Reforms and export-led growth

ISLAMABAD:

After stabilising its economy, Pakistan stands at a crossroads. Opinions on the way forward remain divided. Some argue that, following nearly zero average growth over the past 15 years, the country must prioritise economic expansion to counter rising poverty.

Others, particularly influential voices in the Ministry of Finance and the business community, warn that the recovery is fragile and worry that rapid growth could trigger another high trade deficit, given the persistently sluggish growth of exports.

In fact, Pakistan’s share of global exports has been continuously declining and in the last two decades has fallen by over 20%. According to a recent study by the World Bank, the root cause lies in Pakistan’s approach to trade policy.

While other nations have been lowering trade barriers and integrating their economies regionally and globally, Pakistan has been moving in the opposite direction. Currently, Pakistan’s tariffs are at least twice the global average and three times higher than those of successful exporting countries of East Asia.

Instead of undertaking the necessary reforms, Pakistan has largely relied on external assistance to address its trade challenges. For years, Pakistan has looked towards major trading partners like the European Union (EU) for help. Extensive lobbying eventually secured duty-free access to the EU under its GSP Plus scheme in 2014.

However, over the 10 years that Pakistan has enjoyed this facility, there has been little impact on overall exports. Similarly, the country hoped that significant Chinese investment under CPEC, amounting to over $25 billion, would resolve its energy and investment issues and thus would make its exports competitive. Still, this investment made little change to our exports.

More recently, Pakistan has shifted its focus to Middle Eastern countries, hoping their investments will catalyse export-led growth. However, it is not likely that this would change anything.

To understand how to achieve export-led growth, Pakistan can look to its neighbours, China and India. These nations have sustained some of the highest growth rates in history, averaging 8-10% annually over three decades.

Unlike Pakistan, their rapid growth avoided boom-and-bust cycles, as it was firmly rooted in export-led strategies. Their secret; at critical junctures in their history, both countries were fortunate to have visionary leaders who shifted their economies from inward-looking policies to outward-facing, globally integrated ones.

Just four decades ago, China was an isolated, impoverished nation with minimal internal or external competition. Its total trade was less than $30 billion – about one-third of Pakistan’s current trade volume.

Pragmatic leadership under Deng Xiaoping catalysed China’s shift from a closed economy to one embracing market-led reforms. Deng’s philosophy, encapsulated in his famous saying, “It doesn’t matter if a cat is black or white, as long as it catches mice,” allowed for bold experimentation.

Through its open-door policy, China has lifted over 800 million people out of extreme poverty, achieving the largest reduction in global inequality in history and solidifying its position as a global economic powerhouse.

India’s success story also offers valuable lessons. After its IMF bailout in 1991, India embraced liberalisation policies that transformed its economy. Recognising that earlier IMF programmes in 1966 and 1981 had failed due to resistance to economic openness, India, under Finance Minister Manmohan Singh, shifted from a closed, inward-looking economy to a globally integrated one.

Between 1991 and 2006, it reduced manufacturing tariffs by an average of 75%, paving the way for global integration. This enabled India to forge free trade agreements with Asean and major regional players like Japan, Australia, and South Korea, cementing its globalisation.

Nawaz Sharif’s liberalisation programme in early 1991, which predated India’s, is well-known, but his efforts were short-lived. The last significant round of tariff reforms took place between 1997 and 2002. Since then, progress has stalled and, in many cases, reversed.

While unveiling the Uraan Pakistan programme, the prime minister aptly noted that Uraan would not be easy, as Pakistan’s import tariffs remain “as high as the Himalayas.” Unless this Achilles’ heel is addressed, Pakistan is unlikely to escape its current predicament of low exports and sluggish growth.

Relying on foreign assistance to escape the current quagmire is unlikely to succeed. No country has achieved export-led growth without domestic reforms. The industrial sector must understand that its reliance on tariff protection cannot continue indefinitely; they must outgrow their infant industry status.

Similarly, the government must recognise that depending on international trade for half of its tax revenue is unsustainable. Prolonging low-growth policies risks fuelling social unrest. It is time to address the hardships of the people and pave the way for meaningful change.

The writer is a Senior Fellow at the Pakistan Institute of Development Economics. Previously, he has served as Pakistan’s ambassador to WTO and FAO’s representative to the United Nations at Geneva