Amir Khan

Pakistan is facing a heated debate over its foreign trade strategy, as it struggles to choose between export promotion and import substitution, Dr. Javed Iqbal, international economics expert, and Fulbright scholar, told WealthPK. While Southeast Asia and much of the world have embraced export promotion with a resounding success, Pakistan grapples with the unintended consequences of attempting to balance both strategies, resulting in a suboptimal outcome, he said. Import substitution, a policy aiming to replace imported goods with domestically produced alternatives, has been a long-standing practice in Pakistan. Using the example of the automotive industry, the government implemented measures in the 1980s to protect domestic car assemblers from foreign competition. However, three decades later, these protectionist measures persist, leading to a market with high prices, inefficiency, and a limited scope for competitiveness on the global stage.

Despite fostering a vibrant engineering and vendor industry, the import substitution model faces criticism for its failure to generate substantial exports, thereby straining the foreign exchange reserves. The conundrum is evident in certain industries that thrive domestically; the lack of exports limits the availability of foreign currency needed for essential raw materials. He pointed out that protecting markets from international competition through tariffs inhibits the growth of companies, making them small, inefficient, and unable to compete globally. This is identified as a significant factor contributing to Pakistan's low export figures. In contrast, export promotion, a strategy incentivizing manufacturers to focus on foreign markets through policies like cheap credit and lower taxes, has been successful in East Asian countries. Despite Pakistan offering similar incentives, simultaneous pursuit of both strategies is posited as a key obstacle.

He argued that this dual strategy increases the overall cost of doing business for manufacturers, rendering them uncompetitive in both exports and import substitution. Beyond the dichotomy of trade strategies, he acknowledged that the other challenges hindering export growth include unreliable and expensive energy provision, periodic currency overvaluation, and law and order issues affecting foreign buyers' willingness to visit Pakistan. An illustrative example involving a zipper manufacturer and garment exporters highlights how conflicting duties and tariffs create lose-lose situations, hindering the growth of local industries and placing them at a disadvantage on the global stage. Dr. Javed concluded with a call for a renewed focus on exports, advocating for a shift from the predominant textile industry towards diversification. The proposals include restructuring the tax system, implementing a 'tough love' approach by reducing taxes for companies with increased export shares, and encouraging large business houses to venture into non-textile export businesses.

Credit: INP-WealthPk