Restructuring export base
Pakistan is ranked 138th in the 2016 Doing Business country rankings, reflecting the challenging business environment
The writer is an international development professional, based in Islamabad
In the 16th century, the Indian subcontinent was known for its textile exports, ranging from silk and brocade products to embroidered cloth, with other major exports including precious stones, spices and so on. It is astonishing to note that the last 500 years have not changed the export composition much, with more than 50 per cent of Pakistan’s exports still relating to cotton, textiles and clothing, while another 20 per cent accounting for cereals, raw hides, cement, salt, sulphur, stone, leather and related products. Pakistan is world’s sixth-largest country with a consumer base of almost 200 million people. Despite this significant size, however, the local manufacturing industry remains fairly primitive and low-tech, catering only to basic human needs of eating, clothing and shelter. The domestic industrial base is dominated by the textile industry, agro-based and chemical products, and small and medium enterprises dictating the rudimentary nature of exports. Probably the most complex commercial products that the country produces are refrigerators, air conditioners and assembled automobiles, with high reliance on imported parts. Many would argue that as long as the country can ensure a healthy balance of payments, the export composition may not be of much relevance. Contrary to that, export composition and consequently the structure of industrial base have defined the paths to prosperity for many countries and the secret to Pakistan’s perpetual poverty and poor development may lie in its unsophisticated export base.
Economists believe that export composition and industrial sophistication play a critical role in economic development of a country. Hausmann, Hwang and Rodrik, three eminent professors of Harvard, have argued that there is a clear differentiation between exports of rich versus poor countries. They concluded that countries specialising in more complex and high-technology goods are likely to grow faster than their peers, while the countries that stick to the ‘poor-country exports’, primarily comprising less sophisticated and low-technology goods, are likely to remain poor. As interesting as this proposition sounds, it is also quite intuitive. Richer countries not only claim a higher value-added due to their exports being more sophisticated but also develop specialised capabilities to produce these complex goods, which connect them to a number of other product categories. For instance, if a country exports computers, it can easily diversify into other electronic goods such as tablets and mobile phones, but on the other hand a country exporting cotton or textiles may not have requisite capabilities to switch to other product groups easily. More sophisticated and high technology exports also require a superior human resource and knowledge base, creating a competitive advantage. That is why economists claim that ‘countries become what they produce’.
No wonder why South Asian countries like Pakistan and Bangladesh keep on exporting textiles and other basic manufactured goods year after year, while those countries that made prudent export choices in the past are now far ahead on the industrial development curve. The case of South Korea is particularly interesting. Only half a century ago, three quarter of that country’s exports came from commodities and processed foods. Targeted policies and incentive structures transformed the industrial landscape, with manufactured goods claiming almost 90 per cent share in exports by the mid-1980s. This growth trajectory continued, with the country leapfrogging from one product category to another, with Korea now a leading exporter in semiconductors, wireless telecommunications equipment, motor vehicles, computers and ships.
Even middle income countries that have progressed in recent years such as Malaysia, Indonesia and Brazil, have a fairly advanced export base, with significant share coming from machines, engines, pumps, vehicles, medical and technical equipment, and electronic equipment. If Pakistan has to change its export composition, it will also have to leapfrog to more sophisticated export categories. The first and foremost step is to pick and choose high-technology priority sectors for future government support rather than subsidising exports across the board. This essentially means going against the popular notion of level playing field and rather preferring winners over losers. Once these sectors are identified, the government should adopt a three-pronged strategy: providing incentives to stimulate investment in these technology-driven priority sectors, creating an enabling environment and undertaking targeted interventions.
Providing incentives would encourage more entrepreneurs to develop capabilities in selected sectors and would offset their initial investment requirements, making the proposition more viable. Such incentives can come in the form of rebates for selected sectors, zero-rating of inputs and capital equipment and other tax discounts. Providing an enabling environment means lowering the cost of doing business for the country. Pakistan ranked 138th in the 2016 Doing Business country rankings, reflecting the challenging business environment. There is a need to simplify business regulations, protect intellectual property rights, enforce contracts and facilitate access to credit to improve the business environment. Last but not the least, targeted interventions to address market failures is also an important policy choice for the government. In simple terms, an investor would not invest in an IT manufacturing facility unless there is well-trained human resource available. The service providers on the other hand would not offer relevant IT skills development programmes unless there are sufficient employment opportunities, creating a permanent void. In order to address this issue, the government needs to take the lead and invest in requisite capabilities that can address such challenges for individual investors and simultaneously create supply and demand.
Recently, Pakistan’s exports have registered a significant decline. The government, under pressure to ensure balance of payments and maintain healthy forex reserves, is bound to get swayed by considerations to quickly enhance the export volume without much regard for its composition. Powerful lobbies with interests in incumbent export-related industries would also oppose any change in the export policy. However, it is time for a paradigm shift and putting in place prudent policies to restructure the country’s export base. It must be understood that the path to affluence is not easy and may entail difficult decisions but if these are not made in a timely manner, the country will be stuck with a low-technology industrial base for times to come.
Published in The Express Tribune, September 11th, 2016.
Economists believe that export composition and industrial sophistication play a critical role in economic development of a country. Hausmann, Hwang and Rodrik, three eminent professors of Harvard, have argued that there is a clear differentiation between exports of rich versus poor countries. They concluded that countries specialising in more complex and high-technology goods are likely to grow faster than their peers, while the countries that stick to the ‘poor-country exports’, primarily comprising less sophisticated and low-technology goods, are likely to remain poor. As interesting as this proposition sounds, it is also quite intuitive. Richer countries not only claim a higher value-added due to their exports being more sophisticated but also develop specialised capabilities to produce these complex goods, which connect them to a number of other product categories. For instance, if a country exports computers, it can easily diversify into other electronic goods such as tablets and mobile phones, but on the other hand a country exporting cotton or textiles may not have requisite capabilities to switch to other product groups easily. More sophisticated and high technology exports also require a superior human resource and knowledge base, creating a competitive advantage. That is why economists claim that ‘countries become what they produce’.
No wonder why South Asian countries like Pakistan and Bangladesh keep on exporting textiles and other basic manufactured goods year after year, while those countries that made prudent export choices in the past are now far ahead on the industrial development curve. The case of South Korea is particularly interesting. Only half a century ago, three quarter of that country’s exports came from commodities and processed foods. Targeted policies and incentive structures transformed the industrial landscape, with manufactured goods claiming almost 90 per cent share in exports by the mid-1980s. This growth trajectory continued, with the country leapfrogging from one product category to another, with Korea now a leading exporter in semiconductors, wireless telecommunications equipment, motor vehicles, computers and ships.
Even middle income countries that have progressed in recent years such as Malaysia, Indonesia and Brazil, have a fairly advanced export base, with significant share coming from machines, engines, pumps, vehicles, medical and technical equipment, and electronic equipment. If Pakistan has to change its export composition, it will also have to leapfrog to more sophisticated export categories. The first and foremost step is to pick and choose high-technology priority sectors for future government support rather than subsidising exports across the board. This essentially means going against the popular notion of level playing field and rather preferring winners over losers. Once these sectors are identified, the government should adopt a three-pronged strategy: providing incentives to stimulate investment in these technology-driven priority sectors, creating an enabling environment and undertaking targeted interventions.
Providing incentives would encourage more entrepreneurs to develop capabilities in selected sectors and would offset their initial investment requirements, making the proposition more viable. Such incentives can come in the form of rebates for selected sectors, zero-rating of inputs and capital equipment and other tax discounts. Providing an enabling environment means lowering the cost of doing business for the country. Pakistan ranked 138th in the 2016 Doing Business country rankings, reflecting the challenging business environment. There is a need to simplify business regulations, protect intellectual property rights, enforce contracts and facilitate access to credit to improve the business environment. Last but not the least, targeted interventions to address market failures is also an important policy choice for the government. In simple terms, an investor would not invest in an IT manufacturing facility unless there is well-trained human resource available. The service providers on the other hand would not offer relevant IT skills development programmes unless there are sufficient employment opportunities, creating a permanent void. In order to address this issue, the government needs to take the lead and invest in requisite capabilities that can address such challenges for individual investors and simultaneously create supply and demand.
Recently, Pakistan’s exports have registered a significant decline. The government, under pressure to ensure balance of payments and maintain healthy forex reserves, is bound to get swayed by considerations to quickly enhance the export volume without much regard for its composition. Powerful lobbies with interests in incumbent export-related industries would also oppose any change in the export policy. However, it is time for a paradigm shift and putting in place prudent policies to restructure the country’s export base. It must be understood that the path to affluence is not easy and may entail difficult decisions but if these are not made in a timely manner, the country will be stuck with a low-technology industrial base for times to come.
Published in The Express Tribune, September 11th, 2016.