One of the biggest challenges facing policymakers in Pakistan is not only to increase exports, which are at a meager 10% of GDP, but also to make growth sustainable so as to mitigate the recurring balance of payments crisis it is experiencing. the country every few years.
The private sector plays an important role in generating much needed exports. Unfortunately, the lack of dynamism within the industry, measured by the lack of competitiveness and capacity for investment and innovation, has resulted in repeated crisis.
Exports are unlikely to grow sustainably when the private sector fails to invest in productive activities and innovate by constantly producing new products.
It is critical to transform the private sector into a more productive sector that attracts new investment and fosters much-needed innovation. This transformation should lay the foundation for achieving greater sustainability in economic growth in the long term.
I participated in a panel on Private Sector Transformation in Pakistan at the recently held Challenging Linearity conference at the Institute of Business Administration, Karachi. I set out some key points that can push the transformation of the private sector into a driver of growth.
Although several constraints such as poor access to financial markets, poorly trained workforce and bureaucratic red tape pose significant challenges, there is a need to focus on the following trade-related issues.
It is imperative to improve the digitization of trade processes and procedures so that more companies can engage in international trade activities.
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One of the biggest challenges facing smaller businesses is a lack of information on key markets as well as trade processes and procedures. This can exclude them from international trading activities as they may not be aware of the rules, regulations as well as the potential benefits compared to more established larger companies.
The Pakistan Single Window provides an important opportunity for businesses to increase their participation in international trade activities as they can have easier access to an otherwise complex myriad of rules and regulations.
According to the United Nations Global Survey on Facilitating Digital and Sustainable Trade, Pakistan has made significant progress in paperless trade, mainly due to the introduction of the Pakistan Single Window. It is imperative to not only improve corporate access, but also ensure greater awareness of trade facilitation tools so that businesses can achieve greater potential.
According to a report by the United Nations ESCAP, the Single Window reduced the processing time of trade documents in Singapore from 4 days to 15 minutes, while saving the business community $1 billion in South Korea.
The private sector should be encouraged to participate in two-way trade, which involves strengthening the links between exports and imports. This requires the government to relax import restrictions so that the private sector can obtain the best possible mix of inputs at the lowest price.
Pakistan has low participation in global value chains (GVCs), where a product may cross borders multiple times during the value addition process. While Thailand, Vietnam and India have significantly increased their GVC participation levels over the past two decades, topping $90 billion in 2017, the value for Pakistan is around $6 billion.
On the one hand, Pakistan participates mainly through forward linkages, where the value addition of raw materials and intermediate goods to the exported products takes place in the trading partner instead of Pakistan.
On the other hand, East Asian countries are increasingly involved in backward linkages, where the value addition of imported inputs to exports takes place within their borders.
Investments in better trade facilitation and customs facilities are a priority for the development of GVCs.
One of the main concerns often raised about inward-looking trade policies is that they cause an anti-export bias, since successive tariff rates that raise tariffs on downstream products relative to earlier products are usually applied to create incentives for domestic producers. This leads to higher effective tariff rates, creating a desire for firms to sell domestically rather than export.
In addition, the lack of international standards and certifications for goods sold domestically, which are otherwise required for exports, increases the bias against exports, as companies do not have to bear the costs required to engage in international trade. .
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Therefore, the government needs to reduce the regulatory burden on businesses by ensuring that the local standards and certifications required to sell domestically converge with those required by major export destinations as well as global benchmarks.
Similarity of regulations between countries can help international trade activities. The government should encourage businesses, especially smaller ones, to upgrade the quality of their products and ensure that they adopt the required standards and certifications to become more globally competitive.
SMEs are the largest part of the private sector and their role needs to be strengthened.
According to a recently published report by the Competition Commission of Pakistan (CCP), there are more than 5 million SMEs in Pakistan, which account for 90% of private enterprises. They contribute 40% of GDP, 35% of manufactured goods exports and employ about 80% of non-agricultural workers.
However, they are characterized by low productivity and a lack of competitiveness that often discourages many of them from participating in export activities. For example, bearing in mind my previous point, SMEs often lack the certifications necessary to sell products to foreign consumers.
In East Asia, the vitality of the SME sector has played an important role in stimulating economic growth and ensuring that the benefits of international trade activities are widespread and not limited to a few stakeholders.
Essentially, the mindset of all stakeholders needs to change in Pakistan to transform the private sector. Businesses must embrace competition and promote innovation as this will not only ensure they become globally competitive but also increase their ability to produce new products.
Adding new products and deleting redundant products is critical as companies seek to sell their best product mix. They need to adapt to the challenges instead of constantly relying on government incentives and handouts.
It is imperative that they invest in new machinery and adopt new technologies that enhance their capabilities. Policies should ensure that the most productive and dynamic firms expand their production capabilities, while failures exit the market.
The author is Assistant Professor of Economics and Research Fellow at CBER, Institute of Business Administration, Karachi
Published in The Express Tribune, December 27u2023.
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