October 23, 2021
  • October 23, 2021

Obstacles to export-led growth – Opinion

By on July 10, 2021 0

Pakistan’s exports have stagnated over the past decade, while competing economies have experienced commendable export growth rates which have significantly strengthened their economies. Pakistan’s inward-looking trade policies have been a major obstacle to the economy’s ability to keep pace with its regional competitors. This is allegedly demonstrated by research from the World Bank and the Association of Textile Mills of Pakistan (APTMA), and further described in the context of non-tariff measures, overall protection and export competitiveness. , a recent PIDE working paper which is used in this document. article.

As the Pakistan Institute for Development Economics (PIDE) has pointed out, the stagnation of Pakistan’s exports has been the result of poor performance compared to competing economies. Pakistan’s exports of goods and services by value increased 58% between 2005 and 2017, from $ 17.7 billion to $ 27.9 billion. This compares to growth of 165% in total exports from the South Asian region as a whole, 136% from Thailand and 519% from Vietnam 1 (Figure 2). Bangladesh’s exports, which were almost the same as Pakistan’s in 2005, were US $ 47 billion in fiscal 2018, 50 percent more than Pakistan’s, US $ 30.6 billion .

While modern production networks rely on components of finished products that can move easily across multiple countries, protectionism has made this process inefficient and costly in Pakistan. Tariffs and other duties on imports ultimately serve as a tax on exports, as on intermediate inputs they can be up to four times higher than in East Asia. In addition, average tariffs on finished goods in Pakistan are 50% higher than the South Asian average and almost three times higher than the East Asian average (World Bank).

Pakistan also has a high gap between tariffs on consumer goods and raw materials and between intermediate goods and raw materials compared to the more open economies in the East Asia region, which participate successfully to global value chains. This creates the well-known cascading effect and, with it, high effective rates of protection in many manufacturing sectors in Pakistan.

It is evident that periods of high tariffs in Pakistan have resulted in reduced exports while low import taxes favor exports. In this context, a reduction in taxes can be observed from the following data: in the first decade of the 2000s, the government reduced trade taxes from 23.1% in 1999-2000 to 8.9% in 2014. This had leads to export gains of 173%. . However, this reduction was not consistent and until 2019, tariffs increased to 11.6%, lowering exports to 9.1%. (PIDE)

The PIDE working paper confirms the price increase effect of non-tariff measures in Pakistan. There is evidence that NTMs increase the domestic price of the products concerned, on average, by 55 percent. Therefore, streamlining non-tariff measures provides the best entry point to this process by reassessing their necessity and scope, streamlining the regulatory process and harmonizing it with trading partners. This will help improve the competitiveness of exports and reduce the impact on domestic prices and, with it, alleviate inflationary pressures, a major concern of policymakers. Rationalizing NTMs is not only an effective mechanism to reduce trade costs, but rather a major step in a broad better regulation agenda aimed at improving export performance. A table in this article presents the 10 most applied non-tariff measures on imports into Pakistan in 2015, listed by frequency index measured as a percentage:

Core NTM type                                                                 FI       CR
1    E322. Prohibition for political reasons (embargo)                        100     100
2    B7. Product quality, safety, or performance requirements               24.32   17.20
3    E316. Prohibition of used, repaired, or remanufactured goods           13.15   16.19
4    B31. Labeling requirements                                             10.49   12.15
5    A83. Certification requirements                                         9.86    4.81
6    E129. Licensing for non-economic reasons not elsewhere specified        7.83   25.41
7    B33. Packaging requirements                                             7.29    6.13
8    B42. Technical barriers to trade regulations on transport and storage   6.65    4.59
9    B32. Marking requirements                                               6.52    4.24
10   C3. The requirement to pass through a specified port of customs         5.50    8.46
Source: Faizi, Aleem (PIDE) calculation using WITS data

On the other hand, when it comes to irrational tariff policies, the MMF tariff regime effectively prevents Pakistan from aligning its products in tandem with the rest of the world. Over 60% of the world’s textile trade is in MMF materials, the demand for which has grown exponentially due to the convenience it offers. However, the tariff protection afforded to obsolete factories in Pakistan deprives the Pakistani industry of any chance to compete in this growing market, internationally or nationally. As a result, our textile business mainly produces short staple raw cotton while the world moves forward with an emphasis on man-made fibers. This brings us to the issue of polyester staple fibers, an industry feedstock on which it would be unreasonable to charge. Alarmingly, there is currently a 7% tariff on the import of polyester staple fibers. This accumulates the total import duties, which then fall within a range of 20%, including anti-dumping duties. Surprisingly, anti-dumping duties are also imposed on import export programs, which makes no sense. This factor alone is responsible for the lack of diversification towards new synthetic materials.

Trade policy distortions in the form of tariffs on intermediate inputs affect downstream productivity, through stricter import conditions. This phenomenon has the effect of increasing the cost of production, and therefore of reducing profitability. This results in escalating prices, which increases the burden on consumers and makes products uncompetitive internationally. Therefore, high protectionism is an obstacle to industrialization and must be overcome for the manufacturing sector to develop sustainably, create jobs and generate foreign exchange by increasing and diversifying exports.

Textile exports are all expected to increase to $ 20 billion by 2021, but this will require an additional $ 2.3 billion in working capital – another area where expansion is essential but where obstacles prevail. The cycle for exports is 4 to 6 months from production. Considering the shipping time and L / C conditions (3 months), 7-10 months funds will be blocked. Since the funds are revolving and will be in circulation, the required working capital is $ 2.29 billion, otherwise the export enhancement will be derailed. Some mechanisms to meet this requirement include releasing outstanding sales tax refunds with RBF, which amount to approximately $ 3.9 billion; if that rate were halved, $ 1.84 billion would go to industry. Payment of sales tax, income tax, TUF and DLTL arrears of around Rs 500 billion is also pending and, once released, will allow the industry to meet its fund requirements. bearing. An additional concessional working capital facility would also prove decisive.

Systems have been put in place to allow exporters to obtain imported inputs at world prices, but they are largely inefficient. Only about 2% of textile and clothing exporters in Pakistan have access to duty suspension regimes such as Export Duty and Tax Remission (DTRE) and Bonded Manufacturing (MUB) for their products. imported intermediaries, compared to 90% in competing countries such as Bangladesh. . Any protection of domestic polyester factories should be granted directly by the government and not at the expense of the economic future of our country. Pakistan’s DTRE program is also very inefficient, as the import of synthetic fibers can take two to four months, resulting in delays and uncertainties in production that are not acceptable to global buyers. This raises the question of why not all textile inputs are zero-rated.

Advanced machines and technological adaptation increase labor productivity and thus enable them to produce better quality goods in greater quantity and in less time. However, our engineering sector does not produce sufficiently advanced machinery that could help industries automate production. We remain dependent on imported machinery, which brings us back to the conundrum of high protectionism. As a result, companies often choose to continue with outdated and inefficient technology, which ends up hurting labor productivity and giving way to uncompetitive product prices.

Given the large part of the population that lacks access to quality education, there is a need to improve infrastructure and accessibility, as well as revise school curricula in order to prevent unemployment and low productivity. the workforce. Support for R&D for universities and industry as well as collaborative efforts to introduce industry-oriented solutions / innovations could go a long way to the economy. In summary, investing in human capital is an essential ingredient in boosting productivity. According to the International Labor Organization (ILO) estimate for 2009-2019, China’s output per capita, which is a measure of labor productivity, increased by 388%, India’s by 177%. % and that of Bangladesh by 109% while ours only increased by 32%. %.

Research has shown that productivity in Pakistan has stagnated and aggregate gains have been driven mainly by more productive firms that have gained market share. This situation is likely to persist if timely efforts are not made to ease import conditions, rationalize tariffs, enhance competition and markets, and modernize education in the country. It is high time that the links between government, academia and industry were strengthened in order to stimulate R&D and innovation, thus paving the way for increased productivity. Policies should target and facilitate innovative start-ups to develop them and help modernize the business environment in Pakistan.

Copyright Business Recorder, 2021

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