Are we serious about exports?

Advisor commerce is reported to have told the Senate Committee on Industries that his two top priorities are to halt deindustrialisation and have an export-led growth strategy, in that order. With respect, sir, you have put the wrong foot forward.

We have always put support to domestic industry ahead of export-led growth. Now the Advisor proposes to do the same, reminding us of Einstein’s quip “doing the same thing over and over again and expecting different results”, and what it defines.

Export-led growth strategy is never the cause of deindustrialisation; its absence often is. Put another way, export-led growth is the route to industrialisation. It should not be the second priority if we want to save our manufacturing sector. To become competitive it needs more competition, not less.

Import substitution is a seductive narrative that seamlessly morphs into rent-seeking if we do not first work out what it takes. Empirical evidence suggests, absent a strong producer goods industry (machines that make machines; intermediate goods), import substitution actually adds to import bill, not reduce it. Second, the size of domestic market does not allow the right economies of scale, making you less competitive. Third, without significant productivity gains (a natural outcome of restricted competition) industry becomes ‘path dependent’ - condemned forever to the stretcher of tariff/non-tariff barriers.

Unless industry’s orientation can be geared towards exports, ‘make in Pakistan’ becomes ‘make for Pakistan’, with all its consequences for competitiveness - and obliging the government to rob Peter (consumer) to pay Paul (industrialist).

There are two ways to help manufacturing. There is the easy one: a steroid injection of high tariffs, accompanied with supplements of subsidy and doses of that mysterious drug called ‘ease of doing business’. Then there is the difficult one: making manufacturing more efficient and more competitive. Unfortunately, the easy option has never worked anywhere in the world, except when it is a clearly defined intermediation measure to usher in the difficult option.

The trouble is once you succumb to the easy option it is hard to resist declaring victory. The difficult-option-ball then gets dropped in the scramble for self-congratulation –until the steroid effect wears out and you have the industry strike back with its ‘do more’ chant.

Ours has been a story of barbarians at the gates: rescue us from the marauders (foreign suppliers) or we are done. ‘Relax labour laws, give us cheaper utilities, easier finance, save us from the regulator, save us from the menace of under-invoicing and Afghan transit trade, save us from a disproportionate share of taxation, save us from Chinese inundation of our markets, give us more protection’ has been the refrain ever since one can remember.

The reason is simple. We got our diagnosis wrong and administered the wrong medicine. We didn’t drill deep into the foundations of our manufacturing sector to see why it is so shaky. Part of the explanation is the legacy of ‘permit raj’ that did not permit optimality of size and technological diffusion. The real reason is our failure to establish ‘reward-performance’ criteria, the kind of reciprocity embedded in the Korean model of industrialisation. We give to all and demand of none.

Countries from Germany to Malaysia have low tariffs, and they too are threatened by the Chinese invaders (who, incidentally, have not singled out Pakistan for under-invoicing). But they don’t respond to the threat by jacking up tariffs and doling out subsidies. They work on productivity, innovation and competitiveness. They go for value-addition, global value chains, and knowledge economy. They balance the book through greater exports.

We empathise with the advisor. Export-led growth is virgin territory for us. Rhetoric apart, we have never ever tried it. Import substitution (and often ‘import management’), have been the preferred policy choices, with import duties used for revenue generation rather than as trade policy tool. We may have joined the chorus of ‘Trade not Aid’, but in reality have always opted for aid. When an exuberant head of Export Promotion Bureau (perhaps going bit over the top) coined the ‘export or perish’ logo he was roundly chided.

The closest that we came to an export-led growth strategy was the ill-fated strategic trade policy framework (STPF) 2015-18. As we had predicted in a column elsewhere, it was dead upon arrival. It was a death foretold: it was a Commerce Ministry wish list that did not have the buy-in of the government as a whole.

Export-led growth strategy requires a complete reorientation of government’s policy matrix. Commerce can do the necessary staff work but it has to be driven by Finance Ministry, under a well-thought-out decision of the Cabinet.

This government has a penchant for setting up task forces. That it has not set up a task force for export-led growth strategy tells us something about its ownership of the idea.

The STPF 2018-23 is now on the anvil. Its details are not in the public domain yet, but we suspect it will be more of the same: ill-thought-out subsidies and duty-drawbacks, some adjustments to tariffs, promise of quick refunds, peripheral tinkering of input costs, and perhaps some (non-sustainable) rewards for product and market diversification. This, too, shall go the way of its predecessors.

What is likely to be missing is incentivising greater import content in our exports. It will be lost on the policymakers that Bangladesh does not grow a staple of cotton and yet fetches more for its textiles than our total exports. That Germany does not grow a bean of coffee and yet is world’s third largest coffee exporter. That Switzerland does not grow a pod of cocoa and yet is a major exporter of chocolates.

What is most certainly going to be missing is a thrust towards export-led growth. The composition of the recently announced Council of Business Leaders (CBL) is instructive. Without exception they are able persons with a proven track record (good to see two ladies in there).

It also has some major exporters. But how many of them champion the cause of export-led growth? Even the established exporters there have ventured into domestic market which they find more rewarding.

Accidental or not, the CBL is housed in commerce and not industries division. Let it then work for exports. For starters, study Asian tigers’ ascent —on the wings of export-led growth strategy.

The writer is a freelance columnist