Left to themselves to compete in open global economy, Pakistani exporters have largely been fighting this battle by their own entrepreneurial skills – without meaningful support from relevant government agencies.
True, that power outages and security problems have affected export performance and latest statistics indicate a 10.38 percent decline over the previous year in textile exports. But there is a more fundamental problem – often not discussed in public forums – which is eating away at the country’s export potential. And will continue to do so, even when the energy and security situations have improved.
This is the disconnect between two fundamentally integrated and inseparable activities – trade and investment. Instead of there being synergy between them, the two have been assigned to separate ministries. They have gone their separate ways and sometimes worked at cross-purposes. Consequently, while the pace of value addition and competitiveness of the country’s exports is slowing down, its investment has become directionless and is declining.
One of the most embarrassing examples of a disconnect between our trade and investment policies has been the treatment of the cell phone industry over a decade. First, a glimpse of how other countries are promoting exports by synergising trade and investment. The small and backward Zambia (but a country with a smart leadership) successfully attracted investment in setting up a cell-phone-manufacturing plant way back in 2009. The plant, which met all international requirements and cost only $10 million, has also been exporting cell phones to other African countries. For Zambians, their locally-manufactured cell phone is available for an equivalent of just Rs250.
Pakistan – one of the largest consumers of cell phone products in the world – has spent about $10 billion dollars since 2000 on the import of cell phones, but has not been able to attract $10 million in FDI to set up a single cell phone factory. Not only would made-in-Pakistan cell phones have been available to people for a few hundred rupees, we would have been exporting these to other countries and earning foreign exchange, instead of spending about 800 million dollars a year today on their import.
The consequences of such investment policies and their disconnect with the country’s export interests have not only been widening trade deficits but also creating an investment deficit – where investment-related outflows of dollars are increasingly greater than investment inflows. This is increasing pressures on forex reserves and depreciating the rupee. Several areas of the economy with high export and forex earning potential for the country, however, have not been on the radar of our investment policies. This disconnect is slowing down the pace of value-addition and the competitiveness of our trade with other countries.
For instance, the average per-unit value of Pakistan’s principal exports to the US market – textiles and clothing – is about 20 percent less than those from Bangladesh and nearly 100 percent less than those from Sri Lanka. There is no doubt that some very reputed Pakistani exporters earn top dollar in the US and other export markets because of the high-value content of their products, but these are few and far between. The vast majority of exporters in all sectors look to the government to direct its investment policies in such a manner that it fulfils their needs and helps their businesses accelerate pace of value addition and competitiveness. But that direction is missing as the disconnect between trade and investment is acting as a barrier to value addition and competitiveness of our exports in global markets. What this tells us is that Pakistan could easily double its export earnings even from the current volume of exports by directing its investment policies towards value-added exports.
Vietnam is another shining example of the magic that synergy between trade and investment policies can achieve. Until 25 years ago, the exports of war-devastated Vietnam were negligible and the country did not even figure in any list of exporting countries by UN agencies. In just 25 years, Vietnamese exports are $75 billion – three times those of Pakistan’s. They are powered by its export-oriented investment policies, and its FDI inflows during these 25 years have been more than FDI inflows to Pakistan in all of its 65 years.
Although many countries combine trade and investment, the most successful model of synergy between the two is the Japanese ministry of international trade and industry (MITI), where investment was an integral part of its activities. This synergy was responsible for the rapid industrialisation of its economy – the Japanese miracle – when its GDP jumped eleven-fold in 15 years, from $91 billion in 1965 to over $1 trillion in 1980. Its exports to the US alone kept increasing by about one billion dollar every year during that period. The Japanese model was successfully copied by several Asian countries whose value-added exports now dominate the global trade.
A serious research project was conducted in 2009 to analyse structural issues hindering Pakistan from achieving its export potential. In consequence, a model developed, calling for synergy between trade and investment and structuring of both activities under one umbrella. We also called this model MITI – i.e., ministry of international trade and investment. Since Pakistan, unlike Japan, is a federation and industry is largely handled by the provinces, investment was substituted for industry in our MITI model.
An important forum for tackling inter-ministerial issues for export promotion, which also brings the private and public sector together, has been the Federal Export Development Board. The board, headed by the prime minister, is supposed to meet every six months. Unfortunately, despite requests, the FEDB did not hold even a single meeting during between 2008 and 2010. This writer headed the Trade Development Authority of Pakistan (TDAP). Position papers – including our MITI model – thus remained on the backburner. It finally fell by the wayside, together with other things, when a favourite son was refused an international expo contract, since that would violate PPRA rules.
Pakistan’s declining investment flows and slow growth of value-added exports are products of structural anomalies and cannot be addressed through empty rhetoric. Connecting international trade and investment functions is important to give purpose and direction to investment flows and accelerate pace of value addition and competitiveness. Pakistan’s trade missions abroad should become “trade and investment missions” and part of the MITI.
Pakistani exporters are investors which are already in the world of value addition and earn export dollars for the country. So far, they have carved a niche in global markets largely by themselves. A Pakistani MITI-integrating investment and export development function under one roof – currently divided into three functions – would provide the much-needed synergy and support for them to make big inroads into global markets.
The global economy is dynamic and the rest of the world would further outpace us if we don’t quickly put our house in order. The time for Pakistan to have its own MITI – and see the magic of synergy working for its benefit – is here and now.
The writer designed the Board of Investment and First Women Bank and headed the BOI and the TDAP. Email: smshah@ alum.mit.edu