Pakistan must integrate with the world to grow
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In today’s world, the economic growth of nations is linked to their ability to exploit connectivity and interdependencies within strong regional blocs. The recent publication, “Trade Connectivity” by the Economic Advisory Group (EAG), an independent body of economists and policy advisors, explores this in considerable depth. The book highlights that while earlier trade theories focused on a country’s intrinsic characteristics as the only driver of its comparative advantage, more recent empirical research has supported the role of both internal and external economies of scale.
Global value chains (GVCs), including the increasingly important intra-industry trade, now play a critical role in global trade. Douglas Irwin, Professor of Economics at Dartmouth College, showed that the small size of domestic markets was the key reason many development economists of the 1950s, who were earlier supportive of import substitution policies, became skeptical of such policies (The Rise and Fall of Import Substitution, Irwin, 2020). Ragnar Nurkse, Professor of Economics at Princeton, had also earlier questioned the import substitution policies, arguing that “import substitution would draw resources away from the export sector'' and “may lead to costly and inefficient production in import substitutes” (International trade theory and development, 1961).
Pakistan’s continuing focus on import substitution is one of the reasons it has failed to integrate into the world economy, and was therefore unable to take advantage of the vast opportunities offered by the global marketplace (Vaqar Ahmed et al., 2015). 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 (Ahmed, 2018). The limited size of Pakistan’s domestic market can be gauged by observing that the median per capita annual income in Pakistan is almost equal to the price of the latest iPhone 13 Pro. In other words, the limited purchasing power of the domestic market is inadequate for the scale advantage required to achieve a high level of productivity in the production of industrial goods.
Investment and trade are intertwined, and any growth strategy should be driven by investment in manufacturing for international markets, rather than to primarily satisfy domestic demand.
Javed Hassan
The Pakistani industry needs to take advantage of the extensive opportunities offered through economic integration with world markets. Investment and trade are intertwined, and any growth strategy should be driven by investment in manufacturing for international markets, rather than to primarily satisfy domestic demand.
Data from the World Bank shows that countries which have undertaken tariff rationalization and trade liberalization have achieved faster export growth than those that have been reluctant to open up their economies. In the last decade, the 20 fastest export-growth economies have reduced their import tariffs. In the same period when Vietnam reduced tariffs by 72%, Pakistan moved in the opposite direction by increasing average tariffs and imposing various regulatory duties. Ironically, Pakistan failed to learn from its own experience. Exports grew by 173% from US$ 9.2 billion in 2001 to US$ 25.1 billion in 2014, in the same period when the applied weighted mean tariff in Pakistan was reduced from 20.62% to 8.92%. However, from 2014 to 2017, when tariff liberalization was reversed by increasing the applied tariff to 10.09%, exports declined by 19% to US$ 20.4 billion. Currently, Pakistan maintains the third highest average weighted tariff amongst 68 countries with annual exports greater than US $20 billion.
Trade liberalization will not only boost productivity, but also unambiguously benefit Pakistani consumers, since product prices fall and consumer choice increases with reduced trade barriers. Key policy suggestions related to integration with regional and global markets include reduction in custom and regulatory duties, and replacement of these with a uniform tariff across all sectors and product categories. Concurrently existing schemes, such as the SBP’s export finance scheme, need to be redesigned to incentivize the export of new products and/or to new markets. There also needs to be much greater policy focus on being competitive for segments of GVCs, rather than for entire products. Pakistan actively needs to engage with regional trading blocs with the aim of either joining them or entering into free trade agreements with them. Aggressive diplomatic efforts must be made to facilitate market access to potential candidates such as the Regional Comprehensive Economic Partnership Agreement (RCEP) and The Association of Southeast Asian Nations (ASEAN).
Relating her personal experience of Spain’s rapid economic transformation post its integration with Europe and the world in the early 1980s, IMF’s Dr. Esther Ruiz observed at the launch event of “Trade Connectivity” that “Pakistan is yet to embrace integration, and, as a matter of fact, it has turned more inwards since the turn of the century. Exports as a share of GDP fell from around 14.5 percent in 1999 to less than 10.5 percent in 2021. More integration with regional and global markets is important to improve technological transfer and competition, reverse productivity decline, reduce external vulnerabilities, and increase Pakistan’s modest per capita GDP growth.” Pakistan would do well to take on board such advice.
– 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
