Declining exports — turning around and beyondArchive
PAKISTAN’s exports during the financial year 2015-16 fell to $20.8bn from $23.7bn in 2014-15. The 12.1pc annual decline was unprecedented in the recent history of national exports and warrants a candid analysis of the export sector.
The historical trend over the last seven years helps diagnose the malaise afflicting the export sector. In 2010-11, the international commodity bonanza (cotton and rice) enabled a quantum leap in exports from $19.3bn to $24.8bn; for the next five years exports remained range-bound between $24 to 25bn, till the commodity crisis of 2015-16, abetted by endogenous factors, dragged them back to $ 20.8bn. Hence, Pakistan’s exports, in the current composition, rose and fell with international commodity prices.
During the coming months, pressure on commodity (cotton) prices is anticipated to ease which may oscillate the export pendulum back to its amplitude of $24-25bn within the next 1-2 years; the removal of inefficiencies and improving the ease of doing business may add another $3-5bn.
The quantum leap in exports beyond that, however, depends on a structural transformation of the export sector as the existing composition lacks the force that can propel exports beyond $35-40bn.
The current export portfolio is marred by a lack of diversification — few products, exported by few exporters to few markets. A major upsurge in exports requires major structural reforms.
Pakistan’s export portfolio is a stark mismatch with the world market — 60pc of Pakistan’s exports (textiles) scramble for a share in 4.1pc of world trade whereas its engineering sector ( that constitutes 34pc of the international trade), has a meagre 1pc share of the world trade.
Secondly, exports are dominated by primary and intermediate goods rather than value-added finished products — 74pc of food items and 40pc exports of textiles are primary commodities.
Thirdly, value addition, wherever it exists, is process-focused rather than innovation-based. Consequently, the majority of exporting concerns produce for the low-end market segment characterised by a price race to the bottom in which the winner is the lowest earner.
Fourthly, value creation through designing and branding is resigned to the importer, whereas the exporter is satisfied with the production for private labels owned by international chain stores and brands. Little wonder, a branded sweatshirt retailed in New York at $60 is sourced from a Pakistani manufacturer at $4 per piece!
The structural constraints of the export sector on the market side are equally pronounced — more than 50pc of exports rely on only six markets (the US, China, Afghanistan, UAE, the UK and Germany).
Trade potential remains under-exploited in regional markets which are deemed to be the natural extension of a domestic market due to (a) similarity of consumption patterns ensuing from cultural affinities, (b) short lead time, and (c) low delivery costs.
Pakistan’s trade flow with all the four neighbours is hamstrung — politics overrides economics in relations with India; the security situation in Afghanistan blocks a westward trade push to Central Asia; international sanctions have smothered Pak-Iran trade; Himalayas separating China make the land route costlier than the marine route, around almost half of the Asian continent.
The models of top-50 exporting nations establish the principle that for any country to export beyond $40bn, innovation-driven production and value creation through designing and branding are to be drivers of exports. The structural transformation of Pakistan’s export sector is, therefore, imperative for a quantum leap in exports. Easier said than done — the reliance on commodity based exports cannot be wished away, nor can the structural transformation to an innovation-driven export sector be switched on through passionate professions.
A National Export Growth Strategy (NEGS) with ownership at the highest level and multi-disciplinary commitment from the entire government is essential to stem decline in the short term, ensure growth in the medium term, and structurally transform the export sector in the long-term.
A quick turnaround can come from increasing competiveness of the existing export base and demand-led production of agricultural products, especially high value agriculture products having a low gestation period.
The Strategic Trade Policy Framework 2015-18 has already identified the focus products, focus markets and market-linked focus products, which can help turn around exports in the short term; only an expedited operationalisation of the strategy is needed.
In the medium term, consistent export growth can be realised through a three-pronged strategy — sustainability, growth and penetration. The products (e.g. textiles) and markets (e.g. US) where Pakistan is already strong, the ‘sustainability’ of existing shares and consistent ‘growth’ is to be ensured through enhanced competitiveness and removal of inefficiencies.
Products (e.g. horticulture) and markets (e.g. China) where potential is under-exploited, a ‘penetration’ strategy, developed in consultation with the stakeholders, is required to realise the potential.
The long-term strategy entails structural reforms of the entire export sector — including high tech and innovative products (e.g. engineering and pharmaceutical) in the product mix; value added exports substituting commodities; quality enhancement supplanting price race; value creation through designing and branding replacing private labelling; and, market diversification towards unexplored markets (e.g. South America and Africa).
There is usually little appetite to invest in long-term structural reforms as the gestation period of 10-15 years extends beyond the tenures of political governments and government functionaries. The prescient, who plant the trees for the next generations, are rare but not extinct.
The author is joint secretary (Exim), ministry of commerce.
Published in Dawn, Business & Finance weekly, August 15th, 2016