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Monday November 29, 2021

Enhancing export competitiveness (Part – I)

November 19, 2021

The writer is the author of 'Governing the ungovernable'.

Looking at the high growth emerging economies that have sustained per capita income growth between 4 and 7 percent annually over a fifty year period – China, Korea, Hong Kong, Singapore, Malaysia, Indonesia and Thailand and a likely new entrant Vietnam – what strikes an observer is their exceptional performance in global export markets.

Despite the fact that China has a domestic market of 1.4 billion, its spectacular unprecedented growth couldn’t have taken place if it had not actively participated in international trade. China, starting almost from scratch in 1980, has become the world’s largest exporting nation with over 10 percent market share surpassing the US and Germany although its per capita income is only $11000 – one-fifth that of the US. Hong Kong, Singapore, Vietnam and Malaysia have export-GDP ratios of 100 and over, while Thailand has a ratio of 50. Only Indonesia, being a highly populated country, lags behind these other countries but it would be interesting to note that in October 2021 its exports surged by 53 percent to reach $22 billion – almost close to Pakistan’s annual exports in 2019-20.

Compare this above scenario to what has happened to Pakistani exports. Our share in global markets has declined form 0.2 percent to 0.15 percent in the last thirty years and export-GDP ratio plummeted to 10 percent from over 17 percent in 1992. India was able to jump from 7 percent to 23 percent by 2013 and Bangladesh from 6 to 19 percent. Both these countries were able to significantly surpass Pakistan in capturing the share in global exports (India 1.71 percent and Bangladesh 0.24 percent). Global economic conditions in this period, except for the crisis of 2008, were buoyant and highly favorable to developing countries. World trade was growing at twice the rate of world output and the share of developing countries had risen faster at the expense of the developed countries. At the turn of the millennium, 90-97 percent of merchandise exports used to finance Pakistan’s imports but this capacity has dwindled to only 47 percent.

Not only has export growth leveled off, the composition of our exports has also remained unchanged for the last three decades. Two-thirds of our exports are concentrated in a few agricultural raw materials and unskilled and semi-skilled labour intensive products such as textiles, rice, leather etc. We remain focused on traditional, stagnant, slow-moving sunset exports rather than dynamic, fast-growing strategic products in the medium-tech and hi-tech sectors. The share in hi-tech exports has remained static at less than 2 percent while low-tech exports account for two-thirds of the total, down from one half in the 1980s.

A superficial single-factor prescription such as sharp currency depreciation cannot satisfactorily explain this disturbing trend. Between 2000 and 2007 the Pak rupee-dollar exchange rate was relatively stable and the exports doubled from $8.6 billion to $17 billion while the foreign exchange reserves went up from $2 billion to $16.5 billion by 2007. Current account was in surplus in three out of six years and external debt as a ratio of GDP was halved from 47.6 to 27.8 percent. Those who interpret this outcome as a result of artificial exchange rate would find it hard to explain how foreign exchange reserves can be accumulated by a multiple of eight if the exchange rate was being defended to maintain a certain level.

The sharp depreciation of currency by 55 percent between 2007 and 2008, and 2012 and 2013, resulted in only 24 percent growth in exports. Between 2013 and 14, and 2018 and 2019, exports actually declined from $24.8 billion to $23.2 billion while the exchange rate was relatively stable during this period. The effect of exchange rate movement, taken by itself, therefore remains ambiguous and unclear in the case of Pakistan. This piece of empirical evidence is presented to show that, while the exchange rate would remain an important variable in the export equation, we have to examine other factors that may be able to explain this lack of competitiveness of our exports.

According to the International Trade Centre, ‘export competitiveness’ refers to “the capacity to produce, distribute and sell products and services more effectively and efficiently than is done by the relevant competitors.” It must be recognised that it is the firms that compete, not the countries. Of course, public policies and institutions, macroeconomic conditions and business environment such as tariff and taxation, regulations, utility pricing, ease and cost of doing business do make a difference but the primary responsibility rests with the exporting firms.

The public discourse so far has been mainly and disproportionately centred around the government’s role in export promotion and very little attention has been paid to those “who produce, distribute and sell these products” – the main actors in the scene for making our exports competitive. We cannot absolve the state for their role but that is necessary though not sufficient. This article takes a different tack and highlights those factors that are under the control of the firms or are a product of the interaction and collaboration between the firms and the government.

The industry captains in the export sector should no longer devote their attention towards Islamabad for extracting concessions, tax breaks, subsidies, low interest rates as this would keep them dependent on the crutches provided by the government of the day and keep them entrapped in the present low productivity equilibrium. They should tap the hidden wealth in the industry through labour productivity gains, by hiring professionals, restructuring internal organisation, revamping logistics, acquisition methods, entering into joint ventures and bringing in foreign direct investment, and mobilising capital for expansion and investment in sunrise industries through IPOs.

Once the government, in consultation with them, has announced medium-term trade, ecommerce, services export, sectoral export policies and incentives such as energy prices, tariff rates, DLTL etc the exporters should explore and penetrate new markets, develop new products, embark on Research and Development, assure quality, manage supply chain and logistics, ensure delivery on time and maintain healthy relations with customers. In this way they will be able to save costs and increase revenues on a sustainable basis which would far exceed all the concessions and subsidies granted by the government and withdrawn at its whims and caprices. Instead of travelling to Islamabad frequently, they should head towards Shanghai, Lagos, Johannesburg, Manila, Jakarta, Tashkent, Tehran, Istanbul etc.

The most persistent and lingering phenomenon that needs to be tackled is low productivity in our export industries which is amongst the lowest in the region and is only 30-40 percent of China. We may be a low wage country but – adjusted for productivity, efficiency, quality (rejection rate), reliability and innovation (design) – we are an expensive country. A labour force with average schooling of five years and 40 percent of the population being illiterate places Pakistan at a disadvantage compared to its competitors. It therefore becomes imperative for the exporting firms and the government together to turn this around and not accept the situation as given.

The present practice of considering wages paid to labour as a financial burden, hiring transient, temporary and contractual workers, non-allocation of resources for training and skill formation and upgradation only aggravates the problems. Many firms I know have done remarkably well in treating their workers fairly, training and upskilling them and taking care of their welfare. The attrition rates in these firms are low, morale is high and loyalty to the employer unshakable. The owners of these firms have reaped the dividends and are continuing to do so at a heightened level.

The arithmetic of this approach is simple. Imagine a scenario in which the overall productivity rises by 20 percent by attracting, retaining, training, compensating well and motivating workers and employees. The split in this gain would be 15 percent accruing to the owner in form of higher profits and only 5 percent to the workers.

To be continued