Economic challenges to Pakistan are continually rising and their severity is increasing with the recent rupee depreciation despite the fact that the country has the potential to become one of the world’s fastest developing and richest nations due to its abundance of untapped natural resources and human resources.
Macroeconomic instability and low productivity could call into question the economic stability of any state. The ongoing crisis is perceived to be challenging to the gamechanger China Pakistan Economic Corridor (CPEC) as well. The most prominent of all these challenges faced by Pakistan is the inefficient and dysfunctional infrastructure of civil institutions and their outdated policies for trade, which need to be revised.
Pakistan is on the verge of economic collapse and the country’s progress is stagnant in the global supply chain. Pakistan’s exports are falling at the cost of higher profit in domestic production because of higher protection (subsidies), which iscausing low productivity in the economy.
We witnessed how subsidizing production has failed, as was proved in the case of the textile industry. Pakistan must focus on efficiency and competence in the international market. It needs to give protection to product not production, which means Pakistan will have to spend on the product marketing and quality. Pakistan is providing subsidies on electricity rates, lower interest rates and direct subsidies for production. On the other hand, it is recommended that Pakistan should spend on marketing to increase its market share and move up on the global supply chain
Trade deficit and inefficient distribution of resources are leading to macroeconomic instability. Pakistan’s policies are dominated by the elite; they subsidize sectors that work in their favor but not the economy. That is why global market trends are changing rapidly from the last two decades and Pakistan is somehow lagging behind and not chasing properly at most turns.
Investment and trade are closely linked, and every plan for the proposed growth should be operated by investments in production for the global market, in place of mainly fulfilling domiciliary demand, as is the case with Pakistan. This has hindered transformation and productivity enhancement for Pakistani manufacturers, making them noncompetitive in the international market and for that reason they are impotent to enlarge and generate job opportunities.
Unfortunately, Pakistan has not kept pace with globalization, where the share of total foreign direct investment (FDI) flowing into emerging Asia has skyrocketed over the past two decades from 10.5 percent in 2000 ($142 billion) to about 39.5 percent in 2018 ($512 billion). Over the past half-decade, South Asia’s total exports have increased by 50 percent, FDI to Vietnam has quadrupled and to Bangladesh has gone from $20 billion to $40 billion, while Pakistan’s exports have remained at $20 to $25 billion.
Pakistan’s major export is textiles, and it is the only consistent industry supported by the government the last 70 years. Yet, no significant improvement is visible. Pakistan’s export is about $12 billion and globally he industry is $600 billion. Apparel exports in Bangladesh were $8.8 billion in 2006 and $24.6 billion in 2017 and in Pakistan it was $3.8 billion and now it is $6 billion. Despite its huge population and potential-possessing youth, major global brands have bypassed Pakistan as a manufacturing base for labour-intensive items such as textiles, agro-food products, and footwear, all of which produce massive quantities of exports from host countries.
The reason major global brands are bypassing Pakistan is that there is no suitable structure available to the investors. According to statistics, investors can easily guess where the margin will be. Pakistan’s electricity bill is 31.100 rupees/kWh and Bangladesh’s electricity bill is 19.954 rupees/kWh. It can be seen that Bangladesh supplies producers/investors with cheap electricity of 11.146 rupee/kWh.
Infrastructure bottleneck: At Karachi Port, it takes seven days to handle and unload containers, but at Singapore Port, all this is completed in one day. There is much to mention about the flaws of Pakistan’s policy structure, such as taxation, licensing, bureaucracy and ease of doing business. Most importantly Pakistan needs a right tariff structure (China less than 3 percent, Vietnam 3.5 percent and Pakistan 8.69 percent ).
Pakistan’s production and market is import-oriented, and present tariff rates may not help Pakistan to grow or move up on a global supply chain. Yes, there are export rebates and duty drawbacks, but these mechanisms are not efficient enough. World apparels have handmade fibres in them. In Pakistan handmade apparels have 32 percent duties on them including sales and income tax, while in Bangladesh it is about 5-6 percent. We are thus simply cutting a 25 percent margin.
While CPEC is in development stage which Planning Commission claims is a game changer, but wait, do we really think these motorways and infrastructure will change the game? No, for CPEC Pakistan must increase its trade dramatically otherwise these roads and infrastructure will be liabilities on Pakistan, and Pakistan will be paying the debts and interest to China. Special Economic Zones (SEZs) will only work if Pakistan encouraged domestic and international investors to locate manufacturing in Pakistan and re-export them from Pakistan. Pakistan must be very clear in their vision and SEZs should not become another rent-seeking activity.
We witnessed how subsidizing production has failed, as was proved in the case of the textile industry. Pakistan must focus on efficiency and competence in the international market. It needs to give protection to product not production, which means Pakistan will have to spend on the product marketing and quality. Pakistan is providing subsidies on electricity rates, lower interest rates and direct subsidies for production. On the other hand, it is recommended that Pakistan should spend on marketing to increase its market share and move up on the global supply chain.
Four major recommendations from this policy are (A) Tariff rationalization: Pakistan has to reduce the tariff rates in order to welcome the FDI. (B) Pakistan should focus on the ease of doing business: The consistency environs of such a country further facilitates the start-up and operation of local businesses. (C) It needs to get rid of subsidies and focus on efficiency-seeking investments both domestically and internationally: FDI enters the country to make the most of the factors that allow it to take part in the global market. (D) Human Resource build-up: it is the need of hour to focus on human resource.
This will make CPEC function at its full potential level, will stop currency devaluation, resolve the issue of balance of payment and will service Pakistan’s debt.
