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Pakistan in the Global Economy – Opportunities and Challenges

Amidst distinguished economists, academicians and policymakers from both the national and international platforms, the Lahore School of Economics Tenth Annual Conference on Management of the Pakistan Economy concluded at its Main Burki Campus on Marc 27, 2014. The theme of the two days Conference was “Pakistan in the Global Economy – Opportunities and Challenges”.


The first day of the Conference (March 26, 2014) witnessed an interesting discussion on some key macroeconomic issues confronted by Pakistan including macroeconomic management under constrained balance of payments, exchange rate, imports and the world trading order. Dr Shahid Amjad Chaudhry, Rector, Lahore School of Economics, inaugurated the Conference by welcoming all the speakers and guests, with Dr Rashid Amjad, Director, Graduate Institute of Development Economics, Lahore School of Economics, delivering the keynote address focused on the historical perspective on growth spurts and reversals in the Pakistan economy.



Dr Rashid Amjad asserted that in the short run, the binding constraints on economic growth in Pakistan are the external shocks and the poor macroeconomic management to deal with it. However, in the medium run, the lack of exports and Pakistan’s inability to take advantage of globalization is the key reason for poor economic growth. He suggested a five-point agenda that the present government should follow to revive the economy which included (i) renew confidence at the national, regional and global level; (ii) prudent macroeconomic management; (iii) shift from consumption driven growth to export and investment led growth; (iv) move away from grand visions and frameworks to hardnosed pragmatic plans to overcome the energy and water crisis; and (v) document the economy at least in national income accounts.


The first session of the Conference sparked off the discussion on macroeconomic management under constrained balance of payments and an open capital account, with Mohsin Khan from the Rafik Hariri Center for the Middle East, Atlantic Council, Washington, DC examining the design and operation developments that have been incorporated into Pakistan’s monetary policy framework. He argued that the State Bank of Pakistan has often found itself facing the classic dilemma of operating an independent monetary policy in the context of an open capital account, an exchange rate target, and an economic growth objective. Therefore, adopting an inflation targeting regime would be a more appropriate way to conduct monetary policy.The discussion was very aptly taken forward by Dr Mushtaq A. Khan and Ms Asma Khalid from the State Bank of Pakistan, who presented their views on Pakistan’s parallel foreign exchange market.


The second session of the Conference shifted the focus to the the exchange rate as a policy instrument with Dr Shakil Faruqi, Professor, Lahore School of Economics presenting a long term comparative view of the foreign liquidity crisis and the economy of Pakistan. Dr Faruqi asserted that breaking the ‘begging’ bowl would require structural transformation which Pakistan embarked upon rather half heartedly two decades ago, but never pursued it through its fruition as other countries did. He also remarked that this transformation will be more difficult in current times than it would have been in previous decades.


Dr Syed Kumail Rizvi, Assistant Professor Finance, Lahore School of Economics, carried on the discussion further by analyzing the exchange rate dilemma confronted by the State Bank of Pakistan. He proposed an optimal exchange rate regime to the monetary authorities of Pakistan (SBP) based on a historical study of the outcomes and performance of different monetary stances taken during the last forty years. Another stance on the exchange rate issues of Pakistan was taken by Mr Sikander Rahim, Former Economist, World Bank, who argued that devaluation of the exchange rate has disadvantages that outweigh any supposed advantages, notably its effects on inflation, income distribution, service on foreign debt and incentives.


The next session was devoted to discussions on Pakistan and the world trading order, with Mr Rashid S. Kaukab, Director, CUTS International Geneva, Switzerland presenting a comprehensive overview of Regional Trade Agreements (RTAs) and Preferential Trade Agreements(PTAs) around the world. He proposed that countries like Pakistan should focus on negotiating RTAs with selected countries to build the required capacity for such negotiations and aggressively seek and defending non-reciprocal market access under PTAs.


In a similar vein, Dr. Manzoor Ahmad, Regional Trade Advisor, USAID Pakistan Trade Project, stressed that Pakistan needs to fully embrace trade with India and Central Asia by opening up more routes and acceding to the TIR convention. He strongly argued that Pakistan should reassess the current protectionism and state-ownership of key sectors as it is stifling the economy and undermining its ability to compete in the global market. Dr. Mohammad Saeed, Senior Technical Adviser, United Nations Conference on Trade and Development, took the discussion further, by analyzing the status quo and opportunities for Pakistan under the new Agreement on Trade Facilitation (TFA).


The last session of the Conference highlighted the key issue of Pakistan’s strong import dependency with Dr Ejaz Ghani, Dean, Faculty of Economics and Business Studies, Pakistan Institute of Development Economics (PIDE), examining the import structure of Pakistan over the last four decades, with particular emphasis on regional economic integration. Dr Ghani remarked that if Pakistan is to grow at 7-8% per annum as envisaged in the development plans, then it will continue to experience strong import growth. The discussion was further reinforced by Ms Resham Naveed and Ms Zunia Tirmizee, Lahore School of Economics, who investigated the conventional import demand function and found that there is a significant relationship between import demand and real GDP, relative prices, terms of trade and foreign exchange reserves.


The second day (March 27, 2013) of the Tenth Annual Conference on Management of the Pakistan Economy at the Lahore School Annual Conference opened up with a session on Pakistan’s Competitiveness. Dr. Irfan ul Haque (Special Advisor at South Centre, Geneva) illustrated that an improvement in Pakistan’s export performance is crucial to raising economic growth. He argued that a coherent and articulated industrial policy is required to overcome the disadvantage of slow productivity that hurts Pakistan’s competitiveness. Also, the formulation of industrial policy should involve key stakeholders such as the private sector. He concluded that Pakistan’s very slow productivity growth was the single most important factor that hurt competitiveness and identified certain factors that should underpin the new industrial policy, notably, the changed basis of international specialisation and rules governing world trade.


Matthew McCartney (Director of South Asian Studies and Associate Professor in the Political Economy and Human Development of India at the University of Oxford) emphasized that there does exist space for industrial policy to promote technological upgrading even under contemporary WTO rules and globalization, but that the requirements are still very demanding of state capacity. He used a comparative perspective to offer suggestions for policy reform.


Dr. Syed Turab Hussain (Associate Professor and Acting Chair of the Economics Department at the Lahore University of Management Sciences) explored the barriers to growth faced by small and medium enterprise in Pakistan. Upon the analysis of the fan and sports goods industry, he found that the fan industry appears to be stuck in a trap of low profitability, poor quality production and an inability to access international markets. In the sports goods industry, growth is constrained by the degree of product diversification and innovation, which depends largely on whether or not a firm is a direct supplier to a brand or not.


The second session of the day focused on Pakistan’s export performance. Dr. Theresa Chaudhry (Associate Professor of Economics and a fellow at the Centre for Research in Economics and Business (CREB) at the Lahore School of Economics) suggested that evidence has been found which supports the proposition that exporters exhibit significantly higher total factor productivity and are larger in terms of employment than non-exporters. Looking individually at the eight largest sectors comprising more than 80 percent of the CMI-Punjab, with few exceptions exporters have higher labor productivity and offer higher compensation to workers, but use more capital per worker and more imported inputs.


Dr. Azam Chaudhry (Professor of Economics at the Lahore School and the Dean of the Economics Faculty) gave an interesting analysis of the set of Asian countries that have successfully increased exports. He highlighted that countries that have increased exports have focused on increasing exports in those sectors where they already have expertise and at the same time slowly developing new export sectors. Secondly, high growth Asian economies have developed their export sectors by moving up the quality ladder. Lastly, no single economic policy worked across Asia but two or three policies have been used to boost exports. Finally the only consistent factor that has an impact on high value added export growth is domestic credit to the private sector. These results point to the urgent need for a coherent industrial strategy to boost Pakistani exports.


The third session focuses on building Pakistan’s technological capabilities. Dr. Khalil Hamdani presented the case for a vigorous policy thrust to support investment led growth. He argued that the economy of Pakistan has not maintained a sufficient level of capital formation to sustain growth over the long-term. Two-thirds of current growth is driven by consumption and not investment: that needs to be turned around. There is also need for deliberate polices to boost technological capabilities in the enterprise sector. East Asia did this with great success, creating a dynamic process of capital formation and technological learning that upgraded productive capacity and underpinned export success. 

Nabil Hashmi (Chairman of Thermosole Industries) then took the stage and gave an overview of the Pakistan Auto Industry, elaborated suggestions for Pakistan National Auto Policy, technology sub contracting opportunities and the industries prospective to trade with India.


Salman Ehsan ( Assistant Professor of Business Administration at the Lahore School of Economics) completed the session by giving a descriptive overview of the quality and compliance of Pakistan’s top export categories. His paper introduced the top export categories, key dimensions of international quality standards, specific standards and requirements for textiles and rice, quality assurance infrastructure in Pakistan, identification of major gaps, and policy recommendations in order to improve the state of affairs.


The last session for the conference introduced the diversification of markets and exports in Pakistan. Dr. Naved Hamid ( Director of the Centre of Research for Economics and Business and Professor of Economics at the Lahore School of Economics) stressed upon the reasons for the garments industry not living up to its potential. He also discussed the ways in which leading firms in the industry have been successful in growing rapidly by enhancing value and competitiveness. In conclusion, he analyzed the Punjab Government’s recent garment initiative which aims to tackle some of the important barriers to growth and facilitate movement up the value chain by a larger number of the firms in the industry. Dr. Naved then also elaborated on the relationship between structural change in Pakistan’s export sector and GDP growth, growth rate of world trade, trade liberalization in the country and the degree exchange rate overvaluation.


Ms. Asha Gul (Research Fellow at the Centre for Research in Economics and Business and Teaching fellow at the Lahore School of Economics) explored the trade relationship between Pakistan and Turkey, in an attempt to analyze the potential gains for Pakistan under the proposed Preferential Trade Agreement. She evaluated the existence of potential trade opportunities using descriptive statistics and trade indices. In conclusion she argued that there lies an opportunity for Pakistan to exploit in its trading relationship with Turkey as Pakistan has been enjoying a trade surplus which can be expanded further.Strong export similarities and intra industry trade indicate the presence of greater opportunities for firm synergies between the two countries which can greatly facilitate Pakistan in achieving greater value addition and broader market base for its exports.
 
The last speaker of the day was Naheed Memom (CEO of Manzil Pakistan). She highlighted that Pakistan and India have not yet normalized trade relations despite sharing a common border for more than six decades. Although significant developments have been made since the beginning of 2011, benefits of bilateral trade have not been fully obtained. Pakistan is yet to reciprocate the MFN status, granted by India upon formation of WTO. She identified the changing pattern in comparative advantage of Pakistan’s manufacturing industries. Her study concludes that 18 industries should be protected upon liberalizing trade with India. These industries are termed as ‘vulnerable’, as they have moved from either borderline competitiveness to becoming uncompetitive or vice versa. The study also suggested that excessive concessions granted to China in the FTA and resistance to opening up trade with India may have resulted in inefficient trade i.e. imports from a less competitive partner and exports to a less lucrative market.

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posted by S A J Shirazi @ 3/27/2014 06:19:00 PM,

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