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Changing fortunes

The world is changing or – to borrow the Kaptaan’s phrase – it has changed. In 1990, the US accounted for a quarter of the world’s GDP and China only four percent. Today the US’ share is less than one-fifth, while China’s has grown to 15 percent. Overall, the developed world accounted for 65 percent of the global GDP in 1990. Its share has now come down to one half, while it houses only one-sixth of the world’s population.

The share of the emerging economies has meanwhile grown from 20 to 30 percent of the global GDP for about 40 percent of the overall population. There are the oil-rich developing countries living, depending on their population, in varying degrees of affluence or barely managing. And then there are the remaining two-fifths of the world’s population sharing among them less than one fifth of the global GDP.

These statistics, however, do not reveal an important fact of international life. A good deal of what the emerging economies produce is destined for the developed countries. A bout of cold in the rich industrialised economies brings in the wind-chill effect for countries like China and India, till the time their domestic consumption reaches sustainable high growth levels.

Now, consider Pakistan with 183 million people, representing 2.59 percent of the world’s population – but its share in global GDP is a tiny 0.6 percent. Of course, the statistics would look better even if one-third of the country’s black economy was integrated into the formal one. The latest increases in indirect taxes amount to the government’s surrender before the powerful trader-merchant lobby, the big beneficiary of the undocumented economy.

However, this is meant to highlight another case of failure – the stagnant exports, which impact economic growth and the balance of payments. There are multiple factors behind this stagnation, not least the inadequate supply of energy. But even after discounting that handicap, Pakistan has not come out well from years of globalisation.

Just to explain globalisation as a mixed blessing, I am reminded of a talk delivered by a former head of the International Labour Organisation about how globalisation had led to large-scale job losses in the west. To make sure what he was complaining of, I asked the speaker whose idea it was to globalise. He said that the big developed countries were behind it as they expected to boost global economic growth and benefit from bringing down tariffs. So what went wrong?

The western world quickly worked out a new division of labour. The developing countries particularly China and India would produce low cost industrial goods. In a short span of time China would sweep markets all over the world. India and the Asian tigers would also benefit – the latter doing well in information software and outsourcing. Meanwhile, profit margins for western importers and distributors of textiles and electronics rose phenomenally.

A shirt made for ten dollars in, say, Vietnam would be sold on the high street in the west for a hundred dollars. Nothing low-cost and labour-intensive is made in the west any more, but billions are generated in profits by controlling the supply chain or by simply outsourcing. Human avarice has no limits.

While the trader industry and retail chain stores raked huge profits in the new system, large scale redundancies in labour-intensive industries became the norm in the west. The latter could still market their high-tech goods and industrial plants but that proved inadequate to stem unemployment. The developing countries benefited from the relocation of production but the gains varied from country to country.

The next stage of division of labour would see the developing countries categorised to produce goods for high, middle and low-end customers. By virtue of the size of their production capacity, China and India would be able to produce merchandise for all three categories. Thailand and Turkey surged in garment exports for high and middle-income people. Pakistan and Bangladesh received a reasonable share of middle and especially low-end market in textiles and garments.

The problem of a globalised system is that while the goods produced in the developed world are gaining in prices, the sectors involved in importing cheap merchandise from the developing world are driving their prices lower. The latter is a willing partner since for every low quotation from a country, there are others quoting even lower. The result is that workers being paid below subsistence wage in a country like Bangladesh are then forced to work in sub-human conditions. The tragic death of over a thousand workers in a garment factory led to international outrage and calls for better safety standards.

Although Pakistan too needs better working conditions in its industries, its minimum wage is two to three time higher than in Bangladesh, which has surpassed Pakistan in garment exports. The status of ‘least developed country’ (LDC) gives Bangladesh automatic access to the zero tariff rated GSP plus regime in the European Union, something Pakistan is still striving to achieve to enjoy a level playing field in the world’s largest customs union of 28 members of the EU.

In the absence of this facility, Pakistan’s exports are stuck at around $25 billion with textiles and garments representing half of this total. Bangladesh’s exports have surged to $27 billion with textiles, mostly garments, growing to an unprecedented level of $20 billion last year.

Bangladesh is now traversing that phase of structural and social adjustments in the textile sector which others had to overcome. The improvement of wages and working conditions should help meet the challenges confronting its garment sector in recent months. In order to show its solidarity with the readymade garment sector – the backbone of the country’s economy – Hasina Wajid’s government has asked factory owners to pay salaries as well as festival bonus before the Eidul Fitr holidays.

The EU’s special but limited package of tariff concessions that came into effect this year has helped slow down the rapid decline of Pakistan’s textile industry. However, a proper recovery can be achieved only by granting Pakistan the GSP plus benefits to help its frail economy, made further fragile by the war on terror and repeated natural disasters like earthquakes and floods. If Pakistan’s bid is successful, it may stem the tide of textile owners moving production units to other countries.

Email: saeed.saeedk@gmail.com

M. Saeed Khalid, "Changing fortunes," The News. 2013-07-26.
Keywords: Economics , Economic development , Economic issues , International GDP growth , International economics , Exports-Pakistan , Economic growth-China , Indirect taxes , Natural disasters , Earthquakes , Unemployment , Hasina Wajid , United States , Pakistan , Bangladesh , China , India , GDP , LDC , GSP+