The rising cost of inputs will raise the cost of production for every producer using these inputs
igh productivity machines have drastically reduced the need for the workforce. These machines are ideal to work with during periods of social distancing. It is unfortunate that Pakistan’s is a very low-technology economy.
Its largest exporting sector, textiles, is mostly operating on obsolete technology. Its transport system lacks modern trucking facilities. Industry as a whole continues to operate with outdated machines. Some tile-makers are still producing tiles using machines that are several decades old.
A majority of plastic-molding machines in Pakistan are power guzzlers, dating back to the 1980s. More efficient plastic molders are capable of four times the output using the same amount of energy. The new machines not only reduce the energy cost by 25 percent but also drastically reduce the need for manpower.
The competitiveness of Pakistan’s industry has not been affected seriously by the current global scenario because most of its competitors are also grappling with high input costs, high container freight charges and supply chain disruptions. However, Pakistani businesses are additionally facing a highly volatile and depreciating currency.
The impact of currency depreciation in the competing economies, where relevant, is largely under control. Pakistan is facing high inflation that is 50-100 percent higher than other regional economies. The regional economies also have not seen any unusual surge in food imports. These facts show that governments in the competing economies are performing better than Pakistan.
Several factors impact the cost of doing business. The increased cost due to global factors can be tolerated as it impacts the competing economies as well. However, if local taxes and regulatory duties are increased the increase in cost is country-specific.
A local increase in the cost of inputs raises the cost of production for every producer using these inputs. The economy then loses competitiveness both in the local and global markets. Take, for instance, the power rates in Pakistan that are currently the highest in the region for industries (barring a few exporting sectors).
The cost of doing business also increases if inflation is high. A higher bank markup than the competing economies increases the financial cost. Decline in the value of currency against global currencies also raises the cost of imported inputs used by the exporting industries.
Exports can increase following a currency devaluation but in countries where imported inputs are used in export products; the increase in exports is not in line with the decline in currency. This has happened in Pakistan where the depreciation of rupee over the last 41 months has not translated into corresponding increases in exports. The increase in exports recorded in the past four years has been less than 50 percent depreciation of the rupee. Moreover, even this increase was facilitated more by the provision of gas and power subsidies and concessional export refinance.
These factors pale in the face of the economic cost of corruption. Unfortunately, businessmen rarely talk about it. This suits larger businesses that have the capacity to pay higher bribes for permissions they need and to ease bureaucratic delays.
Small businesses cannot afford to pay large amounts as bribes for the same permission because their turnover is low. Take for instance the case of Duty Tax Remission for Exports (DTRE). On paper, the scheme seems beneficial for the exporters as no government levies are payable if the exports of the imported inputs are made within a specified period.
Low-wage Pakistani workers whether qualified, overqualified or under-qualified, mostly go through the motions of performing their duties without much enthusiasm.
The DTRE licence can be granted for a period of two years but in Pakistan the regulators issue the licences for a period of six months. Each licence is granted allegedly after the extortion of a hefty bribe. Small exporters cannot afford the alleged bribes and opt out of the DTRE scheme. This is the reason the DTRE scheme benefits are monopolised by big exporters. The cost for smaller exporters remains high.
Larger concerns can also afford to deal with over three dozen government agencies that visit the company premises to ensure compliance with government regulations on production, taxes and labour laws. The cost becomes prohibitively high for smaller enterprises that cannot afford to appoint dedicated staff to deal with numerous regulators. Even so, they cannot avoid the customary rents that the businesses have to part with on each interaction with a government functionary.
This shrinks their profit margins. This also makes them do away with expensive regulations altogether and, instead, pay a little more in bribes, causing a bigger loss to the national exchequer. Corruption is also pushing the businesses towards informality where entrepreneurs can ‘please’ corrupt officials as they no longer have to pay the state levies.
Low-wages Pakistani workers, whether qualified, overqualified or under-qualified, mostly go through the motions of performing their duties without much enthusiasm. On the other hand, these workers are unable to properly look after their families. Years of high inflation have eroded their buying power. They feel dejected and the problems back home impact their productivity.
Most employers are unhappy with the performance of their workers. Low productivity of the workers justifies the employers’ dissatisfaction. Workers’ inefficiency takes a toll on the competitiveness of Pakistan’s products. Our industries need willing and efficient workers who enjoy their jobs.
To increase overall productivity, the entrepreneurs must stop looking for talent through HR experts who have made labour markets in the country dysfunctional. They should recruit talent at decent wages rather than the minimum wage. Many organisations are now looking for suitable workers on online talent platforms, like LinkedIn that connect individuals with work opportunities.
One advantage of online talent platforms is their ability to bring transparency and dynamism to the job markets. Most developed economies, even India, are benefiting from these platforms. We could make our labour markets work through the right investment and innovation by the private sector.
Unnecessary costs also impact our competitiveness. For instance, the inefficiency of our port operations is well documented. Some government hides behind sovereign agreements signed with different port handlers. But there are other issues as well that do not relate to port handlers. For instance, the shipping companies allow the importers to clear their container goods within 7 days of filling the Import General Manifest (IGM). After seven days they charge a $70 container rent per day.
After 14 days the rent is raised to $140 per day and after 21 days it goes up to $280 per day. The IGM was earlier filed as the ship got a berth. Recently, the entire import documentation has been digitalised, this is a good step. However, as soon as the ships enter the Pakistani waters the digitalisation forces the importer to file the IGM. The ship could get a berth in say seven days. This means that from day one the container rent clock starts ticking.
When a consignment is struck because of a dispute with the customs; the importer must pay demurrage to the port handler and an additional rent to the shipping company. In some cases, the container retention may go up to a month. The cost of the container is small compared to its rent but ships refuse to sell the container to the importer.
The writer is a senior economic reporter