Barriers to export-led growth

Exports have been stagnant over the last decade in Pakistan, while competing economies have witnessed commendable growth rates in exports that have strengthened their economies considerably. Pakistan's inward-oriented trade policies have served as a substantial roadblock to the economy's ability to keep pace with regional competitors. This is purportedly evidenced through a research by the World Bank and All Pakistan Textile Mills Association (APTMA), and further outlined in the context of Non-Tariff Measures, Overall Protection and Export Competitiveness, a recent PIDE working paper which is drawn upon in this article.

As outlined by Pakistan Institute of Development Economics (PIDE), Pakistan's export stagnation has been a result of weak performance relative to competing economies. Exports of goods and services in value terms by Pakistan increased by 58 percent between 2005 and 2017, from US$ 17.7 billion to US$ 27.9 billion. This compares with 165 percent growth in total exports by the South Asia region as a whole, 136 percent by Thailand, and 519 percent by Vietnam 1 (Figure 2). Bangladesh's exports, which were almost the same just as Pakistan's in 2005, were US$ 47 billion in FY2018, 50 percent higher than Pakistan's, US$ 30.6 billion.

While modern-day production networks rely on components of final goods being able to move with ease through multiple countries, protectionism has made this process inefficient and costly in Pakistan. Tariffs and other duties on imports ultimately serve as a tax on exports, as on intermediate inputs, these can be up to four times higher than in East Asia. Furthermore, average tariffs on final goods in Pakistan are 50 percent higher than the average for South Asia, and almost three times as high as the average for East Asia (World Bank).

Pakistan also has a high differential between tariffs on consumer goods and raw materials and between intermediate goods and raw materials relative to more open economies in the East Asia region, which participate successfully in global value chains. This creates the well-known as the cascading effect and, with it, high effective rates of protection in many of Pakistan's manufacturing sectors.

It is evident that periods of high tariffs in Pakistan led to reduction in exports while low import taxes promote exports. In this context, a reduction in taxes can be observed from the following data: the first decade of the 2000s, government reduced trade taxes from 23.1% in 1999-2000 to 8.9% in 2014. This had led to gains in exports by 173%. However, this reduction was not consistent and until 2019, the tariffs increased to 11.6%, declining exports to 9.1%. (PIDE)

The PIDE working paper confirms the price raising effect of Non-Tariff Measures in Pakistan. NTMs are proven to raise the domestic price of affected products, on average, by a large 55 percent. Therefore, streamlining of non-tariff measures provides the best entry door to that process by reassessing their necessity and coverage, streamlining the regulatory process, and harmonizing it with trading partners. This will help enhance export competitiveness and reduce the impact on domestic prices and, with it, help ease inflationary pressures, a major concern of policymakers. The streamlining of NTMs is not only an effective mechanism to reduce trade costs, but rather is a major step in a wide-ranging regulatory improvement agenda for enhancing export performance. A table in this article shows the top 10 most applied nontariff measures on imports in Pakistan in 2015, listed according to frequency index measured as a percentage:

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Core NTM type                                                                 FI       CR
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1    E322. Prohibition for political reasons (embargo)                        100     100
2    B7. Product quality, safety, or performance requirements               24.32   17.20
3    E316. Prohibition of used, repaired, or remanufactured goods           13.15   16.19
4    B31. Labeling requirements                                             10.49   12.15
5    A83. Certification requirements                                         9.86    4.81
6    E129. Licensing for non-economic reasons not elsewhere specified        7.83   25.41
7    B33. Packaging requirements                                             7.29    6.13
8    B42. Technical barriers to trade regulations on transport and storage   6.65    4.59
9    B32. Marking requirements                                               6.52    4.24
10   C3. The requirement to pass through a specified port of customs         5.50    8.46
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Source: Faizi, Aleem (PIDE) calculation using WITS data

On the other hand, when it comes to irrational tariff policies, the MMF tariff regime effectively prevents Pakistan from aligning its products in tandem with the rest of the world. More than 60% of world textile trade is in MMF materials, the demand for which has grown exponentially owing to the convenience it affords. However, the duty protection given to obsolete plants in Pakistan is denying the Pakistani industry any chance to compete in this booming market, internationally or domestically. As a result, our textiles sector has primarily been producing short staple fiber raw cotton while the world moves forward with a focus on synthetic fibers. This brings us to the issue of polyester staple fiber, a raw material of the industry upon which it would be unreasonable to apply any duties. Alarmingly, at present there is a 7% customs duty on the import of polyester staple fiber. This racks up the total import duties, which subsequently fall in the range of 20% including antidumping duty. Surprisingly, antidumping duty is also imposed on import for export schemes which makes no sense at all. This factor alone is responsible for the lack of diversification into new synthetic materials.

Trade policy distortions in the form of tariffs on intermediate inputs affect productivity downstream, through tougher import conditions. This phenomenon serves to increase the cost of production, and thereby hampers profitability. This results in price escalation, which increases the burden on consumers and renders products uncompetitive at the international level. Therefore, high protectionism serves as a hurdle to industrialization and needs to be addressed, in order for the manufacturing sector to grow sustainably, create employment, and earn foreign exchange by increasing and diversifying exports.

Textile exports are all set to increase to $ 20 billion by 2021, but this will require $2.3 billion in additional working capital - another area where expansion is essential but hindrances prevail. The cycle for exports is 4 to 6 months from production. Given the shipping time and L/C terms (3 months) 7-10 months funds will be blocked. Since the funds are revolving and will be in circulation, working capital required amounts to $ 2.29 billion, without which the enhancement of exports will be derailed. Some mechanisms to meet this requirement include the release of sales tax refunds in circulation with FBR, which are around $3.9 billion; if this rate is halved, $ 1.84 billion would be released to the industry. Payment of arrears of sales tax, income tax, TUF and DLTL of approximately Rs 500 billion is also pending, and once released, will enable the industry to meet its working capital requirements. Additional concessional working capital facility would also prove instrumental.

Schemes have been put in place to allow exporters to obtain imported inputs at world prices, but these are largely ineffective. Only about 2 percent of textile and apparel exporters in Pakistan access duty suspension schemes such as the Duty and Tax Remission for Exports scheme (DTRE) and Manufacturing Under Bond (MUB) for their imported intermediates, compared to 90 percent in competitor countries such as Bangladesh. Any protection to domestic polyester plants should be given directly by the government and not at the cost of our country's economic future. Pakistan's DTRE programme is also highly inefficient, as it can take two to four months to import synthetic fibers, leading to delays and uncertainties in production that are not acceptable to global buyers. This begs the question of why all inputs to textiles are not zero-rated.

Advanced machinery and technological adaptation increase the productivity of labor and thus enable them to produce better quality goods in more quantity and less time. However, our engineering sector does not produce sufficiently-advanced machinery that could help industries in automating production. We are left dependent upon imported machines, which brings us back to the conundrum of high protectionism. As a result, companies often opt to continue with outdated and inefficient technology, which ultimately hurts labour productivity and gives way to uncompetitive product pricing.

Given the large share of the population that lacks access to quality education, there is a need to improve infrastructure and accessibility, as well as to revise curriculum so that unemployment and low productivity in the labour force can be prevented. R&D support for academia and industry as well as collaborative efforts to introduce industry oriented solutions/innovations could take the economy a long way. To sum up, investment in human capital is an essential ingredient for boosting productivity. As per the International Labour Organisation (ILO) estimate for 2009-2019, China's output per person, which is a measure of labor productivity, increased by 388%, India's by 177%, and Bangladesh's by 109% while ours increased by a mere 32%.

Research has shown that productivity in Pakistan has been stagnant and aggregate gains have been mostly driven by more productive firms gaining market shares. This situation is likely to persist if timely efforts are not made to ease import conditions, rationalize tariffs, value competition and markets and modernize education in the country. It is about time the government, academia and industry linkages were strengthened in order to stimulate R&D and innovation, thereby paving the way for enhanced productivity. Policies should target and facilitate young innovative companies in order to build them up and help to modernize Pakistan's business environment.

Copyright Business Recorder, 2021