided must be available across the chain.
Similarly, GDP growth is a goal that requires holistic policymaking, in line with all past efforts to reduce the trade deficit. As the country can no longer afford to rely on loans, we must pay heed to policy recommendations that target export growth, competitiveness and high market share, and investments will inevitably follow suit.