March 05, 2007
A strategic vision for boosting exports
By Dr Parvez Hasan
AFTER strong growth for five years (2000-2005), merchandise exports slowed down last year. Textiles and clothing exports which still account for nearly 60 per cent of total exports are clearly facing increasing competition and declining prices.
The earlier expectations that the phase out of the multiple-fibre agreement from January 1, 2005 would help to increase the market share of our textiles and clothing exports in world trade significantly, have not materialised. Countries most notably China but also India, Bangladesh and Vietnam have done relatively much better in capturing increased market share.
Quite clearly the slow down in exports is causing serious concern in both business and government circles. A number of concessions have been given to the textile industry but they are clamouring for more financial support which the government’s fiscal resources can ill- afford. There is increasing talk—not entirely justified — of the exchange rate which has appreciated in real terms over the last two years of being a key constraint on our competitiveness.
On the other hand, there are arguments that recovery in exports is expected later this year and some speculation that a part of export proceeds are coming in the form of workers’ remittances, which have shown a stronger than expected trend, to bolster the case for larger government support for exports.
Regardless of what happens during the next few months, Pakistan has a serious export problem. But it is not only a short-term problem of competitiveness of the textile sector but also a deeply structural long-term issue that has arisen because of the history of our export development, the pattern of our exports and trade and industrial policies. The structural problems in the export sector are also the result of a lack of fundamental national focus and the absence of a strong vision and strategy for exports.
The great success stories of development during the last half century, Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia including the relative newcomer China have one thing in common. They have successfully exploited the possibilities offered by almost explosive growth in international trade. Putting it another way, there are few cases of rapid economic advance in modern history that have not relied on exports as an engine of growth.
In contrast, Pakistan, though it has enjoyed periods of spurts in export growth, has missed major opportunities to expand exports especially of manufactured goods. Indeed one can go as far as to say that failure to develop manufactured exports was one of the main reasons that Pakistan did not match the economic performance of the Asian tigers.
Stimulated by liberalisation of trade, reduction of tariffs, and technological changes reducing transport costs and improving information flows, the world trade has grown at a much faster pace than world output since the 1960s. The leading edge of this expansion has been the growth in world manufactured goods exports which have increased steadily from less than $ 200 billion in 1970 to $7.3 trillion in 2005, showing an average growth of 11 per cent.
Furthermore, because of the shifting comparative advantage especially in labour- intensive manufactured goods, the share of developed countries (USA, Japan and EU15) in world manufactured exports has been declining. It came down from 75.8 per cent in 1980 to 63.8 in 2000 and it is estimated to have dropped further to around 55 per cent in 2006.
As Table 1 shows almost all of the market share lost by developed countries has been captured by Asian countries whose exports are increasingly dominated by manufactured goods exports. China’s market share in world manufactured goods exports grew rather astoundingly from 0.8 per cent of the total in 1980 to 9.6 percent in 2005. But many other countries did well. The high performers of the 1960s and 1970s in East Asia (Korea, Singapore, Hong Kong Taiwan, Malaysia, Thailand) further expanded their dominant export positions especially during 1980-95. In the more recent decade, gains in export shares by Mexico, Turkey, India and Vietnam have been particularly impressive though they did not nearly match China’s performance.
Against the background of this buoyant expansion in world trade in manufactured goods, Pakistan’s export performance has been very disappointing. Pakistan’s share in world manufactured exports at 0.18 per cent is lower than it was in 1970: Pakistan ‘s total share in world trade which now stands at 0.15 per cent and has also not changed much over the last several decades.
Pakistan has lost relative ground over time to all the major developing countries listed in the Table with the exception of Brazil. This has happened notwithstanding 70 percent increase in manufactured exports during 2000-2005. The rise during the last several years merely compensated for the near stagnation in value of manufactured exports and loss of market share during the previous five years.
Why has Pakistan fallen so far behind in the export field? There are several reasons that are rooted in past policies and attitudes towards exports. First, exports growth has never been a central pillar of development strategy a la Korea, Malaysia, and China. Second, exports were not as profitable as sales in the domestic markets which were heavily protected for a long period.
The anti- export bias in policy was reinforced by an industrial strategy that favoured manufacturing based on processing of domestic raw materials. Export development based on imported inputs was strongly discriminated against by generally high duties on imports. Finally, the spurts of export growth that materialised in 1960s and 1980s were to a substantial extent artificially supported by indirect subsidies to the textile sector that kept the domestic price of cotton well below the international price and thus encouraged relatively low value added textile exports notably cotton yarn.
Over time many of the distortions in trade policy acting against exports have been removed or reduced. The export taxation of cotton was phased out at the end of 1980s. Import tariffs have been gradually reduced and imports greatly liberalised. But the consequences of past policies are still with us and are reflected not only in the relatively low level of our manufactured exports but also in the structure of these exports.
As Table 2 shows, among large developing countries Pakistan has the least diversified pattern of manufactured exports with the exception of Bangladesh. More than 80 per cent of manufactured exports consist of textiles and clothing compared with 12 per cent for developing countries as a group and 6.5 per cent for world as a whole. While Pakistan is a major exporter of textiles and clothing, accounting for 2.2 per cent of world exports, its exports of manufactured exports other than textiles and clothing are very small.
At $2.3 billion in 2005 they were only 0.03 per cent of world manufactured goods exports totalling over $ 7000 billion. India’s manufactured exports (excluding textiles and clothing) are nearly 25 times that of Pakistan while countries like Philippines, Indonesia, Turkey — by no means stellar performers in the export field — have other manufactured goods export levels 15 to 20 times that of Pakistan’s. Even a newcomer like Vietnam enjoys a 5-6 fold advantage over Pakistan in this regard.
Pakistan’s being heavily locked in the textile and clothing exports is one of the main reasons that it has not made major headway in international trade. The rate of expansion of the world textile and clothing trade has not been nearly as robust as the rest of the manufacturing sector exports.
What does the above analysis imply for future export expansion and economic policies?
Pakistan’s own economic history as well as the rich experience of rapidly growing East Asian countries suggests that sustained high growth rates are difficult to achieve without rapidly rising exports. Rapid export development also helps to create jobs, raise wages, improve technological capability, and meet the
rising obligations of debt servicing and investment income payments if, as in our case, investment expenditures are financed by large external inflows.
In my view, if Pakistan hopes to sustain a high GDP growth rate of say 7-8 per cent per annum and at the same time avoid future balance of payments difficulties, it would need to double its long term real export growth rate to 12 per cent per annum, implying annual growth of 13-14 per cent in nominal dollars. This would involve, unlike the past, substantially increasing the share of merchandise exports in its GDP (at present only 13 per cent – roughly the same level as in 1980) as well as significantly expanding share in world exports.
Is this feasible? Yes, but not without a much stronger national commitment than in the past to export development, a well defined strategy to diversify and broad base exports especially in the manufacturing sector but also in agriculture, and a range of policies which will improve our competitiveness in world markets.
Fortunately, at the global level the opportunities for strong export expansion are likely to continue. The growth in world trade is likely to continue to outstrip growth in output in the foreseeable future. Labour- intensive manufacturing remains a especially promising area. While China and now India and Vietnam are making international competition more difficult, some of more established East Asian countries/entities, Singapore, Hong Kong, Taiwan, Malaysia, Thailand and Korea, are finding it harder to increase their market share because of rising labour costs (See Table 1).
China may face a similar situation some years down the road if its record speed of economic growth continues. In any case, China ‘s large current account balance of payments surpluses cannot continue indefinitely. The pressures of domestic consumption along with policy shifts such as exchange rate appreciation will, on the one hand, slow down export growth from China and on the other hand increase imports into China. The opportunities for poor and populous Asian countries like India, Pakistan, Bangladesh, Indonesia and Vietnam in world trade would remain substantial.
For Pakistan the biggest challenge is to diversify both its manufactured and agricultural exports and develop the new area of information technology exports. There is danger that excessive government attention would remain on textile and clothing exports, as it historically has, because they appear to be posing immediate policy problems and the lobby for textile exporters is strong. Whereas the fact is that for the longer run the virtual absence of Pakistan in world markets for manufactures other than textile and clothing (a 0.03 per cent share) represents an unparalleled opportunity.
No doubt, Pakistan’s textiles and clothing exports can and should grow steadily over the next two decades. In the best - case scenario, Pakistan might also be able to increase its market share in world textile and clothing market. However, this market is not growing rapidly. Notwithstanding MFA phase out, world trade in textile and clothing market has grown at the annual rate of five per cent per annum during the last two years, about the same rate of growth as in the previous decade.
Abstracting from current textile industry problems, let us assume that Pakistan’s textile exports can grow steadily by seven per cent per annum over the next two decades. As Table 3 suggests, even on this rather heroic assumption, the contribution of the textile and clothing exports to desired increment of export expansion would be only around 15 per cent over the next twenty years.
Table 3
Pakistan’s Merchandise Exports
An illustrative Optimistic Scenario
(In Billions of US $)
2005 2025
Total exports 15.9 200.0
Manufactured exports 13.0 160.0
Of which
Textile and Clothing 10.7 40.0
Other Exports 2.9 20.0
Note: It is assumed that Pakistan targets and achieves an expansion in its total merchandise exports of 13-14 per cent per annum, in nominal terms, over the next two decades.
The point of the above illustration is that without an overarching goal and vision of expanding manufactured exports other than textiles and clothing strongly--around 20-25 per cent per annum—Pakistan’s high growth strategy is likely to stumble.
The short-term pre-occupation with textiles should not obscure the long- term challenge of massive expansion required in other manufactured exports. While a number a specific actions have been initiated to encourage and promote exports, notably creation of the Trade Development Authority, free trade agreement with China, development of free trade zones, attention to trade facilitation especially in the Lahore- Karachi corridor, an overall vision for export development is either lacking or has not been articulated.
Such a vision is needed to guide and co-ordinate economic policies that influence exports, including exchange rate, trade, investment, skills and infrastructure development. One example of a lack of sufficient focus on exports in economic policies can be easily cited. At present increased foreign investment is a leading edge of growth efforts. However, most of the very sizable foreign investment that has come in or is projected to come in is not directed towards export development. This needs to change.
A longer — term perspective would also help government to ensure that the substantial short- term concessions already given to the textile industry do not indeed perpetuate our heavy and unhealthy dependence on textiles.
The textile industry problems are mainly structural and due to low skills, poor quality, low scale, poor delivery records, and not much movement up the value added chain. The industry just needs to adjust to the realities of the world market and must restore its competitiveness mainly through enhancing productivity and increasing investment in both plant and equipment and human skills.
The case for further direct or indirect subsidies to textiles is weak. The unit values of textile exports from Pakistan are already the lowest among major exporters. It is not clear whether financial support would expand value of textile exports or just cause a further loss of terms of trade. Any financial support given to exports should cover all exports and should be focused on encouraging new investment and productivity improvements.
The author is a former Chief Economist of the World Bank, phasan@aol.com
http://www.dawn.com/2007/03/05/ebr3.htm
A strategic vision for boosting exports
By Dr Parvez Hasan
AFTER strong growth for five years (2000-2005), merchandise exports slowed down last year. Textiles and clothing exports which still account for nearly 60 per cent of total exports are clearly facing increasing competition and declining prices.
The earlier expectations that the phase out of the multiple-fibre agreement from January 1, 2005 would help to increase the market share of our textiles and clothing exports in world trade significantly, have not materialised. Countries most notably China but also India, Bangladesh and Vietnam have done relatively much better in capturing increased market share.
Quite clearly the slow down in exports is causing serious concern in both business and government circles. A number of concessions have been given to the textile industry but they are clamouring for more financial support which the government’s fiscal resources can ill- afford. There is increasing talk—not entirely justified — of the exchange rate which has appreciated in real terms over the last two years of being a key constraint on our competitiveness.
On the other hand, there are arguments that recovery in exports is expected later this year and some speculation that a part of export proceeds are coming in the form of workers’ remittances, which have shown a stronger than expected trend, to bolster the case for larger government support for exports.
Regardless of what happens during the next few months, Pakistan has a serious export problem. But it is not only a short-term problem of competitiveness of the textile sector but also a deeply structural long-term issue that has arisen because of the history of our export development, the pattern of our exports and trade and industrial policies. The structural problems in the export sector are also the result of a lack of fundamental national focus and the absence of a strong vision and strategy for exports.
The great success stories of development during the last half century, Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia including the relative newcomer China have one thing in common. They have successfully exploited the possibilities offered by almost explosive growth in international trade. Putting it another way, there are few cases of rapid economic advance in modern history that have not relied on exports as an engine of growth.
In contrast, Pakistan, though it has enjoyed periods of spurts in export growth, has missed major opportunities to expand exports especially of manufactured goods. Indeed one can go as far as to say that failure to develop manufactured exports was one of the main reasons that Pakistan did not match the economic performance of the Asian tigers.
Stimulated by liberalisation of trade, reduction of tariffs, and technological changes reducing transport costs and improving information flows, the world trade has grown at a much faster pace than world output since the 1960s. The leading edge of this expansion has been the growth in world manufactured goods exports which have increased steadily from less than $ 200 billion in 1970 to $7.3 trillion in 2005, showing an average growth of 11 per cent.
Furthermore, because of the shifting comparative advantage especially in labour- intensive manufactured goods, the share of developed countries (USA, Japan and EU15) in world manufactured exports has been declining. It came down from 75.8 per cent in 1980 to 63.8 in 2000 and it is estimated to have dropped further to around 55 per cent in 2006.
As Table 1 shows almost all of the market share lost by developed countries has been captured by Asian countries whose exports are increasingly dominated by manufactured goods exports. China’s market share in world manufactured goods exports grew rather astoundingly from 0.8 per cent of the total in 1980 to 9.6 percent in 2005. But many other countries did well. The high performers of the 1960s and 1970s in East Asia (Korea, Singapore, Hong Kong Taiwan, Malaysia, Thailand) further expanded their dominant export positions especially during 1980-95. In the more recent decade, gains in export shares by Mexico, Turkey, India and Vietnam have been particularly impressive though they did not nearly match China’s performance.
Against the background of this buoyant expansion in world trade in manufactured goods, Pakistan’s export performance has been very disappointing. Pakistan’s share in world manufactured exports at 0.18 per cent is lower than it was in 1970: Pakistan ‘s total share in world trade which now stands at 0.15 per cent and has also not changed much over the last several decades.
Pakistan has lost relative ground over time to all the major developing countries listed in the Table with the exception of Brazil. This has happened notwithstanding 70 percent increase in manufactured exports during 2000-2005. The rise during the last several years merely compensated for the near stagnation in value of manufactured exports and loss of market share during the previous five years.
Why has Pakistan fallen so far behind in the export field? There are several reasons that are rooted in past policies and attitudes towards exports. First, exports growth has never been a central pillar of development strategy a la Korea, Malaysia, and China. Second, exports were not as profitable as sales in the domestic markets which were heavily protected for a long period.
The anti- export bias in policy was reinforced by an industrial strategy that favoured manufacturing based on processing of domestic raw materials. Export development based on imported inputs was strongly discriminated against by generally high duties on imports. Finally, the spurts of export growth that materialised in 1960s and 1980s were to a substantial extent artificially supported by indirect subsidies to the textile sector that kept the domestic price of cotton well below the international price and thus encouraged relatively low value added textile exports notably cotton yarn.
Over time many of the distortions in trade policy acting against exports have been removed or reduced. The export taxation of cotton was phased out at the end of 1980s. Import tariffs have been gradually reduced and imports greatly liberalised. But the consequences of past policies are still with us and are reflected not only in the relatively low level of our manufactured exports but also in the structure of these exports.
As Table 2 shows, among large developing countries Pakistan has the least diversified pattern of manufactured exports with the exception of Bangladesh. More than 80 per cent of manufactured exports consist of textiles and clothing compared with 12 per cent for developing countries as a group and 6.5 per cent for world as a whole. While Pakistan is a major exporter of textiles and clothing, accounting for 2.2 per cent of world exports, its exports of manufactured exports other than textiles and clothing are very small.
At $2.3 billion in 2005 they were only 0.03 per cent of world manufactured goods exports totalling over $ 7000 billion. India’s manufactured exports (excluding textiles and clothing) are nearly 25 times that of Pakistan while countries like Philippines, Indonesia, Turkey — by no means stellar performers in the export field — have other manufactured goods export levels 15 to 20 times that of Pakistan’s. Even a newcomer like Vietnam enjoys a 5-6 fold advantage over Pakistan in this regard.
Pakistan’s being heavily locked in the textile and clothing exports is one of the main reasons that it has not made major headway in international trade. The rate of expansion of the world textile and clothing trade has not been nearly as robust as the rest of the manufacturing sector exports.
What does the above analysis imply for future export expansion and economic policies?
Pakistan’s own economic history as well as the rich experience of rapidly growing East Asian countries suggests that sustained high growth rates are difficult to achieve without rapidly rising exports. Rapid export development also helps to create jobs, raise wages, improve technological capability, and meet the
rising obligations of debt servicing and investment income payments if, as in our case, investment expenditures are financed by large external inflows.
In my view, if Pakistan hopes to sustain a high GDP growth rate of say 7-8 per cent per annum and at the same time avoid future balance of payments difficulties, it would need to double its long term real export growth rate to 12 per cent per annum, implying annual growth of 13-14 per cent in nominal dollars. This would involve, unlike the past, substantially increasing the share of merchandise exports in its GDP (at present only 13 per cent – roughly the same level as in 1980) as well as significantly expanding share in world exports.
Is this feasible? Yes, but not without a much stronger national commitment than in the past to export development, a well defined strategy to diversify and broad base exports especially in the manufacturing sector but also in agriculture, and a range of policies which will improve our competitiveness in world markets.
Fortunately, at the global level the opportunities for strong export expansion are likely to continue. The growth in world trade is likely to continue to outstrip growth in output in the foreseeable future. Labour- intensive manufacturing remains a especially promising area. While China and now India and Vietnam are making international competition more difficult, some of more established East Asian countries/entities, Singapore, Hong Kong, Taiwan, Malaysia, Thailand and Korea, are finding it harder to increase their market share because of rising labour costs (See Table 1).
China may face a similar situation some years down the road if its record speed of economic growth continues. In any case, China ‘s large current account balance of payments surpluses cannot continue indefinitely. The pressures of domestic consumption along with policy shifts such as exchange rate appreciation will, on the one hand, slow down export growth from China and on the other hand increase imports into China. The opportunities for poor and populous Asian countries like India, Pakistan, Bangladesh, Indonesia and Vietnam in world trade would remain substantial.
For Pakistan the biggest challenge is to diversify both its manufactured and agricultural exports and develop the new area of information technology exports. There is danger that excessive government attention would remain on textile and clothing exports, as it historically has, because they appear to be posing immediate policy problems and the lobby for textile exporters is strong. Whereas the fact is that for the longer run the virtual absence of Pakistan in world markets for manufactures other than textile and clothing (a 0.03 per cent share) represents an unparalleled opportunity.
No doubt, Pakistan’s textiles and clothing exports can and should grow steadily over the next two decades. In the best - case scenario, Pakistan might also be able to increase its market share in world textile and clothing market. However, this market is not growing rapidly. Notwithstanding MFA phase out, world trade in textile and clothing market has grown at the annual rate of five per cent per annum during the last two years, about the same rate of growth as in the previous decade.
Abstracting from current textile industry problems, let us assume that Pakistan’s textile exports can grow steadily by seven per cent per annum over the next two decades. As Table 3 suggests, even on this rather heroic assumption, the contribution of the textile and clothing exports to desired increment of export expansion would be only around 15 per cent over the next twenty years.
Table 3
Pakistan’s Merchandise Exports
An illustrative Optimistic Scenario
(In Billions of US $)
2005 2025
Total exports 15.9 200.0
Manufactured exports 13.0 160.0
Of which
Textile and Clothing 10.7 40.0
Other Exports 2.9 20.0
Note: It is assumed that Pakistan targets and achieves an expansion in its total merchandise exports of 13-14 per cent per annum, in nominal terms, over the next two decades.
The point of the above illustration is that without an overarching goal and vision of expanding manufactured exports other than textiles and clothing strongly--around 20-25 per cent per annum—Pakistan’s high growth strategy is likely to stumble.
The short-term pre-occupation with textiles should not obscure the long- term challenge of massive expansion required in other manufactured exports. While a number a specific actions have been initiated to encourage and promote exports, notably creation of the Trade Development Authority, free trade agreement with China, development of free trade zones, attention to trade facilitation especially in the Lahore- Karachi corridor, an overall vision for export development is either lacking or has not been articulated.
Such a vision is needed to guide and co-ordinate economic policies that influence exports, including exchange rate, trade, investment, skills and infrastructure development. One example of a lack of sufficient focus on exports in economic policies can be easily cited. At present increased foreign investment is a leading edge of growth efforts. However, most of the very sizable foreign investment that has come in or is projected to come in is not directed towards export development. This needs to change.
A longer — term perspective would also help government to ensure that the substantial short- term concessions already given to the textile industry do not indeed perpetuate our heavy and unhealthy dependence on textiles.
The textile industry problems are mainly structural and due to low skills, poor quality, low scale, poor delivery records, and not much movement up the value added chain. The industry just needs to adjust to the realities of the world market and must restore its competitiveness mainly through enhancing productivity and increasing investment in both plant and equipment and human skills.
The case for further direct or indirect subsidies to textiles is weak. The unit values of textile exports from Pakistan are already the lowest among major exporters. It is not clear whether financial support would expand value of textile exports or just cause a further loss of terms of trade. Any financial support given to exports should cover all exports and should be focused on encouraging new investment and productivity improvements.
The author is a former Chief Economist of the World Bank, phasan@aol.com
http://www.dawn.com/2007/03/05/ebr3.htm
