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Friday September 30, 2022

Enhancing export competitiveness (Part – IV)

December 10, 2021

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

It is argued that import duties are refunded by the FBR and therefore in the ultimate analysis there is no additional burden on the exporters. Yes, big and well-connected firms are able to get their refunds which until recent automation and introduction of FASTER took almost years to realise and for which they had to resort to the banking sector and pay financing charges out of their margins.

Small and medium firms that are indirect exporters are unable to fulfill the codal formalities and are at a disadvantage. Global indirect exports have grown at a faster pace than the total exports, but Pakistan did not benefit due to the peculiar obstacles in their way. Nepal, a much smaller economy than ours, was able to reach $1 billion of indirect exports in 2019, up from $337 million in 2009.

Pakistan, according to a recently published ADB report, is at the bottom of global value chain (GVC) trade participation rates. The importance of GVC trade is obvious to even a layperson. Apple’s iPhone assembled and exported from China has more than 90 percent of its components and parts supplied by firms in a large number of countries including Korea, Taiwan, etc. Again, the punitive tariff rate policy becomes a stumbling block along with costly and time-consuming trade facilitation at the borders and relatively inefficient and high logistics costs. The implementation of the National Single Window in 2022 would likely reduce these transaction costs but the costs of evacuation of goods from North to South remains a challenge.

In Pakistan, exports have been synonymous with goods while globalisation through diffusion of knowledge and technology has intensified the tradability of services across borders. Electronic platforms and internet connectivity provide access to individuals, and small and medium enterprises which have traditionally faced barriers in exporting goods. Services account for 50 percent of global GDP and employ more workers than manufacturing but we still believe that jobs can be created only by manufacturing physical goods. In Pakistan, the share of services in GDP has risen to 62 percent providing employment to 62 percent of the non-agriculture labour force. However, the record on exports of services, particularly in business process outsourcing and offshoring by the advanced countries until two years ago, has remained dismal.

Our total exports of services have hovered around $5-6 billion annually, compared to over $200 billion exported by India – a multiple of 40 while the size of its economy is only eight times that of Pakistan. The IT industry in India alone has absorbed 16 million talented young men and women whose average wages are well above other sectors and rising rapidly. A study has estimated that the second-order effect of a single job created in the services sector gives rise to four other jobs due to increased incomes and resultant consumption.

Given the youth bulge in Pakistan, the absorptive capacity of the services sector has to be aligned with the annual additions to the labour force. Upfront capital costs in services and capital employed per worker are quite low. The services trade has a relatively high female participation, especially in IT and IT-enabled operations – and thus the gender gap in Pakistan can be narrowed by encouraging exports of services.

Digitalisation of the economy and upskilling of IT graduates are the two critical ingredients but our annual throughput of 20,000-25,000 graduates with only a quarter employable for global operations is totally inadequate. Given the supply shortage, the rapid turnover of skilled professionals is also high – placing additional costs on the exporting firms. In addition to expanding enrolment at the universities and ensuring high-quality output, bootcamps for imparting intense practical hands-on training and certification courses should be organised across the country including small towns and cities where talent does not get the opportunity to demonstrate their skills.

UNCTAD has projected that the global market for eleven frontier technologies would increase nine-fold to $3.2 trillion in the next few years. At present, Pakistan ranks in the lowest quartile in the Country Readiness Index. It is now time to begin the arduous journey so that we are able to extract a small sliver of that business. The first and foremost measure is to immediately introduce Science, Technology, Mathematics and Engineering (STEM) subjects on a massive scale at our secondary and higher secondary schools. Trained and qualified teachers in these subjects who fulfill the standards and are well versed in inculcating critical thinking and problem-solving skills among the students should be given twice as much salary as other teachers.

Stipends and scholarships should be awarded to any Pakistani student who is able to secure admission in these subjects at the graduate and post-graduate level in reputable universities in Pakistan or for PhD degrees in academically advanced countries. Liberal financing for post-graduate studies and sabbaticals for faculty members in these subjects to spend a year or so in advanced countries should be made available. Laboratories and equipment can be set up by collaborating with the private sector and philanthropists; and I can say with confidence that there are many in this country willing to come forward.

For support staff in the services sectors, more technical and vocational training institutes have to be set up with proper facilities and instructional staff. Those with the aptitude for these practical skills, rather than the uninspiring way of learning at our schools, could be able to get gainful employment. Drop-outs from the formal school system can also be sent to these institutes and it is likely some of them may excel.

Human capital is becoming a valuable asset and it should not be misallocated or frittered away. The Ministry of ITT – along with private exporting firms and universities and other agencies – has charted out plans and strategies to raise exports for this service sub-sector to almost $5 billion in the next two years. In my view, this is a doable proposition as recent evidence is overwhelming. Telecom and IT services exports have almost doubled in the last two years from $1.2 billion in 2019. Pakistan’s technology sector has attracted a considerable amount of foreign capital in 2021 than in the previous six years combined. Locally, some of the family offices of big business houses are beginning to step in the venture capital space.

It is not only the ICT sector that is leading the way globally but also professional and business services. We have a reasonably large pool of professionals in Accounting, Legal, Engineering, Management Consultancy, Architecture, Health Services. Individual Pakistanis employed in these professions are doing well in the US, Canada, UK, Australia, New Zealand and the Gulf States. Had these individuals been working for Pakistani firms exporting these services bundled and solution-oriented, the returns to the economy would have been manifold higher.

Unfortunately, the exports of these services are minimal, and no serious efforts have been made to and incentivise Pakistani firms for participating in the global markets. Just like IT, the annual flow of quality graduates in these professions is limited and has to be accelerated. Our top professional firms are already overburdened with the quantum of work in domestic markets and have very little appetite for extending themselves to uncharted territories and taking risks in a highly competitive environment.

Public policy interventions similar to those in goods exports have to be designed in consultation with the relevant stakeholders. The guiding principle for government and its agencies for the service export sector ought to be ‘Do no Harm’ and engage only in facilitation, removing barriers and opening the doors to other countries while making strenuous efforts to get it included in future bilateral and regional trade agreements.

To be continued

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