Macroeconomics (106467) Spring 2021- Group Project Topic: Assume that you are the chief economist of Government of Pakistan, “What structural reforms would you recommend to increase exports and reduce trade deficit?” Identify macroeconomic problems for lower exports 1. Expensive electricity The electricity tariff is very high in Pakistan as compared to other regional countries, which results into high cost of production of Pakistan’s exports and makes these products uncompetitive in the international markets. Because we produced electricity from fuel and other expensive sources to fulfill our demand 2. Poor Infrastructure and Trade Facilitation Pakistan requires considerably more days to export an item as compared to other efficient countries in the regions i.e. India, Malaysia and Thailand. This is primarily due to lengthy procedures in terms of time taken and documents required. There is need to adopt modern, simplified export procedures and best practices. Need advancement in our transportation system. We have old trucks for transportation of goods which are not efficient and it takes more time for moving goods as compare to other countries. If we have new truck and skilled drivers we move our goods from one city to other within hours not in days. 3. High cost of doing business High cost of doing business is one of the major factors which made Pakistani exports un-competitive in world markets. Due to inefficient and unfriendly socioeconomic environment, the cost of operating a business in Pakistan is considerably high. The main factors of high cost of business in Pakistan are cost of raw material, utilities and cost of finance, lack of human resource (mainly unskilled labor), technology, infrastructure and supporting institutions. The cost competitiveness of business units in Pakistan is comparatively weak when compared with the region. 4. Lack of Diversification of Export Products and Markets Pakistan’s exports consist of a few products mainly textile and primary products and concentrated in very few markets mainly United States, European Union and China. Export diversification i.e. change in the composition of Pakistan’s existing export product mix and export destination, and as the spread of production over many sectors is important and necessary. 5. Low level of Technological Advancement and Research & Development In Pakistan, due to negligence and faulty vision of planners in successive governments, the science and technology sector was never given the status required to effectively use it as a contributor to national and economic growth. Due to meager funding provided by the government, our R&D institutions could not produce any valuable research. Lack of proper facilities and environment for research in the universities and research institutes led to deterioration in the standard of higher education to the extent that today our universities have been relegated to the status of low-level colleges in which valuable university-economy links are totally missing. 6. Liquidity Problem due to Pending Export Refunds Pending Rebates on Exports, Sales Tax refunds and Special Incentive rebates on exports is also one of the major reasons of decline in exports of Pakistan. The delays in tax related/other refunds hamper the competitiveness of Pakistan’s export sector. According to Federation of Pakistan Chambers of Commerce and Industry the export refunds and rebates have been accumulated to over Rs.200 billion for the last two years and are adversely affecting the cash flow / liquidity position of the exporters. 7. Market Access for Pakistani Exports Government of Pakistan needs to get more market access for Pakistani exports by signing preferential and free trade agreements. Pakistan got preferential market access in the shape of GSP plus for its exports in European Union in 2014. United States has also allowed GSP facility to Pakistan in August 2015. European Union and United States are two major exports destinations of Pakistan. 8. Less Educated and Unskilled Labor The unavailability of skilled and educated labor is also one of the major factors contributing export growth of Pakistan. The reasons of non-availability of skilled labor includes, inter-alia, lack of proper training centers, workers are not well educated which makes difficult for them to learn new concepts related to work, use new machinery, etc. 9. Need Large Number of Product to be Export The composition of Pakistan’s exports has changed significantly over the years with a steep fall in the shares of primary and semi manufactured exports and equally sharp increase in the share of manufactured exports. Dependence on international business intermediaries is high, and margins are low and susceptible to fluctuation in prices and terms of trade. Similarly, manufacturing activity in Pakistan is dominated by resource based and low technology activities. Although share of complex products has risen over time but still the performance of manufacturing sector is not optimal, especially when it is compared with other countries in the region; and textiles and food remain the two major manufacturing activities. In terms of exports, our manufactured exports are concentrated in few items. Cotton yarn, cotton fabrics, apparels, leather and its products are among the major export. 10. Impact on Inflation and Interest Rates Inflation and interest rates affect imports and exports primarily through their influence on the exchange rate. Higher inflation typically leads to higher interest rates. Whether or not this results in a stronger currency or a weaker currency is not clear. Traditional currency theory holds that a currency with a higher inflation rate (and consequently a higher interest rate) will depreciate against a currency with lower inflation and a lower interest rate. 11. Impact on Exchange Rates The relationship between a nation’s imports and exports and its exchange rate is complicated because there is a constant feedback loop between international trade and the way a country's currency is valued. The exchange rate has an effect on the trade surplus or deficit, which in turn affects the exchange rate, and so on. In general, however, a weaker domestic currency stimulates exports and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper. For example, Consider an electronic component priced at $10 in the U.S. that will be exported to India. Assume the exchange rate is 50 rupees to the U.S. dollar. Neglecting shipping and other transaction costs such as importing duties for now, the $10 electronic component would cost the Indian importer 500 rupees. 12. Net-Export Effect The net-export effect is one of three basic effects that indicate why aggregate expenditures are inversely related to the price level. The net-export effect works like this e.g. A higher price level increases the relative price of domestic exports to other countries while decreasing the relative price of foreign imports from other countries. This results in a decrease in exports and an increase in imports and thus a decrease in net exports. A lower price level has the opposite effect, causing a decrease in the relative price of domestic exports to other countries while increasing the relative price of foreign imports from other countries. This results in an increase in exports and a decrease in imports and thus an increase in net exports. 13. Aggregate demand Aggregate demand is the demand for domestic production goods and services produced by the domestic economy. A change in the price level is a change in the price of this domestic production. Other countries in the foreign sector produce goods and services, too. If the price level increases in one country, then the production in other countries becomes relatively cheaper. If the domestic price level increases, then buyers in other countries (the foreign sector) are discouraged from buying as many exports from the domestic economy, switching instead to their own production or maybe exports from another country. In addition, domestic buyers (including the household, business, and government sectors) are motivated to switch from the now more expensive domestic production to the now relatively cheaper foreign imports. Identify root cause(s) of the problems Suggests remedial / corrective actions 1. Promoting Exports Smartly And Proactively Pakistan needs to promote its exports smartly and proactively. COVID-19 did not just reduce export flows. It broke many of the underlying buyer-seller links. Large global buyers like JC Penney and J. Crew, which filed for bankruptcy or stopped their operations, have left many Pakistani exporters without clients. Helping firms to seeking new ones needs to be policy priority. Finding new trading partners will take time and money. In the past, trade fairs and exhibitions would offer business matchmaking platforms for producers and their prospective clients. But COVID-19 has upset such opportunities. And in the same way, people discovered they can run their meetings from their living rooms, buyers and sellers will likely opt for remote business meetings too. The Trade Development Authority of Pakistan (TDAP) should take note of this fast-changing reality and leverage artificial intelligence and big data to help exporters harness the potential of online marketing platforms. 2. Helping Firms Comply With International Standards Many textile and apparel firms have adapted quickly to the COVID-19 crisis and shifted their production to face masks and shields for healthcare providers and frontline workers at home and abroad. But complying with strict health standards expected by clients is expensive. When a Pakistani denim exporter decided to turn its materials into protective face shields, the company first got its fibers tested. However, not all tests that conform to standards set by the United States and Europe can be done in Pakistan unlike in Turkey, one of the world’s leading producers of medical personal protective equipment, where tests cost about $6,000. Since testing standards are non-negotiable in global markets, producers from across the world have seen their products turned down at the border of importing countries because they were not properly certified. These rejections create reputational risks for both exporters and their countries of origin. In that context, the government of Pakistan needs to provide information about standards requirements and support the country’s exporters to comply with them. 3. Upgrading The Regulatory Environment With tele-work becoming a more prevalent reality, exports of services – and in particular of information technology (IT) and IT-enabled services (ITES) will grow substantially. To take advantage of this trend, Pakistan needs to upgrade its regulatory environment. To sustain growth in these sectors and encourage firms to innovate in the industry, intellectual property needs to be adequately protected. In a recent study we conducted among IT and ITES firms in Pakistan, we found that three out of four exporting firms and almost two-thirds of non-exporting firms considered that insufficient intellectual property rights (IPR) in Pakistan is an obstacle for their business. Growing in this segment will also require facilitating the movement of talent in and out of Pakistan, expediting the issuing of business visas for foreigners coming into Pakistan, and actively negotiating expedited visa processes for Pakistani experts travelling to visit their clients. 4. The Initial Priority is to Make Exports Competitive is to Ease up Import Restrictions A lot has been said on how COVID-19 may reduce the speed of the globalization process. But the fact is that bringing supply chains home would defy economic rationality. The success of the recently announced industrial strategy 'Make in Pakistan' relies mainly on the ability of Pakistani producers to access raw materials and intermediate inputs at world prices. For example, for a potential Pakistani maker of N95 masks, this means the elimination of tariffs, regulatory duties, and additional customs duties on melt-blown fiber, that currently stand at 12 percent. And if ‘Make in Pakistan’ is to be successfully complemented by a ‘Sell to the World’ initiative, then import duties on final goods will also need to fall gradually. With effective rates of protection at 261 percent for food processing, for example, it is unlikely Pakistani makers will go global anytime soon, since they will prefer the coziness of the highly protected domestic market. In this way, import taxes are nothing but export taxes in disguise. Introducing sunset clauses to tariff protection is key to eliminate the anti-export bias. Suggests how to implement on those suggestions 1. Promoting Exporters last year due to Covid-19 we face huge losses in our exports which was not expected its effect not only us but all around the world businesses are closed. Our situation was same as financial crises 2008 and but this time some countries are survive with their excellent forecasting and trade policy. So this is the time we have to make our trade policy for ignore huge loses in future. Our situation is now we have orders from international market but we do not have material for manufacturing. Because we only forecast our inventory for one year which effect our export in 2020-21 because we already use our inventory to produced goods for export. Also our government play role for exporters but it is not enough we need to improve our foreign policy to increase our share in global exports. According to State Bank of Pakistan, Pakistan’s export share in world exports declined from 0.18 percent to 0.13 percent. In the same period, unlike contraction in Pakistan’s export share, shares of its competitors’ in world exports have depicted substantial increase. Specifically, Bangladesh’s share in world exports increased from 0.06 percent to 0.19 percent, India’s from 0.61 percent to 1.65 percent, and Vietnam’s from 0.14 percent to 1.17 percent. We learn from these countries that how we would increase our exports. We need one platform for export where all exporters now that which market best for export in current situation and what we have which is not available is international market. How we can fulfill foreign demand of our products. Because it is not possible for one company it will possible for group of companies. 2. Helping Firms Comply With International Standards International standard of any product is very important factor and it one of the cause of our lower exports. It includes quality, size, packing all these are already define by international organization for standardization (ISO). They are available in Pakistan and they certified companies that they meet required standards in manufacturing of goods. But still we our products are not acceptable in international market because could not meet actual standards of international organization for standardization (ISO). Because we have corrupt officers who certified anything and in return they take bribe for this. If we our government make an institution for companies where they learn how they will make product as per international standards and what is the benefits behind this. Also our government is not stop them so we have one option is that before every export companies will send their products sample to government and government check these product from labs. if products are fulfill all standard they will issue a detail report of products after that when container is arrive in our seaport for export they recheck products and lab also if product is not similar they seize container and charge huge penalty to that company. Upgrading The Regulatory Environment The Cabinet of Pakistan approved Pakistan’s first-ever e-Commerce Policy in October 2019 thereby according to a long due recognition to an important segment of the economy. E-Commerce in Pakistan is at a nascent stage, with modest internet retail sales, despite 161 million cellular subscribers, 70 million 3G/4G subscribers, 72 million broadband subscribers, and total tele density of 76.56 percent, as of July 2019. However, it is an emerging sector with a noticeable surge in recent past in online vendors, local eCommerce platforms, and online payment facilities introduced by banks and large cellular companies. According to the State Bank of Pakistan, excluding Cash-on-Delivery (CoD) sales, e-Commerce sales stood at Rs 18.7 billion by the end of June 2018 while the total size of Pakistan’s e-Commerce market in 2018 was Rs 99.3 billion. The number of registered e-Commerce merchants has risen by 2.6 times and eCommerce payments have surged 2.3 times in just twelve months. Formulation of the e-Commerce policy is a step in fulfilling the Government vision and commitment to Effectively promote and encourage businesses, especially Micro Small and Medium enterprise (MSMEs) to go online and foster holistic growth of e-Commerce in Pakistan. The policy covers and provides guidelines on key components for the promotion of e-Commerce including the regulatory environment, financial inclusion, and digitization through payment infrastructure, empowering youth and SMEs, consumer protection, taxation, ICT infrastructure, logistics, data protection, and engagement in multilateral negotiations. Since its approval, the ecommerce policy has made headways in smoothening the e-commerce business environment in the country. For instance, freelancers’ remittance limit has been enhanced from US$ 5,000 to US$ 25,000, IT companies and freelancers are now given better exchange rates for dollar in-line with the interbank rate offered to exporters & trade receivable of IT companies will now be used as collateral for loan procurement from commercial banks. Source: Ministry of Commerce Group size: 4 max Due date: 11th session – Report + PPT Presentation: 12th session.
