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Trade without growth

The year 2012 has seen many positive developments on the horizon of Pakistan’s international trading relations both at the regional and cross regional levels. Notwithstanding the obstacles, there was a significant stride towards enhancing economic cooperation and beefing up regional partnerships. However, it will be relevant here to analyse and enquire whether opening markets and liberalising trade can alone shore up Pakistan’s global competitiveness in the future?

The year dawned with the good news of normalising trade relations with India. Many confidence building measures were taken, starting with the granting of most favoured nation (MFN) status to India followed by easing non-tariff barriers like liberalisation of the visa regime, opening doors of investment, developing physical infrastructure, and enhancing customs cooperation.

By reducing irritants to trade and lowering the cost of business on both sides of the border the benefits, supporters say, would be substantial. There would be an increase of bilateral trade from a negligible $2 billion to almost $ 6-10 billion in the near future accompanied with narrowing political friction, which has woefully jeopardised peace, stability and prosperity in South Asia.

At a cross regional level, Pakistan successfully hosted the D-8 summit to develop trade relations with the potentially developing economies of Bangladesh, Turkey, Iran, Egypt, Indonesia, Iran, Malaysia, Nigeria, Turkey in a bid to deepen access to new markets especially in the Muslim bloc. Other examples include signing a preferential trade agreement with Indonesia, and entering into a joint investment agreement under Central Asia Regional Economic Cooperation (CAREC) in the areas of energy and communications.

Apparently, these initiatives reflect a desire to liberalise trade and diversify the narrow export base of Pakistan. Our export market was suffering for a long time because of weak demand from the US and the UK, our main trading partners, due to the global economic recession. In this scenario realigning our economy to new partnerships, particularly within developing Asia, would bridge the demand and supply gap and have a positive impact on Pakistan’s dwindling export growth.

Having said that, it is believed that export growth cannot increase global competitiveness on its own, without accompanying economic growth. It is heartening to note that Pakistan’s economic growth was stagnating at three percent annually for the last four consecutive years, well below the estimated seven percent needed for a robust economy. Growth in agriculture and services saw a marginal expansion whereas industrial activity, which contributes to 60 percent of the revenue, virtually stagnated under the weight of energy shortages and low investment in 2012.

The energy crisis took a heavy toll. Gas and power load-shedding held back the manufacturing output and consequently export performance for the last one year. Textile manufacturers reported substantial reduction of orders in 2012 and expressed concerns that continued energy outages will nullify any potential gains from the European Union tariff concessions (on 75 items, including textiles, approved in February 2012).

On the other hand, foreign investment continued to shrink persistently as many investors had relocated their business to neighbouring Bangladesh owing to sound economic growth, reliable power supply and comparatively better security conditions. This trend shows that production capacity in Pakistan has significantly eroded, undermining growth prospects for the near future.

The greatest policy challenge for Pakistan in the near future is to meet the energy shortage, which is identified as the ‘main constraint’ for economic growth by Outlook 2012, a report by Asian Development Bank (ADB). Increasing domestic gas production (hydro, gas and coal), importing liquefied natural gas from neighbouring Iran or bringing electricity from India or Central Asia are options that need serious implementation within a timeframe. Investment in energy, hence, remains the immediate solution to the dwindling growth and stalled manufacturing capacity besides serving a stimulus to export oriented growth in the long run.

It is pertinent to mention that countries with a strong trajectory of economic growth are seen leading the world today in trade liberalisation and attracting foreign investment. China, Brazil, Russia, India, Costa Rica are a few examples. On the other hand, countries lagging in economic growth like the US and the UK, despite their clout and strategic importance, are viewed by trade economists as areas of risk than regions of opportunity.

More than 60 years down the road, Pakistan is lagging behind its counterparts in terms of competitiveness caused by weak macroeconomic environment. Our regional neighbours, Bangladesh, Sri Lanka and India, are success stories scaling heights of economic growth, approximately 7-8 percent on average, though they had similar socio-economic problems like Pakistan at inception. Now they have turned into havens of foreign direct investment (FDI) on the basis of their improved macroeconomic indicators, whereas Pakistan is seen sliding inch by inch into a quagmire of economic mess.

Pakistan has a lesson to learn from its misplaced priorities. Efforts towards trade liberalisation and regional integration would be meaningless without addressing structural problems first, including prolonged energy crisis, decline in foreign investment, high inflation, weak infrastructure and precarious security issues. Else we would be another sub-saharan region which boasts many more trade agreements than Pakistan narrowed down to zero without adequate economic growth!

The writer holds an LLM degree in international economic law from the University of Warwick, UK. Email: beelam_ramzan@yahoo. com

Beelam Ramzan, "Trade without growth," The News. 2012-12-24.