Rethinking about foreign trade
By Shahid Javed Burki
Monday, 29 Jun, 2009
THE current economic crisis shows no sign of easing. It has demonstrated a number of structural flaws in the economy. Two of these are significant and they are related to each other.
The first is the excessive dependence of the economy on foreign capital flows and the other is an export sector that lacks dynamism in the sense that it has concentrated on the selling of the products that don’t have a growing demand in the international market place. The latter flaw has led to the first.
If there was a dynamic export sector it would be able to pay for the imports it needs through exports. That has not happened and is still not happening. Consequently, the country continues to run large balance of payments deficits which require whoever occupies the seat of power in Islamabad to go to the donor community for financial support.
Another consequence of this way of running the economy is to make Pakistan extraordinarily susceptible to foreign influences in managing the country’s external affairs. The conclusion that one reaches after making these observations is clear: a way must be found to increase the exports.
How this could be done will become apparent once one views the structure of international trade. There are a number of problems with the basic structure. The first one is the concentration of exports in a few product groups. At the product level, using the fourdigit classification in trade statistics, we see that 45 products account for 83 per cent of exports with 10 products representing more than one-half. Lack of product diversity is always a problem. It is a greater problem if the concentration of the products is in the areas in which there is not much scope for increased demand or in which there is intense competition.
In Pakistan’s case, basic textiles and cheap garments account for about one-half of total exports with food and leather products adding another 10 and four per cent respectively. (See table.) As a recent World Bank paper puts it, while textile and engineering account for six per cent and 60 per cent of global trade respectively, their share of Pakistan’s exports is in reverse proportions, 55 per cent and less than two per cent respectively.
That said, there have been some positive developments even within these product groups. Pakistan was once a major cotton exporter and a large exporter of cotton yarn. It is now using a significant amount of the domestic production of these two items in its own industry. The share of textile exports fell from 68 per cent in 2003-04 to 55 per cent in 2007-08. At the same time, shares of manufactures increased from 16 to 20 per cent.
The direction of exports is also concentrated. The United States is the largest importer of Pakistani products. In 2008, its imports accounted for 19 per cent of Pakistan’s total exports. Most of the US purchases are of textile products although, because of the rising incomes of the Pakistani diaspora in America exports to what are referred to as the ethnic markets are picking up.
The direction of Pakistani exports flies in the face of the “gravity model of trade,” according to which the mass of the trading partners and their distance from the concerned country are the two most important determinants of the quantum of exchange. Applying this model to Pakistan would suggest that India and China should be the largest trading partners for the country, not the distant United States. The burden of history has a great deal to do with the small amount of trade between India and Pakistan.
When the two countries achieved independence in 1947, the areas that became today’s Pakistan had India buying 60 per cent of the total exports and was the source of more than 50 per cent of imports. That changed suddenly because of the trade war between the two countries in the late 1950s. The structure of the Pakistani economy would have been very different had the relations between the two countries not deteriorated to the point that they ended up fight ing two major wars – in 1965 and 1971 – and near-wars in recent years.
How could Pakistan tackle its precarious resource situation and in dealing with it how could it use the export sector to provide the resources the economy needs? This is a big question which will take more than a newspaper article to answer. Nonetheless, some of the critical issues that need to be handled can be easily identified. Today, I will focus on three of these. First is the role of the state.
Although the state has been involved in the making of trade policy, it has not been as actively engaged in trade promotion as was the case, say, in East Asia. Promotion of trade requires a number of activities including identification of the products in which the country has advantage, providing details about the potential markets for the products, developing technological support for the production and development of the products, facilitating access to finance for private entrepreneurs who may be interested in producing the product lines, and keeping watch over the international markets for the demand in the product lines being promoted.
Some of these initiatives were taken by some agencies established by the government, including the Export Promotion Board, but without the benefit of a detailed strategy. Much of the emphasis in the past was on tax incentives of various kinds offered to the export sector. These have created serious distortions in the allocation of resources and is one reason why the textile sector has failed to include high value added items to the list of its exports. The present government has decided not to issue annual trade policies but to work on a more comprehensive and multi-year framework for developing international trade. This is a move in the right direction.
The second important area needing government attention is the promotion of regional trade, in particular trade with the large neighbours. Pakistan has treaties in place to promote trade with China and India. In the case of the former, it has concluded a free trade agreement but it appears that it has not helped a great deal in promoting Pakistani exports to that country.
In the case of India, Pakistan is a member of the South Asia Free Trade Area, the SAFTA, which has done little to promote trade among the member countries. Neither Pakistan nor India – South Asia’s two largest economies – seem committed to using the SAFTA framework for increasing intra-regional trade.
Pakistan seems much more focused in developing the markets in Europe and North America for its traditional exports while India is keen on working out an arrangement with the countries in Southeast Asia. Thus distracted they seem much less interested in their immediate neighbourhoods.
The third area for government attention is what experts call, “trade facilitation”. The argument for this is that the steady declines in the rates of tariff mean that duties on imports and exports have lost their significance in promoting (or retarding) trade. There is much to be gained by turning attention to facilitating trade. This includes such activities as improving infrastructure, handling of trade at the borders, computerising the handling of custom documents, studying what causes delays at the borders and removing or lowering the obstacles.
There are several other issues that need to be addressed. The important point to make here is that the government needs to attend the question of expanding trade in a comprehensive fashion and in a way that results in the adoption of a long-term approach. Discontinuities that are inherent in the issuance of annual trade policies don’t help to develop a steady approach towards trade promotion.