Jammed in our revolving door of issues we lose sight of where we are headed. Not that the danger signs have not been posted - demographics, declining quality of human resource, growing inequalities, a dysfunctional political system where good governance is deemed bad politics, collapse of a shared value system.... Through this thicket of thorny issues, a little sapling is pushing itself out: Exports.
Growing trade deficit and decreasing FX reserves are making us notice this troublesome shoot that we would rather dismiss as a weed. Hallelujah. Even the Ministry of Commerce has taken note! Engineer is no longer blaming the world. He has now wheeled his guns towards the other Ministries.
MoC also wishes to breathe new life into the dead-on-arrival Strategic Trade Policy Framework 2015/18. With only a year of STPF remaining, it has sought stakeholder inputs for a 'mid-course' correction! Our exports continue to maintain their downward spiral. On the back of steady annual declines they are down from $25 billion in 2011 to $20.8 billion last year. First eight months of this fiscal they have tripped another 4%, contributing to a 34% growth in trade deficit.
This when the Accountant tells us the Economy has been doing extremely well - and notwithstanding the duty-free market access to the EU! Three fundamentals explain our failure to export more: We have not much to export, we have little incentive to export, and we have no compulsion to export.
We continue to try to sell what we produce and not produce what sells. Over the years, the export mix has not changed. It largely remains commodity-based, with little value addition and less innovation. This makes us susceptible to adverse terms of trade. Add to that the pathetically low levels of productivity and you have an uncompetitive export base.
We have also dis-incentivized exports by making the domestic market more lucrative through high tariff walls and unchecked cartelization. Established exporters are now shifting their focus from exports to the less competitive and growing market at home.
Foreign assistance, remittances, and borrowings that shift the burden to the coming generations (instead of the politically unpalatable alternative to have the present generation 'pay' for reforms), have combined to make the case for Exports less compelling. Plus, the promise of 'faux-FDI' (foreign companies targeting the protected domestic market through purchase of white goods, food, and fast moving consumer goods businesses; or banking, or producing electricity at guaranteed rates of return) makes it hard to keep your eye on the export ball. Yes, in years to come it will lead to large outflows, but the thinking seems to be 'live for today; tomorrow is someone else's problem'.
We have said this before and we say it again: the kind of quantum leap the Professor envisions, and the Engineer despairs of, is just not possible with our existing export base. The bribe of 'export packages' is not the answer. A pro-export industrial policy, that especially targets export-oriented FDI (eFDI), is. We urgently need an Industrial Policy that promotes export growth. You can include job creation, revenue generation, efficient usage of infrastructure and other deliverables as well, but give primacy to export growth. It should provide incentives - tax breaks/subsidies, protection, favourable access to inputs like capital and utilities - that are geared to predetermined export targets. Economies of scale, advanced technology, productivity -enhancement and professional management should be the Policy enablers. To check inefficiencies and rent seeking the incentives would need to be time-bound and on a declining scale, with penal clauses for not meeting the targets.
In theory, a robust domestic market can help exports: it provides the 'bulk' to support export of surpluses on marginal cost basis. Our industry, however, is structurally handicapped to compete in foreign markets. It lacks scale, technology, and managerial competencies; and has been rendered inefficient by the abominable protection levels and a weak competition commission.
Egregious protection levels, by definition, make the need for ever-increasing protection unavoidable. The inefficiency that protection breeds makes it harder for domestic industry to compete against foreign competition that is constantly innovating and raising productivity levels.
High import duties are antithetical to exports. There is ample empirical evidence to support that. Not just because a tax on imports translates into tax on exports, and reinforces anti-export bias by artificially making the domestic market more rewarding, but, more importantly, it defies integration into global value chains. It also discourages eFDI: it is instructive that we do not have a single instance of eFDI. All the exporting majors, even African horticulture, have a significant foreign footprint.
It is the third fundamental - Export not a priority - that skewers the export drivers: industrial policy, tariff rationalization, competitiveness. It is a classic case of policy choice: if the government thinks it can better manage the current account deficit through borrowings, rather than exports, the obvious policy preference will be to maintain high tariffs, strengthen the rupee - and withhold refunds.
Does it matter if this policy choice barters long-term gains for short-term expedience? Who is there asking for export-enhancing reforms that do exact a price? What we see is full page adverts begging for more regulatory duties, campaigns striking the fear of the Lord if we don't do something about imports from China. What we see is the SBP running down its reserves to protect an overvalued rupee. What we see is an industrial policy that favours import substitution, and thinks special economic zones (aimed at domestic market) will cure our manufacturing ills.
Many years ago, Stanford Professor Judith Goldstein argued in her well-received paper Impact of Ideas on Trade Policy 'change is most likely to occur in periods of crisis'. Haven't we got to the tipping point yet? Sorry Engineer. The fight is too much for you. We also understand why your able Commerce Secretary would rather train civil servants than fight a losing battle.
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Copyright Business Recorder, 2017