Boost Exports

Pakistan has never had a consistent, coherent and well articulated export-focused growth strategy.

Exports are often treated as a residual after-thought once the domestic market has been catered for. This is inexplicable given that the country has had a persistently large trade deficit, which has been increasingly difficult to finance each year.

While exports have been rising, economic growth, per se, has never been driven by exports. Nor has building a dynamic export sector been at the forefront of any government’s economic strategy.

Although domestic demand has to remain an important cornerstone of the overall growth story and firms have to be competitive domestically to survive, the focus of policy has to shift from being inward looking to one which is outward looking, focused more on export growth than just on domestic demand.

Comparison with other countries reinforce the lesson that trade openness has been an important factor in driving economic growth in successful countries. Openness has helped economic transformation. Aside from the benefits of having a more competitive environment, which induces firms to become more efficient, unblocking the access to export markets that were not accessible before also provides opportunities for economies of scale in industrial production.

Pakistan’s export to GDP ratio is relatively low and its exports per capita are among the lowest when compared to other Asian economies. If one looks at the export mix, it is apparent that sectors that are low technology and low value are the ones that have grown. Broadly speaking exports fall into two categories: textiles and other Small and Medium Enterprise (SME) industries across different sectors such as leather, chemical, medical goods and agricultural products.

The challenge for Pakistan is to diversify this portfolio by implementing policies that contribute to successfully exporting new and more sophisticated products both within textiles and the SME sectors. A closer look at textiles and SMEs is telling.

Transform textiles.

Pakistan is the 4th largest producer and the third largest consumer of cotton in the world. The downstream textile and garments sector, considered to be low value addition, has grown the most and today this sector represents the single largest industrial sector. It employs approximately 38 per cent of the total manufacturing labour force, supports about 1.5 million farmers and contributes about 9 per cent to the country’s GDP. It is also consistently responsible for between 50 and 70 per cent of the country’s exports. During the past several decades, textiles have attracted the highest share of total capital investment.

Significant progress has been made by an increase in upstream cotton cultivation and the downstream industry has developed from being a fabric producer and yarn exporter to exporting products with a higher value added content. Problems however remain. Cotton yields lag behind those of competing countries, irrigation methods are antiquated, and cotton picking, storage and transportation facilities continue to be poor resulting in contamination of cotton. The cotton produced remains of low quality, which restricts the types of products that can be made from it.

This is evidenced by the value added sector where Pakistan has visibly slid down the value chain with gains in the low value added sectors and setbacks in the higher value added segments. Globally, Pakistan’s value added segments find it hard to compete effectively with goods from China, India, Bangladesh and Sri Lanka. This is further compounded by a poor policy framework, political turmoil, and the high cost of energy and transport. Despite the existence of a Ministry of Textiles, problems are faced by producers due to the shortage of qualified, skilled labour, absence of research 230and development, weak marketing capabilities and a general apathy to address problems proactively at the official level.

This situation needs to be urgently addressed. As a core industry Pakistan’s textiles have the ability to transform its economic future. The sector has been mismanaged and misunderstood for decades. Pakistan’s natural advantage as a cotton producing country has thus been undermined while nations like Bangladesh, China, India, and Sri Lanka have been able to lower costs, attain higher exports and capture world market share without cotton-growing being the backbone of their economies. While some of the large Pakistani business groups have emerged amongst the most competitive textile producers in the world, this is not true for the textile sector as a whole, which remains fragmented. The more successful groups are those that are vertically integrated and have successfully positioned themselves in foreign markets, earning a significant percentage of their export revenues from value added products.

The key to transforming the textile industry is to add value to cotton by better organisation and coordination from cotton ginning to the finished product which can add a new edge to the sector’s competitiveness. This could involve policies to support the import of plant and machinery, access to favourable financing terms, support to cotton growers, incentives for proper transportation and logistics and greater focus on penetrating export markets. This would assist producers to get to the finished goods stage with greater ease and allow greater economies of scale to develop.

A hypothetical example to demonstrate the payback of value addition is as follows. If Pakistan were to utilise its cotton to produce high-quality shirts and trousers its exports could surge. Pakistan produces twelve million bales of cotton each year. Each bale contains 480 pounds of cotton. The production of one shirt and trouser combined consumes approximately two pounds of cotton. If Pakistan produced nothing but shirts and trousers, and sold one trouser and one shirt collectively for $25 in the international market, then, Pakistan could earn $72 billion in export earnings each year. Pakistan’s current textile and apparel exports are $10 billion. A textile strategy which encourages value addition, could therefore transform Pakistan’s economic landscape.

One step in the right direction has been the introduction of the new National Textile Policy 2009-2014 announced by the Ministry of Textiles in 2009. This establishes an investment fund that aims at incentivising investments in specific areas including modernisation of machinery and 231technology, removing infrastructural bottlenecks, enhancing skills, better marketing and use of information and communication technology. The fund provides generous sector-specific and general rebates, re-financing schemes and grants. That said, such a policy falls short on implementation, as it has not resulted in the level of capital investment required to grow value added textiles to the level where they can start to make a meaningful contribution across the board for the economy as a whole.

SME Sector

Often the official pre-occupation with the textile sector blindsides the government to other ‘value added’ exports in the SME sector. Whilst textile exports traditionally account for as much as 70 per cent of annual exports, remaining exports include SME sectors including food, petroleum products, leather, pharmaceuticals, engineering goods, cement, sports goods, carpets, surgical equipment, furniture, gems and jewellery. Most of these sectors are high value added, high margin and have a higher demand propensity in export markets. The key hurdle is that they account for a smaller percentage of Pakistan’s total exports and hence command little attention from government policy-makers.

SME manufacturing enterprises generate 35 per cent of Pakistan’s manufacturing output, 85% employment for non-agricultural labour and 25 per cent of exports.

These are impressive statistics, yet they remain in the backwater of mainstream economic policy. What is urgently needed is a sustained and vigorous policy-driven growth in these sectors with strong forward and backward inter-industry linkages using the ‘inclusive’ growth model. With labour-input, a large component of capital and output, rapid SME growth can have a salutary impact on wages, employment, living standards and alleviating poverty.

Much needs to be done to achieve this outcome. The government has large bureaucracies dealing with SME in all provinces but it is unclear what they do. Surveys of activity in this sector are undertaken, sometimes as infrequently as fifteen years, and a rather imprecise growth rate is calculated. This figure is then put into the National Income Accounts and repeated year-after-year until the next survey. The growth rate of the SME sector has been determined to be as low as 2.5 per cent per annum and has averaged between 7.5 per cent and 7.8 per cent per annum for the last five years. This is not the true rate of growth of the SME sector; rather it is a ‘plug in’ number, which economic managers use, in the GDP economic model.

In Pakistan’s National Accounts, the SME growth rate and that of large scale manufacturing together combine to yield the total manufacturing sector growth. Perhaps with more accurate documentation, it would be possible to generate a more accurate assessment of growth rates for SME. So what is first needed is more and better information on what is going on in the SME sector from which most exports emanate. Second, growth in these SME sectors can be enhanced by technology inputs, trained labour and manufacturing or service capacity to scale up production as well as the marketing expertise in order to penetrate global markets. This can create a virtuous cycle of growth, employment creation, learning about new products and development.

2. The incentive structure needs to favour exports through judicious adjustment in trade, tax, finance and tariff policies.

Special incentives should be given to exporters. If this ’tilt’ is sustained, new exports can surge. An examination of the rather non-descript category of ‘Miscellaneous Exports’ in the official export data turns up some surprising high-value items that Pakistan exports to some very sophisticated markets but the amounts are small and their year-on-year growth is fairly erratic.

3. The non-price determinants of exports need to be strengthened by emulating ‘best-practice’ techniques employed by the world’s leading exporters.

4. Domestic and FDJ proposals that are aimed at exports should be given the highest priority and placed on a fast track for approval.

FDI inflows offer the best route to securing discrete upward shifts in the technological progress function in the SME sector, simultaneously bringing in better managerial and marketing skills critical for exports. Fifth, at the firm level, companies have to find a uniquely Pakistani way to develop a game plan for themselves. To be successful, Pakistani firms have to build market shares in sectors where they have the ability to produce better and cheaper goods for international markets.

The Importance of Harnessing Entrepreneurial Talent for SME

Development

According to the MIT Entrepreneurship Centre at MIT Sloan School, it is imperative for rapidly developing economies to review the importance of supporting entrepreneurship as an urgent matter of public policy. In a similar vein, an Economist Intelligence Report emphasised the importance of government investment in education and Research and Development by highlighting that ‘waves of technically trained young people—steeped in the latest theories and techniques, and honed by some of the smartest minds in science and technology—do more to raise a country’s industrial competitiveness than all the tax breaks, development aid and government initiatives put together’.

Pakistan’s SME Development Vision as spelled out by the SME policy is ‘SME-led economic growth resulting in poverty reduction, creation of jobs and unleashing the entrepreneurial potential of the people of Pakistan’. The SME policy has a vast institutional network consisting of institutions like the Small and Medium Enterprise Authority (SMEDA), the National Productivity Organisation, the Pakistan Software Export Board (PSEB) and the Competitiveness Support Fund. Whilst these organisations have developed a great deal of capacity and can launch a number of high impact programs to encourage entrepreneurship, much more needs to be done in terms of coordination, impact and results.

One of the main concerns is that growth of small and medium sized businesses is still constrained due to limited access to financing, bureaucracy, and the absence of a skilled worked force with the tool kit for setting up a successful small business. Wherever such initiatives are underway, they suffer from limited funding, uneven and insufficient government support and lack of coordination. If properly harnessed, small enterprises have the ability to increase the per capita income to a level of US $10,000 in the next ten years. Whilst an institutional network exists, some of the key initiatives that need further capacity and focus are as follows. First, set up and fund training programs for small businesses in vocational schools and universities in urban and major rural areas. Second, banks should ensure adequate funding for small enterprises, which is based on cash flow lending versus asset-based models. Third, the government should fund an early stage equity fund to provide seed capital for early stage start-up ventures where the fund is managed on a private enterprise basis which could be sector specific such as high growth information technology, human development, agriculture, services, and industry. Fourth, efforts should be directed to encourage ideas, progress and innovation through the formation of clusters. Clusters inherently evolve because of 234entrepreneurship. For example, the technology cluster in Pakistan is Lahore and the textile cluster in Pakistan is Faisalabad and Karachi. Most successful businesses in Pakistan are founded by entrepreneurs who are located in a particular area; the cluster forms around these entrepreneurs. Therefore, focusing on entrepreneurship in clusters can have a significant impact, which reinforces the idea of an inclusive growth model that involves the private sector and focuses on investing in education, vocational training and entrepreneurship.