An Export-Led Growth Strategy: Pakistan Essay

This es aver makes no pretence to offer a novel concept or a smart development turn upline and near economists reading it leave al unmatched probably stifle a gawp and turn the page. Yet it is a subject worth talking about. m each countries round the world, most nonably the former Asian Tigers, china, Brazil, Turkey and much late(a)ly India keep followed such a st rangegy with great success. Pakistan has not and it is well to ask why and what we potty do about it. Pakistan has neer had a consistent, coherent and well-articulated merchandise-led growth st outrankgy. Indeed, exports ar lots treated as a residual, an after-thought, once the domestic merchandise has been filled.This is inexplicable given our persistently large quite a little deficit which has not been reduced over clipping and we tole grade difficulty financing it (filling the gap) each year. Economic growth has at various times been driven by either the public or private domain or much recently and most disastrously in the previous government by consumption which created dangerous asset- hurt bubbles in the domestic economy, led to overheating pressures and a surge in inflation and imports. Economic growth has never been driven by exports nor has construction a propelling export sector been at the forefront of any governments economic strategy.While the large-scale manufacturing sector in Pakistan is the focus of policy attention not least because it has a unchewable lobby, it is the tip of the manufacturing (and export) sector ice-berg. It is the small and medium-enterprise manufacturing (SME) sector in Pakistan that generates four-fifths of our manufacturing output, employment and exports. preserve and focused policy-driven growth in this sector with its strong forward and inverse inter-industry linkages is the kind of -inclusive- growth that Pakistan urgently require.With labor-input a large comp iodinent of metropolis and output, rapid SME growth has important supreme implications for proceeds, employment, living standards and the goal of meagerness alleviation. Why Pakistan has shied away from adopting such a strategy is not clear. Of dustup e in truth now and then in that respect is much bluff and rodomontade about boosting exports and grand plans to contain our external deficit and debt. Since the government is particular giving top antecedence to e very(prenominal)thing, the priority that should be given to exports is drowned amid the t one of the many and often contradictory pronouncements.Perhaps the first spring for not paying sufficient attention to the SME sector and an in plausible one at that is that we dont know much about the SME sector disdain its size and importance in the economy. We have large bureaucracies dealing with SME in all provinces only it is unclear what they do. Surveys of activity this sector are interpreted in -frequently, sometimes as far apart as 15 years, and a inter-survey growth rate is c alculated which is then put into the guinea pig Income Accounts and repeated year-after-year until the next survey.The existing growth rate of the SME sector has been bushel at as low a figure as 2. 5% per annum. The present fixed rate is 7. 5% per annum. But what is really adventure in the SME sector in the inter-survey years no one knows move out through crude methods of linear interpolation. If in that location is no information and solely a fixed assumed growth rate with fixed and outdated coefficients for employment and capital, in that respect back be no meaningful strategy of export- led growth in the SME sector to begin with. The second reason could be that we dont like to talk about transmute rate policy except in whispered conspiratorial terms.Maintaining a -stable supercede rate is always thought to be a coefficient of reflection of how well economic policies are being managed. Governments frequently interfere with permute rate management issues and demand t hat the supplant rate is kept -stable. An appreciating switch rate is greeted with applause. Devaluation is always bad. Nominal exchange rate stability was one of the highly touted achievements of the Musharraf years even though no one was noticing that Pakistans export to GDP ratio was falling (along with our notoriously under-performing and falling tax-to-GDP ratio).This presented star(predicate) facie evidence that export positivity was most probably being besotted and the authorities should have done something about it. But given that we were in an era of plentiful aid and early(a) capital inflows there was no pressure on government to do much either on the export or the tax front. Added to the conspiracy theories, there is a far-flung idea that exchange rate devaluation which for exporters means more rupees viewed per clam exported, has no effect on export performance.The reality is more nuanced and graceful of some elaboration. There are fairly long lags among exch ange rate depreciation and the reaction of exports. It takes time to gear up mathematical product to the new-made level of export profitability. Furthermore, for devaluation to impact exports in a positive way, the exchange rate must depreciate in real, rather than exactly nominative, terms, that is, the extent of depreciation (or append in nominal export profitability), of differentiate 10 percentage, must exceed the going rate of domestic inflation, say 7 percent.Exports respond to gains in real profitability (in the above manikin the real increase in export profitability is 10 percent minus 7 percent = 3 percent, not just the nominal change in profitability, 10 percent). If the extent of devaluation is offset, or more than offset, by high inflation because macro policies are insufficiently tight and there is cost-push inflation, there will be no stimulus to exports because there is no, or perhaps even a negative, change in real export profitability. Importantly, any inc rease in real export profitability needs to be sustained if the stimulus to exports is to be lasting.If exporters see that the modifyment in real export profitability is likely to be fleeting and will dissipate through future inflation, or a change in government policy, they will have little inducing to export and would elect to sell in the domestic commercialize. Given the concentrated, oligopolistic structure of industry in Pakistan and the high-levels of protection afforded to producers in the domestic market from foreign import competition, real profitability in the domestic market tin can be very high, often a multiple of what can be earned in the export sector. In Pakistan this has been a strong disincentive to produce for exports.This brings to the suck up a second-order condition for a successful export drive. Even if there is a real increase in export profitability, the much higher real profitability levels, or monopoly rents, that can be earned in the domestic marke t will induce firms to sell domestically, eschewing exports. Worse, firms may actually switch back to interchange in the domestic market and desert export altogether as the differential among domestic profitability and exports rises. Of course, a judicious application of trade, tax and tariff policies and other incentives can help countries achieve an incentive structure more favorable to exports. umpteen countries that are more aggressive with their export drive actually shimmy profitability sharply towards the export sector and ensure it is sustained. The importance of establishing an incentive structure favorable to exports is underscored by the fact that exporting, per se, is a challenging task. non only are quality requirements higher, strict stick bynces to, for example, packaging, labeling, and hygienic standards is essential. One often hears of Pakistani exports being banned in foreign markets because of our failure to adhere to high standards.Competition from other c ountries selling in the same market is intense price wars and dumping can be ruinous, and there are tariff and non-tariff barriers and complex procedural regulations in the importing country that have to be negotiated and complied with. These non-price determinants of exports can be of significant importance. While price and non-price factors act to determine competitiveness, exports also respond to export market income growth. The magnitude of the response of exports to income growth is the income elasticity of demand for exports which generally reflects the countrys export mix.Given the commodity composition of Pakistans exports, dominated by low-value textiles such as yarn and cloth, the income elasticity of our exports is not large, perhaps even less(prenominal) than unity (or less than one). This means that for every one percent increase in export market income growth, our exports respond by less than one percent. This less than unitary income elasticity of our exports explain s why Pakistans export market share has lagged behind the growth in global income and trade.By contrast, in the more dynamic exporting countries, the income elasticity of exports of their higher-value added products can be as high as four or six and these countries have make impressive strides in expanding their global market share. Many countries use the exchange rate as a weapon of export competitiveness, most conspicuously China, where the exchange rate is kept artificially depreciated (by some calculations by as much as 42% but now toss off to 24%), when Chinas colossal trade surpluses with other countries, most notably the US, and even more massive foreign exchange reserves (presently $2. trillion) would head towards a policy of gradual appreciation of the currency that would slow down the torrid pace of Chinas exports and pull in more imports driven by domestic demand.In doing so, Chinas massive trade surpluses would start to diminish, and with other surplus countries adjus ting in a standardized manner, the global economy would be offend balanced. According to a recent estimate a 20% appreciation of the Chinese currency would get $150 billion off the US trade deficit with China and create 1 million US jobs by making US exports more competitive.Pakistan needs to change the commodity composition of its exports, add new higher value products for export and look for new export markets. by and by 62 years we still export the same products of largely unaltered quality to the same markets as reflected in the estimated Commodity Concentration indicator of our exports which has remained broadly unchanged. We have make little progress in contemptible up the -value-added chain and getting better unit prices for our exports. One content showed that the unit price our exports can be as low as one-third of the unit price other developing exporting countries earn for the same product.The unit price of our exports of garments, for example, was lower than the un it price get by exporters in Bangladesh for the same garments selling to the same market. This is a regretful fact since it shows the Is there any empirical econometric support to the view that the real exchange rate matters? There have been a astonishingly few studies done in Pakistan given the importance of the subject (most of the studies have been done by the World Bank, Asian Development Bank and the IMF use Pakistani data).These studies do point to a strong and fairly rugged relationship between the real exchange rate and exports. Of course, other factors alike contribute as explanatory variables such as world income growth. The lags between real exchange rate changes and real exports mentioned earlier need to be carefully specified to get a better fit of the predictions of the econometric ride to the actual data.Other than these models which are probably out-of-date, the projections that are made each year in the context of our export shows are found on what can be t ermed casual empiricism. The government iterates to a target figure for each export commodity based on discussions with trade bodies and simply extrapolates by using an agreed compound growth rate from a given base-year figure. There is no rigorous forecasting model which specifies explanatory variables that underlies the export targets. To sum up, Pakistan needs more information and better information on what is going on in the SME sector from which most of our exports emanate.It will be costly since the SME sector is widely dispersed but the benefits would more than justify the cost of more frequent surveys of the full nation of the SME sector, say every three years with smaller sample surveys taken each year so as to build-up a time-series profile of the dynamics of the SME sector. External donors would be more than willing to finance such a survey (s) with grant (non-debt-creating) funds if Pakistan can present a credible plan.The decision by the US to give $100 million to the SME sector could portend a new beginning for the sector but one has misgivings about the administrative and technical capacity of the SME establishment and whether they can or will deliver meaningful results. Discussion of the appropriateness of the exchange rate and how domestic inflation and relative inflation affects export profitability, the difference between nominal and real exchange rate, the overall conduct of exchange rate policy, and different exchange rate regimes followed by more successful exporting countries, needs to be more transparent, up-front and better understood.The point to drive domicil is that the real exchange rate does matter and is an important albeit not exclusive determinant of lasting export success. It is the most important price request in any economy. The incentive structure needs to tilt towards exports versus selling in the domestic market through judicious adjustment in trade, tax, finance and tariff policies. Special, selective incentives s hould be given to exporters, especially new exports which should not be available to producers selling in the domestic market within of course the ambit of WTO rules.To prevent abuse of these incentives they should be even to performance and withdrawn if performance is not forthcoming as heedful by, say, actual exports in the previous three years. If this tilt is sustained, new exports will emerge of products and from sectors previously un-thought of A look at the rag-bag category of sundry(a) Exports in the export data turns up some surprising high-value items that Pakistan exports (some to very sophisticated markets in Europe) but the amounts are small and their year-on-year growth is erratic.Since there is little targeted encouragement given to these new exports, they usually fade out of the export picture altogether. If there is no domestic market that they can turn to, these firms shut down. In both cases, Pakistan has lost a potency export item and valuable foreign exchang e something that we can ill-afford. snap on fostering growth in these high-value exports which emanate from the SME sector would improve the export mix, diversify the export base, reduce the commodity concentration of our exports and increase the income elasticity of demand for our exports in world markets.The non-price determinants of exports need to be strengthened through emulating best-practice techniques employed by the leading exporters of the world. This is not rocket-science since most of the best-practice techniques can be gleaned from the internet. Furthermore, domestic investors and FDI proposals that are aimed at exports should be given the highest priority and placed on a fast-track of approval.FDI inflows offer the best route to securing structural shifts in the technological progress function in the SME sector charm at the same time bringing in better managerial and marketing skills which are so critical in exporting. Enhancing productive capability in the SME se ctors means being able to offer higher wages in line with productivity improvements which would lead to higher living standards and pauperisation levels dropping to the teens as demonstrated by the remarkable success of other exporting countries.As productivity growth responds to output growth (as in the P.J. Verdoon and Kaldor models which inverts the causality of neo-classical models of Solow and Swan) with output growth being driven mainly by net exports as would be the case in an export-led development strategy, passive and dynamic economies of scale can be reaped through the process of Learning-by-Doing as espoused by the US economist Kenneth Arrow in his path-breaking work. Such dynamic economies of scale and increasing returns can generate positive cumulative billhook causation effects that impact costs, prices and profitability in the export sector.