The socks economy and mobile phones

During a recent visit to Lahore, the Chinese ambassador was asked about the potential of forming joint ventures between Pakistani companies and Chinese mobile phone manufacturers. He was candid enough to explain that this is something not possible at this stage. In the same visit however, he mentioned the largest socks manufacturer from his hometown in Southern China looking to relocate and highlighted that Pakistan could benefit from such opportunities.

Why do some countries export mobile phones while others have to sell socks? The answer to this question is also the key to understand our prevailing economic crisis. While Pakistan is wrestling with a host of macroeconomic problems, the real issue that has compelled Pakistan to knock at the doors of the IMF is the current account deficit. In simple terms, we don’t have enough dollars to pay for our imports. Over the years, we have borrowed excessively to finance our imports. And now we don’t even have enough to pay our creditors. Hence, we need to borrow yet again from international lenders while reducing our imports through devaluation.

If not exporting enough is our real problem, why does it matter whether we export socks or mobile phones? Shouldn’t we only be focusing on exporting more?

Not really!

What we export in turn defines what value we can command for them. High-tech, sophisticated or exceedingly differentiated products drive a much higher premium than low technology, simple or commoditised products. The more value they command, the more their producers can invest in their manufacturing capabilities and workforce skills, enabling them to make even more complex products. The improved capabilities thereby create higher barriers to entry and a sustainable competitive advantage.

For simpler low-tech products, there are lower barriers to entry, thus creating fiercer competition, which in turn drives the prices down. The labour force making low-end products also remains poorly skilled, thus preventing the country from moving into more sophisticated products.

In fact, the underlying dynamics for the two types of industries are entirely different. While high-tech or sophisticated industries like mobile phones, computers and high-end luxury products are driven by innovation and differentiation, low-tech industries like textiles and agricultural products are characterised by tariff wars and cost reduction. No wonder all the rich countries export high-tech or high-end products, while poor and developing countries export low-end commoditised products.

This is precisely what’s happening with Pakistan.

The real reason behind our declining exports is our narrow export basket, primarily dominated by low value-added primary and intermediate goods, destined for a handful of markets. Textiles, agriculture and food products account for 70 per cent of our exports, while more than 50 per cent of exports are dependent only upon six countries.

Pakistan simply doesn’t have the requisite skill base to take a quantum leap from socks to mobile phone manufacturing, thanks to decades of flawed policies.

Can we break this cycle of the socks economy?

The good news is that it’s possible. Almost all developed countries have leapfrogged into high-tech exports. The bad news is it can’t happen overnight. Decades of mistakes will at least take years to fix.

To begin with, the government should single-mindedly pursue the policy of seeking diversification, value addition and sophistication. The industrial, trade and investment policies should all target product and market diversification, and all subsidies and government support should only be limited to industries pursuing differentiation or upgradation. The notion of specialisation and industrial sophistication has to take the centre stage of economic policy setting.

We must realise that there is no shortcut to fixing our economy. If we do not start exporting products for which we can sustain our competitive advantage, there will be no end to our economic woes. We’ll keep on borrowing more and more.

Published in The Express Tribune, May 28^th, 2019.

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