Economic diversification is the process of shifting an economy away from a single income source toward multiple sources from a growing range of sectors and markets. Traditionally, it has been applied as a strategy to encourage positive economic growth and development.
The pandemic crisis has compelled countries to revisit their economic strategies and factor in the external and internal impacts that have ensued into a situation where growth of many products have either stagnated or lost their value and demand. Many exporting nations have seen a sharp decline in global demand, while at the same time there have been abnormal increases in prices and rates of raw material, transportation, commodities or essential products. This abnormality has led to uncertainty and has negatively affected the cost of products.
Pakistani industries were in a state of instability and insecurity during the initial months of the crisis. The prognosis was of doom and gloom for entrepreneurs, workers, bankers and suppliers. There was instant relief when the government allowed industries to operate again which created the impetus for exporters to dash to the global marketplace. The export regime looked rosy and the current account was in surplus. The domestic scene was also encouraging and despite upsurge in prices, the demand was escalating much to the delight of the producers. However, soon the e.coli hit the fan. Oil prices increased, ship freight charges shot up, containers became scarce, coal continued to become expensive, and all these and much more eventually resulted in increased cost of production. Most of the producers are and were between a rock and a hard place.
Pakistan is gradually scaling up the export ladder, but then there is now an imperative need to tweak the trade matrix. According to World Integrated Trade Solutions, Pakistan exports around 2,800 products to an average of partners in around 194 to 200 countries and imports more than 4,000 products from partners from more or less 208 countries. Moreover, only five countries buy 43 percent of total exports of Pakistan. These are USA, China, UK, Germany and Afghanistan. More than 51 percent of all imports of Pakistan are also from five countries, namely, China, UAE, USA, Saudi Arabia and Indonesia.
Hence a new thinking, strategically planned and processed, is the need of the hour to achieve the objective of reprogramming the trade scenario. This focuses towards the need for economic diversification strategies that could deliver sustained, job intensive and inclusive growth.
For the past many decades, the bulwark of export regime has been textiles. Export policies generally revolved around textiles and every government bent backwards not only to support textiles, but also pamper to every demand of the textile related associations. The textile export policy was centered on exporting raw cotton and then edged towards cotton yarn and cotton grey and unbleached fabrics. Moreover, in the days when the quota regime for apparel and made-ups was in full force, Pakistan could not develop a broader export framework that would have encouraged more inclusion of producers and exporters. The corrupt officials of the erstwhile Export Promotion Bureau in connivance with a small group of leaders of textile associations (mostly family-centered and operated) ruled the roost till quotas were eliminated. Today, these officials are not around while these five or six "owners" of textile associations have shut down their factories or have migrated or are no more in this world or are not heard of. This elite capture was responsible for suffocating the growth of textile garments and made ups. This abysmal episode has been highlighted to raise the point why Pakistan seriously needs to work on economic diversification.
Pakistani economic managers must also comprehend that in the past year when textile exports were increasing all of a sudden, many companies that had huge inventories of cotton, yarn or fabric in their warehouses that were comparatively at a lower cost, made windfall profits and gains. In the domestic market, demand is stagnant, inventories piling up, while sale prices of products are less than the cost. There is an element of uncertainty about the future for most of the industries because of factors such as the depreciation of the rupee, narrow market base, rising cost of production and intense competition. In both cases, a diversified economy would create a sustainable cycle of economic activity where industries and businesses continually take advantage of one another and survive and sustain as the economy grows. As more and more businesses open their doors, it leads to the growth of supporting industries.
Pakistan has been importing essential as well as non-essential products without having a long-term focused import regime. Essential imports are often sidelined when the policymakers indulge in panic buying such as of wheat, sugar, or cotton, because over the years, scant attention was paid to enhancing productivity, quality and prices. This panic situation is also evident in import of LNG. Although it could be argued that luxury goods are draining to some extent the scarce foreign exchange, the fact is that the liberal import policy discouraged diversification. There is no control whatsoever to restrict stock lots and shoddy, under-invoiced and mis-declared goods such as shoes, children's garments, fabrics entering the national borders. It is not feasible to produce these goods here because of the lax attitude of government, because of endemic corruption at the Customs, borders, or dry ports, and because importers have easy access to money laundered funds. Now, when imports are out of control, a minister decrees steps to cool down what he says “Pakistan's economy is heating up”. This is again the over-used, narrow-minded, and ad hoc approach. As an analogy, first they boil the water, then they put their finger in it, then they scream and wail, then they use an ice cube to soothe their pain, and then after some time, boil the water again. For local investors and industrialists, there is no government mandated level playing field, there is unrelenting harassment by FBR and other agencies, and there is non-availability of continuous supply of electricity, gas and water. More reasons why there are no serious efforts for economic diversification.
Pakistan has been endowed with huge reserves of natural resources that need to be exploited. Broad-basing the economy would lead to an improvement in the lives of those who dwell in the hinterlands, mountains, and far-flung areas. Incentivising and facilitating the mineral sector would increase the number of products for exports and even for use by the local market. Except for kinnow or apples and maybe couple of more fruits, Pakistani entrepreneurs and investors have not seriously entered this business. Fisheries, meat, engineering, value added handicrafts, and information technology, to name a few sectors, need expansion, promotion, and investment.
Pakistani policymakers must comprehend the prevailing situation and learn about the experiences of other countries. Germany, the United States, and South Korea are examples of economies with large and diversified product portfolios. Conversely, Angola, Paraguay, and Bangladesh are low-complexity economies with few developed products. Larger countries that export oil, such as Nigeria and Kazakhstan, have failed to substantially expand the range of products they produce and export. Other low-income countries, such as Laos or Malawi, have limited diversified economies. The World Bank Group’s Trade & Competitiveness Global Practice, a joint practice of the World Bank and International Finance Corporation (IFC), is working with many countries which are eager to achieve greater economic diversification. This is commendable especially now as developing countries with limited sector-dependent economies face vulnerability.
What is the right strategy for Pakistan to diversify the economy? At the outset, economic diversification must become an important development goal and must be owned by all stakeholders. Pakistan must also get away from restrictive economic activities that focus only on the textile sector despite the fact that nearly half of all exports are in textiles. It is a given reality that textile must be allowed exponential growth but for how long would the country continue and rely on this low hanging fruit for foreign exchange earnings and job creation. Dynamic strategies, sustainable policies and optimal utilisation of national resources and assets are crucial to identify and implement economic diversification. “Don't put all your eggs in one basket” is a mantra mothers everywhere have been telling their children for generations. Diversification of an economy means that if one sector has a negative consequence, then the domino effect on the overall economy would tend to be minimised. For Pakistan, economic diversification would manage volatility, which is primarily due to external factors, and provide a more balanced structure for employment opportunities, equitable growth and sustainable development. An advice from Hassanal Bolkiah, the Sultan of Brunei, is also pertinent: “The development of our human resources is an area in which we need to do well as it is decisive in determining the success of our diversification process”.
The writer is former president Employers Federation of Pakistan