 | Department of Economics |
PeopleResearch Themes
Industrial Policy
CPEC and Industrial Strategy - Opportunities and Synergies
Researcher: Azam Chaudhry (Lahore School) and Theresa Chaudhry (Lahore School)
Over the last few years, the Pakistani economy has started to gather some momentum. But despite the fact that growth is picking up, there are still many structural problems facing the economy which have yet to be addressed. Some of these like the slowdown in industrial growth, the stagnant exports and the persistent balance of payment problem are closely linked. If you add to this the fact that Pakistan is in the process of implementing initiatives related to the China Pakistan Economic Corridor (CPEC), then it is crucial to determine a coherent strategy for the coming years. In this context, the researchers from the Lahore School of Economics have proposed some key elements of an industrial strategy that has the potential to revive industrial growth as well as lead to higher value-added exports. In particular, some of the key questions in their analysis included where to locate clusters and special economic zones and what to produce in them, determining optimal locations for industries to benefit from CPEC, formulating a credit policy that meets the demands of SMEs, and developing a trade policy that promotes the import of high quality inputs that can lead to higher value-added exports.
To begin with, a major gap that exists in the current Pakistani industrial strategies is that very little attention is paid to which sectors have the greatest potential to grow, in which areas these sectors should be promoted to determine if industry specific clusters should be promoted in these areas or if there is room for multi-industry special economic zones.
The way to proceed with this follows multiple steps: First, one should map the CPEC related infrastructure that is planned, with a special emphasis on planned transportation routes. Second, one should look at the historical evidence (using firm level data) to see which sectors and locations have gained in the past from enhanced transportation routes. Third one should link the planned CPEC related transportation routes locations and industries to see which can potentially benefit (i.e. those areas and industries that will be better connected because of these new routes). Fourth, one should find the locations (districts) as well as the industries that will benefit the most from these new routes. The reasoning behind this that some locations may seem to benefit because they are now closer to road networks, but if these locations lack certain factor endowments then one can't recommend specific industrial strategies in these locations. At the same time, other districts may gain by being closer to new routes and may have the factor endowments to support industry specific growth strategies.
The next question is how to formulate a strategic Trade Policy that supports an Industrial Policy? Historically, there has been much talk of creating the environment or providing the incentives for exporters to expand exports. But despite this discussion and years of government policy to support exporters, the fact remains that Pakistani exports are primarily from a narrow based (mostly textiles), that are remained focused on extremely low value-added goods, and are probably relatively inelastic to changes in the exchange rate. Indeed, there is recent news in which the government has proposed a wholesale reduction in tariffs and have used the argument that these tariff reductions will reduce the cost of imported inputs, which in turn will lead to the production of higher value-added goods and higher exports.
The researchers determined the potential higher value-added goods that can be produced in Pakistan and what imported inputs go into these goods. This points to the role of trade policy to support an industrial strategy. More specifically, this means that Pakistani policy makers need to design a trade strategy that promotes the import of the types of inputs that can help exporters produce higher value-added exports. This also means that wholesale reduction of tariffs may not be an optimal strategy.
Another issue is to identify the key role of Innovation and Technology in an Industrial Strategy. One of the biggest problem that exists in current industrial strategies is the lack of focus on technology and innovation. Some ways the researchers combined a technology transfer strategy with an industrial strategy is: First, determining the key industrial sectors worth focusing on (i.e. with the greatest export potential, greatest growth potential, etc.). Second, mapping the technology that exists in these sectors (the newest technology is used in the textile sector which is on average 20 years old). Third, devising a strategy for TECHNOLOGY TRANSFER in these sectors. Finally determining how to incorporate this transfer of technology in the current CPEC related initiatives.
The researchers working on this study were Dr. Azam Chaudhry, Professor & Dean, Faculty of Economics, Lahore School of Economics; Dr. Theresa Thompson Chaudhry, Professor of Economics, Lahore School of Economics.
Strategic Tariff Reduction to Increase Pakistan Exports: Leveraging Pakistan's Trade Policy with respect to China
Researcher: Rabia Arif (Lahore School) and Nida Jamil (Lahore School)
Pakistan has been facing a chronic trade deficit, with an urgent need to focus on boosting its exports. Thus, there is an urgent need for Pakistan to climb up the export ladder given the worsening trade deficit being faced by the country. The main problem for Pakistan in terms of exports has been its dependence on low value added agricultural and manufacturing goods. Researchers at the Lahore School of Economics did a cross-country comparison of countries including Pakistan, Sri Lanka, India, Turkey and Bangladesh and came up with ways for the Pakistan government to reduce certain tariff (but not all tariffs) in order help Pakistan gain the most out of the Pakistan-China collaboration as well as to boost its exports.
Even though Pakistan has signed many bilateral agreements in an attempt to grow its export market there will be very little impact on exports until it upgrades the products being exported and moves up the value chain by exporting higher value products. The comparison of the top export products for Pakistan and India in 2016 revealed that while low value products like textiles, clothing, cotton and fruits remain the top exporting products for Pakistan, India has significantly increased its exports in high value products. Hence it was found that upgradation is necessary in order to increase the exports.
A cross-country comparison of countries revealed that all of these countries have reduced the average tariff rate on their overall imports. While Pakistan has reduced its tariff on the import of the intermediate goods, what remains striking is the massive reduction in the tariff rates on intermediate by other textile exporting countries in South Asia. Moreover, the import of intermediate inputs in these other countries has grown as compared to Pakistan. So, while the import of intermediate goods in Pakistan has increased over the last few years, the growth is significantly less than other south Asian countries that export textiles.
Then, a sectoral analysis, to find intermediate input tariffs and their correlation with the export value, identified important sectors for Pakistan in which exports would increase if intermediate tariffs were reduced. It was found that lower input tariffs lead to higher exports. It was found that in Pakistan, textiles, wood, rubber and plastic, glass, chemicals, electrical appliances and metal are the sectors which are significantly affected by lower intermediate input tariffs.
The analysis particularly focused on the textile sector, identified a list of intermediate inputs, which have played a strong role in boosting international textile exports. Initially, a comparison with India was done to identify which textile related products have resulted in higher exports since India is geographically/ demographically similar to Pakistan and has climbed up the global export chain.
Then, intermediate inputs were identified for high value textile exports, by looking at the direct correlation between the intermediate inputs and the export value of the textile sector. Climbing up the export ladder for Pakistan means making these inputs more readily available to the Pakistani textile manufacturer.
Next, a comparison of Pakistan's average tariff rates for each intermediate good identified 10 intermediate goods at the HS-6 Digit code which are extremely important for tariff reductions, 8 intermediate goods that are important for tariff reductions and 27 intermediate good for which a marginal reduction in tariffs is required.
Finally, categories of the products that are produced in Pakistan and are of higher quality were identified. These can help policy makers protect the local producers who are already producing high quality goods. Also, these can help policy makers offset any losses borne by the government due to the reduction in some potential tariff rates. The researchers identified 22 intermediate goods (HS Six Digit Code) as high quality intermediate goods for the textile sector which are produced in Pakistan and where there is no need to reduce tariffs.
Overall, tariff reductions on imported intermediate inputs from China are proposed as a key channel through high quality and low priced intermediate goods can be made available to the Pakistani exporters. The main recommendation is for tariff reductions only on the higher quality imported intermediate goods and that the government should focus upon reducing intermediate input tariffs on the identified sectors (textile, wood, rubber and plastic, glass, chemicals, electrical appliances). Finally, it was recommended that policy makers focus on those specific inputs which are highly correlated with growth in international textile exports. Climbing the export ladder would mean making these inputs available to the Pakistani manufacture and after identifying these inputs the government can further narrow down the list of intermediate inputs for which the tariffs should be lowered. This will help the government narrow down the product categories for which the tariffs should be reduced within each sector.
This research was carried out by Ms. Rabia Arif, Assistant Professor & Research Fellow and Ms. Nida Jamil, Assistant Professor & Research Fellow, Lahore School of Economics.
Productivity Dispersion across districts in Punjab, Pakistan
Researcher: Mariam Haroon (Lahore School of Economics)
Academic literature has gained considerable attention regarding industrial concentration dating back to Marshall (1920). Agglomeration externalities have been used to justify cluster policies by national and local governments in developed and developing countries. In Pakistan, industrial clusters and special economic zones are key areas of focus for industrial policy makers in order to promote the industrial base and increase competitiveness. Thus, the role of industrial clusters development in the productivity improvement of manufacturing firms merits attention. Using a firm level panel data set, the relationship between agglomeration and firm level productivity for different sectors in Punjab, Pakistan was empirically investigated.
The aim was to rank sectors to maximize the benefits from industrial clustering and highlight the sectors where the development of industrial clusters and special economic zones are considered to be useful. The analysis was based on two provincial firm level data sets, which are Census of Manufacturing Industries (CMI) and Directory of Industries for 2011 and 2006.
It was found that firms and sectors are not distributed equally across districts in Punjab with more concentration in central part of Punjab. Findings also suggested that there is a correlation between localization, urbanization and total factor productivity of firms in Punjab, however, the relationship varies across sectors. Thus, the results suggested that polices focusing on development of special economic zones and industrial parks should be sector specific and not general in nature.
This research has been done by Mariam Haroon, Assistant Professor & Research Fellow, Lahore School of Economics.
Pakistan's Experience with the 2006 Pak-China FTA and Lessons for CPEC
Researcher: Azam Chaudhry (Lahore School), Theresa Chaudhry (Lahore School) and Nida Jamil (Lahore School)
The relationship between Pakistan and China has a long history and over the last few decades this relationship has been accompanied by significant economic interactions which include the 2006 Free Trade Agreement (FTA) between Pakistan and China as well as China-Pakistani Economic Corridor (CPEC).
There is a growing realization that this relationship can have a significant economic impact for both countries though the impact of CPEC has still to be determined. In order to address the prevailing uncertainty regarding the economic impact of this major collaboration on the industrial sector of Pakistan, senior researchers from the Lahore School of Economics looked at the consequences of the 2006 Pakistan-China Free Trade Agreement (FTA) to ensure that CPEC related initiatives yield the maximum benefits. Researchers found that although Pakistan-China FTA has had a significant impact on the amount of trade between both countries, but this trade has led to movement in Pakistan from higher productivity to lower productivity firms, which was far from optimal in the context of a Pakistani growth strategy.
In particular, the research found that first, Pakistani tariffs on Chinese goods has negatively affected productivity in those sectors that have become more vulnerable to Chinese imports and at the same time, there has been significant decrease in the value added and value added per worker in those sectors that have become more vulnerable. Also, there has been a decrease in the number of firms and the level of employment in these sectors that have become more vulnerable to Chinese imports because of lower Pakistani tariffs.
The researchers also found that lower Chinese tariffs on Pakistani goods has negatively affected productivity in those sectors that could have potentially benefited because of higher potential access to the Chinese markets. At the same time, there has been significant decrease in the value added in those sectors as compared to other sectors. Also, there has been a significant increase the level of employment in the potentially benefitting sectors as well as in the total Pakistani exports to China in these potentially benefiting sectors due to lower Chinese tariffs on Pakistani exports.
The researchers concluded that in the context of results drawn on the impact of Chinese tariff concessions to Pakistani exports, it is critical that Pakistan gain the same level of tariff concessions from China as received by the ASEAN countries. Only with equal access will Pakistani manufacturers have a chance to move out of the cycle of low productivity firms producing and exporting low value added goods to China and into higher productivity firms producing and exporting higher value added goods to China.
The researchers also concluded that since there is a very central industrial cooperation component to CPEC, it is critical that Chinese industrial initiatives yield the maximum economic benefits for local stakeholders in Pakistan. Some ways of achieving this can be first, ensuring that CPEC-related industrial activities must have well-defined local stakeholders who help maximize the local benefits for firms. This can be achieved by promoting joint ventures between the Pakistanis and the Chinese which contain a minimum requirement for local partner involvement in each project as well as guarantee that each is allocated a minimum financial share of each project. The researchers also recommended that the government make pragmatic decisions right now which sectors to focus on. The decision on which sectors to focus on should take into account which sectors can most benefit from greater productivity, which sector can lead to the greatest increase in value added and which sectors have the greatest potential to increase exports.
Finally, the researchers recommended that in order to increase productivity, employment, value added and exports, there has to be a conscious decision by the policy makers that CPEC related industrial projects should lead to a move up the technology ladder by firms. This can be achieved by: first, creating firm level incentives for investment in advanced machinery based on the technological sophistication of output. Second, placing a minimum local content requirement (i.e. minimum percentage of locally sourced inputs) for all goods created in CPEC industrial zones. Third, ensuring that Pakistan's technology is upgraded through technology transfers from China by making it mandatory for a minimum level of technology transfer to take place over the life of all CPEC initiatives. Finally, the only way to ensure higher firm level productivity, higher wages and a move towards higher value added output is to develop a CPEC related labour policy that enables the manufacturing sector to switch from low-skilled to high-skilled labour.
The researchers working on this study were Dr. Azam Chaudhry, Professor & Dean, Faculty of Economics, Lahore School of Economics; Dr. Theresa Thompson Chaudhry, Professor of Economics, Lahore School of Economics; and Ms. Nida Jamil, PhD Economics candidate at the Lahore School of Economics.
Published Article: The Lahore Journal of Economics, Volume 22: SE (September 2017): pp.1-24.
Economic geography and misallocation in Pakistan's manufacturing hub
Researcher: Theresa Chaudhry (Lahore School), Maryiam Haroon (Lahore School) and Muhammad Haseeb (University of Warwick)
In this research the researchers looked at whether localization of industries can reduce economic distortions and dispersion in total factor productivity (TFP) among firms in Punjab using the Punjab Census of Manufacturing Industries (2005-06). This project was completed in 2016. They considered two types of misallocation: i) dispersion in the distribution of output-based TFP (TFPQ), in particular, the survival of low productivity firms in the left tail; and ii) dispersion in revenue-based TFP (TFPR), indicative of allocative inefficiency. On one hand, we find that the distribution of TFPQ is less dispersed in more agglomerated areas (measured by the localization quotient, local productive concentration, and average firm size) and that average TFPQ is positively related to localization. On the other hand, we do not find evidence that agglomeration improves allocative efficiency measured as deviations in TFPR from the sector average, concluding rather that greater localization of small firms is associated with firms being more output and capital constrained.
Published Article: Chaudhry, T., Haseeb, M. and Haroon, M. "Economic Geography and misallocation in Pakistan's manufacturing hub" The Annals of Regional Science (2017).
Relative Factor Abundance and Relative Factor Price Equality in Punjab
Researcher: Resham Naveed (Lahore School)
This study tests the relative factor price equality across districts in Punjab using the methodology developed by Bernard, Redding, and Schott (2009) and data from the Census of Manufacturing Industries for 2000/01 and 2005/06. We find that wages differ significantly across the province, given that all the district dummies are jointly significant. The individual coefficients tend to be significant in districts with a large number of industries. The size of almost all coefficients is found to be positive, which means that the relative wage bill of a nonproduction worker in a district is higher than that of a nonproduction 6 Endowments for the previous analysis are given in Table 3 and also shown in the form of a graph. Relative Factor Abundance and Relative Factor Price Equality in Punjab 131 worker in the rest of Punjab. These results are in line with the HOS theorem: as the scarce factor, nonproduction labor enjoys a wage premium. We have established the presence of factor price inequality from the data, but not to the extent suggested by studies conducted for other countries using the same methodology. This can be attributed to data shortcomings or to the argument that, in Pakistan, there is less variation in factor prices compared to other countries. There is also no correlation between factor endowment and return because there is no inverse relationship between the quantity ratio and wage ratio, even after adjusting for observed quality. Another interesting pattern observed is the presence of more blue-collar workers in relatively better developed areas in central Punjab, where the ratio of nonproduction to production workers representing the district wise endowment is less than 1. This is different from our expectations and shows that, even in relatively developed areas of the province, nonproduction workers are scarce in the manufacturing sector.
Published Article: The Lahore Journal of Economics, Volume 20: 1 (Summer 2015): pp. 105-133.
The Need for a Coordinated Industrial Strategy to Boost Pakistani Exports: Lessons from Asia
Researcher: Azam Chaudhry (Lahore School) and Gul Andaman (Lahore School)
This research focused on a group of Asian countries that have successfully increased exports and found a common industrial strategy. Several key factors emerge from this study. First, countries that have managed to increase their exports focused on doing so in sectors in which they had expertise while slowly developing new export sectors at the same time. Second, high-growth Asian economies have developed their export sectors by making a significant move up the quality ladder and, in particular, moving away from low value-added to higher value-added exports. Third, there is no single economic policy that has worked across Asia; rather, successful exporters have used two or three policies in tandem to boost exports. Fourth, industrial policy has been coordinated with education and training policies to develop both the entrepreneurs and the workforce needed to produce high value-added exports. Finally, the only consistent factor that has an impact on high value-added export growth is domestic credit to the private sector. These results point to the urgent need for a coherent industrial strategy to boost Pakistan's exports (preferably before future trade agreements are signed, which could otherwise damage potential export sectors).
Published Article: The Lahore Journal of Economics 19: SE (September 2014): pp. 177-206
| RESEARCH |