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December 15, 2018

Moral suasion and the economy


December 15, 2018

As the economy is going to pot, messages are doing the rounds on social media that if each Pakistani shuns foreign products and buys only locally made goods for at least one month, that would set the stage for putting the economy back on track.

Preference for domestic products, the argument goes, is a magic wand which will cut back on imports, save valuable foreign exchange, drive up the local currency, and give a leg-up to the domestic industry. As a result, the nation will not have to go through the ignominy of borrowing from abroad. President Arif Alvi also echoed such patriotic thoughts when in a recent tweet he exhorted citizens to buy made-in-Pakistan products only.

Such messages are based on the assumption that Pakistan’s current economic crisis is rooted in the high propensity to buy foreign goods. Let’s, for the sake of argument, take this assumption to be valid. The next logical question is: how can the nation cut down on imports? This can be done in two ways. One, the government may restrict imports through administrative steps – ranging from imposing high customs duties to clamping outright prohibitions on imports. Being in charge of a sovereign state, the Pakistan government can resort to such a remedy without much ado. In fact, this remedy seems so obvious that the man in the street and pseudo-economists alike can’t help wondering what’s holding back the people calling the shots who, unlike their predecessors, possess patriotism and political will in buckets.

Be that as it may, in view of the country’s commitments arising out of legally binding international treaties and protocols only a limited policy space is available to the government to scale down imports. Besides, restrictive measures may force our trading partners to retaliate by subjecting our exports to a similar treatment. The result will be a zero-sum game. That is one reason that government efforts to substantially curtail imports through punitive measures normally come a cropper.

While the government may have its hands tied by the compulsions of international law and the niceties of diplomatic norms, the same does not apply to the citizens. In the end, every industrial buyer and final consumer is himself the judge of where to procure from. So if the people decide to purchase only domestically-made goods, no one can force their hand to do otherwise. Thus, on the face of it, the argument to stop buying foreign goods makes a lot of sense. But then why do we, the Pakistanis, each year spend billions of dollars on foreign goods? Are we short on patriotism? Or are we too xenocentric to reject foreign goods?

The answer is that buying foreign or local products is not a question of patriotism or xenocentrism, but of consumer needs and wants. Imports represent the difference between domestic demand and domestic output (minus exports). The wider the gap, the higher the import volume. All else equal, high imports are undergirded by low productive capacity.

Pakistan is among those countries which have a very narrow production or manufacturing base. We are essentially a producer of primary products, such as wheat, cotton, sugarcane and rice, and low value-added manufactures, such as textiles, sugar articles, that are derived from these primary products. A wide range of the products that our households and factories use as a matter of course are either not manufactured locally at all or are produced in relatively small quantities.

Such products include oil and gas, chemicals and fertilizers, pharmaceuticals, iron and steel, machinery and electronic equipment, vehicles, consumer durables, and aircraft. In case the manufacturing concerns or households refuse to buy these products from abroad – of course, out of sheer patriotism – the resulting scenario is not difficult to construct. Our homes and factories, schools and hospitals, will be without electricity as well as other facilities deemed essential for a decent living or working conditions. Automobiles will not be on the roads – it may be noted in passing that we are only an assembler of autos – and offices will have to work without the necessary equipment. There will be no internet, no social or electronic media – not even newspapers as newsprint is imported. In a word, we’ll be thrown at least a century back.

The domestic supply-side constraints are well brought out by the import profile. During the last financial year (2017-18), the import bill amounted to $60.86 billion, which included $14.43 billion for petroleum products, $11.57 billion for machinery and appliances, $8.91 billion for chemicals and pharmaceuticals, $5.35 billion for metals, $4.83 billion for vehicles and auto parts, and $1.29 billion for raw materials. The cumulative size of these products comes to $46.38 billion, which accounts for more than 76 percent of the total imports. The import of these goods is essential to run our offices and factories and to expand the economy.

Even in industries where we have sufficient productive capacity, the efficiency of the production processes and the quality of products is below the mark. Customers, whether they are households buying for consumption or industrial users purchasing for producing goods and services, want the best value for their hard-earned money. While making purchase decisions, they are guided by the utility maximisation rule – which is to say that within their budget constraints they will buy that basket of goods and services that they believe will afford them the highest possible satisfaction.

While ‘satisfaction’ is subjective and consumers may look for different product characteristics in terms of colour, taste, size, weight, and texture, consumer behaviour is not all that arbitrary. Customers have some expectations of the manufacturers or suppliers in terms of product reliability, performance, safety, conformity to standards, and after sales service. No one expects their new refrigerator, no matter of which brand, to go kaput when the mercury rises. When fulfilled, the expectations create brand loyalty. The principal reason for preference for foreign brands is that there are few local brands that command customer loyalty.

Despite being the world’s fourth largest cotton producer, Pakistan imports cotton as the local produce is not deemed of ‘export quality’. Since the performance of the entire textiles value chain depends in large measures on cotton quality, exporting enterprises prefer to use imported cotton. In 2017-18, more than a billion dollars were spent on imported cotton.

Of the consumer items that Pakistan imported in 2017-18, palm oil had the largest share ($2.01 billion followed by tea ($552 million) and pulses ($534 million). The consumption of tea and pulses is part of our culture and it’s difficult to significantly bring down their imports. As for palm oil, its import reflects preference for processed fruit which uses it as an ingredient. Pakistan doesn’t produce palm oil, while only a limited amount of tea crop is grown in the country. Likewise, pulses are cultivated on less than five percent of the crop area. Together with rice, they constitute the staple food for low-income households.

Using moral suasion for cutting back on imports and promoting made-in-Pakistan, however momentarily appealing it may be to, is barking up the wrong tree. It’s only by shoring up the productive capacity of the economy and developing credible local brands that dependence on foreign products can be shed.

We can conclude by sketching a hypothetical situation: You are going for a job interview. You don’t own a vehicle and thus need to hire one. Your friend runs a cab but it’s not in a good shape and is likely to breakdown midway. You want to help your friend make some money. But would you take the risk of travelling by such an unreliable car for such a crucial purpose, simply because it’s owned by a friend of yours? Let every reader answer the question themselves.

The writer is an Islamabad-based columnist.

Email: [email protected]

Twitter: @hussainhzaidi

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