Transforming the private sector

Exports may not rise sustainably as private sector fails to invest and innovate

KARACHI:

One of the biggest challenges policymakers in Pakistan face is to not only increase exports, which are at a meagre 10% of GDP, but also make the growth sustainable so that it mitigates the recurring balance of payments crisis the country experiences every few years.

The private sector plays an important role in generating the much-needed exports. Unfortunately, the lack of dynamism within the sector, gauged from the lack of competitiveness and ability to invest and innovate, has resulted in the recurring crisis.

Exports are unlikely to increase sustainably when the private sector fails to invest in productive activities and innovate by constantly churning out new products.

It is critical to transform the private sector into a more productive sector, which attracts new investments and fosters necessary innovation. This transformation should lay the foundation to achieve greater sustainability in economic growth in the longer run.

I participated in a panel on Transforming the Private Sector in Pakistan at the recently held conference, Challenging Linearity, at the Institute of Business Administration, Karachi. I put forward a few key points that can propel the transformation of the private sector into an engine of growth.

Although several constraints such as poor access to financial markets, inadequately trained labour and bureaucratic red tape create significant challenges, there is a need to focus on following trade-related issues.

It is imperative to improve the digitalisation of trade processes and procedures so that more firms can participate in international trading activities.

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One of the major challenges smaller firms face is the lack of information on key markets as well as on trade procedures and processes. This can lock them out of international trading activities as they may not have the awareness of rules, regulations as well as potential benefits in comparison to the more established larger firms.

Pakistan Single Window provides an important opportunity for firms to increase their participation in international trading activities as they can have easier access to otherwise complex myriad of rules and regulations.

According to the UN Global Survey on Digital and Sustainable Trade Facilitation, Pakistan has made significant progress on paperless trade, especially driven by the introduction of the Pakistan Single Window. It is imperative to not only improve access of firms but also ensure greater awareness of trade facilitation tools so that firms can achieve greater potential.

According to a report of the United Nations ESCAP, the Single Window reduced the time to process trade documents in Singapore from 4 days to 15 minutes, while it saved the business community $1 billion in South Korea.

The private sector must be encouraged to participate in two-way trade, which involves enhancing the linkages between exports and imports. This requires the government to ease its restrictions on imports so that the private sector can obtain the best possible mix of inputs at the lowest price.

Pakistan has low participation in global value chains (GVCs), where a product may cross a border multiple times during the value addition process. While Thailand, Vietnam and India have significantly increased their GVC participation levels in the last couple of decades, surpassing $90 billion in 2017, the value for Pakistan is approximately $6 billion.

On the one hand, Pakistan primarily participates through forward linkages, where value addition of raw materials and intermediate goods to exportable products takes place in the trading partner instead of Pakistan.

On the other hand, East Asian countries are increasingly involved in backward linkages, where value addition of imported inputs to exports takes place within their borders.

Investment in better trade facilitation and customs facilities is a priority for GVCs to develop.

One of the major concerns often raised regarding inward-looking trade policies is that they induce an anti-export bias as cascading tariff rates that increase tariffs on downstream products relative to upstream products are commonly applied to create incentives for domestic producers. This leads to higher effective tariff rates, creating a desire for firms to sell in the domestic market rather than export.

Further, the lack of international standards and certifications for goods sold domestically, which otherwise are required for export increases the anti-export bias as firms do not have to incur the costs necessary to participate in international trading activities.

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Hence, the government must lower the regulatory burden on firms by ensuring that local standards and certifications required to sell in the domestic market converge with those required by main export destinations as well as global benchmarks.

Similarity in regulations across countries can aid international trading activities. The government should encourage firms, especially the smaller ones, to upgrade the quality of their products and ensure that they adopt the required standards and certifications to become more globally competitive.

SMEs constitute a major proportion of the private sector and their role needs to be enhanced.

According to a recently published report of the Competition Commission of Pakistan (CCP), there are more than 5 million SMEs in Pakistan, which represent 90% of private businesses. They contribute 40% of GDP, 35% of exports of manufactured goods and employ about 80% of non-agricultural workers.

However, they are characterised by low productivity and lack of competitiveness that often discourages several of them to participate in exporting activities. For instance, considering my previous point, SMEs often lack certifications that are necessary to sell products to foreign consumers.

In East Asia, the vibrancy in the SME sector has played a major role in boosting economic growth and ensuring that benefits of international trading activities are widespread and not limited to a few stakeholders.

In essence, the mindset of all stakeholders must change in Pakistan for the private sector to transform. Firms must embrace competition and foster innovation as that will not only ensure that they become globally competitive but also increase their ability to churn out new products.

The addition of new products and the deletion of redundant products is critical as firms seek to sell their best product mix. They must adapt to the challenges instead of continuously relying on government incentives and handouts.

It is imperative that they invest in new machinery and adopt the new technologies that improve their capabilities. Policies must ensure that more productive and dynamic firms expand their production possibilities, while the failures exit the market.

The writer is the Assistant Professor of Economics and Research Fellow at CBER, Institute of Business Administration, Karachi

 

Published in The Express Tribune, December 27^th, 2023.

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