Fundamental issues: The disconnect in Pakistan’s trade and GDP growth

Published: October 1, 2012

In Pakistan, trade grew 1.2% lower than our GDP, while on a global basis, trade has grown 1.8% ahead of global GDP growth on average. ILLUSTRATION : ANAM HALEEM

KARACHI: 

In the recently-concluded American Business Council Economic Summit, titled ‘Beyond Borders: Trade Treaties and their Implication’, I presented the hypothesis that “in all successful economies, GDP growth has a direct correlation with trade growth”.

Trade – the act of buying and selling goods and services – is to me a key barometer to judge an economy’s vibrancy and growth. For any given country, it reflects the cumulative value of total imports and exports. The higher the value addition by the domestic producer, the higher will be the selling price and transaction value.

On the face of it, Pakistan’s trade has come a long way from $2.2 billion in 1970, to almost $57 billion in 2010 – an almost 25 fold increase. To judge whether this performance is great, average or poor, one needs to compare it with other economies in the region. To me, India and Bangladesh are excellent benchmarks. During the same period, these two countries increased trade 175 and 45 times – clearly outperforming Pakistan.

Diving into global trade data, we see that Pakistan’s trade performance was par excellence from 1970 to 1990; significantly better than both India and Bangladesh (see graph 1). By 1990, our trade was 39% of GDP, versus 20% for Bangladesh and only 15% for India.

However, in the last 20 years, our trade has plunged while India and Bangladesh have clocked impressive trade growth above the global average of 39%. Bangladesh and India’s trade performance reached 43% and 50% of GDP respectively in 2010, while Pakistan’s dropped to a dismal 32%.

For perspective, countries which have a strong industrial and services sector deliver trade figures above 100% of their GDP: for eg, Singapore (385%), Malaysia (177%), Thailand (125%), and South Korea (102%). The reason their trade figures are greater than their GDP is reflective of their undertaking a significant amount of trade outside their countries’ borders via offices, branches and manufacturing operations in foreign countries.

Does our trade policy drive GDP growth?

If one reviews trade growth and GDP growth figures over time, it is normal to see them grow in tandem in all good economies. On average, global trade and GDP have been growing 7.2% and 5.4% per annum respectively over the past 20 years. For emerging markets, including countries like India, Bangladesh and the Asian Tigers, trade growth is either equal, or in most cases higher, than GDP growth.

In our case, trade grew 1.2% lower than our GDP, while on a global basis, trade has grown 1.8% ahead of global GDP growth on average.  If you try to plot Pakistan’s trade as percentage of GDP and GDP on a graph, it is shocking to discover that there no correlation between GDP growth and trade growth (see graph 2).

If similar calculation is done for India, Bangladesh or for the entire world, we find clear-cut growth trends and a strong correlation between GDP and trade growth. Table 1 shows the correlation coefficients for our two neighbours, as well as the world. It clearly confirms that trade drives GDP growth in these countries, as they all have a high correlation coefficient of 0.9 or 1.0.

On the other hand, Pakistan’s performance over the last two decades is negatively correlated to GDP growth, which indicates the presence of a parallel, yet vibrant and large undocumented economy. It may also show the impact of constant foreign loans and aid, which have driven our GDP growth over the years. Trade, clearly, does not play as significant a role as it does in all other emerging economies.

Why are Pakistan’s trade and GDP growth not correlated?

Key among the many factors impacting trade performance is a lack of long-term economic policies that drives trade. Investors, both local and foreign, need to have a clear view of consistent fiscal and trade policies, without which no investment will flow into our country.

In addition, poor security, sporadic energy access, deteriorating infrastructure, as well as poor overall governance has hammered our ability to drive trade or to attract international trade to Pakistan. 58% of our trade is composed of “imports”, which predominantly consist of consumables, electronic goods, food items, and petroleum products – but not plant and machinery, which drive long-term sustainable economic growth.

Weak intellectual property legislation also discourages trade and foreign investment to enter and access our markets. Also, as I discussed in a previous article, decades of protectionist policies have rendered our industries inefficient and uncompetitive: until the early 1990s, tariffs were as high as 90%.

Other issues that will help drive trade include the signing of more Free Trade Agreements with trading partners. These will provide the private sector greater access to other countries and regions, improve infrastructure. We also need to work on access to energy and inland logistics, lowering port and airport charges, streamline customs operations and border controls, and increase the availability of skilled human resources. We also need to significantly increase investment in education and skill building.

Without a 360 degree approach to fixing the weak aspects of our economy, fixing our issues in trade will not be possible.

THE WRITER WORKS IN THE CORPORATE SECTOR AND IS ACTIVE ON VARIOUS BUSINESS FORUMS AND TRADE BODIES

Published in The Express Tribune, October 1st, 2012.

Reader Comments (17)

  • just_someone
    Oct 1, 2012 - 4:08AM

    looking at the correlation of trade growth and gdp growth depends highly on what model the country is following to progress. the asian tigers championed the ‘economic growth through trade’ concept and it worked out well for them. BUT this is not the only way to grow. south american countries have grown through more ‘standard’ methods which involve growing through the domestic sectors rather than being reliant on the countries.
    then there is the classical mistake you are making of correlation and causation. the integratedness of a country with the world economy itself drives the correlation you mention and not necessarily causes growth.
    anyway, pakistan’s economic woes can not be solved through trade and exports. there are fundamental problems with economic policies and the volatility of these that is hampering pak growth. those first-order should be addressed rather than second or third order issues.

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  • Khalid Pathan
    Oct 1, 2012 - 6:57AM

    Make money by unfair means, loot and corruption is OK. Successive governments have been reenforcing this concept. Wait for the right opportunity and change your black money into white. This concept has encouraged dishonesty at the expense of hard work, merit and fair play. The situation will only start to change once it is established that earn money as much as you can but only by fair means, a bad situation will get worse.

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  • Oct 1, 2012 - 10:51AM

    Pakistan has continued to offer much greater upward economic and social mobility to its citizens than neighboring India over the last two decades. Since 1990, Pakistan’s middle class had expanded by 36.5% and India’s by only 12.8%, according to an ADB report titled “Asia’s Emerging Middle Class: Past, Present And Future.

    Domestic production and consumption have been rising with rapid growth of urban middle class in Pakistan, and it makes Pak economy much more domestic driven and rather than trade driven than India or Bangladesh. This domestic growth will drive trade in the future years.

    http://www.riazhaq.com/2012/08/upwardly-mobile-pakistan-on-66th.html

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  • djbsdfj
    Oct 1, 2012 - 12:05PM

    It says “see graph 2″, but where? It would have been good to see it since I love a shocking graph.

    I would expect that various other negative factors and events erode the growth gains from trade giving the negative relation. The graph which would have shown what time frame we are talking about would have been helpful.

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  • Falcon
    Oct 1, 2012 - 6:51PM

    Saad – Great article as usual. My only question is you have mentioned correlation between GDP and trade (instead of exports in specific). Does it mean that high trade volume that is comprised of high imports vs. exports (and therefore high trade deficit) still reflective of health of the economy?

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  • Raj
    Oct 1, 2012 - 8:38PM

    @Riaz Haq – Yes as per the report Pakistan’s performance is relatively better than India as far as percentage of population is concerned. However this report seems to be generated with data of 2005. I would like to see more recent trends if it is available as that may portray a slightly different picture.

    For example in the report China’s absolute number is shown as 442(mn) but since then in last 7 years it is speculated to rise to somewhere around 650(mn) which is phenomenal by any standards though I don’t have any official documentation indicating the same.

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  • gp65
    Oct 2, 2012 - 6:41AM

    @Author “Without a 360 degree approach to fixing the weak aspects of our economy, fixing our issues in trade will not be possible.”
    Did you mean 180 degrees?

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  • gp65
    Oct 2, 2012 - 6:44AM

    @Raj: Riaz quoting outdated data is not accidental. This is a standard ploy used by him.

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  • Oct 2, 2012 - 12:15PM

    Domestic growth will surely derive Pakistan:s GDP.But just peep across the eastern border and you will see the El Dorado at your doorsteps and how it can change our world.The name is FTA, Mr Haq.( We all remember Mr Haq of :THE POVERTY CURTAIN Fame ).But alas do not want to adopt it.

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  • Saad Amanullah Khan
    Oct 2, 2012 - 7:53PM

    @Riaz Haq:
    I sincerly hope you are correct.

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  • Saad Amanullah Khan
    Oct 2, 2012 - 7:55PM

    @Falcon:
    You make a great point and 2 weeks ago I wrote an article on Exports which are very poor as compared to our neighbours specially over the last decade. If you want to read it check out the article: http://tribune.com.pk/story/437617/a-slew-of-problems-why-has-our-export-performance-remained-dismal-over-the-years/

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  • Saad Amanullah Khan
    Oct 2, 2012 - 8:05PM

    @Falcon:
    Trade in general is a healthy indicator but only if a) Exports make up more than 50% of the split (inour case it is 40%) and B) what is the imports comprised of. If we are importing equipment, machinery and technical equipment, that is great as that will drive sustainable economic activiity. Unfortunately our imports are predominantly focused on consumables, electronic goods, food items, and petroleum products — whcih are consumed and do not add any value. We should make our own consumables. Overall Trade and open boders are good as investment comes with trade. We unfortunatly don’t have very efficient industries which are spoiled by years of protectionist policies and are neither cost competitives nor efficient and lack innovation.

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  • Saad Amanullah Khan
    Oct 2, 2012 - 8:06PM

    @gp65:
    No 350 — if you turn 180 you only go from left to right. 360 degrees makes you see the entire range, i.e. all around you .. all the issues.

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  • Falcon
    Oct 3, 2012 - 12:57AM

    @Saad Amanullah Khan:
    Your explanation helps. Thanks.

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  • Aviator
    Oct 3, 2012 - 7:24AM

    Actually, the East Asian Tigers grew by succesfuly protecting and developing their domestic industries, trade was not the cause of their growth.

    Also it is not a bad thing to have a lower trade to GDP ratio, it offers protection from global economic crises.

    But I do agree that the fundamental problems of Pakistan’s economy must be fixed.

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  • Saad Amanullah Khan
    Oct 13, 2012 - 9:00PM

    @Aviator:
    You make a fair point, but whatever our core competencies is like Textiles, Sports Goods, Surgical Equipments, etc. we must look towards going global to get a bigger footprint and that means increasing trade. Yes, we must focus on local manufacturing and making it stronger and robust. Even South Korea started by focusing on textiles and memory chips and became huge using their exports and trade. Hope you understand my pov.

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