Protectionist Trade Policies

[Originally published in the UTrade magazine]

Pakistan’s trade deficit increased by PKR 951.9 billion in the last five years: from PKR 367.6 billion in 2004-05 to PKR 1,319.6 billion in 2008-2009 , according to records available with the Federal Bureau of Statistics, Government of Pakistan. This bourgeoning trade deficit is reason enough for the government to implement effective policies to improve the socio-economic conditions in the country at the earliest in order to save local industry from dying an early death, and to bring Pakistan forth as an economic power.

There are several issues that need to be examined in this regard. Firstly, the deteriorating law and order situation prevalent in the country that has led to several shocks at the Karachi Stock Exchange needs to be improved immensely as it has had a huge impact on trade activities in the country in the recent past. Secondly, the energy crisis that has hit the country hard since the incumbent government came to power needs to be solved at the earliest in the best manner so as to keep costs low and industries running. Thirdly, local industries need to be encouraged through various protectionist measures in order to ensure growth and prospects of greater exports.

Whereas the first two issues mentioned above are topics of heated debate and attention in the media and the social and political circles of the country, the third issue needs to be considered and emphasised upon in detail.

Although free trade is advocated by most economists who argue that it provides higher chances of economic growth, it is imperative for us to understand that there is a certain level of stability and size companies in an economy have to achieve before completely opening up to foreign trade. Local industries must be given the chance to grow in order to be able to sustain and compete with foreign firms, and help an economy achieve a favourable balance of trade.

The Special Economic Zones established by the revolutionary Deng Xiao Peng in China in the 1980’s is an excellent strategy to promote exports while protecting the local economy at the same time. China’s website regarding investing in SEZs  states: “Special Economic Zones (SEZ’s) are development zones established by the PRC to encourage foreign investment in China, bringing much need jobs, technical knowledge, and future tax revenues in return for significant tax concessions at start-up of the operations and over a number of years.”  The footnote on the same webpage warns: “CAUTION: Do not be fooled into the belief that starting up your manufacturing operation in an SEZ will either provide easy or automatically approval for domestic sales rights.” The usage of such blunt language goes to show how particular the Peoples Republic of China is in safeguarding its local economy while ensuring benefits to its local economy through foreign investment.

China’s assistance to Pakistan in setting up Export Processing Zones (EPZ) in some industrial cities of Pakistan is a very fortunate as well as encouraging step. A new zone is under construction in Faisalabad, which will be the biggest industrial estate of Pakistan when complete, and has sections for each country and the first phrase is already complete with a special Chinese zone in it. There has also been a new SEZ proposed on the currently under construction Sialkot-Lahore motorway, and Qatar has proposed an investment of $1 billion in it. Once all of these EPZs are fully-functional, they can prove to be the driving engine of the Pakistani economy, provided the socio-political situation improves.

Pakistan is known to be largely dependent on the agriculture sector for economic growth. It is the fifth largest producer of cotton in the world, the third largest exporter of raw cotton, the fourth largest consumer of cotton, and the largest exporter of cotton yarn. 1.3 million farmers (out of a total of 5 million) cultivate cotton over 3 million hectares, covering 15 per cent of the cultivable area in the country. Cotton and cotton products contribute about 10 per cent to GDP and 55 per cent to the foreign exchange earnings of the country.  This goes to show the dependence of the Pakistani economy on its cotton industry, which hence should be paid immense attention to.

Consider the export patterns of cotton over the past two years. As compared to the trade volume during July-November 2008, exports from the textile group declined by 24.3% during July-November 2009. Further details show that the export of raw cotton and cotton yarn increased by 107.5% and 18.3% respectively, whereas the export of knitwear, bedwear, and towels showed a 7.5%, 7.2%, and 6% decline respectively. Readymade garments sector shows 2.3% growth whereas ‘Art silk and synthetic textile’ showed growth of 86.3%.  These statistics should be a cause of concern for Pakistani policymakers as well as industrialists as the more profitable sectors of the textile group that constitute readymade textile products such as bedwear, towels, knitwear, etc. are declining whereas the export of raw and cotton, which can be of manifold value if processed locally, is increasing.

Now take the case of agricultural subsidies paid to farmers in the European Union (EU). Though agriculture constitutes a minute proportion of the total economy of the EU states, 43% of the EU’s budget is planned to be spent “in favour of” natural resources over the period 2007-13.  This should serve as an important example for our policymakers, as the preceding wheat crisis in the county in 2008 was caused partly due to the support price of a meager Rs. 650 per 40 kg in Pakistan as compared to Rs. 1400 in neighbouring Afghanistan and Rs. 800 in India, which resulted in the smuggling of the staple crop of the country.  These are important policy considerations that our government cannot afford to ignore if serving the people while fostering economic growth is a priority.

Local innovative industries also need strong encouragement and support from the government in Pakistan. For instance, in the year 2005, Pakistan became in the 16th nation in the world to manufacture its own brand of cars when Adam Motor Company, Ltd. started production of the Revo car. However, shortly, in the year 2006, Adam Motor Company, Ltd. was forced to cease production and sell its assets due to lack of funds and uncertain political climate. What started off as the production of not only the most affordable car in the country but also a symbol of national pride had to be shut down in a short span of time. This could have been avoided had there been greater restrictions on the manufacture of cars in Pakistan by foreign companies coupled with Research and Development (R&D) subsidies to the local company, which should have been monitored by the government.

Although India gained independence at the same time as Pakistan, it is popularly regarded today as one of the “emerging giants” in the world economy, whereas some reports claim Pakistan to be a “failed state”. Not until political stability is achieved in Pakistan will the dreams and goals of high economic growth and prosperity be realized not only by the policymakers but the common Pakistan man as well. This power, of course, is in the hands of the government to make necessary changes in its policies to make Pakistan trade, investment, and growth friendly. Those in power have to realize that the RPP contracts will benefit only a few lucky ones in the country, the rest only want uninterrupted power supply at affordable rates.

For starters, uninterrupted power supply to the industrial estates has to be ensured. It is now up to the talented pool of individuals – from politicians, economists, social activists, industrialists, investors, and managers – in Pakistan to work together to enable our economy to take a fast leap forward, just like the Markhor, our majestic national animal.

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