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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.
Should Pakistan Liberalize Trade With India Against the Backdrop of the FTA with China? A Comparative Advantage Analysis for the Manufacturing Sector
Naheed Memon, Faiza Rehman, and Fazal Rabbi
Published:Sept 2014
Pakistan and India have not yet normalized trade relations and gained the full benefits of bilateral trade despite significant developments to this end since 2011. Pakistan has yet to reciprocate the most-favored-nation status granted by India. This study investigates the benefits of trade liberalization between the two countries by studying the global competitiveness of Pakistan’s industrial sector from a policy perspective. We construct a revealed comparative advantage index for manufacturing products (HS 2-digit level) for Pakistan, India, and China for the period 2003–12, and then identify the changing patterns of comparative advantage for Pakistan. We find that 18 industries should be protected upon liberalizing trade with India. These industries are termed ‘vulnerable’ as they have moved from either borderline competitiveness to becoming uncompetitive or vice versa. Additionally, the excessive concessions granted to China in its free trade agreement with Pakistan and the resistance to opening up trade with India may have resulted in inefficient trade, i.e., imports from a less competitive partner and exports to a less lucrative market. We aim to establish a direction for further research to determine the ex ante impact of trade with India on the economy via a change in the production levels of these vulnerable industries, given the impact of free trade with China and the availability of Chinese substitutes.
KEYWORDS:
Pakistan-India trade,
revealed comparative advantage,
manufacturing exports,
trade liberalization.
JEL:
F10,
F11,
F12.
Analyzing Pakistan’s Trade Opportunity with Turkey
Asha Gul
Published:Sept 2014
Growing economic cooperation between the Pakistani and Turkish
governments—manifested in the recently proposed preferential trade agreement
(PTA)—has served to strengthen the historically good relations between both
countries. This paper explores the trade relationship between Pakistan and Turkey
in an attempt to analyze the potential gains for Pakistan under the proposed PTA.
We evaluate potential trade opportunities using descriptive statistics and three
trade indices: a trade complementarity index, export similarity index, and intraindustry
index. Our findings suggest that Pakistan’s trade surplus with Turkey,
strong export similarities, and intra-industry trade would allow greater
opportunities for firm synergies between the two countries. This, in turn, would
help Pakistan achieve greater value addition and a broader market base for its
exports. The Government of Pakistan should, therefore, lobby strongly for the
proposed PTA (which might later evolve into a free trade agreement) and leverage
the agreement in such a way that Pakistan can maximize its potential benefits.
KEYWORDS:
Preferential trade agreement,
Pakistan,
Turkey,
trade complementarity index,
export similarity index,
intraindustry trade index.
JEL:
F14,
F15,
F13.
Reviewing Pakistan’s Import Demand Function: A Time-Series Analysis, 1970–2010
Zunia Saif Tirmazee and Resham Naveed
Published:Sept 2014
This paper investigates the conventional import demand function for
Pakistan using time-series data sourced from the World Development Indicators for
the period 1970 to 2010. Using a vector error correction model and impulse response
functions, we show that, for the given period, relative prices and income lose their
significance as long-run determinants of import demand. This indicates the need for
additional determinants. We compare the residuals of the conventional import
demand function with those of a model that includes the terms of trade and foreign
exchange availability (in addition to the conventional parameters) as determinants of
import demand, and find that the latter largely resolves much of what is
nondeterministic in the former model. The paper also explores the peculiar trend of a
falling imports-to-GDP ratio (from the 1980s to the 2000s), which is unusual for a
developing country. In a subsidiary regression analysis for this period, we argue that
falling net capital inflows explain this persistent fall in the imports-to-GDP ratio.
The recovery thereafter, when Pakistan started catching up with other developing
economies, may have been responsible for the 2008 balance-of-payments crisis.
KEYWORDS:
Pakistan,
import demand function estimation,
capital inflows,
balance of payments.
JEL:
F140.
Pakistan’s Dependency on Imports and Regional Integration
Nasir Iqbal, Ejaz Ghani, and Musleh ud Din
Published:Sept 2014
With growing global and regional economic integration, Pakistan, too, is
actively seeking to enhance regional economic cooperation; it has entered into
various regional and bilateral trade agreements that encompass trade policies
ranging from import substitution to export promotion. However, the country’s
imports remain concentrated in a few product categories as well as in terms of
origin. Despite several regional trade agreements, Pakistan has not been able to
source its imports from regional trading partners. This stems from constraints
relating to trade facilitation, regulatory frameworks, and physical infrastructure.
Our empirical analysis shows that, while changes in real income and import
prices have a significant effect on import demand in the long run, variations in
the domestic price level do not. If Pakistan is to grow at 7–8 percent per annum
as envisaged in official development plans, it will continue to experience strong
growth in imports to meet its rising industrial and consumer needs. Pakistan
needs to develop a strategy to use regional integration schemes as a platform for
enhancing trade ties in both imports and exports. This will ensure greater trade
and investment links with its regional trading partners, helping to lower the
transaction costs of trade and boosting economic growth.
KEYWORDS:
Pakistan,
import demand,
regional integration.
JEL:
F13,
E64.
The Changing Landscape of RTAs and PTAs: Analysis and Implications
Rashid S. Kaukab
Published:Sept 2014
This paper traces the evolution of “discriminatory” international trading arrangements: (i) regional trade agreements (RTAs), which offer their members better access to each other’s markets; and (ii) preferential trade agreements (PTAs), which offer developing and least developed countries (LDCs) nonreciprocal access to certain markets. The number, coverage, and depth of RTAs have increased tremendously in the last 25 years, potentially leading to even deeper integration among dynamic economies. However, countries on the margin of RTA activity may be in danger of not benefitting from the growth in international trade. The number of countries offering PTAs has also increased with many developing countries now providing LDCs with nonreciprocal market access. This significant level of RTA and PTA activity raises serious challenges for countries such as Pakistan, which remain on the margins. Efforts to rectify this should, in the short term, focus on negotiating RTAs with selected countries to build the required capacity for such negotiations and improve Pakistan’s visibility on the RTA landscape. The country must aggressively seek and defend nonreciprocal market access under PTAs, with particular focus on such GSP schemes as offer additional benefits. Medium-term actions should aim to improve competitiveness by investing in infrastructure, energy, and human resources; adopting a coherent and supportive macroeconomic policy framework; and improving law and order. This will help Pakistan enter into and benefit from RTAs with dynamic economies while substantially reducing its dependence on PTAs.
KEYWORDS:
Pakistan,
WTO,
regional trade agreements,
preferential trade agreements,
GSP.
JEL:
F13,
F40.
The WTO Trade Facilitation Agreement: Implications for Pakistan’s Domestic Trade Policy Formulation
Mohammad Saeed
Published:Sept 2014
Recognizing that trade facilitation has contributed significantly to reducing costs and time in cross-border trade, World Trade Organization (WTO) members adopted the new Trade Facilitation Agreement (TFA) at the last ministerial conference in Bali. WTO members are now gearing up to implement the commitments ensuing from the TFA in accordance with the special and differential treatment stipulated for developing countries. This paper assesses the impact of the TFA on Pakistan’s national trade policy and shows how the process of policy formulation in Pakistan should be adjusted so that the agreement can be promptly and correctly implemented on a sustainable basis.
KEYWORDS:
Pakistan,
world trade organization,
trade facilitation agreement (TFA).
JEL:
F13,
F40.
Improving Regional Trade to Support Pakistan’s Economic Growth
Manzoor Ahmad
Published:Sept 2014
Regional trade has been an important factor in the economic success of many countries. Within most trading blocs, intra-regional trade comprises 40 percent or more of each member country’s individual trade. However, for the regional arrangements of which Pakistan is a member, intra-regional trade accounts for less than 5 percent. Pakistan’s strategic location is its greatest asset, but it has not leveraged this to its advantage. Although it was a relatively forward-looking country until the mid-1960s its policies have not been favorable to promoting trade and economic development since then. While other successful developing countries have espoused liberal trade regimes since the 1980s—resorting to protectionism only on a selective basis—Pakistan continues to rely on import substitution policies. Clearly, the country needs to revisit its regional and global trade policies.
KEYWORDS:
regional trade,
Central Asia,
regional trade routes,
ports,
Gwadar.
JEL:
F10,
L50.