a fresh and objective look

Islamabad:

It has become almost a cliché to say that we should focus on adding value to all economic activities and that we should become part of regional or global value chains.

While the idea has its merits, and more importantly, the enabling factors and conditions, we should look at it with a fresh and objective eye. Added value, or benefits from it, should be valued and distributed efficiently, comprehensively and, above all, fairly. The fair value difference or distribution can only be achieved when the main contributor in the value chain, which is the first producer, makes the most of it.

The current form of value chains actually restricts the fair distribution of value benefits, thereby chaining value. Chained value also means that the so-called value chain partners do not have the time, appetite and business model to go beyond a simple supplier limited by a certain type of activity as part of the value chain.

Take the example of global value chains (GVCs) in textiles. There are many of the Pakistani textile producers who are part of one or the other GVC.

The problem, however, is how much they earn from this contribution to the value chain. For example, if one of the textile producers produces jeans for a famous global brand, the selling price of that producer may not even be one-tenth of the selling price of that jeans from the global brand.

More importantly, the Pakistani producer may be bound by contract clauses to produce similar jeans under its own brand. In such cases, what exactly do we get by being part of GVCs? It’s just a small, nominal business margin that any of the businesses could earn. Beyond this monetary benefit, there are also limitations to domestic value addition, the development of national brands, and the culture of national competition and pursuit of quality.

One may rightly ask who forces such producers to be part of GVCs and why they do not develop their national or regional value chains and establish their own brands. There are some positive examples in this regard, but this space has been largely unguarded for too long.

Reading Expenditure restraint is a necessary condition for economic stability

It may be due to lack of entrepreneurial skills, thus ignoring such opportunities, or it may be due to lack of enabling ecosystem through institutional and industry support.

At best, our institutional support is geared towards providing financial and logistical support on favorable terms to exporters, irrespective of the nature, scope and economic efficiency of such exports and exporters. There is no mechanism or criteria for assessing the potential unrealization of the economic potential or opportunity cost of exports at the raw or intermediate level. It should be focused.

While it may not be possible to punish untapped economic potential, it can certainly be encouraged by providing additional benefits and removing support from national funds for such cases.

On the business side, it may not be easy to witness a paradigm shift due to long-standing social norms, business culture and values ​​and lack of support mechanisms, especially access to finance. It is certainly possible and necessary to incentivize it and provide it with the required elements such as capital.

Even a tenth of the expenditure from funds and mechanisms such as the Export Development Fund, would be enough to bring about this visible paradigm shift in the development of new and encouraging existing entrepreneurs to create domestic value chains, maximizing the retention of benefits from GVC and encourage the many untapped entrepreneurial talents to materialize.

It is worth mentioning that there were huge expectations from the China-Pakistan Economic Corridor (CPEC), in the context of creating value chains in Pakistan. One can analyze the factors while it has not been realized so far and what needs to be done to tap this huge potential.

Being a part of GVCs is not necessarily bad, however, it all depends on what you get out of it and what you bargain for in terms of monetary, technology transfer, brand or reputation and other benefits. We in Pakistan are unfortunately not good at negotiations. Let value be created, accumulated and most importantly maintained, rather than tied up in the value chain.

The author is an international economist

Published in The Express Tribune, January 22^n.d2024.

Like Businesses on Facebook, follow @TribuneBiz on Twitter to stay updated and join the conversation.