Pakistan

Unlike the countries of East Asia, Pakistan has failed to live up to the promise of export-led growth. Poverty reduction in Pakistan, however, has been influenced by the external sector, but this has been primarily through export of manpower to the Middle East. Pakistan's trade policies have traditionally focused on protection and saving rather than on earning foreign exchange. This has changed in recent years, but the economy remains dependent on a narrow range of exports. One major cause of the failure to diversify has been conflict, particularly in the principal commercial port city of Karachi.

The above summary of trends and factors influencing Pakistan's trade is explored in four sections below. At the time of Pakistan's independence in 1956, 66.7 percent of Pakistan's exports—mainly raw material—went to the United Kingdom and India; products from these two countries constituted 67.8 percent of Pakistan's imports. Pakistan's refusal to follow the devaluation of the pound sterling led to a crisis in trade relations with the United Kingdom and India. However, the Korean War (1950–1953) soon led to a sharp increase in demand for Pakistan's raw materials and enabled a period of relatively liberal imports. This phase came to an end with the cessation of hostilities.

Thereafter, the pattern of growth was heavily influenced by import substitution industrialization (ISI) policies. A web of foreign-exchange licenses and permits, including a bonus-voucher scheme, enabled the creation of a domestic industrial virtually from scratch. The exchange-rate policies employed for the industrialization drive fed regional tensions—the export revenues earned by jute in what was then East Pakistan (now Bangladesh) were provided to West Pakistani entrepreneurs at subsidized prices. During the 1950s and 1960s the emphasis remained on ISI. This development path was not unlike that of the nations of East Asia, all of which were engaged in different levels of ISI at the time.

The major difference began to occur in the 1970s. As East Asia opened up its economies gradually and benefited from poverty-reducing export-led growth, Pakistan engaged in a series of nationalizations which broke the back of the nascent industrial and financial sectors. The resulting state-owned industries and banking corporations did not have the expertise, or the incentive, to engage in trade.

In 1965 Pakistan faced a major balance of payments crisis when war broke out with India and led to sanctions. A decade later, the oil-price shock imposed an equally severe constraint, on top of the pressures faced by recently nationalized state-owned enterprises. Whereas oil and machinery dominated the import bill, Pakistan's exports were restricted to rather basic textile production. Raw cotton exports were replaced by yarn, and leather exports were also in low value-added production. Sports goods and basic surgical equipment from the city of Sialkot also enjoyed a reasonable reputation in export markets. The massive devaluation of the Pakistani rupee in 1972 had provided a major stimulus to exports, but the positive effect of this policy change was nullified by nationalization and the oil-price shock.

The oil-price squeeze on the balance of payments was mitigated somewhat by the major export of manpower to the Middle East. Unlike the migrations to North America and Western Europe, the numbers involved were enormous. Most of the migrants were from poor families. An estimated 10 million Pakistanis benefited from the manpower exports: at their peak in 1982 to 1983, remittances reached $3.2 billion, twice as large as net aid inflows.

During the 1980s Pakistan undertook a series of structural reform programs. The leading role of the public sector was reversed, and Pakistan reverted to being a private-sector-led economy. Tariff reduction, liberalization, and privatization opened the economy to competition. In addition, large-scale smuggling, primarily through Afghanistan, also allowed a substantial flow of competitive imports.

Despite these reforms, Pakistan was unable to diversify its export base substantially. The country's exports remained largely confined to textiles and leather. Although the failure to achieve a more dynamic open economy is partially attributable to the complex subsidies given to protect domestic industries, the broader failure lay in issues of political economy. In the late 1980s, just as Pakistan was liberalizing its economy, the major port and commercial city, Karachi, collapsed into a dangerous spiral of violence. Since Karachi's collapse the economy has never returned to the high growth rates achieved in earlier periods, particularly the 1960s and much of the 1980s.

Chronic political instability, uncertainty and conflict ravaged Pakistan's economy during much of the 1990s and the early years of the twenty-first century. Despite export incentives and subsidies, including concessionary finance and generous tax incentives, the scale of export diversification has been minor. In the area of garments, for example, South Asian exports from Bangladesh and Sri Lanka entered the global market on a major scale. This export drives were FDI-driven (Foreign Direct Investment), and Pakistan failed to attract much FDI through the course of the 1980s and 1990s.

As noted earlier, fifty years ago Pakistan's trade was confined largely to the United Kingdom and India. Official trade with the latter is now negligible. The five largest export markets for Pakistan are the United States (responsible for 25% percent of exports), Dubai (7.9%), United Kingdom (7.2%), Germany (4.9%), and Hong Kong (4.8%). An annual import bill of just over $10 billion—consisting mainly of petroleum products and machinery—is balanced by exports in the $9 billion region, and remittances, which have shot up from $1.6 billion in 2001 to double that amount, $3.2 billion, largely because remittances have been sent through formal banking channels since the al-Qaeda attacks of September 11, 2001. Saudi Arabia has the largest share in the imports coming into Pakistan (11.6%), followed by Kuwait (7.1%), the United States (6.7%), Japan (5.0%), and Malaysia (4.4%). As a percentage of gross domestic product (GDP), exports accounted for just over 15 percent in 2002, and imports were 17 percent of GDP.

The future prospects for Pakistan's external sector are a source of cautious optimism. Part of this is related to the possible peace dividend arising from the ongoing Indo-Pak dialogue. In early 2004 a regional trade agreement, the South Asian Free Trade Agreement (SAFTA), promised expansion of export opportunities for Pakistan, particularly to the lucrative Indian market in areas such as textiles. Pakistan also seeks to sign a bilateral agreement with India similar to the one India signed with Sri Lanka, which gives the latter preferential access. With Afghanistan expected to grow in the 10 to 15 percent per annum region over the next decade, Pakistani construction firms, as well as those who may benefit from possible pipeline routes, may have new markets to explore. In addition, China and East Asia remain relatively unexplored and provide considerable potential for expanding Pakistan's intractably narrow export base.

SEE ALSO Bangladesh; Bengal; Cotton; Famine; Import Substitution;Indian Ocean; India;International Trade Agreements;Pakistan;Persian Gulf;Textiles.

BIBLIOGRAPHY

Amjad, Rashid. and Ahmed, Viqar. The Management of Pakistan's Economy. Karachi: Oxford University Press, 1990.

Hussain, Akmal. Strategic Issues in Pakistan's Economic Development. Lahore: Progressive Publishers, 2000.

Hussain, Ishrat. Political Economy of an Elitist State. Karachi: Oxford University Press, 2001.

Nasim, Anjum, ed. Financing Pakistan's Development in the 1990s. Lahore: Oxford University Press and the Lahore University of Management Sciences, 1992.

Noman, Omar. Economic and Political History of Pakistan. London: Kegan Paul International, 1990.Noman, Omar. Why Pakistan Did Not Become a Tiger. Karachi: Oxford University Press, 1999.

Omar Noman