December 13: South Asia can turn into the fastest growing exporting region of the world if authorities in Pakistan and its South Asian neighbours implement a set of policy actions aimed at improving the business environment, connecting to global value chains (GVC), leveraging clusters, and strengthening firm capabilities, says a new World Bank report 'South Asia's Turn: Policies to Boost Competitiveness and Create the Next Export Powerhouse.'
The report argues that increasing productivity of firms in Pakistan and the rest of South Asia is the only sustainable path to improving competitiveness. Today, a broad set of constraints limit the growth and export potential of Pakistani firms' vis-à-vis their competitors in East Asia and the rest of the world. In order to address these, the report highlights the well-known challenges in the region's investment climate, but more importantly draws attention to fewer well-researched areas such as the role of cities and clusters, global value chains, and firms' abilities to innovate and efficiently use resources, including technology.
According to the report, the duty and tax remission for export programme (DTRE) in Pakistan is also problematic. It can take two to four months for textile imports, which is not acceptable to global buyers. As a result, the Pakistani apparel industry is dominated by the production of low value, cotton-based garments, using poor quality textiles sourced domestically. As a result of these constraints on the import of man-made fiber in India and Pakistan, the industry in the region is excessively concentrated on cotton fibers.
Case studies reveal low capacity utilisation in India and Pakistan among apparel makers (operating at 6.5 months annually vs the global average of 9 months) and auto makers (66 and 44 per cent, vs. more than 75 per cent in China). Only four of the 18 OEMs in the auto sector in India and Pakistan operate at the industry standard for efficiency of 100,000 units per model.
Twice as many Indian firms use computers and software than firms in Nepal and Bangladesh, and 30 per cent more firms use computers and software in India than in Pakistan. Pakistani firms lie in between the two sets of countries, with around 71 per cent of firms having at least one worker using a computer. ICT adoption rates also vary considerably by sector within and across countries. For example, the use of ICT in electronics is much higher than in apparel in most South Asian countries. The ICT use is higher in sectors more exposed to international competition, for example apparel and some automotive sectors, than sectors that are less exposed to competition, for example agribusiness.
In Pakistan, the authorities have recently embarked on a two-year roadmap to improve the country's Doing Business ranking to the top 100 by 2018, by preparing a DB Reform Strategy. The strategy provides reform recommendations for all the DB indicators, and also identifies institutions at the provincial and federal levels with the mandate to carry out the reforms. The strategy is currently being implemented both at the federal and provincial levels, after having been endorsed by an 'Ease of Doing Business Committee' formed by the government on investment climate reforms. In addition, and complementing the big push on Doing Business, the government of Pakistan also took a series of legislative actions and implemented regulations to improve access to credit, payment of taxes, and financial intermediation (capital markets and housing finance), as well as reforms in financial transparency and oversight of state owned enterprises.
The report states that Pakistan subsidises fertiliser through low urea prices. Large water subsidies (eg irrigation charges only cover 10% of the cost in Punjab, Pakistan and water pumping enjoys free power in Punjab, India) lead to unsustainable overuse of water.
Pakistan is the furthest upstream (54 per cent of its GVC exports are intermediates), followed by India (37 per cent). By contrast, Sri Lanka is much further downstream (4.6 per cent of its GVC imports are intermediates), and Bangladesh is even further downstream (0.4 per cent).
The region's great potential to boost its competitiveness is evidenced through a number of examples in the report, ranging from the highly successful apparel industries in Bangladesh and Sri Lanka to Pakistan's light manufacturing cluster in Sialkot which has achieved dominant global market shares in products such as soccer balls and surgical instruments.
"Pakistan, in particular, has important strategic endowments and development potential," said Illango Patchamuthu, World Bank's Country Director for Pakistan. "Located at the crossroads of South Asia, Central Asia, China and the Middle East, Pakistan is at the heart of a regional market with a vast population, large and diverse resources, and untapped potential for trade."
Pakistan leads many global competitors when it comes to wage competitiveness and proximity to key markets yet continues to experience weakening in exports competitiveness. Exports remain concentrated in the textiles and food sectors and investment in global value chain capabilities including physical capital, human capital, institutions and logistics remain limited.
"The region has a significant untapped potential in raising productivity through development of urban ecosystems providing thick markets for skilled labour, large tracts of industrial land, and world class logistics," said Vincent Palmade, Lead Economist and one of the report's co-authors. According to the report, firms realise significant productivity benefits from locating areas with a wide diversity of workers, suppliers, and customers.