Wanted: trade liberalization

PM Imran wants to eradicate poverty from Pakistan; and there is no sustainable way to do so without economically uplifting the country. The inefficiencies in the economic system have to be removed, and one proven formula is to liberalize trade, and economically integrate with the region. It is a recipe to attract FDI for export oriented sectors.

Policymakers need to adopt the policies that Vietnam did in last three decades. In December 1986, the country put the foot down to reform the economic system - called Doi Moi (renovation). The beauty of the system was that political elite gradually changed the economic system without altering the political system. However, in the past 30 years, Pakistan kept on oscillating between one and the other political system while the domestic industrial protection and import substitution policies continued with no major change.

Vietnam kept on moving up the ladder with average GDP growth rate in the past three decades around 6-7 percent. In 1986, Vietnam exports ($0.8bn) were one fourth of Pakistan ($3.8bn) and today their exports ($162bn in 2015) are around seven times that of Pakistan’s. Vietnam was running a trade deficit then and even in 2015, its imports were slightly higher than exports.

The answer to external problems is not in shifting the trade balance; rather it is in increasing the overall trade volume. In Vietnam, the economic policies of 90s were aimed at attracting FDI for export promotion; the policy framework adopted was to do free trade agreements with developed world and region. The idea was to use cheap labour of Vietnam to attract foreign investment for exporting in other countries.

Vietnam signed the trade agreement with ASEAN countries in 1995; it joined APEC in 1998 and signed bilateral trade agreements with USA in 2000. Apart from that, FTAs were also signed with European Union and South Korea. These are a few examples of trade liberalization and opening up of economy by Vietnam which yielded improvement in socioeconomic indictors. The country’s exports to US ($33.5 bn in 2015) were higher than South Korea ($8.9bn), Singapore ($3.3bn) and Thailand ($3.2bn) combined.

A few ASEAN countries moved their production facilities to Vietnam which has used Special Economic Zones (SEZs) for its benefit to have investment for exporting in other countries. Vietnam worked on improving competitiveness and invested the surplus in improving energy, transport and other related infrastructure, facilitating manufacturing sector.

Today, Vietnam’s per capita income is higher than Pakistan’s and poverty head count reduced from 77 percent in 1992 to 12 percent in 2014. The literacy rate has improved and female participation in labour force increased significantly. PM Imran wants similar results, and he should learn from Vietnam whose GDP is still lower than Pakistan’s, but trade volumes are 5-6 times higher.

For the past 30 years, Pakistan has been running import substitution polices and all the foreign investment was either attracted in this regard - such as automobiles, or for domestic market seeking - such as telecom, and consumer durables. In case of exports, the narrow base kept on enjoying the economic rents and it is the same old domestic business groups operating in the domain.

The proposals coming from big business associations - such as PBC, suggest not opening up the protected industries. If a consumer buys an imported car at $10,000, versus $18,000 locally assembled car, the consumer surplus gained can be saved for better use - such as bringing efficient investment. While in case of companies making high profits, trickledown effect may not take place, and in case of foreign investors, the profits earned, from domestic consumers surplus, repatriated outside.

The focus of foreign investment should be on export proportion. Vietnam’s example suggests that it happens when the economy is opened by trade liberalization. Unfortunately, ideological and strategic fixations had always trumped Pakistan’s economic interests - be it with India, Iran or Afghanistan. China and Taiwan have issues too but bilateral trade between them is well above $100 billion, China and India have territorial disputes too but bilateral trade is over $50 billion. Investments of Taiwan on mainland China are worth more than $100 billion.

Pakistan needs to improve its connectivity and develop requisite infrastructure to promote trade through it. For that, role of Customs has to be changed from a revenue source authority to an agency which facilitates trade through borders.

Early operationalization of TIR Convention is the way forward for helping Central Asian region and Afghanistan to connect with rest of the world through land and sea. Also, Operationalise SAFTA as this will open bigger market for goods that can’t be sold in far off European and American markets. Having regional FTAs will help develop competencies to enter into FTAs with bigger economies to secure market access for goods in the long run.

Nobody in Pakistan or India, at this point, is ready to talk on mutual economic interests as war hysteria is at its peak. But once the dust settles, both countries need to introspect and bring socioeconomic interests on top. PMs on both sides have a commitment to eradicate poverty in their respective countries, and that can only happen through trade and economic cooperation. CPEC and CAREC are two economic corridors which can help Pakistan reap benefit of its important geo-strategic location.