Naya Pakistan needs new ideas for economic gains

Subsidies won’t work; domestic economy needs high priority and thorough assessment of tariff regime

ISLAMABAD: The Pakistan Business Council (PBC), the association of leading Pakistani manufacturers, has given “Make in Pakistan” as its main advice to the new government.

According to PBC website, “Adopting a ‘Make in Pakistan’ approach to strengthen domestic industry will create much-needed jobs as well as promote value-added exports and import substitution. The role of manufacturing in the economy has declined over the years and its growth is well below that in India, Bangladesh and Vietnam.

“Pakistan is rapidly losing its share in world exports whereas Bangladesh has more than doubled its share in the last 15 years. We must identify and reverse the factors undermining domestic industry to drive up value-added exports and promote import substitution.”

PBC also notes that “a market of over 200 million people provides domestic manufacturing (and service industries) the opportunity to acquire scale and become competitive. With this advantage, Pakistan can reduce its reliance on imports and find markets for value-added exports abroad.”



This is not for the first time that such a call is given and this is not for the first time that the government will be listening to this. As a matter of fact, export-orientation and import substitution have always featured high on the government’s policies since the 1960s.

All governments have done the same. Result should not be surprising. We are still stuck in a low value-added, inefficient manufacturing and falling exports trap.

Subsidies

In their analysis of export subsidies in Pakistan, economists Nadeemul Haque and Mohammad Ali Kemal (2007) find that export subsidy schemes do not seem to work. They also note that these policies have prevailed without any serious evaluation.

They conclude: “We have assessed the impact of subsidy schemes on exports over the last three decades. Our econometric investigation shows that both subsidy mechanisms – export financing and rebate/refunds – have an insignificant impact on exports over the long run. In the short run, the rebate/refunds scheme seems to have a small positive impact.”



From 2005-08, Pakistan’s government doled out Rs50 billion to textile producers and exporters in the name of research and development (R&D) subsidy. The result: while no R&D was undertaken, all the money was sent outside Pakistan through price transfer. Buyers demanded from Pakistani exporters to convert the subsidy into a price discount. However, no official evaluation was ever undertaken, at least not in the public domain.

While we have relied on poorly designed subsidies and failed, we have also induced anti-industrial and anti-export bias.

Pakistan’s former ambassador to the World Trade Organisation (WTO) Manzoor Ahmad believes that the anti-export bias in Pakistan’s tariff regime has considerably increased over the past five years.

He writes that customs tariff rates have been considerably enhanced on the pretext of removing discretionary SROs, levying a minimum tax on all imports including essential raw material and restricting import of luxury goods through regulatory duties.

High tariffs

Pakistan’s tariffs are in general twice as high as the world’s average and three times more than those in Southeast Asia. On top of high tariffs, there are regulatory duties on a large number of goods. When the PRIME Institute published a paper a couple of years ago urging the government to accept the Information Technology Agreement, all the ministries agreed, except for the Federal Board of Revenue (FBR). It rejected on the pretext of fall in revenue as ITA demanded zero tariff on IT-related imports, which also included medical-related equipment.



However, the then FBR administration unfortunately relied on a narrow and flawed measure of revenue loss without accounting for the overall economic gains in the long run. The new government must not try these old and flawed ideas, although first meeting of the cabinet exactly indicates to the contrary.

For an industrial revival, we need to adopt several measures. Subsidies would not work. Domestic economy should be accorded high priority. A thorough assessment of the tariff regime is urgently needed to help Pakistan become part of the global value chain and improve industrial productivity. It is not a question of poor implementation; it is a question of poor ideas. Naya Pakistan needs Naya ideas.

The writer is the founder of PRIME Institute, an independent think tank based in Islamabad

 

 

Published in The Express Tribune, August 27^th, 2018.

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