Bring down the wall

Seventeen years ago, Pakistan had 23 percent share in the total stock of inward FDI in South Asia. Today, that number stands at 8.5 percent, according to the latest World Investment Report by the UNCTAD.

This is both because of slowing FDI inflows at home, and increasingly higher flows to other South Asian countries, of which India enjoys the bulk. Total stock of inward FDI in South Asia ballooned from $30 billion in 2000 to $507 billion in 2017, according to UNCTAD. India’s has attracted the most of it; its share rising from 54 percent in 2000 to 74 percent in 2017.

But even after ignoring India from this math, Pakistan’s performance is dismal. Total FDI stock in South Asia (minus India) rose from $14 billion in 2000 to $129 billion in 2017. Pakistan’s share in that - South Asia (minus India) - dropped from 49 percent in 2000 to 33 percent to 2017, implying that incremental FDI flows to the region have mostly been going to other South Asian countries.

The usual answers behind Pakistan’s sluggish performance are discussed aplenty: security tensions, law and order, political uncertainty, poor performance in ease of doing business, inconsistency of policies and what not. One reason that is not too frequently discussed and has been brought to fore recently by the likes of Pakistan’s Business Council and Prime think tank is Pakistan’s weak performance in global value chain.

Using the lens of GVC analysis, UNCTAD decomposes into a domestic value added (DVA) component and a foreign value added (FVA) component. The former is the “real” value added exchanged in trade; all countries participating in GVCs contribute to its creation through their own (“domestic”) factors of production. The latter component is value added traded as part of imported inputs in multi-stage, multi-country production processes, i.e. as UNCTAD puts it, FVA or the upstream component is the imported goods and services incorporated in countries’ exports.

“The more ingrained the GVCs in the global economy, and the more fragmented the global production processes, the higher is the foreign value added. (At the other extreme, in the absence of GVCs, trade would serve only final consumers. In that situation, foreign value added would be null and domestic value added would equate to exports),” the WIR noted.

With that concept in mind, a look at the graph here shows how Pakistan is least integrated in the global value chain. Pakistan’s upstream component in fact is the least among peer economies tracked by UNCTAD. The emphasis, therefore, is to change the nature and direction of government policies to change the economic structure.

A bulk of evidence shows that industrial policies through FDI promotion can be very successful in kicking off new economic sectors or new production activities in existing sectors. Likewise, it is not necessary to draft policies or attract FDI in one industry as a whole. Instead, the focus could be sub-sectors of the industry than the entire industry.

If Pakistan wants to expand its export base, it will either have to gain excellence in all areas and all sectors of the economy – say from world class engineering universities to world class engineering companies, and world class poultry research to world class poultry meat quality and standards, and so forth. Since no country has been able to achieve excellence in all and sundry under the sun, the time is nigh to draft policy using the lens of GVC, and to bring down the wall of tariffs for making an entry into the global value chain.