Pakistan needs greater economic complexity to grow rapidly
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Pakistan’s exports have remained range-bound between $20 and $25 billion during the last decade. In the same period, South Asia’s total exports increased by over 50 percent, Thailand’s by 45 percent, and Vietnam’s by 267 percent. The majority of Pakistan’s exports are concentrated in low-tech manufactured and primary products, textiles and agriculture, respectively.
The government’s ‘Make in Pakistan’ policy initiative needs to focus not only on expanding the value of exports but also their diversity and sophistication. Doing so will incrementally enhance the endowment of capabilities (a combination of physical infrastructure, institutions, systems, skills and social networks), which in itself will help boost economic growth.
Although economists and policy makers have traditionally focused on indicators such as Gross Domestic Product (GDP), it is observed that the wealth of nations is closely linked to their productive structures, defined as the variety of goods and services they can produce. This in turn depends on locally available capabilities at any point. Countries that can produce products requiring a relatively large number of capabilities have economies that are more adaptable than countries producing fewer complex products.
The virtuous cycle created through an evolution of capabilities required for current products enables branching out into producing complimentary new products to spur future enterprise. This has been the strategy adopted by resource-poor countries like South Korea, Singapore and Taiwan that have experienced exponentially faster rates of economic development than resource-rich nations like Angola, Venezuela and Nigeria that generate revenues by exporting mineral commodities.
Economist Ricardo Hausmann and physicist César Hidalgo, drawing on such empirical evidence, have presented a theory, that the sophistication of products made by countries matters more than simply the value extracted from them. They demonstrate that in the long run, economic growth of countries is driven by the complexity of their respective economies.
Pakistan has to rely on its existing endowment of capabilities to produce a broader, increasingly more complex, set of goods and services by removing bottlenecks that have stagnated its global market share in textile exports. It must also in parallel explore new pathways for moving into high-productivity, technology and knowledge-based activities.
Javed Hassan
By measuring the number of products a country exports, and the exclusivity of these products, the theory has been applied to map 133 countries' relative level of sophistication in the Atlas of Economic Complexity by Harvard University’s Growth Lab. Countries exporting a large variety of products that few other countries can make are ranked higher on the Economic Complexity Index (ECI) than those making a narrow range of products that many others also make.
Importantly, there is a strong correlation between national income and the level of complexity. The relative positioning of countries in the index seems to explain much of the variance of incomes across countries. In instances where there is a deviation from the relationship between income and complexity, it serves as a predictor of future growth potential. For example, Vietnam, which is ranked 41 positions higher than Kazakhstan despite having less than a third of the latter’s per capita income, is expected to grow significantly faster than the mineral-rich exporter. Effectively, the complexity of economies not only infers the actual level of income, but also their latent potential.
The ECI, on 2018 data, ranks Pakistan as the 99th most complex country. More alarmingly, over the last decade Pakistan's economy has become relatively less sophisticated, declining 20 places in ranking. India’s (42), Thailand’s (22), Vietnam’s (52), have improved 8, 9, and 11 places respectively.
Growth Lab’s examination of the diversification reveals that Pakistan’s additional 21 new products to its export basket since 2003 have only contributed $2 per capita to the value of exports. India also added 21 new products that contributed $3 per capita. Top performers like Thailand and Vietnam added 34 and 48 new products that contributed $213 and $1020 per capita respectively to the value of their exports. Pakistan's worsening position reflects the fact that its diversification has been primarily in low value and low-tech products, while better performing countries have added more complex high value products.
In the short run Pakistan has to rely on its existing endowment of capabilities to produce a broader, increasingly more complex, set of goods and services by removing bottlenecks that have stagnated its global market share in textile exports. It must also in parallel explore new pathways for moving into high-productivity, technology and knowledge-based activities.
Encouragingly, emerging Information Communication Technology and IT-enabled services sector’s exports have surged by 42 percent year on year to US $823 million during first three months (July-September) of FY 2020-21. The sector is one of the fastest growing sectors and expected to double in next three years to $7 billion, or to contribute almost 2 percent of GDP.
As well as enhancing the sophistication of the existing exports’ basket, policy efforts must incentivize structural transformation by encouraging competition, innovation, foreign investment and the creation of a digitally advanced economy.
Investment in the building blocks for a more sophisticated economy by stakeholders across sectors will not only boost economic growth and welfare, but also over time help Pakistan make headway in convergence with developed countries.
– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.
Twitter: @javedhassan
