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What Does the Exchange Rate Do? A Status Symbol?
Sikander Rahim
Published:Sept 2014
This paper aims to assess the harmful impacts of exchange rate depreciations on Pakistan’s economy, including impacts on international capital movements, wages, the domestic price level, and development. Devaluation of a currency in terms of foreign currencies or metallic standards was for long considered to be undesirable and, if unavoidable, a sign of failure. Attitudes have since changed and devaluation is thought to bring advantages, especially by making economies more competitive exporters. This paper is intended to show that it has disadvantages that outweigh any supposed advantages, notably its effects on inflation, income distribution, service on foreign debt and incentives. It does so by describing in concrete terms the relations between foreign and domestic prices and the costs of untradeable goods and services that are components of the price of any good in any domestic price index. It also discusses the motives, official and unofficial, that have prompted the monetary authorities of Pakistan to make a practice of regular depreciation of the rupee and to question their justification.
KEYWORDS:
Pakistan,
exchange rate,
depreciation.
JEL:
E31,
O24.
Toward a Competitive Pakistan: The Role of Industrial Policy
Irfan ul Haque
Published:Sept 2014
This paper’s basic premise is that an improvement in Pakistan’s export performance is crucial to raising economic growth. After examining the reasons generally given for Pakistan’s poor export performance, we conclude that the country’s very slow productivity growth was the single most important factor that hurt competitiveness. We argue that a coherent and articulated industrial policy is required to overcome this disadvantage. While the experience of the East Asian economies offers useful lessons, Pakistan’s policy must accord with its own conditions, which are, in many ways, different. The formulation of industrial policy should involve key stakeholders, particularly the private sector. The paper identifies certain factors that should underpin the new industrial policy, notably the changed basis of international specialization and rules governing world trade.
KEYWORDS:
East Asia,
industrial policy,
export performance,
productivity.
JEL:
F43,
L59.
Pakistan’s Growth Spurts and Reversals: A Historical Perspective
Rashid Amjad
Published:Sept 2014
This paper takes a historical perspective to search for the major causes of Pakistan’s stop-go growth cycles and come to the conclusion that, to varying degrees, the foreign exchange constraint provides a major explanation for these cycles of irregular economic growth in the country, particularly since the 1990s.
KEYWORDS:
Pakistan,
macroeconomic management,
foreign exchange,
IMF.
JEL:
F43.
The Political Economy of Industrial Policy: A Comparative Study of the Textiles Industry in Pakistan
Matthew McCartney
Published:Sept 2014
The textiles industry in Pakistan has failed to fulfill its “historical mission,” whether judged in terms of promoting rapid and sustained economic growth, reducing poverty, or providing employment to young women and so promoting wider social transformation. This paper makes a case for a particular and targeted form of industrial policy that would help the textiles sector learn and upgrade. It argues that those factors commonly seen as constraints to industrial policy—the “China effect,” the global rules of globalization, global value chains, and the problems of energy and education in Pakistan—do need careful consideration, but they are not insurmountable obstacles to industrial upgrading. The key market failure is the risk and uncertainty associated with acquiring and learning to use new technology. The paper explores a number of policy options, reviewing the lessons that cannot be learned from the Republic of Korea and India and one that can from Bangladesh. The latter shows that rapid and sustainable export growth in textiles can be achieved, even in an economy with a weak, corrupt, and unstable form of governance.
KEYWORDS:
Pakistan,
Korea,
Bangladesh,
textiles,
industrial policy,
technological change,
upgrading.
JEL:
O40,
L50.
The Need for a Coordinated Industrial Strategy to Boost Pakistani Exports: Lessons from Asia
Azam Chaudhry and Gul Andaman
Published:Sept 2014
This paper focuses on a group of Asian countries that have successfully increased exports and found a common industrial strategy. Several key factors emerge from this study. First, countries that have managed to increase their exports focused on doing so in sectors in which they had expertise while slowly developing new export sectors at the same time. Second, high-growth Asian economies have developed their export sectors by making a significant move up the quality ladder and, in particular, moving away from low value-added to higher value-added exports. Third, there is no single economic policy that has worked across Asia; rather, successful exporters have used two or three policies in tandem to boost exports. Fourth, industrial policy has been coordinated with education and training policies to develop both the entrepreneurs and the workforce needed to produce high value-added exports. Finally, the only consistent factor that has an impact on high value-added export growth is domestic credit to the private sector. These results point to the urgent need for a coherent industrial strategy to boost Pakistan’s exports (preferably before future trade agreements are signed, which could otherwise damage potential export sectors).
KEYWORDS:
Pakistan,
East Asia,
industrial policy,
quality ladder.
JEL:
F10,
L50.
Exporters in Pakistan and Firms Who Do Not Export: What’s the Big Difference?
Theresa Chaudhry and Muhammad Haseeb
Published:Sept 2014
A variety of stylized facts about exporters have emerged in the new literature on international trade based on firm-level data. These include low levels of export participation among firms; small shares of export sales in firm revenue; larger firms; and higher levels of productivity, skill, and capital intensity among exporters. In this paper, we seek to examine the extent to which these stylized facts fit the experience of firms in Pakistan, using two cross-sections of firm-level data—the Census of Manufacturing Industries (CMI) 2000/01 for Punjab and the World Bank Enterprise Survey dataset (2006/07) for all Pakistan.
We find similar levels of export market participation but very large shares of export sales in firm revenue for those who do, compared to the US sample studied by Bernard, Jensen, Redding, and Schott (2007). We also find, as do many other studies, that exporters exhibit significantly higher total factor productivity (TFP) and are larger in terms of employment than nonexporters. Exporters’ TFP was 150 percent higher than non-exporters before we controlled for firm size. Considering the eight largest sectors (which comprise more than 80 percent of the CMI Punjab), with a few exceptions, exporters had higher labor productivity and offered higher compensation to workers, but used more capital per worker and more imported inputs.
The government’s recent emphasis on developing the readymade garments sector is well placed: more than half the apparel producers in the CMI Punjab 2000/01 were exporting—and nearly all of their output (93 percent). The capital-labor ratio and use of imported inputs was modest. Exporters were relatively large employers with 400 workers on average and offered significantly higher compensation than nonexporting firms. A greater understanding of firm dynamics could be gained if the CMI were to resume collecting data on firm-level exports (not collected since 2000/01) and if this data were linked across years so that firm performance could be measured over time.
KEYWORDS:
Pakistan,
export,
firm,
sales,
revenue,
Census of Manufacturing Industries (CMI).
JEL:
F10,
L60.
Compliance with Global Quality Requirements in Pakistan’s Export Sector
Salman Ehsan and Ayesha Khanum
Published:Sept 2014
This paper describes the level of compliance with quality standards in relation to Pakistan’s top export product categories. With greater competition, innovations in technology, and stricter measures of quality being enforced, Pakistan needs to adopt a holistic, systematic approach to not just meeting, but also exceeding, international quality standards and certifications for its exports. Focusing on rice and textiles, we identify which compliance-related gaps need to be filled to ensure the sustainable growth of high-quality exports to major global markets. The study outlines the key dimensions of international quality standards as well as specific standards and requirements for textiles and rice, examines the quality assurance infrastructure in Pakistan, and presents policy recommendations.
KEYWORDS:
Global quality standards,
exports,
compliance,
Pakistan.
JEL:
P45,
L15,
Q18,
Q27.
Foreign Direct Investment and Technological Capabilities: The Relevance of the East Asian Experience for Pakistan
Khalil Hamdani
Published:Sept 2014
This paper makes the case for a vigorous policy thrust to support
investment-led growth. Pakistan’s economy has not maintained a sufficient level
of capital formation to sustain growth over the long term. Two thirds of current
growth is driven by consumption and not investment: this needs to be turned
around. The government needs to put in place an investment regime that
motivates and induces industry to invest, innovate, and reinvest. Foreign direct
investment can play an important role in strengthening the country’s
investment rates. There is also need for deliberate polices to boost technological
capabilities in the enterprise sector. In this context, East Asia – which
successfully created a dynamic process of capital formation and technological
learning that upgraded its productive capacity and underpinned export success –
holds important lessons for Pakistan.
KEYWORDS:
Investment,
technology,
industry,
Pakistan.
JEL:
F21,
O38,
O53.
The Textiles and Garments Sector: Moving Up the Value Chain
Naved Hamid, Ijaz Nabi, and Rafia Zafar
Published:Sept 2014
The textiles and garments (T&G) sector accounts for almost 50% of Pakistan’s exports and is the largest component of manufacturing. T&G sector, because of recent favorable developments for the industry in Pakistan and the expected future changes in the international trade structure for the sector, has the potential to play an important role in expanding Pakistan’s exports. In addition, garments manufacturing is the least energy and capital intensive industrial activity and thus resonates with Pakistan’s resource endowment to generate economic growth and employment.
Garment manufacturers have tried to overcome the constraints arising from the energy shortages and adverse security and country risk perceptions by investing in power generation, upgrading IT, developing design and R&D capability. Punjab Government’s focus on garments as a central plank of its industrial strategy has also helped. However, this paper argues that for the sector to fully realize its potential, government policies that shape the incentive structure faced by the industry need to be re-aligned In this regard, the most important is Pakistan’s import policies and customs procedures that discourage the import of materials such as synthetic yarn and fabric, technical textiles and specialized trimmings and accessories needed by exporters to move up the value chain, and a significant bump up in the growth trajectory will only take place if import policy and custom procedures are substantially reformed. This paper focuses on the following themes: First, structural changes and trends in T&G exports; second, the associated constraints to growth of the garments sector; and third, to highlight some of the steps taken by the industry leaders in terms of policy reforms and by firms, particularly with regards to managing resources to enhance competitiveness.
KEYWORDS:
Pakistan,
exports,
textiles,
garments,
international trade,
growth,
global value chain.
JEL:
F13,
O10,
O14,
F10,
L50,
L10,
L25,
L60,
L67.
Patterns of Export Diversification: Evidence from Pakistan
Hamna Ahmed and Naved Hamid
Published:Sept 2014
This paper examines historical trends in the diversification of exports in Pakistan, using the Hirschman index to quantify the degree of export diversification. We analyze the structure of exports through the lens of ‘traditionality,’ for which we construct industry-specific, average cumulative export experience functions, i.e., a traditionality index of all 2-digit export industries in Pakistan from 1972 to 2012. This is useful in distinguishing between traditional and nontraditional export industries. We also study the degree of structural change in the export sector since 1972 by recalculating the traditionality index based on five-year interval periods. The cross-industry variance of this index is then used to calculate the structural change index. Periods for which the index values are low are interpreted as periods during which the export industries experienced uniform patterns of export growth (and thereby no structural change). Periods for which the index values are high are interpreted as periods during which the export industries experienced varied patterns of growth, thus undergoing structural change. Finally, we explore the determinants of structural change in exports by looking at variables such as GDP growth, export growth, the real exchange rate, the growth rate of world trade, trade liberalization, and the degree of product concentration in the country’s export base.
KEYWORDS:
Pakistan,
export,
growth,
trade.
JEL:
F40.