National Dialogue Forum

To increase exports, Pakistan must restructure its economic policies to benefit the many, not the few

Pakistan's export growth is meagre when compared to peer-economies in the region. The main reason for this is the country's political economy, which incentivizes real estate development over agriculture and other productive sectors. To increase exports, Pakistan needs to restructure its domestic political economy and reallocate resources from non-productive to productive sectors. This can be done by progressive taxation on unproductive sectors, agrarian reforms, and urban land reforms.

There seems to be a general ‘consensus’ among policymakers that the underlying cause of Pakistan’s economic woes is the poor performance of the export sector. In the midst of the ongoing politico-judicial crisis in Pakistan, the Pakistan Democratic Movement government has taken an initiative to start a bilateral discussion on trade with US officials.

Despite Pakistan’s shaky relationship with the US over the past few decades, the US remains the biggest single export market for Pakistani goods. As per 2020 estimates, around 17 per cent of Pakistan’s total exports are absorbed into the US market. Moreover, Pakistan has consistently run a trade surplus with the US since the mid 1990s.

From an international trade perspective, this is not surprising at all because the US is not only one of the largest consumer markets in the world, it is also a net importer.

Although Pakistan runs a trade surplus with the US, in reality, Pakistan’s export growth to the US is meagre when compared to peer-economies in the region. Bangladesh, for example, earned 54pc more revenue (in terms of US dollars) in 2020 from its exports to the US than Pakistan. There is, therefore much potential for Pakistan to increase exports to the US. But how?

Looking inwards first, outwards after

For starters, Pakistan must restructure its domestic political economy. Focusing solely on securing preferential access to the US markets will not yield the desired results without putting the house in order. Of course, the former can have a positive impact on exports, but at the current juncture, the main emphasis should be on the domestic front. Allow me to elaborate on this.

When we disaggregate trade flows between the US and Pakistan, we see an interesting picture. It may come as a surprise to many but Pakistan imports more agricultural products from the US than it exports to it.

This is partly tied to the prevailing structure of the political economy of land in Pakistan. That is, large agricultural farms in general and smaller farms in particular, have been squeezed by state policies. At the same time, real estate developers have been incentivised and allowed to extract super-rents in the form of gated housing societies.

In effect, this has at least two major negative ramifications. One, capital goes where the returns are high and easy. Consequently, there has been a continuous outflow of capital from agriculture and other productive sectors of the economy and an inflow into real estate.

Secondly, to keep up with the growing investor demand, real estate developers are moving towards the cities’ peripheries, which has also led to rapid transformation of agrarian land into gated housing enclaves across Pakistan. Not to mention, the urban-sprawl has negative environmental implications.

Read more: Real estate as an economic bogeyman

In essence, exports are a function of a country’s productive capacity. Pakistan’s lacklustre growth in exports is a mere symptom of a deeper economic problem — the economy’s inability to expand its productive capacity with the passage of time.

From an economic policy perspective, policymakers are asking the wrong question: how to increase exports? Instead, the more pressing and immediate question that they must address is: how to expand economic productive capacity?

De-concentrate the capital

The answer lies in the socio-institutional reallocation of resources from nonproductive to productive sectors of the economy. It is only possible by putting an end to cheap rents — super-rents extracted via gated housing enclaves, subsidised inputs to monopolistic/oligopolistic firms — which are distributed among a small number of economic actors, who have no incentive to innovate and compete in the export markets.

At the moment, the discussion on the economy is primarily framed in accounting terms on a short-term horizon — how to balance current and fiscal accounts. Economic policy making in Pakistan has been reduced to an accounting exercise. Current and fiscal account deficits are certainly important but twin deficits are symptoms of the underlying ‘political economy’ problem of Pakistan.

Pakistan’s current economic problems should be conceptualised in a holistic political economy framework. This is a necessary condition to envisage and implement effective long-term policy solutions to the country’s macroeconomic woes. By learning from the successful development experience of East Asian economies, it is clear that an effective reallocation of factor endowments is an important prerequisite to move out of the low-state equilibrium.

In other words, two things need to be done simultaneously on the policy front. One, the ongoing redistribution of resources from bottom to top must end. Two, in order to offset some of the negative socio-economic ramifications of the bottom to top redistribution, policymakers must take immediate actions to uplift the folks at the bottom so they can fully contribute and participate in the processes of economic development.

For example, revenue generated by the progressive taxation on unproductive sectors of the economy, such as real estate (assuming it is implemented effectively), should be used to invest in sectors such as education, vocational training, clean energy and public transport. This can improve the overall productivity of the economy.

Similarly, agrarian reforms are needed to protect small landholders from the onslaught of housing developers. Access to affordable institutional credit must be provided to every farmer. Both these steps can lead to improvements in agricultural output and uplift the historically marginalised segments of society.

On the other hand, urban land reforms are also needed, which would restrict the use of land, water, trees and other environmental resources for ‘conspicuous consumption’. This can be an effective policy tool to reallocate resources away from gated housing enclaves to productive sectors such as clean-energy, besides promoting ecological sustainability.

In other words, the pathway to sustainable economic development, including export growth, requires a new economic deal between the state and citizens that can ensure that the fruits of economic development will improve the lives of ordinary Pakistanis.

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Dr. Danish Khan
Dr. Danish Khan
Non-Resident Fellow NDF.
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