Attract foreign investment to ‘Make in Pakistan’ and sell to the world
Pakistan’s exports have remained range bound between $20-25 billion during the last decade. In the same period, South Asia’s total exports of goods and services increased by over 50 percent, Thailand’s by 45 percent, and Vietnam by four-fold.
Not only is Pakistan’s performance weak compared to its competitors, but the portfolio of goods sold abroad remains concentrated in a few products, shipped out by a narrow band of exporters to a handful of markets. Also, rather than value-added finished products, primary and intermediate goods make up its exports. For example, 70 percent of agricultural products and 40 percent of textiles exports are primary commodities. Exports constitute less than 9 percent of Pakistan’s gross domestic product (GDP), ranking it on this measure among the bottom 10 of 193 UN member nations.
Pakistan comprises approximately 2.6 percent of the global population, yet its share of global GDP and exports is less than 0.4 percent and 0.11 percent respectively.
Failure to integrate with the world has meant not being able to take advantage of the vast opportunities offered by the global marketplace. Investment and trade are intertwined, and any growth strategy should be driven by investment in manufacturing for international markets rather than primarily to satisfy domestic demand as has largely been the case for Pakistan. This has stymied innovation and productivity gains among Pakistani manufacturers, making them uncompetitive in the global market, and therefore, unable to scale up and create jobs. A fast-growing and youthful population makes job creation a necessity.
Effectively, Pakistan has failed to participate in the globalization trend where the share of total global foreign direct investment (FDI) inflows has increased from 10.5 percent in 2000 ($142 billion) to almost 39.5 percent in 2018 ($512 billion) to Asian developing economies. These inflows have transformed many of these countries to become the factories of the world.
Pakistan needs to accelerate the steps being taken toward comprehensive trade reforms simultaneously and urgently, keeping in mind their interconnectedness, if it is to leverage its inherent strategic advantages, such as potential access to over $2 trillion import market as a result of the China-Pakistan Economic Corridor as well as proximity to Central Asia and Middle East.
In the last five years, the cumulative FDI inflow into Pakistan has been less than $12 billion, compared to Vietnam’s $38 billion in 2019 alone. Moreover, over 80 percent of this investment has been into non-manufacturing sectors like power, oil and gas, construction, financial business, and communication IT & telecoms, and even when directed to manufacturing, this been to satisfy demand of domestic protected markets.
There’s been little efficiency-seeking FDI that looks for manufacturing competitiveness in terms of cost and availability of labor and raw material inputs as well as access to cross-border markets.
Despite its large and youthful population, major global brands have ignored Pakistan as a production hub for labor-intensive products like textiles, agro-food products and footwear, all of which generate huge volumes of exports from host countries.
According to the United Nations Conference on Trade and Development (UNCTAD), as much as 80 percent of trade takes place in ‘value chains’ linked to Multi National Corporations (MNCs), which play a vital role in boosting exports in the developing world. This has been the model followed by China to boost its exports and more recently, the same model has been adopted by Vietnam-- both countries acting as export-processing platforms for MNCs.
Based on detailed analysis and consultation with Pakistani stakeholders, the World Bank Group recently published “Modernizing trade in Pakistan: A Policy Roadmap”, a report that makes specific recommendations for improving the Pakistani industrial sector’s global competitiveness, increasing the country’s global and regional linkages, and boosting investment and, therefore, exports.
One of its key proposals is to “reduce tariffs and para-tariffs for intermediate and capital goods in agriculture while lowering restrictions on services trade and foreign investment in enabling services.”
Although the recent budget proposes a tariff reduction from 11 percent to 3 percent or zero on many raw materials and semi-finished products for the industrial sector, effective rates of protection for the food processing sector remain over 200 percent making it impossible for an agro-based economy like Pakistan to compete in the global market. Pakistan still maintains the third-highest average weighted tariff among the 68 countries having more than $20 billion annual exports.
In addition to easing import restrictions, the World Bank report recommends “minimizing the time, cost, and documentation required to process imports and exports at Pakistan’s borders; negotiate terms in the China–Pakistan Free Trade Agreement that secure increased preferences for high-potential products from Pakistan in sectors such as textiles, vegetable products, and raw hides and skins; redesigning import duty suspension and refund programs to provide apparel exporters with access to high-quality inputs— particularly synthetic fibers— at world prices.”
It also proposes that the government should help exporters harness the potential of online marketing platforms by leveraging artificial intelligence and big data.
Pakistan needs to accelerate the steps being taken toward comprehensive trade reforms simultaneously and urgently, keeping in mind their interconnectedness, if it is to leverage its inherent strategic advantages, such as potential access to over $2 trillion import market as a result of the China-Pakistan Economic Corridor as well as proximity to Central Asia and Middle East; readily available raw materials for manufacturing items; and a large domestic market and human resource base.
By doing so, it can become the preferred destination of efficiency-seeking investment that converts the government’s policy initiative of ‘Make in Pakistan’ into a reality by enabling Pakistani industries to sell to the world. This in turn will help revive economic growth and boost employment prospects of its youthful and aspiring population.
*Javed Hassan is an investment banker who has worked in London, Hong Kong, and Karachi. He tweets at @javedhassan.