Export diagnostics: A death foretold?

WEB DESK: Pakistan’s exports are on a declining path. The best estimates for this fiscal are well below $23 billion, some $ 2.5billion off 2011. In real terms (i.e. at constant prices) the fall is even sharper.

Export/GDP ratio has plummeted to 8.8% and Pakistan’s share in global exports to an all time low of 0.12%.

The Engineer’s target of $ 35 billion will happily elude us, not because of adverse external factors but vacuous policies. The reason for the failure of all the Strategic Trade Policy Frameworks is quite simple: you can’t treat what has not been properly diagnosed.

A slowdown in international trade, energy issues, security concerns, and an overvalued rupee are the stated fault lines. Let’s see if these are irritants or deterrents or just alibis. Yes, slower global growth and falling commodity prices have impacted international trade, which is expected to grow by a modest 2.8% this year. However, a historical analysis of Pakistan’s export performance strongly challenges a causative linkage with slackness in global GDP.

If anything, we fared relatively better when GDP growth in our major markets was flat. Our weakness as a low priced supplier becomes a strength under conditions of declining incomes. That the global slowdown is not the root cause of our poor export performance is also borne out by the performance of our comparators in the same market environment.

Over the last 5 years, Bangladesh’s exports grew by 50%, those of India by 25%. Vietnam doubled its exports and Cambodia is well on its way. Market share analysis is another useful tool. Market shares, by definition, ‘even out’ the impact of demand expansion or contraction. If you lose market share you know global slowdown cannot be the principal accused. Our analysis (that we will be happy to share with the Engineer) confirms market share slippages in most of our products in the major markets. Access to energy has two dimensions: availability and price. Availability does not seem to have seriously impacted exports as in quantitative terms we have lost little ground. We have been selling more for less.

Price, however, is higher than several of our competitors. But it is questionable if it has been a disabler: for most of our products energy is a relatively small component of the overall cost of production. Security challenges affect business in several ways, but its more obvious manifestation – reluctance of buyers to visit or dampening B2B partnerships – is overstated. It is reasonably mitigated by ‘The internet of things’, proximity to Dubai, and our exporters’ readiness to travel. It is the perception of Pakistan being an unreliable source of supply – law and order could affect production and shipments – that is a more telling threat.

The buyer will ‘cover’ himself by extracting price concessions. This too can be at least partially mitigated if the government picks up part of the tab. [Instead, the Accountant rubs salt into the wounds by blocking legitimate refunds!] The rupee is undoubtedly overvalued, but the classic theory of a weak exchange rate helping exports does not quite apply to Pakistan. Pakistan’s export mix is largely ‘commodity driven’ that is generally non-responsive to softening exchange rates.

There is sufficient empirical evidence to demonstrate that; though a ‘creeping, crawling’ devaluation helps. So if none of the above is a slayer of exports, what is? The first and foremost is a tariff policy driven by considerations of revenue generation and import substitution (arguably, not helping either objective). It is fundamentally anti-export. It defies the dictum that a tax on imports is a tax on exports, and challenges a smooth zero-rating regime.

High tariffs also breed inefficiencies, requiring ever increasing tariff escalations for the protected industries to remain afloat. More perniciously, they induce an anti-export bias by artificially making domestic market more profitable. Pakistan has reversed its liberalisation process, with higher duties, more slabs, and virtual ‘permanence’ of regulatory duties. Pakistan is now said to be the 6th most protected economy in the world. Lessons from a host of countries, who saw their exports soar when they lowered import duties, are lost on the policymakers. Next is an inefficient and narrow production base.

High tariffs, the legacy of the permit raj that precluded economies of scale, lack of technological diffusion, a culture that rewards rent seeking and not entrepreneurial excellence, weak competition commission, have all combined to make our manufacturing sector incompetitive. This is exacerbated by the limited range of goods we produce. By and large we try to export what we produce and not produce what the markets want.

The FTA with China is a case in point: despite tariff concessions available in thousands of products our exports are confined to only a handful. Without a competitive production base export growth will remain a forlorn hope. The third issue is the lack of a ‘foreign foot print’ on our Export-scape. What the ‘exporting tigers’ have in common is a vibrant foreign presence.

Over half of China’s exports are FDI-based. In Pakistan there is little export-oriented FDI. Even the multinationals here would rather prey on the domestic market than leverage the global networks to which they have ready access. Given our chronic balance of payments predicament we should be seeking FDI that either saves or earns a dollar, and not into burgers and banks that has led to a net cash outflow. Export-oriented FDI, along with tariff rationalisation, will also facilitate the badly missing integration with global value chains.

Finally, it is the institutional failure. It fails on grounds of competence, consistency and co-ordination; and no accountability. Trade policy has ritualised desired outcomes (efficiency, innovation, productivity, market access, technology) without due recognition of the difficult reforms that these lofty ambitions require.

No trade caravans, no alishaans, not another 50 trade officers will do the trick. Until the Professor, the Engineer, and the Accountant can get their act together, and undertake genuine reforms, all these targets (40-45 billion by 2013 announced under Export Plan 2007; 32 billion under STPF 2012; 35 billion under STPF 2015; 150 billion under vision 2025) will remain something to laugh at. Sirs, exports is no laughing matter. shabirahmed@yahoo.com

-Business Recorder