The Ministry of Commerce, in an analytical study presented to Prime Minister Shaukat Aziz, has catalogued major factors that have contributed to a sharp downslide in Pakistan's export performance. The two primary causes listed in the ministry's report which have eroded competitiveness, include poor product quality and low value-addition.
Use of relatively old machinery, and inadequate electricity supply given to some of the sectors too have proved hampered production, requiring a high maintenance cost, which in turn has eroded product competitiveness.
Low return on capital, low productivity of labour and increased wastage of inputs are the other factors that have made Pakistani products more expensive than those from some of the neighbouring countries, says a Recorder Report based on MoC's study. It says that Pakistani entrepreneurs tend to invest in non-productive, speculative and non-industrial sectors such as real estate and stock market, which yield quicker and better returns as compared to industrial and productive sectors.
This tendency has in fact already prompted the Planning Commission to recommend to the government to discourage investment in non-productive and speculative activities through imposition of capital gains tax on real estate and stock market transactions. Lack of adequate investment in R&D, export houses' shortage of capacity to meet bulk orders and the levy of high protective tariffs with pronounced anti-export bias, have all discouraged investment in export-oriented industry.
Uncompetitiveness in terms of adherence to contracted quality and general failure to stick to delivery schedules are the other major reasons that have dented the country's export sector. The downward export graph is more reflected in the fact that our exports during July-March 2006-07 have increased by only 3.5 percent as compared to 18 percent export growth registered during the same period last year and 14.3 percent for the whole of FY2005-06.
A major cause of slow growth of exports is said to be the decline in the export of food, carpets, rugs and mats, sports goods, tanned leather, footwear, surgical/medical goods, chemical and pharmaceutical products etc.
An important trade policy concern of Pakistan has been to increase the share of manufactured exports in the external trade. This requires the competitiveness. However, a labour force with relatively low wages and inadequate professional skills such as we have, is unfortunately not the crucial factor in international competitiveness.
A study has shown that the unit cost of production in Pakistan remains high despite low wages. The main cause of this is the low productivity of labour, which in turn is caused by poor skill endowment. Second, export diversification through higher value-added products will require manufacturing firms to upgrade their technology and infrastructure, which most of them are unwilling or unable to undertake.
Third, Pakistan's exports have traditionally remained concentrated in a few items, ie cotton, leather, rice, synthetic textiles and sports goods. These five categories have usually accounted for 74.5 percent of our total exports, with cotton manufactures alone contributing 58.4 percent, followed by leather (6%), rice (6.9%) and synthetic textiles (1.2%).
Further, Pakistan's exports are highly concentrated in a few countries, with the USA, Germany, Japan, UK, Hong Kong, Dubai and Saudi Arabia accounting for 50 percent of them. Almost all of Pakistan's exports are low skill based (98 percent) and labour intensive (99.5 percent - compared to India's 77 percent). Thus a major source of vulnerability is the country concentration of Pakistan's trading whereby a handful of countries account for the bulk of our trading.
Textiles represent the bulk of our manufactured exports (78 percent) and cotton-based exports represent two-thirds of the total. Since cotton production is subject to great variations due to pest attacks and floods, the economy is subject to extended shocks as foreign exchange earnings shrink.
Though quite comprehensive, MoC's report can be called a typical bureaucratic exercise, as it contains nothing that is not already known. All it does is to recapitulate and categorise what has been said on the subject on so many occasions. It short, it is short on substance and needlessly long on detail. And it volunteers no solid remedial measures either.
It should be kept in mind that product branding, creating brand awareness and marketing constitute the three-tier strategy that has to be followed for the promotion of a product. Well-targeted awareness campaigns in electronic and print media have to be launched to capture foreign markets, which we have not done adequately. Foreign brands have become household names in Pakistan, thanks largely to the brand awareness campaigns launched by marketing companies. Decline in our export sector can thus be partly attributed to the lack of branding and then undertaking a high-tech awareness campaign. Secondly, the government should ensure that the quality of the products to be exported should be of international standard.
Unfortunately, overriding profit motive and corruption have caused incalculable harm to competitiveness of our products in international market. Long-term sustained GDP growth requires the strengthening of competitive foundations of our economy to capture a larger share in the world market. There should thus be increased investment in industrial infrastructure and skill development of the labour force, proper communication infrastructure to meet delivery schedules, and exercise of strict quality control to ensure that our products' competitiveness in international market.