Time to look beyond our comparative advantage

  • It’s still basic economics

By Dr Khurram

The theory of comparative advantage suggests that a country should produce whatever it is most efficient in producing. In the simplest of cases; a country good at producing, say, guns should produce them and trade their excess production with the country which is good at producing, say, butter. Thereby maximising the welfare of consumers in both countries where they get each product at the lowest possible price. This being said we should keep this point in mind and move forward, we will come back to it later.

In Pakistan, every seminar, policy discussion and debate starts with the ill fated textile industry since we are supposed to have comparative advantage in it, and ends with new resolves and policy options to improve upon its issues and boost the exports in textile sector with an aim to shirk the ever widening balance of trade crisis. Energy crisis, increased competition, lack of government support, and lack of technology are considered as the main hurdles to more growth in this sector. At present, the textile industry exports of Pakistan accounted for almost 60.03pc of our total exports in FY 16-17). The second in line is rice, which accounted for 7.75pc of the total exports. Pakistan earned revenue of Rs.953 billion from textile exports in 2016. So all the policy options that we discuss are focused on increasing these exports to capture more of the total textile demand in the world. We intend to beat Vietnam, Turkey, India, South Korea, US and China in this race for textile market. All of this under the umbrella of Comparative Advantage.

Now let us take a trip down the memory lane and evaluate our not very recent textile performance. In the early period we restricted our cotton exports as it was the main ingredient for textile goods. Then up till Dec 2004 we could enjoy a quota in world textile demand. In short the industry was protected. There was no energy crisis in the country and everything was smooth and we had ample time to improve the textile sector technology that we now raise hue and cry about in every debate, discussion and seminar. Then the quota was lifted on January 1, 2005 and we met with competitors like India and China who increased their market shares in United States during Jan-Jul 2005. Pakistan’s share in the most lucrative category in textiles; “Apparel and Accessories”, remained same while China’s grew from 17.7 to 27pc, followed by India i.e. 3.7 to 4.5pc. While in “Textile and Fabrics” Pakistan’s share fell by 24.5 percent. Around 25 percent of the quotas removed in the final stages were in fabrics category.

Now let us look at the scenario from the other dimension of trade. Our imports are based on heavy machinery, transport equipment, electronics and crude oil. As per Economic Survey 2016-17 stats we had 46.33pc of our total imports in the form of electrical goods, non-electrical machinery, transport equipment, and petroleum products. This amounts to almost Rs1862 billion as against Rs.953 billion from exports. So we run trade deficit right at the start when our major exports which are 60pc of the total do not give use enough revenue to finance even few of our major import costs which are only 46pc of the total imports. Our major imports are more than twice in value to our major exports. Just answer this simple question: “How many T-shirts do you have to produce and sell to pay for one laptop or one barrel of oil or an imported car?”

The theory is perfectly right in its true sense; consumer’s welfare is maximised. But in the long run when government faces a deficit it increases taxes and squeezes out the same population

The theory is perfectly right in its true sense; consumer’s welfare is maximised. But in the long run when government faces a deficit it increases taxes and squeezes out the same population. So the issue is not with the comparative advantage, the issue is our understanding of the theory. We must consider that governments need to function, and for that they need revenue. Free trade and comparative advantage suits the countries that have comparative advantages in cars, or laptop etc, i.e. in goods that pay more than an item from our domestically produced garments’ list. I must add that every policy decision starts with “Why?”, then “How?” and “When?” We followed it in distant past for the first time when we choose textile as our main focus but in the present competitive context we always start with the later two for our trade policy, and assume that the” Why?”, which was answered some 40-50 years ago is still valid in the current global environment. We forget that in those times our imports, other than petroleum products, were far cheaper than an iPhone or a 1000cc fuel efficient fully featured car.

In essence the objective of this article is not to discourage trade boosts in textile industry. After all it is almost 60pc of our total exports and we must make policy reforms to boost this number. The objective is to highlight the policy of attempting to buy laptops by selling T-shirts is not sustainable in the long run. We must focus on other industries as well, and formulate policies to enter agreements with other countries to boost technology based industry as well. We must also acknowledge that laptops and other electronics do not grow out of land like agriculture so countries like Japan, China, and Taiwan had to strive for their production efficiency; hence they achieved comparative advantage in those high paying products. When we talk about CPEC and China consider bringing in its industry, why can’t we make agreements to bring in cell phone manufacturing or engine manufacturing into Pakistan (even if it is for an electricity generator). These small steps can later help in acquiring the desired technologies and take our export portfolio diversification out of nature given comparative advantage.

The writer is a PHD in economics from Austria and works at State Bank of Pakistan