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Pakistan’s Exports Sector/Challenges and Response

By | on April 30, 2015 | 0 Comment

ed3Introduction

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 terms of 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 since 2000, 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.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.

This paper is an attempt to analyse the exports performance of Pakistan, pinpoint its weaknesses and come up with a plan of action to boost her exports profile

Pakistan’s Exports Profile

Pakistan’s exports profile is a mixed bag in terms of volume, composition, destination and growth rates. Its exports have increased from 15.43 billion US $ in 2005 to 25.45 billion US$ in 2010, depicting an annual growth rate of around 12 % per year. However, since then, there has been a steep fall in exports earnings and only now these have been projected to touch 24.67 billion in current financial year. These growth rates have not been a consistent over this years, extraordinary growth in one year has been followed by a paltry increase next year and so on. Majority of its exports goods have been destined to few countries led by USA and followed by United Arab Emirates, Afghanistan, China, United Kingdom, Germany, Turkey, Italy, Bangladesh and Belgium in descending order. Similarly composition of her exports reflect great vulnerability as more than 60 percent of Pakistan’s exports comprise cotton and textile products followed by food items, sports and petroleum products  in descending order.

SWOT Analysis of Pakistan’s Exports

Before prescribing any remedial measures to increase a country’s exports, it is always necessary to carry out her SWOT Analysis i.e. what are the strengths and weaknesses of her exports? What are the opportunities available to boost exports and what are the threats she is likely to face in short to long term? This analysis is extremely useful for chartering an appropriate course of action.

  • Strengths

For a medium-sized country like Pakistan it is extremely crucial to explore and export market for her products in addition to domestic market to take full advantage of the internal and external economies keeping in view her strengths in this respect.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 

  • Weaknesses

However, Pakistan’s exports potential cannot be fully realized due to her structural economic weaknesses and absence of a clear long-term strategy with regard to export promotion over the past six decades. With few exceptional years, it is difficult to discern a clear long-term strategy that Pakistan has pursued with regard to export promotion over the past six decades. Heavy concentration on traditional resource-base and low value added products mainly produced for domestic captive market for selling at high prices, dampens the urge of manufacturers to improve quality of their products. Most of them rely 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. While increasing costs of production are making our products expensive in the world markets, delayed delivery due to energy crises and law and order/security situation are compounding her problems. Last but not the least is the lower prices our exports fetch because of exporting few items to limited destinations resulting in cut throat competition among our exporters.

  • Opportunities

Rapidly globalizing world with attendant expansion of markets, ease of communication and rapid transportation of goods and services presents vast opportunities to Pakistani exporters to increase our exports. Increasing world population and growing global prosperity is fueling the demand for new products while Pakistani Diaspora, becoming prosperous and keen to buy goods and services of Pakistan, offer vast market for our products. 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. While there is a greater possibility of acquiring competitive advantage  by importing raw material not available locally on the one hand, joint venture agreements with businessmen of the countries having raw material but lack expertise and resources on the other. At the same time, relocation of industries from developed countries to developing countries in the wake of global restructuring and increasing outsourcing opportunities from developed countries because of increasing costs of production there. 

  • Threats

However there are threats also. Pakistan’s major export markets – the United States, the European Union, China and the Middle East – are experiencing an economic slowdown resulting in lowere demand for our products which were already facing tough competition from the increasing number of competitors in the same groups where Pakistan has the comparative edge.At the vsame time there are  increasing concerns of the importing countries about social and environmental issues- the green technologies, child labour, gender balance, bonded labour etc. These dampen the demand still further. Her image as an exporter of low quality, low prices of selected goods and services is restricting the placement of orders for high quality products Pakistan does manufacture. While law and order/security situation is deterring the importers to visit Pakistan or participate in our trade exhibitions, energy crises are creating crises of confidence among the importers about the certainty of timely delivery of exports orders. Last straw on camel’s back is the shifting of Pakistani industrialists to other countries due to various push/pull factors.

Challenges

Keeping in view the strengths and weaknesses identified in the SWOT Analysis above and the opportunities available to increase our exports notwithstanding the threats posed in this connection, we can identify the following broad challenges to be faced by Pakistan’s exports sector in the foreseeable future:

  1. How to accelerate the growth rate of Pakistan by improving its foreign exchange earnings through increased exports of goods and services without adversely affecting their adequate availability domestically
  2. How to achieve the above objective in the face of increasing competition to our exports from regional and global competitors in a rapidly globalizing world.
  3. How to attract foreign investment in our exports sector which could modernize it all by introducing new technologies and techniques

How to meet the stringent social and environmental compliance conditions of foreign importers without becoming uncompetitive while meeting those standards

Response

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

Devising appropriate Policy Framework

In order to fully exploit her export potential Pakistan will have to first formulate 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. Within this broader framework Pakistan needs to formulate 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.

In this policy environment, 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

  • 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

Increasing Exportable Surplus

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

  • Surplus Capacity Utilization

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

  • Capacity Expansion/Diversification

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

  • Accelerating Productivity Growth

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 namely (a) investment in physical capital and promoting innovation (b) skills formation by increasing labor productivity through education, on the job training, skill up gradation and dissemination of new knowledge and techniques and (c) competition which ensures that resources are allocated to the most efficient firms and  forces existing firms to organize work more effectively

Enforcing Strict Quality Control

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. At the same time compulsory quality certification along with subsidy to the manufacturers of high quality products is urgently needed. However it should be complemented with the establishment of facilitation centers by the state to reduce the costs of production and ensuring quality of finished products

Facing Challenges of WTO Regime

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

Encouraging Private Public Partnership

Confident private sector is forcing the state to give them more space in policy formulation, shed its extra load and shift from all-encompassing role of service provider, enabler and regulator to merely regulation. Pakistan is no exception to this universal trend and 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

Reducing Transaction Costs

Pakistan is ranked 110th by the World Bank in its Ease of Doing Business Index, higher than Argentina, Brazil and India. 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 shipping fleet of 15 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

Social /Environmental Compliance

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, not only from a specific and technical perspective but also from regulatory, social, environmental performance and Customer specific standpoints. 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

Encouraging SMEs to Export

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. The formal sector, through strategic alliances, subcontracting, and outsourcing can bring the SMEs into the production network and lead to overall productivity gains. 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.

Attracting Foreign Investment

No one can deny the role of foreign investment in accelerating the growth rate and promoting exports by bringing in 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.

Rationalising Import Policy

No country can afford to restrict imports in the present day rapidly globalizing world However we should not go for whole-scale opening of imports across the economy  to increase efficiency as no country practices absolute free trade; the US protects its steel, autos  and heavily subsidizes agriculture and the defense sector while the European Union has provided hundreds of billions in subsidy to its “inefficient” agriculture. We should therefore follow a cautious liberalization 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 in the form of the internal security situation and the energy crisis and expecting these sectors to compete  against heavily-subsidised competition — is a recipe for disaster.

Maintaining Rational Exchange Rate

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. It demands 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. One of the major reasons for the Japanese growth has been their continuous efforts to improve their competiveness by adopting both the methods-cost reduction through efficiency improvement and currency depreciation. Chinese learnt the lesson from them and kept their currency undervalued. Americans failed to do so and lost their manufacturing, first to Japan and later on to Chinese.

Reinvigorating Economic Diplomacy

Role of exports as an important driver of economic growth in all the countries is well recognized. That’s why 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 effective marketing organizations by involving the private sector and inducting professionals. In a global perspective, the trade is largely conducted through regional alliances/groups. Pakistan is also a member of such regional arrangements i.e. SAARC and ECO, which have yet to contribute to the promotion of intra-regional trade.

Conclusion

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. However, the most worrying feature is here reliance on too few exportable items and too few trading partners. This narrow base and lack of diversification of exports have made the country vulnerable to external as well as internal shocks. To obviate the possibility of such occurrence, 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.

 

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