Pakistan faces a severe productivity challenge. A major concern is that the exports of goods from Pakistan have remained stagnant in recent years, barely breaching the $30 billion mark while exports of other major regional countries have grown substantially. According to the trade statistics provided by the World Bank’s World Development Indicators, exports of India increased from $220 billion in 2010 to $394 billion in 2021, exports of Bangladesh increased from $19 billion to more than $50 billion, and exports of Vietnam increased from $73 billion to $335 billion, while that of Pakistan only increased from $21 billion to $22 billion in the same time period.

Although exports increased about 25.5 per cent in the fiscal year 2022, surpassing $31 billion, this growth was an anomaly in recent years. Furthermore, this growth had come on the back of extensive government support via subsidies. It is clear that this strategy was not sustainable: in the current fiscal year, export growth has eroded once again. Thus, there are now significant doubts over the capabilities of the producers in Pakistan – as it is their sluggishness to improve productivity that has cast a dark cloud over future export growth.

According to the statistics on value addition in the manufacturing sector provided by the World Bank’s World Development Indicators, manufacturing as a percentage of GDP in Pakistan was at 12 per cent in 2021. Comparatively, India reported it at 14 per cent, Bangladesh at 21 per cent, and Vietnam at 25 per cent. The contribution of the manufacturing sector in GDP in Bangladesh in 1972 was a negligible 4 per cent, while that of Pakistan was at 15 per cent. Pakistan reported a sharp decline in 2000 when the value added in production decreased from 14 per cent in 1999 to 10 per cent in 2000 as a result of the fallout from the financial implications of the nuclear tests conducted in 1998. Bangladesh and Vietnam both reported significant growth since 2010, coinciding with the higher levels of growth in their exporting activities.

The lack of productivity is a major driving force for the lack of competitiveness of Pakistani producers, not only within the domestic market but also regionally and globally.

One interesting factor is that although the contribution of the industrial sector (including construction) as a percentage of GDP is comparatively lower, it provides similar employment opportunities as its regional counterparts. Approximately 25 per cent of the total workers employed in Pakistan worked in the industrial sector in 2019 compared to 25 per cent in India, 27 per cent in Vietnam and 21 per cent in Bangladesh. This suggests lower productivity levels in the industrial sector as each worker in the industrial sector is likely to contribute less to value addition workers in regional countries. Hence, the output per capita generated by the manufacturing sector, an indicator of the level of industrialisation in a country adjusted for its population size, is likely to be relatively lower for Pakistan. This clearly suggests that the country lacks productivity, which is evident in its inability to increase exports and become competitive in regional and global markets. This paper will analyse this productivity challenge, as indicated by various indicators on manufacturing output and exports, in greater depth and recommend a way forward to improve the productivity levels.

Figure 1: Manufacturing Value Added per Capita Across Selected Economics

The trend in manufacturing value added per capita in selected countries is presented in Figure 1.

Although, the four economies had similar values in 1995, they had significantly diverged away from Pakistan by 2021. Vietnam and Bangladesh experienced an increase in their value by more than five times while the value for Pakistan even failed to double in the last three decades.

Figure 2: The Correlation between Percentage Change in Manufacturing Value Added per Capita between 1996 and 2019 and the Manufacturing Value Added per Capita in 2019

The percentage change in manufacturing value added per capita between 1996 and 2019 is plotted against the value of manufacturing value added per capita in 2019 in Figure 2. Pakistan not only has one of the lowest values in 2019 in the Asia-Pacific region, the percentage change in value added in manufacturing between 1996 and 2019 has also remained relatively stagnated. It is clustered among several sub-Saharan African countries, a region that is mostly devoid of industrial activity and economic growth. On the other hand, the regional counterparts have experienced significant growth in the manufacturing value added per capita, which is evident in their relatively improved export competitiveness.

Figure 3: Manufacturing Value Added per Capita of Countries within the Asia Pacific Region in 2019 (Ranked According to Descending Order)

Further, the position of Pakistan as a laggard in the Asia-Pacific region in terms of its level of industrialisation (as measured by the manufacturing value added per capita in 2019) is evident in Figure 3. It ranks below all non-least developed countries and non-small island states in the region. The more established export powerhouses in the region, such as Malaysia, China, and Thailand, all rank high in the figure. The fact that Pakistan has failed to improve its productivity levels, while other countries in the region have made significant strides, has important implications for the economy of Pakistan – especially since it continues to struggle with a recurring balance of payment crisis and the consequent approaches to the IMF for an economic bailout package. The lack of productivity, as indicated earlier in this paper, is a major driving force for the lack of competitiveness of Pakistani producers, not only within the domestic market but also regionally and globally.

Figure 4: Exports as a Percentage of GDP between 1995 and 2020 for Selected Countries

The exports of goods and services as a percentage of the GDP of three South Asian countries, Pakistan, India, and Bangladesh, and three South-east Asian countries are presented in Figure 4. The South Asian countries report lower levels than their Southeast Asian counterparts, with Pakistan reporting the lowest value at below 10 per cent. The South Asian countries are relatively less open to trade than their Southeast Asian counterparts.

Figure 5: Exports as a Percentage of GDP of Countries within the Asia Pacific Region in 2019 (Ranked According to Descending Order)

The exports of goods and services as a percentage of GDP for countries within the Asia-Pacific region are presented in Figure 5. Pakistan has the third lowest value, slightly higher than Kiribati and Nepal. This clearly suggests that Pakistani firms struggle in terms of their competitiveness as they fail to participate in exporting activities, which is likely driven by the low level of productivity. Countries such as Vietnam, Malaysia, and Thailand export more than 50 per cent of their GDP.

Figure 6: The Correlation between Percentage Change in Manufacturing Value Added per Capita between 1996 and 2019 and the Percentage Change in Exports as a Percentage of GDP Between 1996 and 2019

The percentage change in manufacturing value added per capita between 1996 and 2019 is plotted against the percentage change in exports as a percentage of GDP between 1996 and 2019 in Figure 6. While Bangladesh, India, and Vietnam have successfully expanded their export base relative to the total size of their economy, it has, on the contrary, contracted for Pakistan.

Figure 7: The Correlation between Percentage Change in Manufacturing Value Added per Capita between 1996 and 2019 and the Percentage Change in Imports as a Percentage of GDP Between 1996 and 2019

The percentage change in manufacturing value added per capita between 1996 and 2019 is plotted against the percentage change in imports as a percentage of GDP between 1996 and 2019 in Figure 7. This too has contracted in the last two decades. One of the key factors that is often blamed for the balance of payment crisis is the large import demand in Pakistan. Although imports surpassed $80 billion in FY22, imports as a percentage of GDP in Pakistan are not higher than that reported by its regional counterparts.

A few of the Southeast Asian countries that have become successful export powerhouses have done so by establishing important linkages between exports and imports. The economy of Pakistan has become relatively closed with both exports and imports shrinking as a percentage of GDP while its regional counterparts have only grown exports and imports in the last few decades. This could explain the fact that the low levels of productivity and its associated challenges have decreased the capabilities of the firms to become more globally competitive and subsequently hindered their participation in international trading activities.

The level of firm employment and value-added based on different trading activities at the firm level is presented in Figure 8. The data is borrowed from the World Bank Enterprise Surveys. Firms that trade two-way, that is, export and import, are not only likely to employ more workers but also generate greater value addition, which is calculated as the difference between total sales of firms and the sum of wages as well as raw material costs incurred to produce their goods. Firms that sell in the domestic market tend to be the smallest in terms of the total level of employment and are more likely to have the least amount of value addition. This signifies that firms with stronger import and export linkages are likely to be larger, enforcing the claims that firm growth is likely to be linked to their participation in international trading activities. Further, it is important to note that firms which exclusively either export or import are likely to be smaller and generate less value than firms that participate in two-way trade. Hence, linkages between international trading activities and improvements in productivity levels become increasingly important.

Low levels of productivity and its associated challenges have decreased the capabilities of the firms to become more globally competitive and subsequently hindered their participation in international trading activities

The way forward

Here are a few recommendations that can help boost the export participation of firms, by enhancing their international competitiveness.

1. Elimination of trade policy distortions: Distortions in trade policies such as high tariff rates on the imports of goods into Pakistan and targeted subsidies to specific traditional industries have pushed the inward orientation of firms and resulted in the lack of export diversification amongst the exporters. World Bank’s recent study titled, “From Swimming in Sand to High and Sustainable Growth: A Roadmap to Reduce Distortions in the Allocation of Resources and Talent in the Pakistani Economy” argues that such distortions not only increase the profit margins of firms selling their goods locally but actually reduce their desire to innovate and introduce new products that could compete globally, in turn reducing the diversification in the export base as exports remain concentrated in a few traditional products. These distortions, involving high tariff rates and export subsidies, must be phased out to improve the level of productivity at the firm-level in Pakistan. The government could start the phasing out program with the products reporting the lowest gains but receiving higher levels of subsidies and protection.

2. Accession to trade connectivity agreements: There are significant benefits in adopting cross-border paperless trade procedures and digitalization of trade processes to lower trade costs. For instance, the Framework Agreement on Facilitation of Cross-border Paperless Trade in Asia and the Pacific aims at accelerating the implementation of digital trade facilitation measures. According to a study by the United Nations ESCAP, trade costs are expected to reduce between 10 percent and 30 percent with the full implementation of cross-border paperless trade, increasing the export potential of the Asia Pacific region by more than $250 billion. Such agreements help with compliance of international standards, harmonization of rules and regulations, reducing capacity gaps in infrastructure and human capital as well as improving cooperation between different stakeholders in the economy. They can also aid the improvement of productivity at the firm level, ensuring that firms strive to become more competitive in the global market. It is recommended that Pakistan accedes to agreements that can help improve its trade connectivity, while incorporating the role of digital technologies in trade to aid the growth of its exports.

3. Government support to small medium enterprises (SMEs): The role of SMEs in international trading activities needs to be enhanced to improve the competitiveness of the trading environment in Pakistan and to ensure better diversity in the export composition. The current trade policies are biased towards larger firms as the smaller ones struggle in accessing financial markets and government incentives. A recent study by the Sustainable Development Policy Institute (SDPI) recognizes the importance of easing the business environment on smaller firms, recommending improved business facilitation by agencies such as SMEDA and TDAP. The government must reach out to SMEs to facilitate their business operations and their participation in international trading activities.

4. Expanding access to information for exporting firms: The key to improving the ability of Pakistani exporters is to ensure that they have access to information that helps them produce the right mix of goods as demanded by the consumers in their targeted markets. This not only involves improving the quality of the trade missions abroad to establish stronger trade linkages but also improving the quality of portals providing trade information and on business processes surrounding international trade – this will enable smaller exporters to better participate in trading activities. The government must ensure that exporters receive the right set of information on export destinations, not only through the trade missions but also through various information portals.

In conclusion, it is apparent that Pakistan has not only become relatively less open to trade than its regional competitors but has also reported low levels of growth in its manufacturing capabilities over the last two decades. This has significant consequences on the challenges of economic growth and the balance of payment management for Pakistan. This paper has analysed Pakistan’s trading patterns, as well as its level of industrialisation, and has provided a few recommendations as a way forward to address the challenges as the productivity dilemma continues to exacerbate the competitiveness of Pakistani industries.

Aadil Nakhoda

The writer is an Assistant Professor of Economics & Research Fellow at CBER, School of
Economics and Social Sciences, Institute of Business Administration (IBA), Karachi. Member,
Economic Advisory Group at PRIME Institute

The post How To Tackle Pakistan’s Export Crisis? appeared first on Dissent Today.

The Achilles heel of Pakistan’s economy is the failure to institute stable and sustained economic growth. There is a mad rush to growth for a few years, followed by collapse with high fiscal or current account deficit or both. The IMF is called in. Some patchwork is done and a sigh of relief is enjoyed. The relief is temporary as the anti-growth structure of the economy remains untouched. This game of musical chairs has now been played 23 times in the half century elapsed since the second partition of the country in 1971. All players are equally to blame – politicians for their short-sightedness, military for its long term delusions, judiciary for myopic interference in economic affairs, bureaucracy for its lack of professionalism, businesses for poor competitiveness, landlords for failing to make their own lands productive, media for ignoring economic realities, intelligentsia and ulema for obfuscating discourses and even the ordinary people for not protesting enough against the rot.

Part of the explanation is that, over the years, understanding of the economy has been made a complex game. This article is an attempt to show that there are simpler and more accessible ways of looking at the economy and appreciate what ails it fundamentally. Ask a housewife in Lahore or Karachi, the question posed by the German chancellor, Angela Merkel, in 2008: “The root of the crisis is quite simple. One should simply have asked a Swabian housewife, here in Stuttgart, in Baden-Württemberg. She would have provided us with a short, simple and entirely correct piece of life-wisdom: that we cannot live beyond our means.” Instead, we have followed Keynes without paying attention to the context. Keynes had observed in one of his Essays in Persuasion (1931) that “We have plenty of cloth and only lack the courage to cut it into coats.” Clothes in Pakistan, as we all know, are not plentiful. A senior federal minister has publicly stated that the country has defaulted. Yet the programme with the IMF is not focusing on the expenditure side of the budget. Relatedly, the attention has been diverted away from the expenditure side of the national accounts as well.

When the country embarked on its development plans in the 1950s, there used to be a major debate on the saving and investment gap. Over the years, questions of saving and investment rates have been relegated into the background. Their place has been taken by fiscal deficit and the current account deficit. The twin deficits do suggest that saving is low. But how many of us know what is the domestic saving rate and where is the growth, whenever it happens, coming from?

The real GDP growth at basic prices was negative in FY20 due the devastating impact of the pandemic. It revived to 5.74 percent FY21, mainly because of the base effect. But its continued upward path with a growth of 5.97 per cent in FY22 created an illusion of revival, which was shattered soon by the international as well as local forecasts of growth of less than the population growth in the current year. Initially, the State Bank expected it in the range of 3-4 per cent but subsequently reviewed it further down. Consistent with Pakistan’s known history of political cycles of booms and busts, some economists fear a negative growth. Regardless, the official forecast of the government was 5 per cent.

Source: Planning Commission

Table 1 tells a story not told often. First, and foremost, growth in Pakistan is almost entirely driven by consumption. As its point contribution exceeds the GDP at market prices, it means that our consumption contributes to growth in countries we import from. Growth, to be sustained, has to be driven by investment.

In the past six years, the average contribution of total investment was 0.2 percentage point. It was less than the 0.3 percentage point contribution of public consumption. The highest GDP growth in this period, 5.97 per cent in FY22, had the highest contribution of consumption at 8.3 percentage points. The rate of total investment increased from 14.6 percent of GDP to 15.1 percent of GDP. With the private investment unchanged at 10 percent, the increase was completely attributable to public investment. Despite the slight increase, the rate of investment remains among the lowest in the world with a ranking of 133 among 151 countries. Bangladesh has a rate of investment of 30.5 per cent. In Pakistan, the rate of investment declined from 18.7 per cent in the 1990s to 17.7 in the 2000s and 15.5 per cent in the 2010s. It remains stagnant at the average for 15.6 per cent in FY16-22. Stagnant investment and declining labour productivity cannot produce growth sufficient to absorb the annual addition to the working population, what to speak of the existing pool of the unemployed.

Even the low level of investment is dependent on external financing. It will be seen in Table 2 that in FY22, national savings financed only 11.1 per cent of the investment, with a gap of 4.1 percent of GDP filled by the net inflow of external resources, or the so-called foreign saving.

The national savings rate is low, and the domestic saving rate should also worry us. Domestic savings, it may be noted, are achieved by deducting workers’ remittances and net investment income from abroad from national savings. These include household savings, business savings and public savings. Financial liberalisation and financial inclusion measures have not had the expected impact on household saving. Much of the financially included household saving is crowded in by the government for consumption, as public saving is ruled out in an environment of persistently high fiscal deficits.

Domestic financing plays a crucial role in the revenue collection efforts of developing countries. As Table 2 shows, domestic savings declined from 9.8 per cent in FY16 to 6.4 per cent in FY19. In FY20, it increased to 7.6 per cent but started to decline again reaching as low as 4.5 per cent in FY22. The average for the period is 7.4 percent. The second highest GDP growth rate of 5.97 per cent was achieved with the lowest domestic saving rate of 4.5 per cent. Domestic saving have been declining since the 1990s when it was 14.2 percent of GDP. In the 2000s, it declined further to 11.8 per cent. Now it is in single digit.

Pakistan’s low domestic saving rate is the inevitable outcome of the economic system’s failure to carry out real (not cosmetic) structural reforms over the decades.

We have an investment rate that fails to move to a respectable level, leaving growth to consumption financed by foreigners and the local elite. Debt accumulation is the inevitable result and the economy is seriously exposed to external shocks. Low domestic saving reduces financial independence and the chances of sustained economic growth.

As noted above, low domestic saving rate is the inevitable outcome of the failure to carry out real, not cosmetic, structural reforms over the decades. Periods of high growth generated by foreign saving did not bring forth domestic savers and investors. Indeed, foreign savings substituted for domestic savings. High growth leading to higher incomes that do not translate into higher domestic savings and investment is a recipe for decline in the times to come.

Immediately, there is no alternative to completing the IMF programme in a strict compliance mode. In the medium term, the approach that investment will generate its own savings has to be abandoned. The country should learn to save and invest accordingly. A domestic saving rate of 20 percent of GDP and national saving rate of 22 percent invested in productive assets is doable.

Dr Pervez Tahir

The writer is a political economist with a PhD from Cambridge. He served as the Chief Economist at the Planning Commission of the Government of Pakistan. He is presently a columnist at Express Tribune.

The post To Fix The Economy, Pakistan Must Learn To Save And Invest appeared first on Dissent Today.