Lahore School of Economics

A distinguished seat of learning known for high-quality teaching and research

Exports: Lessons from the Past and the Way Forward

Hamna Ahmed*, Naved Hamid**, and Mahreen Mahmud***

1. Introduction

The idea that trade is important for economic growth dates back to the nineteenth century when classical economists such as Adam Smith, David Ricardo and John Stuart Mill advocated the favorable effects of international trade on output. Since then, a rich body of theoretical and empirical literature has evolved with regard to the role of trade in growth and development. Initially, post-Second World War, development economists viewed trade as a negative factor in developing countries’ industrialization objectives, and from the 1950s through the early 1970s most newly independent countries adopted an import-substitution industrialization (ISI) strategy. By the mid-1970s, however, there was growing disenchantment among development economists concerning ISI and in favor of the export-led growth strategy that several East Asian countries had successfully adopted. Subsequently, this was formalized in what is referred to as the Washington consensus: generally described as an outward-oriented development (OOD) strategy, it has since been adopted by most developing countries.

According to proponents of the OOD strategy, outward orientation can promote economic growth through three main channels. The first is trade, which enables firms (at the micro-level) and countries (at the macro-level) to gain through specialization and economies of scale. This is because increased competition results in the least efficient producers being driven out of the market, while the most efficient producers expand their market share, thus raising aggregate productivity through the reallocation of resources (Tyler, 1981; Melitz, 2003). The second is exports, which serve as the primary source of foreign exchange needed to purchase imported inputs such as raw material and machinery and, more broadly, to help ease the balance of payments constraint (Faridi, 2012). The third channel involves trade as an important source of knowledge and technology transfer, with the potential to encourage innovative activity—such as research and development, and the introduction of new products and processes—by increasing the returns on innovation as exporters have access to a larger market than nonexporters.


Pakistan was one of the most successful countries in implementing the ISI strategy during the 1960s. Although it has slowly moved away from ISI since the late 1970s, there has never been any domestic ownership of the OOD strategy. Thus, while the anti-export bias may have weakened over time, it remains substantial. India, which had followed the ISI strategy for a long time, began to change in the 1980s, while Bangladesh, after continuing for a few years with policies inherited from Pakistan, also started to move toward an OOD strategy in the 1980s. This is evident in that global integration, measured by the trade-to-GDP ratio, increased by 25–40 percent in Bangladesh and India between 1980 and 2000. In contrast, there was no change in Pakistan’s trade-to-GDP ratio even though its average tariff rates declined significantly over this period (Dollar, Hallward-Driemeier, & Mengistae, 2006).

Pakistan’s share of world exports has remained more or less stagnant over the past three decades, pointing to the country’s inability to expand exports faster than world trade (see Table 6.1). On the other hand, its South Asian neighbors and the East Asian countries have shown a tremendous increase in export shares. Malaysia and Thailand entered their rapid export growth phase in the 1980s and 1990s, while Bangladesh and India started theirs in the 1990s, which continues to date. India has managed to increase its export share almost fourfold and Bangladesh by more than three times since 1980. As a result, Pakistan’s exports, which were more than a third of India’s and almost four times that of Bangladesh in 1980, are now less than one tenth of India’s and about the same as Bangladesh. The latter has achieved this tremendous export growth on the back of its garments sector, and today Bangladesh exports garments worth over USD 14 billion, which is almost four times the value of Pakistan’s garment exports.
Table 6.1: Country-wise share of world exports (1980–2011)


Note: * Bangladesh’s data is for 2007.
Source: Authors’ calculations based on data from UN comtrade.

Pakistan has experienced several periods of high GDP growth, but given that its income elasticity for imports is almost twice as high as that for exports, growth accelerations have been invariably followed by balance of payments crises and periods of stagnation. Thus, solving the problem of poor export performance is key to breaking the stop-go cycle in which Pakistan has been stuck for more than 30 years. This is particularly important today when the country is passing through a prolonged period of economic stagnation—after a spurt of growth in the mid-2000s that was brought to an end by a balance of payments crisis—and it seems to be headed toward another balance of payments-cum-debt crisis.

The aim of this chapter is to use Pakistan’s experience to identify potential drivers that could boost its export performance in the medium term. We define an export driver as a product (or a product group) that has the potential to expand output (i.e., domestic production conditions are favorable) and in which Pakistan has a demonstrated competiveness. Sections 2 and 3 analyze Pakistan’s manufacturing and agricultural exports, respectively, with the aim of identifying potential drivers that could substantially boost the country’s exports in the medium term. Section 4 provides a brief discussion of the foreign exchange earnings potential of the export of information technology (IT) and entertainment services. Section 5 identifies elements that cut across sectors and can boost overall export performance. Section 6 concludes the chapter.

2. Manufacturing

If we analyze Pakistan’s important manufacturing exports, we find that the combined share of the top five exports has declined from over 80 percent of total exports to 71 percent over the past decade (Figure 6.1). This drop has occurred primarily because of a fall in the share of textile exports by over 10 percentage points. The only other product group to lose export share during this period was garments. The country’s manufacturing exports have been dominated by the textile and garments sectors since the 1960s, but in the past decade, their combined share has fallen from about 73 percent of total exports at the start of the 2000 to 55 percent in 2010. Other exports in the top five—small and medium enterprise (SME) manufactures, cement, and petroleum—all registered a steady increase in their share during this period.

Figure 6.1: Manufacturing export performance (share in total exports)


Source: Authors’ calculations based on data from UN comtrade (SITC Rev. 3).

In order to have a significant impact on aggregate export performance in the medium term, we need to identify drivers from among the existing major exports. Therefore, we focus on the top five exports in 2010. Out of these, petroleum exports are primarily a result of mismatch between refinery output mix and domestic demand, and Pakistan does not seem to have a comparative advantage in this industry. Cement exports have grown rapidly in the last decade largely because of excess capacity in the country and a massive increase in demand in Afghanistan associated with the aid financed-postwar rebuilding process. It is likely, however, that this demand will taper off after the withdrawal of US forces in 2014. Cement is also an energy-intensive industry and there are major concerns about its environmental impact. Therefore, only textiles, garments, and SMEs in the manufacturing sector have the potential to become export drivers in the medium term. Each of these is discussed in turn with some recommendations for realizing this potential.

2.1. Driver 1: Textiles

In 2012, exports of cotton fiber, yarn fabric, household textiles (towels and bed linen), and garments constituted 5, 13, 40, and 28 percent of textile exports, respectively. Although the share of textiles in total exports has fallen substantially in recent years, given its share in the medium term, export growth cannot be accelerated without higher growth in textiles. The decline in the share of textiles is partly a natural process that occurs in all countries as they develop, but its precipitous decline in Pakistan over the last decade is attributable to (i) the imposition of regulatory (antidumping) duty by the European Union (EU) for several years on bed linen imports from Pakistan; (ii) the weakening of demand in the EU, in particular, since the global financial crisis; and (iii) the worsening energy crisis in the country since 2007. However, if Pakistan succeeds in getting GSP-plus status in the EU in 2014, textile exports could expand substantially. If, at the same time, the country were to increase cotton production significantly—of which there is a good possibility (see Section 3.2)—this would boost the export growth of textiles even further.

As cotton moves up the textile chain, its value increases from USD 1 for the fiber to USD 2 for yarn, to USD 4–6 for “towels, bed linen and fabric”, to USD 12 for garments (knitwear and woven items). There is considerable scope for accelerating textile (and garments) exports by moving up the value chain. Although the fastest-growing portion of textile exports in recent years has been yarn, it accounts for very little value-added, particularly the low- and medium-count yarn that Pakistan exports. Hence, an export strategy that aims to push textile exports up the value chain should provide incentives for higher-value textiles, and could be initiated by imposing a small export tax on low-count yarn. This might encourage the spinning industry to produce higher-count yarn and reduce the cost of yarn (which is almost 50 percent of the cost) for domestic towel and woven (denim) garment producers. This would, on one hand, encourage the production of higher value-added yarn and fabric and, on the other, boost the competiveness and exports of two of Pakistan’s main higher value-added products.

2.2. Driver 2: Garments

The fallout from 9/11, in terms of travel restrictions by the US on Pakistan and heightened security concerns, coincided with the transition phase of the end of the Multi-Fiber Arrangement (MFA) and quota regime in 2005. Major international brands and retail chains, particularly from the US, in planning for the period post-2005 aimed to reduce their reliance on Pakistan as a major source country for garments. As result, the phasing out of the MFA benefited Bangladesh at Pakistan’s expense. In 2000, the latter’s garment exports were about USD 2 billion compared to USD 5 billion for Bangladesh; by 2010, they were less USD 4 billion and over USD 14 billion, respectively. Thus, Pakistan lost out on the opportunity offered by the expansion in international trade in garments following the end of the MFA.

However, another opportunity is emerging: China, with exports worth USD 130 billion in 2010, is presently transitioning from the export of low-end manufactures to higher value-added products, and its current world market share of 37 percent of garment exports will decline in the foreseeable future. Pakistan could be one of the countries to pick up a part of this share. Moreover, with rising wages in China, firms there are looking to relocate production; just as East Asia benefited from the relocation of industry from Japan, and Bangladesh from Korea, Pakistan could benefit from the relocation of industry from China, especially given its special political relationship with that country.

The strategy for seizing this opportunity has to address those factors that are currently a drag on Pakistan’s garment industry. These include the country’s critical energy shortages, and the security and law and order situation that prevents foreign buyers or their technical staff from visiting Pakistan. In addition, it is important to make trade policy and customs procedures friendly to those who use imported materials, such as fabrics, dyes, and clothing accessories, to produce their exports. As pointed out earlier, it is also imperative that the incentive structure be one that encourages value addition and generates employment. There are considerable differences in the degree of labor intensity between different stages of the value chain. According to one estimate, converting 50,000 kg of fiber into yarn and yarn into fabric requires 400 person-days at each stage, while converting fabric into garments requires 1,600 person-days. This highlights the importance of the garments industry not only for exports but also for employment generation.

2.3. Driver 3: Traditional and Emerging SME Exports

SME products are diverse, and include sports goods, surgical instruments, fans and other electrical products, automobile parts, and vehicles (rickshaws and motorcycles). Their collective total share has been increasing and was about 8.5 percent in 2010. Pakistan has a long history of exporting some of these products—sports goods and surgical instruments, in particular—while others, such as fans and automobile parts, are just beginning to be noticed. However, all have a huge and expanding international market and the potential for increasing Pakistani exports in them is considerable. In addition, SMEs—including those that produce these goods—are generally highly labor-intensive and their growth would generate substantial employment. These four SME product groups are, therefore, ideal export drivers in the medium to long run. An effective strategy to develop the export of these products would entail promoting industrial clusters, improving SMEs’ access to finance, and providing a supporting environment for innovation, particularly for improvements in production processes, design, and quality standards.

2.3.1. Promoting Industrial Clusters

Industrial clusters are defined as a collection of related companies located in the same region, which leads to the development of a pool of skilled labor related to that industry, spillovers, and the availability of needed raw material and intermediate goods (Krugman, 1991). According to Porter (1990), underlying the phenomenon of clustering are mechanisms that facilitate the interchange and flow of information between firms while rivalry is still maintained. There is empirical evidence to suggest that firms in clusters benefit from the above externalities and are likely to grow faster than firms located outside (see for example Naudé & Rossouw, 2010, Aitken, Hanson, & Harrison, 1997; Fujita, Krugman, & Venables, 2001). Industrial clusters also help small firms enter export markets.

Firms that wish to start exporting face significant costs associated with the search for suitable markets and international contacts. This involves accumulating detailed knowledge on consumer preferences to tailor products to local tastes, developing distribution channels, and at times expanding or upgrading existing plant and equipment. These costs are referred to as “sunk costs”, and a firm will only choose to incur them if the perceived benefits of exporting outweigh these costs. In situations where sunk costs are too high, especially due to difficulties in accessing knowledge, they will act as a deterrent. Clustering can help reduce such costs for an individual firm because of the spillovers that exist within clusters and the possibility of pooling resources when incurring some of the sunk costs.

The geographic concentration of exporters may also promote the development of specialized transportation infrastructure, such as storage facilities, dry ports, and long-distance trucking operations, or it may improve access to information about goods that are in demand and market players in the importing countries (Aitken et al., 1997). Location advantages in terms of backward links, such as the existence of raw material and intermediate goods suppliers, and the availability of labor with specialized skills, can also reduce the cost of exporting. Thus, the existence of spillovers within a cluster will increase member firms’ propensity to export. The city of Sialkot (where there are probably more individual manufacturing exporters than in any other city in the country, including Karachi and Lahore) is a testament to the effectiveness of such forces.

A number of large SME clusters have developed in Pakistan. An important element of a policy to promote industrial clusters should be to give priority to export clusters in the provision of infrastructure, particularly power and gas, the development of common facilities, particularly for testing and certification, and skills training centers and programs (for details, see Ahmed, Mahmud, Hamid, & Rahim, 2010).

2.3.2. Improving Access to Finance

There is a positive link between financial development and international trade (see, for example, Beck, 2002; Svaleryd & Vlachos, 2005; Do & Levchenko, 2007). This is because entering foreign markets is costly since it entails additional costs as discussed above. Thus, credit-constrained firms will find it more difficult to export than firms that have access to finance, and only those firms will become exporters that are able to overcome their liquidity constraints. For a sample of manufacturing firms in Italy, Minetti and Zhu (2011) find that the “probability of exporting is 39 percent lower for credit-rationed firms than for nonrationed firms and that rationing reduces foreign sales by more than 38 percent.”

Pakistan‘s financial markets are underdeveloped relative to those of other developing countries (Figures 6.2 and 6.3) because “the terms of loans are much shorter, average loan sizes are larger, and bank requirements for collaterals against loans are higher” in the former (World Bank, 2009). As a result, financial access is restricted primarily to large firms, and SMEs are mostly excluded. Ahmed and Hamid (2011) find that, other things being equal, SMEs are 12.2 percent and 7.4 percent less likely to have access to external finance than large firms. The situation tends to worsen as credit markets tighten, as is evident from the fact that SMEs’ share in total bank lending is estimated to have declined between 2004 and 2007 (World Bank, 2009). Since credit availability has tightened even further since then, it is likely that SMEs today are almost entirely excluded from bank credit.

Figure 6.2: Financial depth*

Note: * domestic credit to private sector (as a percentage of GDP).
Source: World Development Indicators, 2011.

Figure 6.3: Bank credit as a share of working capital (%)


Source: Various rounds of the World Bank’s Investment Climate Assessment Surveys.

Financial access for firms is a function of (i) the degree of financial deepening in the country, and (ii) the lender’s risk evaluation of the borrower. While there is substantial financial penetration in large cities such as Lahore and Karachi, access to finance has not spread uniformly across the country. Ahmed and Hamid (2011) find that firms located in smaller cities such as Sheikhupura, Sukkur, and Hyderabad, have a lower probability of financial access relative to firms located in metropolitan cities such as Karachi and Lahore or those in export clusters (such as Sialkot). Consequently, emerging export industries, that must incur additional costs when entering export markets and are not located either in large cities or export clusters, are likely to be the most affected by financial constraints.

The data also shows that there is a link between financial access and exports in Pakistan’s manufacturing sector. According to the second round of the Investment Climate Assessment Survey (World Bank, 2007), financial access is three times greater in the study’s sample of exporters compared to nonexporters. Thus, innovative polices are needed to increase financial access for SMEs by introducing appropriate financial products and encouraging banks to move from collateral- to returns-based lending.

2.3.3. Providing a Supporting Environment for Innovation

There is consensus in the literature that a firm’s trade status is linked to innovative activity (defined as the introduction of a new product or process or both). However, the direction of causality between the two has not been established. Ahmed and Mahmud (2011) find that, while export status did not determine innovative activity for a sample of manufacturing firms in Pakistan, there was a significant increase in the number of firms that started exporting post-innovative activity. Their study also shows that a firm’s presence in a cluster is an important factor explaining its innovative activity, and that financial access is a significant determinant of innovation for SMEs.

The East Asian economies have exhibited tremendous export-led growth on the back of a successful transition from low- to high-end technological production. What matters for growth is not just the scale of production, but also the ability of countries to innovate. The important question is how to promote innovation. According to INSEAD’s global innovation index for 2011, Pakistan ranked 123rd out of 125 countries on the innovation input subindex, which captures the environment for innovation. However, on the innovation output subindex, which measures actual achievement in innovation, the country ranked 67th. As a result, it ranked fourth on the innovation efficiency index. These numbers show well both Pakistan’s tragedy and resilience, i.e., its environment is among the worst in the world but its people are among the most innovative. Thus, to promote innovation, Pakistan needs to improve the input environment. For this purpose, the most cost-effective strategy would be to invest in the development of human capital and industrial research infrastructure, promote industrial clusters, and improve financial access for SMEs.

2.3.4. Facilitating Regional Trade

Pakistan’s regional trade has expanded rapidly in the last decade, and overland trade with Afghanistan has been its fastest-growing component (Hamid & Hayat, 2012). Trade with Afghanistan has boosted SME exports, particularly in the light engineering industry. For example, Afghanistan accounted for 33 percent and 17 percent of Pakistan’s global exports of metal manufactures and machinery and transport equipment, respectively, in 2010/11 (Hamid & Hayat, 2012). Similarly, in 2010/11, Bangladesh accounted for 52, 45, 45 and 16 percent of Pakistan’s global exports of textile and leather machinery, heating and cooling equipment, motorcycles and bicycles, and pump compressors and fans, respectively (United Nations Statistics Division, 2010). As Hamid and Hayat (2012) argue, these exports could play an important role in the future overall export of such products because “it is always difficult to develop new export products, but once export capacity, production experience, and domestic supply chains are developed for a particular product, it is much easier to export that product to other markets.”

Trade with India, particularly overland trade, would boost SME exports in two ways. First, the opening up of the large Indian market, where conditions and tastes are similar, would provide much greater export opportunities than in Afghanistan or Bangladesh. Second, India’s engineering exports have expanded rapidly and the industry is becoming increasingly integrated with global supply chains, from which Pakistani industry is, unfortunately, isolated. Overland trade with India would help link Pakistan’s light engineering industry to the Indian supply chain and through that to global supply chains.

As an example, in 2009/10, car sales in India accounted for 1.9 million vehicles, and 489,000 motor vehicles and 1.3 million motorcycles and auto-rickshaws were exported, yielding total automobile industry exports of USD 4.3 billion (Banerji, 2012). According to Banerji, the automobile components industry had a compound annual growth rate of 16 percent for the period 2004 to 2010. By 2020, “passenger car sales in India are set to touch nine million, with [the] auto-component industry set to grow to USD 113 billion” and “exports of auto parts are expected to touch USD 40–45 billion” (more than a third of output in revenue terms). India’s major global automobile manufacturers—such as General Motors and Ford—source original equipment manufacturer (OEM) parts from the country, while companies such as Suzuki, Hyundai, Ford, and Volkswagen operate in the local market. The Indian automobile market, including exports, therefore offers huge growth potential for automobile component manufacturers in Pakistan. The same is true for surgical instruments, white goods, and industries in Pakistan’s light engineering sector.

In terms of policy measures, Hamid and Hayat (2012) argue that, “given the growth prospects of most of the neighboring governments, one can expect that the potential for Pakistan’s exports will continue to expand. It is up to Pakistan to adopt appropriate policies to take advantage of this potential. This will require a change in the mindset of the policymakers—an ‘economy-first’ approach is needed.” With regard to Pakistan-India trade, the Pakistan Business Council’s (2011) panel on regional trade concludes that SMEs in garments, footwear, food processing, auto parts, metal products, and IT have considerable potential to benefit from liberalized bilateral trade if they can identify market niches in India by acquiring specialized local knowledge, participating in trade fairs and cutting business deals. This requires both easy travel as well as access to commercial bank branches to facilitate quick cross border transactions.

This requires the government to move quickly toward implementing the agreement to relax visa regimes and allow Indian banks to start operations in Pakistan.

3. Agriculture

The agriculture sector provides employment to half the country’s labor force and account for a significant share of exports. Rice exports are increasing and are second only to the textile sector in terms of value. High-value nontraditional agricultural exports such as meat, fruit, and vegetables have also grown: their combined share rose to almost 5 percent of total exports in 2010, though it fell in 2011 (Figure 6.4). Rice and high-value products are, therefore, potential export drivers for Pakistan’s agriculture sector in the medium term. Cotton is also a possible export driver, given its large unexploited potential in terms of increases in yield through BT cottonseed. All three drivers are discussed in turn below.

Figure 6.4: Agricultural export performance
(commodity share in total exports)


Source: Authors’ calculations based on data from UN comtrade (SITC Rev. 3).

3.1. Driver 1: Rice

Pakistan is the world’s fourth largest rice exporter with exports increasing from USD 0.5 billion in 2000 to over USD 2 billion in 2011—rice accounted for 8.1 percent of Pakistan’s total exports in 2011 (United Nations Statistics Division, 2010). The increase in the value of rice exports in the last decade was the result of a twofold increase both in export price and the quantity exported. The world demand and price outlook for rice in the medium term is strong and Pakistan should benefit from this. However, the country’s rice yields are well below those of the rest of the world and, as the extensive margin is more or less exhausted, it is necessary to focus on improving yields to realize the crop’s full potential as a driver of export growth in the future.

Additionally, Pakistan receives far lower prices for Basmati rice than India. To obtain premium prices, the country needs to facilitate investment in DNA testing and certification facilities, which should be done through public–private partnerships to attract international expertise and investment. There is also potential for tapping niche, high-value markets for Japonica rice, which has been grown successfully in Swat. The potential for expanding rice exports is, therefore, considerable, but realizing it will require a set of policies aimed at enhancing export value and rice yields, i.e., areas in which Pakistan holds a good track record.

3.2. Driver 2: (BT) Cotton

Pakistan enjoyed a record cotton crop in 2012, largely due to the use of BT cottonseed, which is based on smuggled seed varieties developed by Monsanto in India. Farmers in Pakistan started using BT cottonseed in 2002 and, currently, the bulk of the area under cotton is sown with BT seed. However, since this seed is based on varieties developed for conditions in India and are marketed without any formal approval and regulation of minimum quality standards, their yield is far below the potential. In 2010, an initiative in Punjab aimed to reach an agreement with Monsanto under which BT cottonseed suited to conditions in Pakistan could be developed. However, since Pakistan has no law protecting the intellectual property rights (IPR) of seed breeders and the government was not willing to compensate Monsanto for the reproduction and sale of the seed varieties it would develop, the MOU was never signed.

Unfortunately, Pakistan continues to waste its enormous potential for increasing cotton production. A major cotton exporter for 50 years after independence, it has been unable to significantly improve its yield per hectare since 2000 and has now become a net importer of cotton. In contrast, India, which was initially a net importer of cotton, doubled its production between 2000 and 2005 following the introduction of BT cottonseed. It achieved this by doubling the yield per hectare while the area under cultivation remained almost unchanged. Today, India is a net exporter of cotton.

Were Pakistan to use BT cottonseed tailored to local conditions and that met minimum quality standards, it could increase its cotton production by 50–80 percent in five to seven years. This, in turn, could increase cotton exports by over USD 3 billion per annum, and if converted into textile products, could increase exports by a multiple of that.

3.3. Driver 3: High-Value Nontraditional Agricultural Exports

Pakistan’s fruit and vegetable exports have grown slowly, with their export share increasing to 4.4 percent in 2010. The Competitiveness Support Fund (2007) cites issues with the production, harvesting, and transportation of produce, observing that growth could otherwise have been much faster. While the quality and variety of fruit and vegetables is good, exports suffer due to wastage, a short shelf-life, and lack of certification. In other product types, Pakistan exported a negligible amount of meat and meat preparations in 1998. Since then, the sector has shown significant growth, attaining a 0.6 percent share in total exports by 2010. Over 50 percent of these go to the United Arab Emirates and Saudi Arabia alone, and the top five destinations are all in the Middle East.

These emerging product groups have considerable potential; improving trade relations with India, particularly freeing up overland trade, should accelerate the growth of export fruit and vegetables, while developing the necessary infrastructure and certification facilities could result in the rapid growth of meat exports by tapping into the huge market for halal meat in the Middle East and Southeast Asia (i.e., Malaysia and Indonesia).

3.4. Strategy for Promoting Agricultural Exports

We have argued that there is considerable potential for accelerating the growth of agricultural exports and that this would require sustaining the growth momentum in rice, revitalizing cotton production, and developing a marketing infrastructure to export higher value-added products such as fruit, vegetables, and meat. However, the government plays a critical role in developing a high-quality seed market, establishing grading and quality standards and the associated testing and certification facilities, and facilitating investment in the necessary marketing infrastructure.

High-quality seed. Pakistan appears to be stuck in a low-level equilibrium in the production of its major crops, i.e., wheat, rice, cotton, and sugarcane. An important factor in this is the failure to develop a market for high-quality seed, a key reason for which is the lack of legislation protecting IPR (a bill for the Plant Breeder’s Rights Act, for example, has been lying in the National Assembly since 2010). As a result, research in the development of new seeds is confined to the public sector, which has become increasingly ineffective. The example of Monsanto’s refusal to develop BT cottonseed in Pakistan for this reason was discussed earlier.

The success in the production of maize in Punjab is another example of missed opportunities in other crops. Hybrid maize seed, which cannot be reproduced in farmers’ fields and is, therefore, less dependent on an IPR regime, was developed and marketed in Punjab by an international seed company. Since 2000, the area under maize production has increased by almost 15 percent while the yield per hectare has more than doubled—from 1,741 to 3,944 kg/hectare (Pakistan, Ministry of Finance, 2012). Maize is the only crop in which yields are higher than in Indian Punjab. The private sector faces significant costs in developing new seeds and the infrastructure to market them, and without IPR protection there will be gross underinvestment in this sector. In fact, the benefits accruing to Pakistan from the use of high-quality seed are so large that the government should consider subsidizing the development of a modern seed industry through grant incentives or public–private partnerships.

Product markets. Market failure in domestic agriculture markets is an important factor slowing down the growth of high-value crops. This market failure is reflected in the large wedge between farm-gate prices and the retail prices of fruit and vegetables. One of the reasons for this is that agricultural marketing in Punjab (and other provinces) is governed by an almost-century-old agriculture markets act that perpetuates the role of the traditional “arthis” who for generations have been members of the district and local market committees that monopolize the trade of agricultural produce in their areas. This has resulted in multiple layers of intermediaries between the farmer and the consumer, which are responsible for the large price wedge as well as for the very high wastage rate in perishable products. It makes it difficult for a modern marketing system, which usually consists of only two intermediaries—the wholesaler and the distributor—to develop. It also greatly dilutes the impact of changes in market prices on production decisions and incentive to invest in improving production methods. Thus, Pakistan must reform its agricultural markets regulatory framework for the high-value agriculture sector to develop.

The presence of international supermarket chains (such as Metro and Hyperstar) in the country has a role to play in developing the domestic supply chain, introducing quality standards, and providing international market access. Supermarkets are better connected and more aware of international best practices, and also have the incentive to make or facilitate investment in upgrading market infrastructure. (See Hamid, 2008, for a more detailed discussion on the likely impact of international supermarket chains on marketing and the export of high-value agricultural commodities.)

Standards, testing, and certification. Pakistan lacks the market infrastructure for meeting quality and phytosanitary standards, which has impeded the growth of high-value agricultural exports, especially to developed countries. Creating this infrastructure requires actions both on the demand and supply side. As discussed above, reforms in agriculture marketing regulations and the growth of international and local supermarket chains will promote demand for these facilities. On the supply side, the government needs to step in to facilitate investment in testing and certification facilities by international players through partnerships or franchise arrangements with domestic firms involved in the agriculture sector.

4. IT and Entertainment Services

The export of IT services has played a key role in the Indian economy’s high growth performance over the last two decades. The development of the IT sector not only helped the country ease its balance-of-payments constraint but boosted investment and growth in other sectors of the economy. In recent years, the expansion of knowledge-based exports in the fields of entertainment and health tourism have made a growing contribution to India’s foreign exchange earnings and employment generation. With the right policies in place, these sectors are capable of contributing similarly to economic growth in Pakistan.

Pakistan’s earnings from the export of computer and IT services in 2010/11 were USD 215 million with another USD 18 million generated by call centers (State Bank of Pakistan, 2012). This can be compared to India’s software exports of approximately USD 61 billion in 2010/11 (Reserve Bank of India, n.d.). However, Pakistan’s official figures are based on payments received for IT-enabled services through the banking system.

India has adopted the World Trade Organization’s methodology for calculating exports of IT services, which not only takes into account payments for services shipped abroad, but also the incomes of Indian companies and IT professionals that are based abroad. Using this methodology, the Pakistan Software Export Board (2013) estimates that the country’s global IT sales revenues are around USD 1.6 billion. This implies that the ratio between Pakistan and India’s global IT exports is about 1:38 rather than 1:250, as implied by the official statistics. Given that the ratio for IT professionals between the two countries is 1:25—there are an estimated 110,000 IT professionals in Pakistan compared with 2.8 million in India (Pakistan Software Export Board, 2013; Reserve Bank of India, n.d.)—the figure of USD 1.6 billion for Pakistan’s global exports seems more reasonable, although it is still well below potential.

Pakistan is considered one of the leaders in the second-tier countries in the global information and communications technology industry (Pakistan Software Export Board, 2013). It has more or less similar endowments, in terms of human resources, culture, and language skills, as India and could also, therefore, become a major outsourcing center for IT services.

A key reason for why Pakistan has not been able to realize the foreign exchange earnings potential of the IT industry is that businesses in developed countries are reluctant to outsource to Pakistan due to the perceived country risk arising from its poor law and order situation, negative international image, and the US State Department’s travel advisory. According to a pioneer of the industry and one of its largest software exporters, Pakistan could very easily earn over a billion dollars from the export of IT-enabled services (by the State Bank of Pakistan’s definition) if there were no US travel advisory for the country.

Another potential growth area is the emerging infotainment industry, particularly in the fields of mobile applications, gaming, and animation. According to one commentator,

Pakistan’s mobile, gaming, and animation scene is increasingly a hotbed of a new generation of exciting entrepreneurs who are in the process making an impression on the rest of the world. These entrepreneurs include Babar Ahmed, whose Mindstorm Studios created Cricket Revolution™—the first PC game produced by a Pakistani gaming outfit to sell in retail stores internationally—and recently launched the official game of the ICC World Cup 2011; Brothers Rizwan and Irfan Virk, who [together with their MIT colleague Mitch Liu] set up Gameview Studios which created the successful Tap franchise that was acquired in 2010 by the Japanese social gaming giant DeNA; and Hasan Rizvi, whose Pepper.PK developed two top-ranking paid BlackBerry applications at BlackBerry’s AppWorld store (Pakistan Software Export Board, 2013). According to another commentator, [While] the Philippines and Korea are highly preferred countries in animation sector … India and Pakistan are growing massively in Asia… Although India is more forward in animation industry [it is] also more expensive then Pakistan … Animation industry in Pakistan may seem [to] be a new expected hotspot of discussion and exploration … Pakistan has full potential of fetching precious forex [foreign exchange] of USD 1 billion every year through promotion of Animation Industry [sic] (Azeem, 2012).

Exports by the traditional entertainment industry were less than USD 3 million in 2010/11 (State Bank of Pakistan, 2012). However, the potential for expanding export earnings from this industry has also grown rapidly in recent years. Pakistan has undergone a media revolution in the last 10 years: there are now 85 private satellite television channels (Pakistan Electronic Media Regulatory Authority, 2010) including 25 news channels, 23 entertainment channels, 14 regional channels, 7 music channels, 3 religious affairs channels, 3 food channels, and dozens of other assorted channels (Tirmizi, 2013).

This gives some idea of the scope and diversity of content being created in Pakistan. While their quality is uneven, a number of television series, such as Coke Studio (a music program now in its fifth season), HUM TV’s Humsafar, and ARY’s Meri zaat zarra-e-benishan, have had a large international audience. There is a large market for such entertainment content not only among the Pakistani (and South Asian) diaspora but also in India. At the moment, many Pakistani channels are aired on cable television in Europe and North America, and almost all the entertainment programs being produced are available on YouTube. The issue is how to convert this large international viewership into earnings for the industry and the country.

5. Cross-Cutting Boosters

5.1. Leveraging the Diaspora

The Pakistani diaspora offers great potential for expanding exports from Pakistan to their countries of residence. Recent estimates show that the Pakistani diaspora across the world may include as many as 10 million people (Pakistan, Planning Commission, 2011). In 2012, the country received total remittances worth USD 14 billion (International Monetary Fund, 2012). Members of the diaspora can play a role in increasing trade between their country of origin and country of residence in three ways (Figure 6.5):

1. Pakistanis residing abroad create demand for Pakistani goods and services. In the UK, for example, there is rising demand for Pakistani food items (fruits, particularly citrus and mangoes, packed foods, and spices, such as Shan food masala) as well as for high-end consumer goods such as furniture, clothing (local brands such as Bareeze and Junaid Jamshed). This increase in demand is driven by the presence of a Pakistani diaspora in the UK (direct effect) and, to an extent, through the influence of Pakistani culture and cuisine on local culinary habits and tastes (indirect effect).

2. Members of the diaspora enjoy wider access to and greater knowledge of both their country of residence and their country of origin. These connections can be useful in creating opportunities for trade, outsourcing, and partnerships. Moreover, exporters can use the diaspora’s context-specific knowledge to tap into new markets or identify high-growth products in existing markets. Thus, they serve as important agents of facilitation for increasing market presence in their residence countries as well as identifying profitable niches in those markets.

3. In the context of a country’s export industry, diaspora-led investments in the country of origin can have a twofold impact. By increasing the numbers of players in the market, such investments may bring with them foreign knowledge and facilitate the flow of technology and information. This may, in turn, fuel innovative activity among domestic producers.

Figure 6.5: Benefits of engaging the Pakistani diaspora (in ascending order)


The diaspora have had a huge impact on a country’s development in a number of cases, with trade in the case of China and IT outsourcing by India as the best examples. Encouraging the Pakistani diaspora to play such a role may need a more proactive strategy that will target top executives of companies abroad as well as business owners in resident countries for purposes of mobilizing direct investment into Pakistan or facilitating the export of Pakistani products to the diaspora’s countries of residence. Diaspora business forums, which help identify and address problems encountered by diaspora businesses in investing in Pakistan and which support exhibitions and events in their countries to showcase Pakistani products, could be an effective instrument for such a strategy.

5.2. Improving the Business Environment for Trade

A country’s investment climate is an important determinant of international integration. For a sample of eight developing countries (including Pakistan), Dollar et al. (2006) find that the proportion of exporters is higher in countries where the number of bottlenecks is low versus countries where it is high. The study also estimates that, if Karachi had the same investment climate as Shangai, the number of exporting firms in the former would more than double. It takes firms in Karachi four times as long to clear customs (15.8 days) compared to firms in Guangzhou (3.9 days) and Shangai (4.4 days) (Dollar et al.).

According to the World Economic Forum (2012), Pakistan ranks 109th on quality of infrastructure—well below India (86) and Sri Lanka (48) (see Figure 6.6). In addition, in Pakistan there is a strong anti-trade bias as firms bear a much higher burden of customs procedures and trade barriers than firms in other countries. Thus, to be more competitive, Pakistan must improve its infrastructure and regulatory framework for trade.

In terms of infrastructure, the most important is the energy sector, which has emerged as a severe bottleneck and a threat to the economy’s competitiveness. Pakistan’s rank on the quality of electrical supply is 126—better than Bangladesh (135) but worse than India (112). According to the World Bank (2009), the greatest financial losses faced by Pakistani firms are due to power outages. Moreover, these losses due to power outages are far greater for Pakistani firms than for firms in comparator countries such as Thailand, India, and Turkey. While it is important to solve the energy problem, eliminating power shortages may take some time. For the time being, therefore, SME export clusters should be given priority in the allocation of power and natural gas.

Figure 6.6: Ranking by various dimensions of the business environment: A cross-country comparison



Source: World Economic Forum (2012).

As regards the trade business environment, of which the logistics performance index (LPI) is a good overall indicator, Pakistan ranks 110th out of a total of 150 countries (Figure 6.7). Disaggregating the country’s performance along individual dimensions gives an even more dismal picture: Pakistan ranks the lowest on all the dimensions cited above relative to comparator countries in South and East Asia (Table 6.2). The gaps in performance between Pakistan and comparator countries such as India are very large in areas such as customs, logistics competence, and timeliness. Customs procedures and trade deregulation have been the focus of numerous World Bank reports and structural adjustment loans that seem to have had hardly any impact.

It is hard, therefore, to make any recommendations in this regard except that, without progress in the area of customs procedures, particularly for the import of materials by export industries, diversifying exports or moving up the value chain will be difficult. Significant improvements in logistics competence can only take place if the logistics industry is developed on modern lines. This, in turn, requires measures such as ending the special treatment of the National Logistics Corporation and fixing the tax system, which favors haulage and trucking operations outside the formal corporate structure and restricts tariff concessions to industrial importers and duty refunds to direct exporters.

Figure 6.7: Country rankings on the LPI, 2012


Source: World Bank (2012a).

Table 6.2: Dimensions of the LPI: Pakistan and comparator countries


Source: World Bank (2012a).

6. Conclusion

Pakistan’s export performance paints a dismal picture—the country has failed to improve its world share and appears to be stuck in producing and exporting products at the low end of value addition. It is necessary for the country to increase not only its export volumes but also to move up the value chain in terms of products exported. To this end, this chapter has identified potential export drivers and proposed a strategy for focusing on a limited number of product groups to deliver a sharp acceleration in export growth. In the medium term, these drivers are garments and other value-added textiles; SME manufactures; and rice, cotton, and high-value agricultural products such as fruit, vegetables, and meat. To leverage this growth, we have proposed engaging with the Pakistani diaspora to develop export markets, attract investment, and expand human capital, along with prioritizing the export sector for infrastructure allocation and improving the country’s trade regulatory and administrative environment.

In the past, the case for export growth focused largely on its implications for the balance of payments. While this is obviously important, large-scale employment generation is equally important for sustainable rapid growth. Fortunately, the export drivers identified above are all labor-intensive and, therefore expanding their production will also yield a large employment bonus. This could help actualize the demographic dividend that the ongoing demographic transition has made possible, and initiate a virtuous circle of export growth leading to employment generation, poverty reduction, rising savings and investment rates, and still higher economic growth.

* The author is a senior research fellow at the Centre for Research in Economics and Business (CREB), Lahore School of Economics.
** The author is director of CREB at the Lahore School of Economics.
*** The author is a doctoral candidate at the Department of Economics, University of Kent, in the UK.
1 We include in SME exports miscellaneous manufactured articles (primarily sports goods), scientific equipment (primarily surgical instruments), general industrial machinery and parts, road vehicles and parts, telecommunications and sound recording equipment, power-generating machinery and equipment (primarily motors and fans), and specialized machinery for particular industries (primarily machine tools). Most of the export production of these products takes place in small and medium units in industrial clusters around Karachi, Lahore, and the Sialkot–Gujrat–Gujranwala triangle in central Punjab.
2 Pakistan’s current share is about 3 percent and thus a small gain in its world market share would translate into a large increase in its garment exports.
3 The Punjab government was establishing a “garment city” on the Sunder industrial estate near Lahore on the basis of an understanding with Chinese firms who were interested in relocating to Pakistan when the kidnapping and murder of several Chinese engineers working on construction projects in other parts of country made the firms change their mind.
4 Data provided by Shaukat Ellahi Shaikh, the managing director of Nagina Cotton Mills Ltd., during an interview on the subject.
5 “Such as the textile cluster around Faisalabad, the engineering, pharmaceutical, and textile clusters around Karachi, and the textiles, light engineering and sports goods cluster in the Sialkot, Gujrat, and Gujranwala triangle” (Ahmed et al., 2010).
6 In connection with a study on the garments industry, one of the authors recently interviewed a number of firms and found that not a single SME was using bank credit (International Growth Centre, 2013).
7 Splitting the sample of firms by those with and without financial access shows that the probability of exporting is lower for firms without financial access than for those with financial access; 50 percent of the firms with financial access are exporters compared to only 18 percent of credit-rationed firms.
8 The index comprises five pillars: institutions, human capital and research, infrastructure, market sophistication, and business sophistication.
9 The index comprises two pillars: scientific outputs and creative outputs.
10 This is calculated as the ratio of the two subindexes, and examines how economies leverage their enabling environments to stimulate results in innovation.
11 The Punjab Agricultural Produce Markets Act 1939 is the basis of the laws and regulations that govern the operation of agriculture markets in Punjab. While this act has been amended several times, its basic structure remains more or less unchanged.
11 This section draws on Hamid (2008).
13 Interview with Aezaz Hussain, chairperson of Systems Limited, on 6 May 2013.
14 For example, a substantial market for Pakistani mangoes has developed in the UK through the Pakistani diaspora settled there. Initially, the mangoes were only available in small grocery shops in areas of Pakistani concentration, but with their availability came growing popularity, and now they are available even in mainstream supermarkets.
15 A more general impact of diaspora entrepreneurship is the creation of jobs in the overall economy.
16 The other countries studied include India, Bangladesh, China, Nicaragua, Brazil, Peru, and Honduras.
17 Four specific bottlenecks are considered: (i) the number of days it takes to clear customs, (ii) losses due to power outages, (iii) the inefficiency of the government in providing public utilities, and (iv) limited access to financial services. Pakistan emerges as one of the least investment-friendly countries.
18 These are country rankings based on individual pillars of the global competitiveness index and have been taken from the Global Competitiveness Report for 2011/12. Countries have been ranked from 1 to 133; the higher the rank, the lower a country’s performance and vice versa.
19 The data used in this report refers to 2010/11 and the current position is very likely much worse than two years ago.
20 This index ranks countries on the basis of the quality and efficiency of various dimensions of trade logistics prevalent in a country. These include customs, international shipments, logistics competence, tracking and tracing, and timeliness. A high rank on the overall index as well as on individual dimensions denotes low performance on the index and vice versa.

Labels: , , ,

posted by S A J Shirazi @ 12/18/2013 11:51:00 AM,

<< Home

City Campus

104 - C, Gulberg III,

Lahore, Pakistan.

Phones: 92-42-35714936, 38474385

Fax: 92-42-36560905

Main Campus

Intersection Main Boulevard Phase VI

Burki Road

Lahore, Pakistan.

Phones: 36560935, 36560939


Like on Facebook

Follow on Twitter

Subscribe by Email

Web This Blog

Popular Links

Alumni, Convocation, Debates, Faculty, Images, Life at Campus, Publications, Management of Pakistan Economy

Archives

Previous Posts

Powered By

Powered by Blogger