Notes on Pakistan’s Trade and Industry Policy

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By

 

Faizullah Khilji[1]

 

 

Abstract

The paper seeks to develop some understanding regarding Pakistan place in the world economy, with particular reference to the post 2nd world war evolution of the world trade regime. The changing international trade regime figures prominently in this discussion because trade is one of the principal means of interaction with the world economy. Thus the economic opportunities that the world has offered and continues to offer to economies such as Pakistan, and, secondly, Pakistan’s record of respond to and realising these opportunities to its advantage are considered. The point that emerges from the paper is that Pakistan is not producing the goods which are increasingly in demand in the world, and in its present state it is perhaps not quite geared up to do so. Pakistan does not compare well in terms of the pre-requisites that investors look for: credible legal and regulatory institutions, relatively good infrastructure, a labour force with some discipline and vocational or functional skills, and relatively few barriers to trade. Arguably Pakistan’s predicament is shared to some degree with the other large South Asian economies. Author.

 

“…the pattern of trade can only be understood as being the outcome of some military or political equilibrium between contending powers.”[2]

“Economies evolve, and so, too, must economic policy.”[3]

Part 1: Introduction

What should be Pakistan’s economic policies? This question is often asked, and one suspects that it is asked with an unspoken hope that there exist policies that hold forth some promise, and that these policies are such as could catapult the nation into the developed world, and that once these policies are in place not too much hard work is involved.[4] The presumption is that Pakistan’s problem lies chiefly in not following the right policies and the inference is that the principal issue, therefore, might be a knowledge gap about the identification of these right policies. In these well meaning conversations export-based successes of East Asian economies are cited in passing as the desirable outcome; and a frequent lament is the charge that post-Korean war success that South Korea has experienced is really based on its implementation of Pakistan’s 2nd 5 year plan, which the Koreans allegedly “copied” whilst a Korean delegation was visiting Islamabad! Thus the Holy Grail was lost. The charge of “copying,” however ill-informed, is nonetheless an amusing but sad comment on the self-confidence of the nation, and strengthens the belief that the answer to the national problems lies chiefly in missing knowledge. Hence the search and recovery mission must continue until the Holy Grail is found.

This question of the “right policies” is not in itself the subject of these notes. The present notes have a more modest purpose. Any answer aimed at devising a set of policies today, however cursory the effort, presumes some understanding of two developments: firstly, the economic opportunities that the world has offered and continues to offer to economies such as Pakistan, and, secondly, Pakistan’s ability to respond to and realise these opportunities to its advantage.  These notes seek only to develop some understanding regarding Pakistan’s place in the world economy, with particular reference to the post-2nd World War evolution of the world trade regime. The trade regime figures prominently in this discussion because trade is one of the principal means of interaction with the world economy.

The write up that follows these introductory comments is in three parts. The next part discusses some aspects of the post-2nd World War evolution of the world economy. The context that is developed is then applied to an examination of Pakistan’s case. The final part sums up the discussion and offers some concluding observations.

Part 2: Some aspects of the postwar world economy

One may briefly recall the post-2nd World War trends in the world economy. The table below sets out average annual growth rates in GDP and exports for 1950-73, 1973-98, and 2000-06.

World GDP and trade 1950-2006

(annual average compound growth rates in percent)

1950-73 1973-98 2000-06
GDP Export volume GDP Export volume GDP Export volume
World 4.91 7.88 3.01 5.07 3.00 5.50
North America 4.03 6.26 2.98 5.92 3.00 3.00
Latin America 5.33 4.28 3.02 6.03 2.80 6.00
Western Europe / Europe 4.81 8.38 2.11 4.79 2.40 4.00
Eastern Europe, USSR / CIS 4.84 9.81 0.56 2.52 5.70 8.00
Asia 9.97 5.95 10.00
Asia, excl. Japan 5.18 5.46 6.10
Japan 9.29 2.97 1.00
Africa 4.45 5.34 2.74 1.87 4.10

Sources: For 1950-73 and 1973-98 data, see Angus Maddison, The World Economy, A Millennial Perspective, OECD, Paris 2001, pp 126-127. For 2000-06 GDP data see United Nations World Economic Situation and Prospects 2008, United Nations, New York, 2008. For 2000-06 export volume data see World Trade Organisation, International Trade Statistics 2007, (Geneva, WTO, 2007).

The data in the above table makes one big point: in the sixty year-plus period that followed the end of the 2nd World War, world trade and output have expanded continuously, and trade has expanded noticeably faster than output and income. The world increasingly exchanges more goods for a given level of output and income. This implies increasing integration of the world economy. Trade has arguably been the engine of output growth.

A number of factors have facilitated growth in trade. First among these is the reduction in trade barriers that the world has experienced over this period. This phenomenon is also commonly referred to as improvements in market access, or more broadly, as trade liberalisation.

There has been continuous liberalisation of trade since the inception of GATT. Extensive and unparalleled multilateral negotiations have been undertaken to achieve this liberalisation. Beginning with 1947, twelve multilateral negotiating rounds have taken place. Of these twelve negotiating rounds, seven preceded the Uruguay Round. The Uruguay Round was a defining moment in postwar trade negotiation history.

The Uruguay Round was a defining moment because it set up the World Trade Organization, being the fulfillment of the postwar desire for an International Trade Organization (it may be recalled that the GATT at its inception was only a temporary three year arrangement to provide some time for completion of inter-governmental negotiations on the ITO Charter).[5] It was also a defining moment because the developing countries were brought more fully into the fold of international trade negotiations. Henceforth the developing countries needed to have greater clarity in their goals, needed to be more knowledgeable about the subject as well as more participative in the discussions. The developing countries were encouraged to offer more and expect less at the negotiating table; and, indeed, to get less in way of “special and differential treatment.” Though in some respects the new status of developing countries was much closer to that of the developed ones, there is little doubt what they received at Marrakesh was an unusually tough bargain. Arguably, what made such an outcome possible was the changing geo-strategic map: the erstwhile Soviet Union, the very existence of which had amounted to an implicit bargaining chip for these developing countries, was in the process of evolving into a number of new states. With the end of the Soviet Union, the world of trade relations changed for all countries, but perhaps more so for the developing countries, especially with regard to concessions.

Four negotiating rounds have followed the Uruguay Round with rather modest outcomes; the Doha round which began in 2000 and has yet to be concluded is the most recent of these four. The WTO membership now stands at 153,[6] and it has been argued that the increase in membership and hence in the numbers at the negotiating table directly increases the time taken to negotiate a trade Round.[7]

The net effect of liberalisation efforts might well be summed up in the one statistic, pertinent for our purpose, that whilst at time of the inception of GATT the developed countries applied import tariffs averaging 40 per cent on the import of manufactures, today this figure stands sharply reduced at 4 per cent! This remarkable reduction in import tariffs on manufactures greatly assisted the industrialization efforts of a number of developing countries.[8]

Other factors too contributed to the remarkable growth in trade. A second factor was the changes brought about in the financial system. The move towards financial liberalisation began in the late 1960s among the developed market economies of the time, it continued apace in the decades that followed, and a liberal financial regime was virtually a universal phenomenon by the late 1990s. A liberal financial regime such as the one prevalent today makes it possible to hold, transmit and receive funds in almost any currency. Financial transactions take effect almost instantaneously. This has considerably facilitated payments and receipts on account of trade, and hence facilitated the growth in trade flows. The liberal financial regime has also facilitated foreign direct investment, which is a topic touched upon below.

A third factor contributing importantly to the growth in trade was the change in technology and techniques for transportation of goods. The innovations in transportation of goods, e.g., the development and the increasing use of the container, the development and use of larger and faster ships and aircraft, and improvements in port handling, have speeded up the delivery of goods and also brought down the relative cost of shipping goods. A fourth contributory factor, also of some importance, was the development in information technology. Information technology added great speed to exchange of transaction records, including particulars of goods and services, their shipment and payments and receipts.  Information technology has also directly facilitated the delivery of certain services, of which the output of the media industry provides a good example, and hence aided the growth of trade in such activities. As is explained below, information technology has also importantly helped to foster the newer approaches to organising production and trade. Developments in transportation technologies and in information technology are often captured collectively in the picturesque phrase death of distance.[9]

The opening up of the world in this manner, liberalisation of trade and financial flows, affected the nature of production. Traditionally, the typical large corporation, well established in its domestic market, would sell overseas through an agent, and in time it would set up a sales outlet of its own there. The next step could be to license manufacture of the product to a business in that overseas location, or to set up a fully or partially owned manufacturing facility there to meet the local demand. This pattern began to change as trade liberalised and transport costs, information costs, and shipping times came down. The calculus of profitability, upon which private enterprise is founded, dictates that costs of production be kept to a minimum in competitive markets. Guided by this maxim, the development of the organisation of production took a particular direction in response to the changing opportunities offered by the world economy. With lowering of trade barriers and improvements in communications and development of financial markets and commercial techniques, it became possible to separate the functions of research and development, design, manufacturing, assembly, packaging, and distribution, and to locate these functions in such manner as would minimize costs and hence yield the best return to the business. It became feasible and advantageous to develop and design the product in the home country, to produce most of the components in the lower wage economies, and also to assemble and package it there, to distribute it from those economies, and to market it from the home country. To exploit these opportunities implied investment by the corporation in the relevant developing countries. [10]

It stood to reason, when looking for manufacturing locations among the developing countries, to go for those low wage locations where there were credible legal and regulatory institutions in place, infrastructure was relatively good, labour force was relatively disciplined and also vocationally or functionally educated, and barriers to trade the least.[11] Those developing countries that were relatively better placed with regard to these considerations, or other developing countries that understood these emerging requirements, naturally responded with policies to suit those foreign investors who wished to locate production in low wage economies in order to avail themselves of the low cost of production and export the resulting output. For the developing economy receiving this investment, it meant a boost to the levels of employment and exports. As understanding of these new developments grew, developing countries put in place policies (chiefly fiscal and monetary incentives applicable in special zones which had, or were provided with, the necessary infrastructure, etc.) to compete with each other to attract this investment with an in-built potential for exports. The late-comer developing countries naturally faced greater competition and higher benchmarks in terms of incentives to be made available.

The above discussion helps to understand why cross-border long-term investment flows have grown steadily in the context of developing countries. Even in years when the global totals of foreign direct investment (often referred to as FDI) have slumped, the flows to developing countries have maintained some growth. These flows of foreign direct investment to developing countries are arguably the response by the international business to the opportunities offered by improved market access and are made possible by financial liberalisation.

FDI inflows, global and by group of economies, 1980-2006

(Billions of dollars)

Source: United Nations, World Investment Report 2007 (United Nations, Geneva, 2007)

An illustration of the typical approach to organising production and trade in an internationally branded good today is perhaps seen in the manner in which Nike organizes its business. This example also helps in an understanding of the role of foreign direct investment. Nike does the research and development, as well as marketing, in its headquarters in the United States. It then uses its overseas partners and volume producers and vendors to implement its production and logistics functions. Overseas partners produce the high-end signature models. The volume producers (who manufacture for other brands as well) supply the standardised lines. At the same time potential partners are developed under tutelage for future purposes. In this Nike example, the partners are located in South Korea and Taiwan, volume producers are in South Korea and Vietnam, and potential sources are being developed in China, Indonesia and Thailand. Nike headquarters in the United States provides designs, technical expertise and specialty components to its partners. The partners and the volume producers provide other components, and put together the finished product.[12] The “flows” and the structure of the networked production approach is illustrated in the diagram below:

Diagram showing the organization of production by Nike

Source: Peter Dicken, Global Shift, Reshaping the Global Economic Map in the 21st Century, New York, The Guildford Press, 2003, p. 264

Note: This diagram is illustrative of the kind of relationships that might exist. It is taken from a 2003 publication, and actual relationships and locations could well have changed.

There are variations on the Nike approach described above but the basic organisation usually involves locating the design research and marketing functions in the home country (though increasingly some of these might also be located elsewhere), and the production, packing and shipping tend to take place in lower cost locations. Also, it is worth pointing out and the diagram does make it clear, there is a flow of physical components between economies. Components flow between partners and volume producers, as well as between the latter two and the headquarters. Also, finished goods move from partners and volume producers; and technical advice and equipment may move from headquarters to partners and volume producers. The organization often grows in linkages and complexity in cases such as the electronics and automobile industries, as the products and number of parts and regulatory frameworks increase.

Increasingly, it becomes obvious that in order to export one has to import. And this fact is borne out by the trade data, which shows that the bulk of the trade in manufactures is between affiliated firms, and a good part is in components. To take one example, in the case of China, it is estimated that the share of foreign content in China’s exports is at about 50 percent. This is an aggregate statistic giving the average for all manufactured exports, and there are variations across industries. Those industries that are likely labeled as relatively sophisticated, such as the industry producing electronic devices, have a particularly high foreign content (about 80 percent). There are also variations as between forms of firm ownership. Firms with foreign investment tend to have higher foreign content in their exports than domestic firms.[13] The point is that in order to produce and export those manufactures that are experiencing rapid growth in demand and trade, one needs to import components in a substantial way. Frequently, an economy only produces a component or some components of the whole product. To facilitate such imports, the import regime must be as friendly to this kind of activity as is possible and also operate with some efficiency. [14]

Next consider the composition of the expanding trade between products. An even spread would be surprising. The rate of growth therefore differed as between the different categories of goods and services as global preferences changed, demand varied and supply capacities differed.  New goods and services emerge with time, as indeed would be expected. New goods, it may be noted, by their very nature tend to be manufactured, rather than raw materials, minerals and metals, or agricultural produce. The data clearly establishes that trade in manufactured goods grew significantly faster than that in other goods. The table below gives data in respect of goods which satisfy two conditions: firstly, the good has a significant share in world export trade (significant share is defined here as a share of not less than 0.5 percent of the world trade in 2006 by value); and, secondly, the export trade in this good has also experienced growth rates of 7 percent per annum or higher over 1995-2006. Thus the table below lists those goods which satisfied this twin criteria: a share in value of world export trade of not less than 0.5 percent in 2006, and an annual rate of growth in export value of 7 percent over the period 1995-2006.

International trade: value and growth of exports of most dynamic goods 1995-2005

 

(values in million dollars and shares and growth rates in percentages)

SITC Description Value 1995 Share 1995 Value 2006 Share 2006 Growth 1995-2005
333 Crude petroleum & bituminous oil 205 936 4.08 739 769 7.22 12.52
334 Heavy petroleum & bituminous oil 92 143 1.82 367 380 3.58 12.69
343 Natural gas, liquefied or not 34 754 0.69 124 630 1.22 12.66
515 Organo-inorganic compound acid salt 26 785 0.53 79 424 0.77 11.22
541 Pharmaceuticals excluding medicines 26 368 0.52 66 327 0.65 9.84
542 Medicines including veterinary 45 340 0.90 204 917 2.00 17.06
598 Miscellaneous chemical products 29 574 0.59 63 291 0.62 7.35
667 Pearls,precious semiprecious stone 39 711 0.79 90 140 0.88 8.13
784 Motor vehicle parts and accessories 112 746 2.23 232 528 2.27 7.05
781 Passenger cars and race cars 232 452 4.60 485 053 4.73 7.35
764 Telecommunicate equipment part 121 662 2.41 351 538 3.43 10.36
772 Electrical circuit equipment 66 460 1.32 141 877 1.38 7.14
712 713 714 718 Non-electric engines excluding 26 243 0.52 68 174 0.67 9.34
723 Civil engineering plant & equipment 29 635 0.59 68 992 0.67 7.16
763 Sound TV recorder or reproducer 21 475 0.43 62 160 0.61 12.21
761 Television video receive project 24 016 0.48 57 225 0.56 8.82
821 Furniture part; bedding furnishing 45 209 0.90 97 185 0.95 7.52
872 Medical instruments appliances nes 19 085 0.38 52 431 0.51 10.17
874 Measure analyze control device nes 52 692 1.04 110 458 1.08 7.23

The goods described in the above table are all those items the export trade in respect of which experienced a growth rate of not less than 7 percent per annum in value over 1995-2006, and also accounted for not less than 0.5 percent of the world export trade value in 2006.

Source: United Nations, UNCTAD Handbook of Statistics 2006-07, (United Nations, Geneva, 2008), Table 3.2A, pp. 144-147.

A quick glance at the preceding table shows that with two exceptions (the understandable case of oil and related products, and the high income related goods category of precious and semi-precious stones), the high growth that the world export trade has experienced is entirely in manufactures. It is worth noting that of these manufactures, those which appear against SITC 700 and 800 codes are all engineering goods (some categories of chemicals and pharmaceuticals may be seen under SITC 500s, but the values in these cases pale in comparison with the values for the engineering goods exports). It may be noted that the approach to low cost production of dividing up the product into components and distributing the production of these components between low cost locations (discussed above with the aid of the Nike example) seems the natural thing to apply to the manufacture of these SITC 600s, 700s and 800s goods. [15]

Economies that were part of the production network of the goods in the table above benefited, as indeed would be expected.

Part 3: Reflections on Pakistan’s situation

South Asians, arguably because of the history of their colonialisation fresh in their consciousness, were not amongst the first to seize the opportunities that an evolving world economy was creating to produce and sell via foreign affiliations, cross-border investments and trade: it is indeed a documented fact that even though the trade of empire economies expanded faster than those outside the empire at the peak of the British empire, the colonized economies failed to industrialise.[16] A case can indeed be made that colonization retarded industrialization, and this hypothesis has received some support recently from the proposition that the one “colony” that managed to stay out of the empire trade loop, i.e., the United States, did manage to industrialise successfully.[17] Arguably, trade also has the power to impoverish, but the East Asian and ASEAN economies clearly benefited from foreign affiliations and investment in the 2nd half of the twentieth century.

When one considers Pakistan’s patterns of trade and industry, one finds that these patterns bear some resemblance to those of other South Asian economies, i.e., Bangladesh and India. Therefore to facilitate understanding, it may be worthwhile to consider the South Asian situation in its historical context. The first point of note in any such comparison is that the export performance of the South Asian economies falls into a categorically different pattern from that of the East Asian and the ASEAN economies. The table below summarises this aspect:

Selected Asian economies: Merchandise Exports at Current Prices

(in millions of dollars)

Memo: share of manufactures in merchandise exports
1950 1973 2006 2006
Bangladesh 303 358 11 802 92.1
India 1 145 2 917 120 254 68.0
Pakistan 330 955 16 930 81.4
China 550 5 876 986 936 92.4
Japan 855 37 017 649 931 90.2
Republic of Korea 23 3 225 325 465 89.1
Indonesia 800 3 211 103 487 42.9
Malaysia 160 676 73.4
Philippines 331 1 885 47 037 86.2
Thailand 304 1 564 130 790 75.3

Sources: For 1950 and 1973 data, see Angus Maddison, The World Economy, A Millenial Perspective, OECD, Paris 2001, p 360. A point to note is that in 1950 though Bangladesh did not exist, Maddison does give separate data for that economy. One may assume that Maddison constructed the series for Pakistan and Bangladesh, making necessary adjustments to obtain consistency between 1950 and 1973. For 2006 data, see World Trade Organisation, International Trade Statistics 2007, (WTO, Geneva, 2007).

The fact that the data in the above table is in current prices does not distort the comparative purposes for which it is used.

The data in the above table is quite revealing, perhaps even startling. In 1950 India was the leading exporter amongst the Asian economies, well ahead of Japan and China. And, also in 1950, Pakistan and Bangladesh appear to be in the same league, export-wise, as Philippines and Thailand. By 1973, the year of the first oil shock, and hence the first major supply side shock to the world economy after the Korean war, India was visibly lagging behind China (India’s exports being one-half of the exports of China in that year), and Pakistan was equally trailing Philippines and Thailand, but Japan had clearly leapt well ahead of the pack. When one looks at the 2006 data though, the different patterns for the South Asians and the others are most striking. Indian exports are reduced to one-eighth of China’s, Pakistan is similarly dwarfed by Thailand, and Bangladesh accounts for the lowest level of exports amongst all in the table. This is something of a puzzle.

It is a puzzle because in 1950 the world was in the process of emerging from the debris of the 2nd World War. The war ravaged economies of continental Europe, China and Japan were in shambles. Indonesia, Malaysia, Thailand, etc., were widely perceived as lacking in the essential prerequisites of development.  South Asia with its hard infrastructure of well-functioning railways, telegraph and telephones, roads, ports, etc., in place, and its reputed soft infrastructure of colleges, universities and administrative services operating smoothly, held great promise.[18] Calcutta was the second city in the British Empire! In actual fact, South Asia could not keep abreast in the export league even up to 1973, a period in which governments were generally seen as having a legitimate role in development of private enterprise, and import-substituting-industrialisation was accepted as a respectable pursuit and the sensible policy to follow. The export performance (or the lack of it) in the post-1973 phase is a little easier to comprehend, as that period was one when market-friendly policies became the norm, and the vocabulary changed accordingly: import-substituting-industrialisation was now talked of as “crony capitalism,” and the development-oriented state (“gentlemen at work,” in Papanek’s terminology[19]) was seen as a fine example of “bloated bureaucracy.”[20] South Asia evidently failed to comprehend the seriousness of this shift in thinking. It thus failed to respond in time to the implied changes in policies that were taking place globally, and could not quite benefit from the opportunities that the new global economy was creating.

The above table also shows that in 2006 by far the bulk of the exports from South Asian economies, Pakistan included, are manufactured goods indeed. Manufactures account for a high percentage of South Asian exports, and this ratio is comparable with those of the leading Asian economies, i.e., China, Japan and Korea, as well as the ASEAN economies. But the manufactured exports of South Asian economies are not the most dynamic goods and these exports have not grown at anywhere near the rate experienced by the exports from East Asian and ASEAN economies. And the point of note therefore is that the element of manufactured goods in the total merchandise exports does not by itself offer any explanation or insight regarding the differences in export performance, as the ratio for this factor is generally similar as between East Asians and the South Asians.[21]

Next consider one aspect of import policy that impacts industrial activity and exports, i.e., market access. This aspect is important because manufactured exports of the rapidly growing category require a high level of imported inputs. The element of import tariffs is recognized as a critical one in according market access. The table below summarises some of the data in respect of the import tariff regime:

Tariff regime for imports of non-agricultural goods 2006

Binding coverage (%) Average applied MFN (%) Duty free imports* Specific rates* Tariff peaks* Exports

($ million)

Share of manufactures in merchandise exports (%)
Bangladesh 2.9 14.9 6.7 0.1 37.6 11 802 92.1
India 69.8 16.4 2.4 6.0 10.7 120 254 68.0
Pakistan 99.1 14.0 0.1 40.2 16 930 81.4
China 100.0 9.0 7.3 0.4 13.0 986 936 92.4
Japan 99.6 2.8 55.1 2.1 0.8 649 931 90.2
Republic of Korea 93.8 6.6 15.9 0.1 1.6 325 465 89.1
Indonesia 96.1 6.8 22.7 0.1 3.0 103 487 42.9
Malaysia 81.3 7.9 55.4 0.1 23.8 160 676 73.4
Philippines 61.8 5.8 3.1 1.5 47 037 86.2
Thailand 70.9 8.2 20.6 17.4 17.0 130 790 75.3

*share of six digit HS headings in percent

Source: World Trade Organisation, World Tariff Profiles 2006, (WTO, Geneva, 2007), pp. 14-19.

The above table shows that the average applied tariff on most favoured nation (MFN) basis is significant in respect of the East Asian and ASEAN economies in comparison with South Asian economies. The East Asian / ASEAN economies also permit a substantial quantity of imports duty free relative to South Asian economies. Finally, the East Asian / ASEAN economies have far fewer tariff peaks, i.e., tariffs in excess of 15 percent than the South Asian counterparts. To further emphasize this latter point, it may be noted that the average industrial tariff is approximately 7 percent for the 34 economies that account for 95 percent of world trade.[22] To conclude, the tariff regimes of the South Asian economies do not compare favourably with those of East Asian and ASEAN economies; indeed they are in a different category.[23]

It cannot escape notice in a review of exports and tariffs that there is something here that cuts across countries and governments. Over a time span of some sixty years the South Asians have changed governments several times and have also shifted gears in terms of policies. Regardless, the three South Asian economies display similar profiles in terms of export performance and now tariffs. Equally, the East Asian and the ASEAN economies have experienced a number of governments of different hues over this relatively extended period, and, regardless of these differences, the East Asian / ASEAN experience appears broadly similar as between the different East Asian / ASEAN economies. To conclude, the East Asian / ASEAN experience has evolved into something distinct and different from the South Asian experience.

Turning now to a discussion of Pakistan’s situation, the first point to be noted is that Pakistan did not inherit much in way of industry in 1947; for example, the entire textile sector consisted of six rather modest size mills. It was only in the 1960s that manufacturing enterprises first began to appear in context of a pre-dominantly state-directed effort to develop the country’s nascent private sector in an import-substituting-industrialisation framework. The initial progress was encouraging, and also widely recognised at the time as a model case of government assisted private sector industrial development.[24] The 1965 war on the South Asian mainland introduced a shift in development priorities. Pakistan’s industrialisation efforts were disrupted as a result and slowed down sharply.

One important determining factor in the direction that Pakistan’s industrial development was to take in subsequent years was the policy shift of the early 1970s. Pakistan at this conjuncture embarked upon a programme of nationalisation of its banking and financial services, its manufacturing industry (barring textiles), and its shipping, as well as some of the agricultural sector related industrial activities. With conservative governments coming into power in the United Kingdom in 1979 and the United States in 1981, the economic policies in the developed market economies increasingly became market oriented. The international financial institutions naturally followed up on this thinking, and began to advise a market oriented policy stance in developing countries. (In due course this market friendly policy advice acquired the label of “Washington Consensus.”) The world economic policy establishment made a firm turn to the right. The winds of change were now gaining strength but Pakistan had already lurched leftwards;[25] it was out of sync. Textiles, being the only major industrial activity open to the private sector, flourished. Pakistan’s private investors did not have the opportunity to invest in any other medium or large scale industrial activity as edible oil industry, chemicals industry, iron and steel industry, fertilizer industry, metals and minerals industry, automobile and engineering industries, etc., were all reserved for the state sector.

In the late 1980s and early 1990s, the need for privatization of state enterprise was increasingly emphasized by the multilateral financial institutions pursuing the implementation of the Washington Consensus set of policies. Pakistan, as a user of these institutions, heeded such policy advice. But stagnancy in the industrial structure did not go away with the onset of privatization. A number of explanations are offered. One plausible explanation is that Pakistan traditionally protected certain industries and this protection continued a fortiori with privatization as the newly privatized industry sought space (i.e., chiefly high tariffs on imports) to recover and establish. A further aspect of this line of thought is that these industries, having been set up in an import-substitution framework, catered to the domestic market, and they were unable to develop competitively in a global context – their size was restricted by the size of the domestic market and the possibility of economies of scale or world scale plants did not offer itself. These considerations froze the industrial structure in time. The decisions to switch back and forth between nationalisations and privatizations within a time span of 15 years or so were exacting a toll.

Apart from the limitations set by the state in the industrial structure, the development of a vocationally or functionally educated and disciplined labour force did not receive the kind of attention from the policy makers that it deserved in the changing global economic environment, and this “oversight” also did not help in attracting investment. Low expenditures on education and health characterize national and provincial budgets over long periods, regardless of the political hue of the government in authority. An additional handicap from the investor’s perspective has been the insufficient priority attached to the relevant communications infrastructure: congestion at ports has increased with time, railways have had great difficulty in keeping up with the growth in demand for their services and the railway hardware has not been maintained to operate with efficiency. Finance was not easily forthcoming for the new entrepreneurs and new activities, and was frequently channeled into non-productive activity leading to record bad debts.[26] This lack of attention to the ingredients of a successful industrial policy was not helpful, and perhaps also hindered the realization of even those opportunities that neighbouring China the fastest growing economy in terms of output, exports and imports offered.

Pakistan: structure of exports

(in per cent)

. 2005 2000 1995
.
All food items 12.0 10.5 11.8
Agricultural raw materials 1.5 2.9 3.8
Fuels 4.2 1.4 1.0
Ores and metals 0.4 0.2 0.2
Manufactured products 81.8 84.8 83.0
of which . . .
Chemical products 3.0 1.6 0.7
Machinery and

transport equipment

1.8 1.0 0.5
Other manufactured

products, chiefly textiles, clothing

77.0 82.2 81.8
100.0 100.0 100.0
.
Total value (million dollars) 16 050 9 201 8 158

Sources: United Nations, UNCTAD Handbook of Statistics 2006-07, (United Nations, Geneva, 2008), and World Trade Organisation, International Trade Statistics 2007, (WTO, Geneva, 2007).

A particularly alarming aspect is that the economy has been unable to reduce its reliance on cotton, cotton yarn and cotton textiles. These products account for an inordinate proportion of the country’s total industrial production as well as the bulk the nation’s exports. Two factors complicate this dependence. Firstly, world trade in cotton and cotton textiles is relatively stagnant, and for this reason production and export of these products is not perceived to show much growth in future. Hence these are not the products that would help in boosting national economic growth. To illustrate the point, the table below gives the growth rates for world export values relating to textile and clothing merchandise for the period 1995-2005: as may be seen these rates are negative in three cases, below five percent in another seven cases, and only in one ill-defined case does the rate exceed 7 percent. In this last case, i.e., 658 made up textile articles, not elsewhere specified, the share in world trade is insignificant (that is below 0.5 percent in value in 2006).

Growth in world exports of textile items

(annual compound growth rates for value of exports)

SITC Description Growth 1995-2005
266 Synthetic fibres for spinning -0.29
267 Man made fibre for spinning; waste 1.09
651 Textile yarn 1.73
652 Woven cotton fabrics 2.68
653 Man-made woven fabrics -1.51
654 Other woven textile fabrics -0.27
655 Knitted or crocheted fabrics 4.65
656 Tulle lace embroidery trim etc 5.62
657 Special yarn and textile fabric etc 2.91
658 Made-up textile articles 8.38
841 Male clothing, woven 2.45
842 Female clothing, woven 5.13
843 Male clothing, knitted crocheted 4.82
845 Articles of apparel 6.71

Source: UN, UNCTAD Handbook of Statistics 2006-07, Geneva 2008, Table 3.2A, pp. 144-147.

The second aspect is that even though these products account for a large part of Pakistan’s production and trade, Pakistan does not have a prominent share of world trade in these products. Indeed a number of countries that do not produce cotton[27] have a larger share in textiles as well as clothing. Thus we have a situation that is problematic in three ways: firstly, Pakistan’s exports rely heavily on a narrow range of goods and hence the economy is excessively exposed to changes in fortunes in that particular industry; secondly, these goods are facing stagnant demand and hence this sector is unlikely to show much growth in output, employment and export; and, thirdly, Pakistan is not a price maker in these goods and export prices are subject to gyrations in the world prices for these products. Thus the industrial sector and the economy to a large extent sink or sail with the fortunes of the textile and clothing industry! The charts below illustrate this dependence.

Source: World Trade Organisation, International Trade Statistics 2007, (WTO, Geneva, 2007)

Pakistan’s share in world textile trade appears to be relatively modest, but quite unlike the two major exporters of textiles, i.e., EU and China, its reliance on textiles for export income is the highest in the world! The economy is highly vulnerable in this respect, and this vulnerability has increased with the change in the trade regime from a quota based system to a competitive one. The end of the Multifibre Agreement in 2005 and quotas has increased the degree of competition in the system, benefiting the more efficient producers. Pakistan’s textile sector would therefore need to significantly enhance its efficiency to remain competitive and hence retain its existing position.

Source: World Trade Organisation, International Trade Statistics 2007, (WTO, Geneva, 2007)

As the above diagram depicts, Pakistan’s vulnerability in exports of clothing is somewhat less than that in textiles. But when we combine the exports in clothing, a derivative of textiles, to that obtaining in textiles we get an alarmingly high rate of dependence on one set of goods, albeit at different stages of production, when it comes to industrial output and exports.

There is another problem looming in the extremely competitive world of clothing, where, to repeat, economies often compete in face of stagnant demand, and hence any gain in exports by one country is likely to be at another country’s expense. There is evidence that establishes that buyers are increasingly demanding consistently good quality, and variety, as well as timely delivery, in addition to a competitive price.[28] These factors of quality consciousness and timely delivery (and making commitments with a view to honouring the promises) would need to be woven into the economy’s textile sector’s approach to exports and possibly in its work ethic and culture. Regard would also need to be paid to new designs in order to enhance the variety being made available.

Part 4: Concluding remarks

As stated earlier the task of identifying the right policies is beyond the scope of these notes. The point that emerges from the foregoing discussion is that Pakistan is not producing the manufactured goods which are increasingly in demand in the world. And in its present state it is clearly not quite geared up to do so. Pakistan does not compare well in terms of the prerequisites that investors look for: credible legal and regulatory institutions, relatively good infrastructure, a labour force with some discipline and vocational or functional skills, and relatively few barriers to trade. Arguably these propositions also apply in some degree to the other South Asian economies.

The question that arises is what is it that has held back the policy makers of Pakistan, and more generally South Asia, from systematically undertaking the self-evident tasks of developing credible legal and regulatory institutions, a skilled and disciplined labour force, and reasonable infrastructure that compares with that of successful economies.

In these notes one is considering a sixty year period. To repeat, this sixty year period has seen governments of different hues and shades in South Asia as well as East Asia and the ASEAN economies. Thus the deficiencies mentioned in context of Pakistan and possibly South Asia in the preceding paragraph appear to have some resilience that cuts across different governments and possibly countries.

Indeed, there is a notable inertia in South Asia when one makes a comparison with the East Asian and ASEAN economies. This inertia is pervasive and persistent; it is evident in practically all socio-economic indicators, be it neighbourly relations, national integration, health, education, industrialisation and exports, per capita income, etc. It is an inertia that the political gyrations and shifts in policies do not sufficiently explain. And it is not the purpose of these notes to explore the reasons for these differences;[29] in any event these reasons are surely not simple. They would appear to lie in the area of history, culture, and political economy.[30] Finally, it also needs saying here that it is only this particular comparison with specific regions of East Asia and ASEAN that puts South Asia in the shade; South Asia could perhaps come out shining in comparisons with some of the other regions of the developing world. But there is nonetheless the disturbing fact that the South Asian region is home to the largest number of human beings in absolute poverty!

In looking to the future, the importance of industrial development in the progress of a nation cannot be underestimated. But it is also a fact that the kind of direct support that could once be extended to help the national industry and its exports to develop is no longer permissible. Economies industrialised through protection, subsidy, and (in today’s vocabulary) violation of intellectual property rights. Limited protection might still be possible for a time, but subsidies would in general be no longer permissible and would be contested as a violation of the country’s WTO commitments. Similarly violation of intellectual property rights would only bring opprobrium of the international organizations and eventual legal actions. The “ladder” that was historically used by countries such as Germany and United States to climb up in their respective industrialization phases has been “kicked away,” as Ha-Joon Chang has frequently asserted.[31] Those setting out now would have to work harder than the precursors.

Thus efforts by Pakistan, and indeed South Asia, to get within shouting distance of the East Asian league could only be a long haul enterprise.

Annex 1 table

Selected Asian economies: Foreign Direct Investment Inflows

(at current prices in millions of dollars)

2004 2005 2006
Bangladesh 460 692 625
India 5 771 6 676 16 881
Pakistan 1 118 2 201 4 783
China 60 630 72 406 69 468
Japan 7 816 2 775 -6 506
Republic of Korea 8 980 7 050 4 950
Indonesia 1 896 8 337 5 556
Malaysia 4 624 3 965 6 060
Philippines 688 1 854 2 345
Thailand 5 862 8 957 9 751

Source: United Nations, World Investment Report 2007 (United Nations, Geneva, 2007).


[1] Dr Faizullah Khilji is an economist and a former Chairman of the National Tariff Commision.


[1] The writer gratefully acknowledges South Centre’s generosity in provision of office facilities in Geneva earlier this year (and thus facilitating this work), and Khalil Hamdani’s efforts in bringing it about. The work also benefited from the author’s discussions with Khalil on a number of issues covered in this paper. The writer is also grateful to Dr Rajesh Chadha, Professor Ali Khan, Dr S M Naseem and Dr Eric Rahim for helpful and pertinent comments.

[2] Ronald Findlay and Kevin O’Rourke, Power and Plenty, (Princeton University Press, New Jersey, 2007). This book gives a systematic account of the development of international trade over the last 1000 years.

[3] Remark attributed to the late Hyman Minsky.

[4] Posing the question in this form is also a reflection of a period in which examples of European reconstruction under Marshall Plan and East Asian development under the state were the norms. The belief at the time was that it was the state and not the market that would help bring prosperity to societies.

[5] See for example discussion in Douglas A Irwin, The Creation of GATT, mimeo, December 2007.

[6] Number of members as at the date of writing, i.e., August 10, 2008

[7] Interestingly, the prediction regarding the duration of a trade round with a WTO membership of 150 is approximately 105-110 months! See figure 10.2 in Steven Brakman, et. al., Nations and firms in the global economy, (Cambridge, Cambridge, 2006), p 278.

[8] For example, one empirical analysis of measurable causes of rapid growth in trade, vis a vis growth in output over the period 1980-2002 shows reduction in tariffs to be one of the two major explanatory factors (the other being productivity growth – in turn caused by for a large part, one would argue, by developments in information technology). See Mark Dean and Maria Sebastia-Barriel, Why has world trade grown faster than world output, Bank of England Quarterly Bulletin, Autumn 2004, pp 310-330.

[9] The recent rise in energy prices has meant the cost of fuel and hence shipping has increased. The increased shipping costs would impact on the organisation of production and trade. Some of the consequential effects are becoming visible. See discussion in appendix 2.

[10] See discussion in Sven W Arndt and Henryk Kierskowski, Fragmentation, (OUP, Oxford, 2001).

[11] Some of these well known considerations have been re-affirmed in a recent survey. See UNCTAD, Occasional Note, Worldwide Survey of Foreign Affiliates, UNCTAD/WEB/ITE/IIA/2007/5 (United Nations, Geneva, 2007).

[12] This description is based on the account given in Peter Dicken, Global Shift, Reshaping the Global Economic Map in the 21st Century, New York, The Guildford Press, 2003.

[13] Robert Koopman, Zhi Wang and Shang-Jin Wei, How Much of Chinese Exports is Really Made In China? Assessing Domestic Value-Added When Processing Trade is Pervasive, National Bureau of Economic Research, NBER Working Paper No. 14109, June 2008, http://www.nber.org/papers/w14109. Also see discussion in Leonard K Cheng and Henryk Kierzkowski, Global Production and Trade in East Asia, (Kluwer, London, 2001).

[14] This very fragmentation of production (also sometimes referred to as slicing up the production chain) is in itself a cause for increasing trade flows, as components flow back and forth. A considerable amount of this trade is naturally within affiliated firms.

[15] For some examples see, Leonard K Cheng and Henryk Kierzkowski, Global Production and Trade in East Asia, (Kluwer, London, 2001), op cit.

[16] See Kris James Mitchener  and Marc Weidenmier, Trade and Empire, National Bureau of Economic Research Working Paper 13765,  January 2008, http://www.nber.org/papers/w13765.

[17] See Gregory Clark, Kevin H. O’Rourke and Alan M. Taylor, Made in America? The New World, the Old, and the  Industrial Revolution, National Bureau of Economic Research Working Paper 14077, June 2008, http://www.nber.org/papers/w13765. Also see Duncan K Foley, The Economic-Historical Roots of US Foreign Policy, mimeo, November 2007 for a discussion of trade that impoverished the colonies.

[18] The subject of these notes though is not to explore directly what went wrong. Therefore this latter aspect would not be explored further here.

[19] Gustav F Papanek, Pakistan’s Development (Harvard, Cambridge 1968).

[20] For this interesting change of vocabulary, see discussion in Bruce Cumings, The American Ascendency, mimeo, 1999.

[21] An argument has been made that the East Asian and ASEAN manufactures are in the category of highly differentiated “complex goods” exports. Such exports it is hypothesized are aided greatly by having credible legal institutions. See Daniel Berkowitz and Johannes Moenius, Law, Trade and the Asian Miracle, Paper prepared for the 2008 AJPEA Symposium in Hong Kong, June 4, 2008.

[22] Finanacial Times July 20, 2008, Doha deal would aid many European farmers, report by Patrick Messerlin

[23] Quite contrary to the direction the world is taking, Pakistan raised its tariffs again in the FY 2009 budget announced in June 2008. Therefore Pakistan’s tariff regime is a little more restrictive today than the 2006 data in the table would suggest.

[24] See for example discussion Gustav F Papanek, Pakistan’s Development (Harvard, Cambridge 1968), and Gustav F Papanek, Development Policy: Theory and Practice, (Harvard, Cambridge, 1968). Papanek’s point of view may have also benefited from his position as a member of the Harvard Advisory Group then assisting Pakistan in formulation and implementation of economic policy.

[25] There is an interesting but unconfirmed narrative that the Pakistani policymakers had mentioned their goal to nationalize a good part of the economy well in advance of the actual move in the presence of the then Chinese Prime Minister Zhou En Lai. The old man is reported to have been a little taken aback, and is said to have spent an unscheduled hour or more politely making an effort (he was keeping poor health) to dissuade his hosts by explaining the many problems that arise in getting efficient output from the state sector.

[26] A comparison of some of these indicators as between economies may be seen in World Bank, Doing Business 2008, (World Bank, Washington DC 2008).

[27] Pakistan’s production of cotton being the one factor that is suppose to give its textile industry the edge over the textile and clothing industries of other countries.

[28] See for example Meenu Tewari, The role of price and cost competitiveness in apparel exports, post-MFA: a review, Indian Council for Research on International Economic Relations, New Delhi, November 2005.

[29] Some explanations have been offered for the East Asian economic success, including the claim that it was the advice held forth by the multilateral financial institutions that explains the East Asian performance. See World Bank, The East Asian Miracle, Washington DC 1994.

[30] It is not the intent here to suggest that all of East and Southeast Asia has one history, culture or political economy. Nonetheless there may be common features which distinguish these regions from South Asia in terms of development priorities, work culture and work ethic.

[31] Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, (Bloomsbury, London, 2007), and Kicking Away the Ladder: Development Strategy in Historical Perspective, (Anthem, London, 2002).