Exports: try being complex

That exports have come to matter less and less to Pakistan’s GDP growth is indisputable. What ails those exports, however, has been a matter of great debate. Add another candidate to explain those export woes away. It is the ‘economic complexity’ – the scope of knowledge that is needed to produce a product. Evidence is that ‘simple’ exports – ones that don’t benefit as much from collaborative knowledge networks overseas – are at the periphery of value addition and at risk of gradual decline.

Several examples on the MIT’s Economic Complexity Index (ECI) show that countries that rely on complex networks of overseas knowledge and collaboration tend to have exports that are diversified, more competitive and of high-value-added nature. Complex global networks bring sophistication to products, helping exports move up the value chain. Simple exports are rarely found in growing sectors.

The Pakistan of today can be categorized as a largely ‘simple’ exporter, with its economic complexity ranking declining since the 1970s. The MIT’s latest ECI ranking (based on 2016 data) places Pakistan at number 74 among 89 economies studied. This is sharply below India at number 37 and China at number 18 – the two neighbouring economies that have massively grown their exports in recent decades.

Pakistani exports, as seen through the ECI’s product-space map – which is a network that connects co-exported products – lie at the periphery of complexity. Bulk of Pakistan’s exports is concentrated in traditional sectors of textiles, leather, and cereals. These are sectors that are largely reliant on indigenous production, thanks to local availability of raw materials. But as those sectors are inherently low on complexity, such export sectors are witnessing negative or mild growth on a global level.

Policy focus on stimulating select-few conventional exports through “packages” has remained sticky over the past decade or so, even as emerging Asia moved towards integrating cross-border trading relationships. It’s an indictment of a policymaking approach that has viewed export competitiveness as solely a matter of domestic factors of production. The thinking that one can make a product from start to finish in-house and then find a viable market overseas is no longer competitive in this era.

Therefore, it is not without reason that even countries that haven’t been on the best of diplomatic terms with each other in emerging and advanced Asia have increasingly become part of global value chains. Vietnam’s example is instructive here, as its exports crossed $200 billion in 2017, growing 13 times since 2002.

Over the past decade a half, this now-highly-export-dependent Southeast Asian nation rapidly diversified away from traditional exports like textiles and footwear towards high-complexity sectors like broadcasting equipment, integrated circuits, telephones, and other machinery items. The shift came about as Vietnam actively pursued trading partnerships with regional heavyweights like China, South Korea and Japan.

In short, Pakistan must focus on export sectors that have a higher degree of economic complexity, which, by the way, has also been found to have a correlation with income inequality. Sectors that have the most potential include electronics assembly, component manufacturing and auto parts. For that, it is imperative to bring down the import tariffs, improve connectivity, raise the related institutional capabilities and link up with the region.