If there is one tried and tested way for quick economic growth, it is through international trade. Pakistan's export performance during the past 40 years has been much below its potential. Until the 1960s Pakistan's manufactured exports were higher than those of the Philippines, Thailand, Malaysia and Indonesia combined. Now our total exports are merely a fraction of the exports of any one of these countries. The chart below compares Pakistan's present export performance to its once comparable economies.
What happened? Half a century ago, Pakistan was a forward-looking country with a relatively open international trade. Nationalization of key industries that soon became inefficient and started demanding high tariff walls set the trend in the 1970s. Import substitution became our mantra. While most other countries have outgrown this phase, in Pakistan it is still equated with being patriotic.
Successive governments have been announcing ambitious export targets but these were not backed by any concrete actions. In 2007, when our exports were USD18 billion, a target of increasing the exports to USD43 by 2013 was set. Subsequently in 2012, when the Strategic Trade Policy Framework 2012-15 was announced, a target of USD95 billion was set to be achieved during the three years. These goals were not matched by a corresponding change in policy for international trade. The fact is that by 2015, Pakistan's exports have barely crawled up to USD25 billion from 18 billion and trade in goods and non-factor services as a proportion of GDP declined from over 35% in 2007/08 to approximately 31% in 2013/14. The current government, under its Vision 2025, is eyeing exports of US$150 billion by 2025. Would they succeed this time? It is highly unlikely as the primary focus of the trade policy is not to grow exports but to collect more taxes on imports. No successful country has followed such policies.
It is not just our own economy that we are ruining through high tariffs but that of our neighbouring countries as well. Pakistan has been hindering trade of Afghanistan and other Central Asian countries by placing various restrictions on transit trade. Most of that trade has now shifted to Iranian ports in spite of those routes being longer and more expensive. If we want to reciprocate the goodwill of President Ashraf Ghani, we need to allow Afghanistan to import its goods through Pakistan. Rationalizing our tariffs would ensure that it would no longer be economical to smuggle back goods into Pakistan. This would also allow Pakistan to enable the Central Asian countries and Afghanistan to import goods from India through the shorter land routes of Wagah. If Pakistan keeps its current policies in place, it would be the biggest stumbling block in creating the Silk Road Economic Belt and the realization of the South Asia Free Trade Area.
While there is a theoretical acceptance in Pakistan that open trade and investment regimes are a key driver of growth, our government's policies are just doing the opposite. Only recently new "regulatory import duty" of 5 to 15% was imposed on 313 products. In addition, a large number of other products that were previously importable at zero percent have now been subject to one percent customs duty. This was against our bilateral and international commitments.
New taxes on import of machinery and environmentally friendly goods would make it difficult for any new investment to come into the country. There seems to be no realization that open economies are better able to exploit their comparative advantages and gain access to global markets. The prevailing misperception about Pakistan's economy being rather open and not in need of further liberalization needs to be corrected. This perception dates back to 1980s when most economies followed import substitution, but is not correct any more.
The following chart clearly shows that in every sector whether it is chemicals, industrial raw material or finished goods, Pakistan has the highest tariff rates compared to its competitors.
This also means that Pakistan is unable to compete in any of these sectors. Protectionism in Pakistan is also clear from any globalization index. According to the Swiss KOF Index of Globalization, Pakistan is ranked at 143 out of 184 countries. This rank is below Chad and Rwanda and just above Niger and Benin.
Another factor that is not realized by policymakers is that the pattern of international trade has changed. International trade is now carried out as a part of global supply chains and production networks. Changed circumstances need corresponding adjustment in trade policy but our trade policy has continued to be as it was several decades ago. About 80% of trade in the East Asian economies is now carried in components and parts. Pakistan is unfortunately not adjusting to these realities. Having higher tariff means that our industry is not competitive and it also brings an anti-export bias.
Almost all economies that achieved big jumps in their trade volume, had a well-considered reform process. Pakistan needs to learn from those successful examples. Two such cases, where trade policies were earlier similar to Pakistan's but then they radically changed their policies from import substitution to export-led growth, are worth mentioning.
During late 1970s, Pakistan and Turkey had similar level of exports - about US $ 3 billion. During early 1980's, Turkish leadership decided to adopt policies that would enable them to become a part of the European Community. As a first step they aimed to have a Customs Union with the EC. This required reducing customs tariffs to bring them at par with the EU where the average tariff is 2-3 percent and most imports are exempt. During the next 15 years Turkey followed that path. During those 15 years, we kept increasing our tariff rates. We can see the results now; while Turkey's exports are over USD170 billion, we are languishing at USD25 billion.
Another relevant example is that of Chile. Like Pakistan, Chile was a protectionist country till the late 1970s. Then it decided to get out of its protectionist mode, level the playing field for all industrial sectors and reduce all tariffs to 10%. Its economy started growing at a fast pace. But some industries were used to rent seeking and prevailed on the subsequent government to reverse some of those policies. In the 1980s there was some roll back but it was soon realized that taxing international trade was not the right way forward. Chile recommenced its liberalization and adopted a uniform rate of 6% in 2003. Since most of its trade is with countries with which it has Free Trade Agreements, almost all imports are duty free. Chile is now a member of OECD and one of the most stable and prosperous countries in Latin America. Its exports are now over US$80 billion.
In its own neighbourhood, opening of China and India over the last two decades has done wonders for them. Pakistan should have followed their example instead of the solitary path of isolationism.
A well-conceived reform process aimed at achieving export-led growth can only be carried out with a political vision. Currently, the Ministry of Commerce is the focal agency for achieving these exports but it has no regulatory authority on any of the export promoting instruments. According to the WTO, the main trade policy instrument in Pakistan is its customs tariff. But since the tariff rates are set mostly by the Federal Board of Revenue which is more focused on raising revenue, Pakistan's export interests are not receiving due importance. It is important that all tariff-related reforms should be assigned to the Ministry of Commerce so that export-led growth becomes a priority for the government.
While it cannot be denied that Pakistan's tariff regime is much more liberalized as compared to the 1990s but since the reform process was stopped in 2002 whereas our competitors continued to liberalize, our industry has lost its competitive edge. Indian economy was far more protectionist till the 1990s but thanks to continuous reforms, it is now much more liberalized. Now Pakistan is left far behind.
Further tariff reforms will have to be carried out, if Pakistan's exports are to grow. The present government has imposed more tariffs during the short time it has been in power than any other government did during the last 15 years. Higher protection results in higher inefficiency. Pakistan's industry cannot afford to be less competitive than that of the other similarly placed countries. Given high freight and insurance costs faced by Pakistan's exporters, they have to be more competitive than others even if all other things were equal. For its internal tariff reforms, the best way is to benchmark against a group of successful developing countries such as the ASEAN and reach that target. India has been working towards achieving that for the past 10 years and is gradually closing the gap.
It is high time that the authorities realize that Pakistan's ill-advised tariff and trade policies are not only hurting the country economically but also politically. Pakistan's high tariffs are making it an undesirable destination for investment and a less preferred global partner for trade. In his research paper for the World Bank on "Multilateral Trade Liberalization and Political Disintegration", Maurice Schiff gives several examples of how high taxes on international trade have been responsible for secessions and civil wars. One of the examples he quotes is the secession of East Pakistan. He explains how such tariffs resulted in shifting of resources from East Pakistan to West Pakistan as the latter was selling manufactured goods to East Pakistan at prices well above the international prices. Since most of the industry is located in Karachi and Lahore and protected through high tariffs, we are doing the same thing vis-à-vis smaller provinces.
Pakistan has also to abandon the belief that any special market access granted to it by developed countries can boost its export. For years, Pakistan's main focus was on getting GSP plus from the EU. It got it and except for some export diversion, there was hardly any noticeable increase in exports. Achieving market access through preferential schemes such as GSP are at best temporary measures. These schemes are basically meant for least-developing countries, which are unable to carry out domestic reforms or get market access on the basis of equality through bilateral free trade agreements.
A lack of reforms has resulted in Pakistan reneging on its international and bilateral commitments. Its Free Trade Agreements (FTAs) are frozen, as it is unable to meet its commitments for follow-up phases. For example, Pakistan was committed to starting work on the second phase of Pakistan China FTA in 2013. Instead of going further, it is seeking reversal of earlier concessions. It is the same situation in case of SAFTA. While other SAFTA countries have integrated through bilateral or unilateral measures, Pakistan is standing alone.
During its previous two tenures, the PML(N) government was known for its business-friendly and reform-oriented attitude. It had taken many bold steps such as doing away with import licensing during its first tenure and substantially reducing tariff rates in its second tenure but this time, it seems to have become protectionist in its outlook and unable to follow its reform agenda. Pakistan has to revisit its policy of high taxes on international trade. This keeps it a closed country and prevents it from taking advantage of its location as a transit country, and becoming a part of the global supply chain and global trading community. Since taxes collected on international trade are simply passed on to the public, this exacerbates poverty.
If the government is to achieve the lofty targets it set for itself in its Vision 2025, it has to back them with a reform process and follow the path of other successful countries. Waiting for largesse from major countries is not the answer. The government has to radically reform its policies to join the ranks of successful countries. It will not only be helping its own poor but would also be providing more stability for its terror-torn border provinces and its neighbouring countries.
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Average Tariff on Industrial Goods (%)
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Commodity Group China India Indonesia Malaysia Sri Lanka Pakistan
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Chemicals 6.5 8.5 4.8 1.9 2.8 8.6
Plastics and Rubber 9.4 9.5 8.4 13.2 12.6 17.0
Paper and Paperboard 5.3 9.1 4.4 10.3 12.8 15.8
Textiles 11.5 9.8 10.8 7.7 6.7 18.7
Glassware, Ceramic articles 13.4 9.5 7.9 17.9 17.8 24.7
Machinery 8.3 7.2 5.2 5.4 4.9 12.2
Vehicles 13.2 30.2 16.9 17.7 15.5 35.8
Misc Manufactured articles 11.6 9.8 9.5 8.9 19.8 21.3
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