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A roadmap to diversifying Pakistan’s exports: operationalizing the product space
April 30, 2019

CPEC over the past decade, there has been much written about the reoccurring balance of payments crisis in Pakistan. This discussion has covered a wide range of topics, from the cost of oil imports to boosting exports, from IMF stabilization packages to the China-Pakistan Economic Corridor (CPEC). Though a comprehensive discussion of how to address the balance of payments problem must address most of these issues. The lack of export diversification in Pakistan has remained a critical impediment to growth in Pakistan. Therefore, the focus of recent research work by a team headed by Dr. Azam Chaudhry of the Lahore School of Economics was to identify potential export areas that address the chronically underperforming export sector. The research team argued that in order to address this issue, it is crucial to identify potential new exports that are not only relatively closer to the current export basket but also those products that have the potential to lead to higher value-added exports.

The researcher team stated that Pakistani export sector is characterized by three important features:

First, the Pakistani export sector has been heavily reliant on textile exports and in particular low value-added textile exports. The problem in the Pakistani case is that while other countries move beyond low value-added exports, Pakistan has consistently failed to do so.

Second, while there is much optimism about the impact of the recent round of devaluation on exports, the reality is that the actual impact depends on the price elasticity of exports; if Pakistan exports low value-added textile products and they become cheaper, there is a good chance that exports won’t increase significantly.

Finally, though policy makers keep discussing growth strategies, the fact is that over the last few decades there has been almost no serious work done on actually looking at the how to promote exports and economic growth through a comprehensive industrial strategy.

Using well-developed techniques to analyze the product space, the researchers started by identifying specific products that Pakistan could potentially export using the idea of product ‘distance’. The idea behind this is simple: While mapping a country’s entire productive capabilities is virtually impossible, international researchers have developed tools to measure the ‘distance’ of new products from a country’s current production basket.

But after identifying potential export products, there was a chance that the goods identified are less sophisticated, low value-added goods. So, the authors then determined the product ‘sophistication’ of the proposed export goods. The idea behind product sophistication is that one can identify higher value exports by looking at the type of countries that make these exports. In particular, countries with high incomes tend to produce more technologically sophisticated products while lower income countries tend to produce less technologically sophisticated products. So the researchers used this methodology to rank potential export goods in terms of high and low product sophistication.

The policy implications of the combination of product distance and product sophistication of potential export goods are obvious: If Pakistan is interested in developing an export strategy that focuses on goods that it can potentially produce and goods which are higher value-added, then it should focus on those goods that have lower ‘distance’ and are also more sophisticated than the average sophistication level of the goods in the current Pakistani export basked.

An important question that arises is that while the methodologies discussed above identify potential export products based on cross-country data, could Pakistan actually produce the goods that we are proposing? If not, is the entire exercise purely academic? While the recommendations from our analysis above do provide important lessons, the researchers extended their analysis by also calculating the distance and product sophistication of goods that Pakistan already exports, though in relatively small amounts (less than USD 1 million or less than USD 10 million). This allowed the researchers to formulate a recommended list of products that we know that Pakistan can produce (since it is already exporting them) and which are characterized by higher product sophistication.

The researchers then presented a list of actual goods which included a wide range of potential export goods including fish fillets (frozen), cinematographic film, typewriters, waste oils, mineral or chemical fertilizers, aluminium and aluminium alloys and ferro-manganese etc. which fit into Pakistan’s current production capabilities, but are more sophisticated than the current export basket of products.

The idea underlying this research was that the Pakistani government needs to find new export categories that the country can realistically produce and which are also higher value-added goods. Until the government pursues more active industrial and export policies, the reoccurring balance of payments problem will be impossible to eliminate.

This research team included Dr. Azam Chaudhry, Dean & Professor, Faculty of Economics, Lahore School of Economics and Gul Andaman, University of Malaya

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Labels: CPEC, Dr. Azam Chaudhry, Lahore School, Research