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February 15, 2015

Aid or trade?

Opinion

February 15, 2015

It is customary for our leaders on either side of the political divide to maintain that Pakistan needs trade (read: increased market access), not aid. Such statements, though politically powerful, are grossly incorrect and misleading for at least two reasons: One, they imply that the country has to choose between foreign aid and better access for its products in export markets and that it should invariably opt for the latter. Two, they assume that the country is in a position to reap the benefits of increased market access if and when it is offered.
In fact, Pakistan requires both aid and trade and that aid is necessary for securing any benefits from enhanced market access for exports. Aid for trade, and not merely trade, is what the country really needs.
The very concept of aid for trade is based on the realisation that countries need to build their capacity to become effective players on the global or regional economic scene and overcome the costs of trade liberalisation. In the words of the World Trade Organization’s task force on the subject, “Aid for trade is about assisting developing countries to increase exports of goods and services, to integrate into the multilateral trading system, and to benefit from liberalized trade and increased market access.”
Coming back to Pakistan, the country is a founding member of the WTO as well as a signatory to several regional and bilateral regional trading arrangements (RTAs). In the wake of its membership of WTO and RTAs, the country has significantly liberalised its trade regime and secured better market access for its exports. However, it has not been able to reap benefits of multilateral or regional integration and seen its trade balance deteriorate with the passage of time.
The major reason for this is the increasing supply-side constraints and lack of competitiveness. This is borne out by the slide in the country’s ranking on the global competitiveness index (GCI) of the World Economic Forum

(WEF) over the years. In 2007-08, Pakistan’s GCI position was 92nd, which in 2014-15 fell to 129th.
On institutions, the country’s ranking fell from 81st in 2007-08 to 123rd in 2014-2015; on infrastructure, from 72nd to 119th; on macroeconomic stability from 101 to 137th; on health and primary education from 115th to 129th; on higher education and training from 116th to 127th; on labour market efficiency from 113th to 132nd; on technological readiness from 89th to 114th; and on innovation, the GCI ranking slipped from 69th to 88th.
According to the World Bank, total public spending on education and total spending on health (public and private) in Pakistan make up 2.1 percent and 3.1 percent of the GDP respectively. A capital reason for this is the low fiscal space available to the government, with the country having one of the lowest tax-to-GDP ratios in the region.
There are several areas in which Pakistan needs aid for trade. To begin with, trade-related technical assistance is needed to formulate the right trade strategies and negotiate and implement multilateral, regional or bilateral trade agreements. Present-day trade agreements are very comprehensive in scope and cover a wide range of subjects including investment, intellectual property rights, dispute settlement, services, economic cooperation, health and safety standards and competition policies. Negotiating and implementing such comprehensive agreements requires capacity building of the institutions concerned.
In the second place, strides in information and communication technology have connected domestic markets to the international economy. Accordingly, trade related physical and commercial infrastructure has become a major element of competitiveness of nations. Conversely, countries like Pakistan which lack quality infrastructure find it difficult to compete internationally. The country must improve physical and commercial infrastructure, for which foreign aid is needed.
In the third place, the export performance of a country in large measures depends on its industrial performance. Pakistan mainly exports low technology and low value added products, such as textiles, garments, leather articles and sports goods and is effectively excluded from global value chains. The export base is narrow and the textiles sector, the linchpin of the country’s export performance, is marred by low productivity, obsolete machinery, lack of innovation and deficiency of skilled labour force.
Besides, the share of textiles in global trade is stuck around six percent for many years, which means Pakistan’s export pattern is quite opposite to the world’s and it should diversify its export portfolio. The capital reason for such export profile is the industrial profile of Pakistan, which is characterised by low productivity and lack of innovation and diversification. Again, foreign technical assistance can be of great help in putting the domestic industry on the right track.
In the fourth place, the country needs trade-related adjustment assistance to help meet the costs associated with trade liberalisation. Globalisation has enormously benefited consumers by enabling them to have access to cheaper goods than they had previously. But it has also exposed domestic firms to tough competition with foreign businesses. In a show of strength, inefficient firms are doomed to be driven out of the market.
The importance of being efficient has put cost controls at a premium. In their bid to bring down their cost of production, firms are forced to eliminate several positions and even re-locate to a foreign land, as some textile manufacturers in the past located themselves to Bangladesh to benefit from the country’s least developed country (LDC) status. Obviously, there are some winners and losers in this process. The main losers are the blue-collared workers, who are either thrown out of their jobs or forced to work at lower wages.
There is a need to undertake programmes for the re-adjustment of displaced workers. However, the problem in countries like Pakistan is that they lack the funds as well as the institutional mechanism for re-adjustment of displaced workers.
Vulnerable as Pakistan’s economy is to foreign competition, it is ill-equipped to deal with this flip side of globalisation – and thus needs foreign assistance. Failure to readjust displaced workers is not only an economic but also a social problem. It results not only in loss of income but also in the loss of prestige and self-respect.
Finally, there is the need to strengthen linkages between trade and human development. Trade can serve as an engine of human development by accelerating growth, generating jobs and incomes and reducing poverty.
On its part, human capital development increases workers’ productive capacity. Since workers are the most valuable asset of a firm, human capital development can be a very effective means of improved trade performance. Human development is an area where Pakistan lags behind most of its competitors. A major reason for this is low budgetary allocation for health and education. Foreign assistance can be of great use in increasing human development related public spending.
The writer is a freelance contributor. Email: [email protected]

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