Structural weaknesses of economy

Structural weaknesses of economy
EDITORIAL (June 13 2007): A prestigious international research organisation, BCA, in its special report on Pakistan's emerging markets strategy, has characterised the country's economy as structurally weak because of a low investment ratio and lack of competitiveness, says a Recorder Report.The report says that pressure on inflation/interest rates is on the upside, implying thereby that the odds for further growth are skewed to the downside. Further, trade accounts for a very small portion of Pakistan's GDP, and its export sector is struggling to maintain competitiveness in a few low value-added industries.More significantly, savings and investment patterns are poles apart as the country's savings and investment are much below a satisfactory level. The report lists spiralling trade deficit as a serious challenge to the country, and claims that Pakistan's 11 percent of GDP trade deficit has resulted from a combination of factors, which mainly include an uncompetitive export sector, with consumption outstripping domestic production.The report compares Pakistan's abysmally low spending on education, ie only 0.2 percent of the GDP, to Vietnam's allocation of 3.2 percent, which has put the latter in a better position than Pakistan to compete in manufacturing, given its development of human resources and infrastructure.According to BCA report, Pakistan's poor competitiveness is basically structural in nature, and a relatively cheap currency would not produce a significant revival in exports. Further, Pakistan cannot substitute its imports with domestic products simply because the imported goods are not produced by local firms.At the same time, any currency depreciation would only worsen the inflation dynamics, because the pass-through from the exchange rate to inflation has increased in Pakistan, thanks largely to a very large volume of imported consumer goods.Pakistan's growth is driven primarily by household consumption, which accounts for 7.8 percent of its GDP. Further, FDI inflows have been primarily channelled into the services sector because it is booming along with consumer spending. The macro fundamentals of Pakistan are thus inferior to those of many emerging economies. Structural problems have in fact contributed a lot towards Pakistan's economic woes.In particular, the state retains a prominent direct role in the economy and the tax system has been used extensively as a means of providing incentives to the possible detriment of revenue collection. Further, protectionist policies have shielded domestic producers from foreign competition, and have contributed to an anti-export bias. As tariff remains Pakistan's main trade policy instrument, its relative importance has increased as a result of elimination of non-tariff barriers on several items.As a consequence of a major restructuring of Pakistan's custom tariffs undertaken in 2001-02, the average applied tariff rate fell to 20.4 percent from 56 percent in 1993-04. However, tariff protection still remained relatively high.As a result, tariff remains a potential restraint on domestic competition, and this has served as an obstacle to efficient allocation of resources, creating adverse consequences for the economy's productivity and local firms export competitiveness.Pakistan has had a persistent current account deficit, although this was reduced considerably from 7.2 percent of GDP in 1995-96 to 1.9 percent in 2000-01, largely due to a substantial fall in the trade deficit. Further, Pakistan has always had a narrow export base concentrated in low-value added products and a few markets. And EU, the US and Japan have retained their positions as Pakistan's major trading partners. Further, border protection, which is now largely confined to tariffs, has been reduced drastically through unilateral cuts.Despite severe economic and political difficulties, Pakistan has by and large resisted protectionist pressures and opted for market-based reforms, including adoption of a more liberal attitude towards imports and foreign investment.Pakistan's long-term economic growth depends mainly on continued implementation of its economic revival programme, particularly in the reduction of direct state intervention in the economy, and improvements in the tax base. Secondly, Pakistan economy's long-term growth also depends on its trading partners' willingness to keep their markets open to Pakistan's goods and services. However, in order to achieve this objective, the government will have to ensure Pakistani products' competitiveness through strict quality control.
Copyright Business Recorder, 2007