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July 11, 2018

Without value-addition, Pakistan’s exports unlikely to go north or even close


July 11, 2018

LAHORE: Countries export goods either because they have inherent natural resources, or they produce labour-intensive products because of low-cost but the ones that excel in this department produce either specialised items or benefit from economies of scale.

It is high time that our planners looked at the global trends in trade. They should take a decision on the way they want to proceed and formulate policies accordingly.

As far as Pakistan is concerned, it does have some advantage of having natural resources. It produced cotton for exporting textile industry and it also exports substantial quantity of rice, but it has not benefitted from its fruits and vegetables potential as there is no value-addition.

Moreover it loses a lot of foreign exchange in importing edible oil. So the trade potential from natural resources is not so high in Pakistan. In fact the trade in commodities and agricultural goods actually accounts for minor share of global trade, the actual beneficiaries are those that buy these commodities at low prices and make high value products from them.

Pakistan is still among low labor cost countries. China penetrated the global markets on the same strength. The cost of labour in the Asian giant is comparatively much higher making it difficult for it to retain markets of low value-added goods.

In Bangladesh, it is comparatively much lower than Pakistan. It has almost the same population as well. We were a force in textile sector but we grossly neglected its labour-intensive apparel sector. Bangladeshis took advantage of this opportunity by establishing the most labour-intensive garments industries.

Pakistanis invested heavily in very low value-added products like yarn that need less labour. So we could not scale up our textile exports nor could we create a lot of jobs in this sector.

The low labour cost advantage does not look as lucrative as it was three decades back. The rapid automation in the last three decades has drastically reduced number of workers required to operate a plant. Two decades back a 25000-spindle spinning mill required 1100 workers out of which 600 worked on machines, while 500 used to pick up trash from the cotton before spinning.

The laser scanners that pick trash from cotton eliminated the entire trash picking workforce. The mills then operated with 600 workers. Now the new spindles that are not only fast but also save energy need only 150-200 workers to handle 25000 spindles.

Every industry saw reduction in workers when modern machines were introduced. The robots have replaced many workers in numerous industries. Private sector in Pakistan would have to modernise their equipment on regular basis if they want to stay in global markets. Besides modernisation, they will have to scale up production to achieve economies of scale.

Despite the fact that countries like China and India have made great strides in global markets, the developed economies are still ahead of them in technology. They have introduced and established brands through research and development. Those brands are sold at high premium. Most of these them are produced in the developing economies at very low rates.

Companies in developing economies compete with each other to obtain orders from brands. The rates they quote are 4-5 times cheaper than the retail prices of these brands. The big brands thus make more money on their products than the producers of these brands in developing economies. The developed economies thus lose some jobs but earn five times higher than their suppliers.

The current trade war between the United States and its trading partners including China is going to impact the developing economies as well. China because of its large population of over 1.4 billion can withstand competition on the strength of its economies of scale.

India with almost same population can bank on its huge population to achieve economies of scale. However, Pakistan, which is only 200-million-strong, has to penetrate global markets to achieve economies of scale.

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