What we have not learnt

Adverse global economic conditions, overvalued rupee, political instability, and unfavourable international trade agreements, these are some of the factors attributed with Pakistan’s decline in exports. And all of them explain in part the growing trade deficit.

In a hypothetical situation in which Pakistani rupee is at its true market value, democracy is reigning strong, and trade agreements are skewed in Pakistan’s benefits, would Pakistan be enjoying a huge surge of exports?

In all likelihood, the trade deficit would not be as large as it is currently, but export receipts would still be significantly less than import payments because of the lack of value addition of our products (read “Trade Deficit, Not a Failure of FTAs” published on 24 July, 2017).

Pakistan, Bangladesh and Vietnam come from a similar base. In 2003, Pakistan’s $83 billion GDP was higher than Bangladesh’s $60 billion GDP and Vietnam’s $65 billion GDP. The textile sectors of all three countries contributed roughly equally to global textile exports. Since then however, Bangladesh and Vietnam have driven their industries through their garment sectors. Pakistan on the other hand, has only seen incremental growth.

Bangladesh is important for most big brand names in the west. So much so that 77 percent of 2014’s US Fashion Industry Benchmarking Study respondents stated that they source their garment imports from Bangladesh. 65 percent of the respondents expected their sourcing from Bangladesh to increase in the next few years.

Ranked second after China in world garment exports, Bangladesh main ingredients for its success are low costs of energy, cheap and abundant labour. Maximizing potential, government policies in Bangladesh support the garment sector. These include almost no tariffs for the spinning sector, high tariffs on imported yarns and material to encourage use of local fabrics and yarn production and the quota-free textile rule that was introduced in 2005. Liberal government policies promote investment from foreign countries along with monetary advantages and institutional help.

Vietnam’s textile industry has been around for centuries in the form of weaving thread into silk. From the late 1950s to the 1970s that French investment flowed and set up several large textile factories. Since then, textile is one of the biggest industries in Vietnam.

Vietnam’s main markets are USA, Japan, and Korea. In the US Fashion Industry Benchmarking Study, 90 percent of the respondents stated they preferred Vietnam after China for sourcing of their garments. Since then, geographical convenience, political stability, cost of labour, and favourable trade policies have driven Vietnam’s textile sector growth.

Pakistan is a cotton growing nation yet it has not used this resource for value added manufacturing. While the world demand pattern has changed, Pakistan reliance on its cotton exports continues. For example, under the GSP Plus, several tariff lines remain under utilized due to the lack of capacity and technology to supply man-made fiber-cotton mix. Bangladesh on the other hand leverages GSP Plus to export to the EU as one of its top garment markets.

The garment sector of Vietnam and Bangladesh were driven by FDI that brought technological advancements. On the other hand, Pakistan has weak contract enforcements, lack of protection of intellectual property right, high tariff barriers for imports of key input, ever increasing tax burden, energy crisis, and political instability that discourage foreign investors. What we have not learnt is the importance of attracting and retaining FDI in growing the manufacturing sector. Importance of foreign investment is a lesson that most of our neighbours and contemporaries are well versed in. Till this issue is addressed, Pakistan’s reliance on export of low value goods, and the widening trade deficit, will continue.