MEDIA

A low value-added export trap

While there has been much debate about the strengths and weaknesses of Pakistan's economy, the one thing that no observer of the economy can deny is its predictability. A balance-of-payments crisis forced the government to enter into an IMF stabilisation package a decade ago as did another crisis five years ago. Now, again, the country is faced with an unsustainable balance-of-payments situation and has entered another stabilisation programme. While there is a natural tendency to blame various economic managers, the fact is that the problem is not simply one that can be solved by minor policy adjustments. Rather, Pakistan is facing fundamental structural problems and while policymakers are making serious attempts to deal with some of these long-term issues, such as low savings and investment, they are reluctant to accept the fact that, even after an almost 40% devaluation, exports have failed to rise.

The simple reason for this is that Pakistan is mired in a low value-added export trap.

In order to fully grasp the problem of low exports, one has to understand the current structure of Pakistan's exports: To start with, the Pakistani export sector has been heavily reliant on textile exports and in particular low value-added textile exports. While many developing countries have started out by exporting low value-added goods, ones in which they have a comparative advantage, the problem in the Pakistani case is that it has failed to move beyond this narrow range of low value-added goods.

Also, while there was much optimism about the expected impact of the recent devaluation toward making the prices of our goods attractive to foreign buyers, the reality is that economic theory is much more nuanced in terms of its predictions about how devaluations affect the balance of payments (and exports and imports in particular). More specifically, while devaluations do increase exports, the actual magnitude of this increase depends on how much more of Pakistani goods will be bought by foreigners as their prices fall; so, if Pakistan exports low value-added textiles whose demand is less sensitive to price, there is a good chance that exports won't increase by much after devaluation. At the same time, Pakistani imports do tend to respond to higher prices, which means that they fall significantly as the value of the rupee falls. This results in exactly what we see today: a current account deficit that is contracting mainly because of a large fall in imports, but no significant increase in exports.

This article has been written by Dr. Azam Chaudhry, Professor & Dean of the Faculty of Economics at the Lahore School of Economics

Link to the Article in The Express Tribune

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