Poverty alleviation is a complex, foremost objective and the principal challenge of Pakistan. Pakistan is endowed with the richest natural resources and geo-strategic location. These resources and location have created many investment and trade opportunities for traders and investors.
There is evidence that huge potential and attractive opportunities exist in Pakistan; potential investors and traders did not come up to the desirable level, due to various reasons, especially the infrastructure deficit, the energy crisis, poor innovation and technological advancement, low labour productivity, low value addition, high costs of exports, lack of diversification, absence of economies of scale, unpredictable government policies, uncertain investment climate, capacity constraints and rampant corruption, etc.
Pakistan, predominantly an agricultural country with a negligible industrial sector in the South Asia region, has achieved an average growth rate of 5 percent during the current decade. The high economic growth rate during the 1980s and 2000s, combined with the high capital inflow, brought prosperity into the country and resultantly, a substantial decline in poverty and employment.
The structure of the Pakistani economy has changed from agricultural to a strong service base, that accounts 53 percent of the GDP although employing only 24 percent of the labour force. Besides agriculture (employing 44 percent labour force), the manufacturing sector is the second largest sector of the economy, employing 32 percent of the work force. In the past, foreign direct investment was allowed only for the manufacturing sector.
Now, the policy regime for foreign investment is more liberal, other economic sectors are also open for foreign investment, with significant efforts for organising domestic financial resources towards investment. The trade performance of Pakistan viewed an unprecedented economic downturn; the global trade contracted by 9%.
The exports of Pakistan declined to US $17.8 billion, as compared to previous year's exports of US $19.1 billion and imports also witnessed a relative decline and fell by 13%, as Pakistan's imports during 2008-09 stood at US $34.9 billion as compared to US $40.4 billion in 2007-08. According to the WTO, Pakistan's share in global trade has declined from 0.21 percent in 1999 to 0.13 percent in 2009.
The government figures showed that currently, poverty is lower in Pakistan as compared to regional countries. In Pakistan, 22.6% of the population lives below $1.25 a day, as compared to India's 41.6% and Bangladesh's 49.6%, whereas our 60% of population lives below $2 per day, as compared to India's 75.6% and Bangladesh's 81.3%.
The investment policy of Pakistan has always created an investor-friendly environment, with particular focus on given incentives, opening up the economy and marketing the potential for foreign direct investment, including foreign equity of $0.3 million in the manufacturing sector and at least $0.15 million in the service sector. The zero percent duty on the import of capital goods, plant, machinery and equipment, without discrimination, also creates a moderate environment for investment in Pakistan.
The trade policy of Pakistan underlined more structural transformation and offered more open world markets to increase exports and attract inward investment that have made great strides in reducing poverty. According to Doing Business in South Asia 2009, Pakistan ranked 77th in ease of doing business, 19th, world-wide, as protecting investors. The significant foreign investment in the industrial and service sector, through the transfer of technology and the reallocation of units, sustained the economic performance of Pakistan.
Investment in these sectors, either through joint ventures or by foreign businessmen, would definitely help in employment generation and self sufficiency. Increasing efficiency in the industrial sector is an important stage of economic development of Pakistan. The role of industry in the economy in the WTO era has become essential, not only to preserve local industry, but also to benefit from increased trade opportunities in the global market, subsequently strengthening Pakistan's economic performance.
The strength of Pakistan's economy depends on the vitality of businesses that can counter opportunities as they emerge, restructure and adapt to market demands. However, this can be possible through favourable policies of the Government, through regular interaction with the private sector.
The Ministry of Industries and Production should provide the vision for industrial development in an ambitious way, to play a leadership role in formulating and implementing a comprehensive strategy for the rapid industrialisation of Pakistan, by maximising job creation.
Achievement of goals as set out, requires realistic steps for policy formulation with respect to industrialisation. Training and enhancement of professional education being a prerequisite for developing a workforce that is equipped with skills for improving competitiveness and productivity.
According to Global Competitiveness index, Pakistan ranked low; 101 in 2008-09 instead of 92nd during the last year due to internal inefficiencies like, infrastructure deficit, energy crisis, poor innovation and technological advancement, low labour productivity, low levels of value addition, low foreign investment in manufacturing and exportable sectors, high costs of exports, lack of diversification, absence of economies of scale, high cost of doing business, poor governance, high cost of capital, low productivity and low quality control.
China, as 'Big brother', the labour intensive and neighbouring country of Pakistan, can contribute to its industrial development through the transfer of labour-intensive technology and re-allocating of industrial units like packaging, plastic, computer, engineering goods, biotechnology, cellular chips and assembling plants of electrical appliances. The investment in these sectors either through joint ventures or by Chinese businessmen, would definitely help Pakistan in employment generation and poverty reduction.
Pakistan can also offer enormous investment opportunities in the field of the energy sector like hydrocarbons, wind power and coal utilisation as there is heavy demand in the energy and power sectors, which significantly effect economic growth and improvement in the living standards of the people.
The structure of domestic production of Pakistan should shift in favour of labour-intensive activities, then more jobs would be created per every $ of investment in each sector. Concurrently, escalating competition would force improvements in productivity, which would eventually drive up wages. The exports of Pakistan highly based on textile and leather.
In the rapidly changing global economic environment, there is an urgent need to strengthen the competitiveness of the textiles and leather sectors. The Chinese economy attained an 8 percent growth rate through integrated itself into world trade, opened up its doors to foreign direct investment brought down poverty less than 10 percent of the population.
The Govt. of Pakistan has announced incentives-laden textile policy first time in the history for next five years (2009-14), has set an ambitious export target of $25 billion with the incentives including the continuation of export refinance at lower rates, relief on existing long-term loans, restructuring and the reorganisation of the textile sector is also on the cards, drawback of local taxes, refund of past R&D claims and magnetisation of the PTA.
The government was continuously engaged in negotiating Bilateral Investment Treaties (BITs) with leading economies of the world. The main vulnerability of Pakistan exports are exposure to domestic and international shocks, high export concentration ratio, supply side, competitiveness hurdles, capacity constraints and an economy of scale.
Pakistan is also improving its trade facilities, but exporters remain hesitant about inefficiency in customs and the infrastructure, as well as access to market intelligence. The poor infrastructure leads to delays and higher transport costs in Pakistan.
Pakistan needs markets to enhance efficiency, which are competitive. The export competitiveness of Pakistan would largely depend upon the quality of governance and management structures deployed to implement it and could be improved by reducing costs of doing business and raising productive efficiency.
Pakistan should focus on increasing the diversification of merchandise exports, capacity building on trade and investments through negotiation, interpretation and implement of trade agreements in a manner which prioritises the concerned demand side, the trade policy and supply side trade competitiveness, trade facilitation, trade mainstream, policy reforms and the fiscal implications of trade.
Diversification of export merchandise, with its comparative advantages and to become less dependent on single export markets or products. Investment in human capital and technology is necessary to increase the potential of trade and investment. Investments made in Millennium development goals (MDGs) can contribute to better trade and investments outcomes, creating a virtuous circle from the vicious circle of poverty.
Pakistan can reduce poverty through diversifying the economy, improving the business climate, strengthening governance, human development and increased regional co-operation for trade and investment.
Pakistan needs to explore the ways to promote investment and the expansion of a dynamic market economy, especially to alleviate poverty by upgrading industrial development through improvement of the business climate, control of the underground economy, human development, infrastructure provision and diversification of the economy, finding ways to attract inward investment and improve competitiveness in the global economy.
Pakistan can move from traditional activities to modern activities (often from agriculture to manufacturing or services sector) by opening up of new production possibilities, technological upgradation and trade opportunities.
Better trade and investment opportunities, also support the sustainable level of economic development in Pakistan. The availability of an enabling infrastructure, growing industrialisation and expansion of exports can put the economy on a path towards sustained growth and development, ultimately culminating in poverty and inequality reduction in the country.
Better roads and cheaper transportation will give the poor better access to the principal markets for their products and let them benefit from opportunities that might develop as a result of trade liberalisation. Governments should produce industrial policies in general and trade policies, in particular, according to the explicit situation of Pakistan. The public and private sector should identify opportunities and contribute in improving the operational environment to reap the benefits of investment and trade.
(The writer is Research Economist, FPCCI)
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