After the government's decision the Ministry of Commerce has conceived the Strategic Trade Policy Framework (STPF) to respond to the emerging challenges to our export competitiveness. We hope that a successful implementation of STPF would enable Pakistani firms to produce and export more sophisticated and diversified range of products. This will also result in an increase in wages for the sectors ready to embrace the global competitive environment.
Wide ranging structural reforms aimed at liberalisation, privatisation and de-regulation since late 80s' brought about a marked shift in dependence from trade to domestic taxes and removal of protective duties/taxes on industry to foster competition and increase exports. However, within the ambit of fiscal policy, the existing tariff structure and the concessionary tariff regime have anti-export biases, as it accords identical tariff treatment to:
Labour intensive industries vis-a-vis capital intensive industries
Small scale industries vis-a-vis large scale industries
In the given scenario, the need to formulate a long term tariff policy can
hardly be over-emphasised. A rational tariff policy and structure with
short and long term tariff measures aimed at making the industry
competitive and moving up the sophistication ladder is the priority objective of STPF (2009-12). There is a need for devising such tariff policy which aims at removing anti-export biases. It should help Pakistan come up with a much more effective response, in the context of reduction of tariff and binding, due to the expected conclusion of Doha Development Agenda (DDA) and bilateral trade negotiations, enabling the country to benefit from the next round of trade liberalisation. The Ministry of Commerce, which deals with treaties, agreements, protocols and conventions with other countries and international agencies, having a bearing on trade and commerce under the Rules of Business, would re-design the National Tariff Policy to realise the following objectives:
Withdrawal of protection from inefficient, internationally non¬competitive and government dependent industry
Minimisation of taxation at investment stage to reduce the cost of doing business
Rationalisation of Effective Protection Rates (EPR) and Nominal Protection Rates (NPR) currently ranging between extreme negative protection to excessive positive protection levels
Review and revise the tariff protection criterion for taking into account sophistication, value-addition and diversification of export items and announcement of special incentives for the industry in this regard
1.2 Monetary Policy
Another crucial component of macro policies is monetary policy. Interest costs specifically in times of tight monetary policy, as being pursued since last one year, can raise the cost of production and thereby affect the competitiveness of exports. Though interest policy at macro level is more closely aligned with the status of aggregate demand, inflation, budget deficit and exchange rate policy, yet at times, it remains an important tool for dampening the cost of production. In case of export industries, the scheme of export re-financing and sectoral credit allocation parameters need to be re-designed, finely tuned and re-set to focus on high value sectors, more sophisticated export products and non-traditional items.
1.3 Exchange Rate Policy
Stable exchange rate is the first best policy to promote exports and manage imports. For Pakistan, it is predicated on stable internal and external macro environment that includes medium-term stability in oil prices, food commodity prices, predictable flow of FDI and foreign
assistance, exportable surplus and steadily growing world demand. Positive or negative shocks in any of these elements of macro-environment can impact on the nominal and real effective exchange rate that in turn determines the profitability of exports versus imports. In a regime of managed float, it is essential for promoting exports and controlling speculative imports, that exchange rate trends although mostly governed by free market mechanism, are managed by the State Bank to avoid wide fluctuations and promote orderly and smooth adjustments to reflect and incorporate the changing macro-environment.
1.4 Effective Trade Facilitation
The Ministry realises that the transaction costs at and behind the border in Pakistan impact negatively on the competitiveness of Pakistan's exports. The benefits of reduced costs could actually be far greater in comparison to what is envisaged from greater market access and removal of tariff and non-tariff barriers. The latest studies suggest that the goods shipped from developing countries have comparatively high transaction costs that can be as much as two to three times the transaction costs in developed countries and account for as much as three times the average tariff rate applied to industrial country imports since the Post-Uruguay Round. The Ministry feels that all the stakeholders in trade facilitation need to wake up to this reality and face this common challenge. In Pakistan, an added challenge is that the transaction costs to import are significantly lower than exportation. The Ministry would undertake and coordinate all the necessary measures to facilitate the provision of lower cost, more efficient and reliable trade support services in promoting our exports, without which Pakistan would not be able to reap the benefits of expanded exports base, foreign investment and overall economic growth. We need to urgently look at policies and processes that underpin the logistic and trade facilitation.
The Ministry of Commerce approved the National Transport and Trade Facilitation Strategy in 2008. Trade Policy 2009-12 includes many measures aimed at procedural efficiencies and trade facilitation. The Ministry would ensure an effective implementation of National Transport & Trade Facilitation Strategy and other reform efforts aimed at trade facilitation to increase the ranking of Pakistan at the global level.
Trade Development Authority of Pakistan (TDAP), as the national trade promotion organisation, undertakes a large number of activities to promote Pakistan's exports, in most of the cases with the help of Business Support Institutions (BSIs) in Pakistan and Commercial Sections of Pakistani Missions abroad. There is a need to enhance its efficacy so that the Pakistani exporters are not at a disadvantage as compared to their competitors as far as governmental trade promotion efforts are concerned. TDAP is undergoing institutional reform at present and the Ministry would help TDAP and other BSIs become vibrant, dynamic and world class trade promotion organisations.
In order to facilitate local firms to have international presence and to penetrate in the international market which would thereby increase their profitability, the following initiatives were announced in last year's Trade Policy (2008-09):
Support for opening exporters offices abroad
Support for opening retail sales outlets abroad
Warehousing scheme abroad
100% subsidy for compliance certification
In the current year's Trade Policy, it has been decided that the above
given initiatives would be continued.
It has been decided that in order to help trade and industry to interface with the office of Directorate General of Trade Organizations (DGTO) at their doorstep, four regional offices at Karachi, Lahore, Quetta & Peshawar would be established.
1.5 Improving Business Processes
The ability to re-engineer the business processes, where business comes across the government agencies, has started playing an increasingly important role in growing global competition. For a country like Pakistan, which needs to quickly enhance its manufacturing and firm level efficiencies, it is necessary that we revamp, restructure and redefine these business processes in line with international best practices in order to enhance productivity and improve competitiveness. Within three months of the announcement of the STPF, the Ministry of Commerce would critically look at those business processes which are hampering Pakistan's export competitiveness and come up with plans to improve the efficiency of these processes with the help of the private sector.
2. Enhancing Product Sophistication Level in Pakistan's Exports
2.1 Integrating Local Capacity with Overall Supply Chain
Climbing the export sophistication ladder is, to a large extent, linked to upgrading local industry's capacity to integrate into the global supply chain. This depends on factors such as technology intensity, income index (per capita measure), capital intensity in the production process, value-addition, entrepreneurial abilities, returns to factors of production, etc. There can be many entry points to increase the sophistication level of export products such as research, design, assembly, production, distribution, and marketing. With a view to push Pakistan up the sophistication ladder, the Ministry would initiate different sets of measures, with the help of relevant partners, to help potential sectors jump to the higher value ladder, especially through the development of networked clusters.
Many of the developmental sectors, e.g. sports and surgical goods, have failed to establish their brands in foreign markets due to lack of resources and entrepreneurship. Consequently, manufacturing in these sectors is largely done under the brands of foreign companies, and that results in lower prices for manufacturers in these sectors.
To address this gap, it has been decided that surgical instruments, sports goods & cutlery sector would be granted 25% subsidy on certification cost and brand promotional expenses like advertisement in recognised trade journals.
2.2 Innovation and Technology Up-gradation
Technological capability of firms is the most important pre-condition of pushing Pakistan up the sophistication ladder. One of the principal objectives therefore of STPF is to increase the capacity of Pakistani firms for technology absorption, technology development and innovation creation. The Ministry of Commerce in this regard would seek an active collaboration with the Ministry of Science and Technology & Information Technology, Ministry of Industries, Textiles, Intellectual Property Organisations of Pakistan and other establishments of technology and innovation promotion in Pakistan. In order to enhance competitiveness of our industry by technology up-gradation and improved management systems, STPF proposes to establish Technology, Skill and Management Up-gradation Fund
3. Enhancing Competitiveness of Firms
3.1 Skills Up-Gradation
Pakistan despite having a potential demographic dividend has not
been able to enhance the labour productivity as compared to its
competitors. There have been a number of initiatives taken by the
government in the recent past to train our labour better. STPF would coordinate and leverage the skill up-gradation programs in the priority sectors and strengthen the institutions entrusted with the skilling. In this regard, skilling of women workers would be given special importance.
Surgical instrument industry has been identified as a priority sector as its growth has been retarded due to shortage of well-trained skilled manpower. To provide fillip to this industry, STPF has proposed to establish a Center of Excellence for catering to the training, designing, and research & development needs of surgical sector at Sialkot.
3.2 Enterprise and Entrepreneurship Development
The overall competitiveness of firms is a reflection of entrepreneurial capability of firms. Pakistan's performance on this account has been rather weak, as compared to the international businesses which have embraced major corporate changes during the last few years to stay competitive, pro-active and customer-focused. More competitive exporting firms have been fast adopting the low cost efficient practices and new technologies which not only helped leaner and efficient production lines but are more cost effective in terms of wastage reduction, efficient consumption of utilities and manpower requirement. Our competitors have made massive investments to expand economies of scale to cater to the business needs of large and medium scale buying programs and extensive process re-engineering initiatives have been undertaken to produce faster, better and competitively. The efficient firms all over the world are giving special attention to productivity through training, adoption of more efficient technology, redefining process flows and comprehensive application of IT.
Similarly, the development of middle and senior management pool has become a special focus as a key success factor, enabling the exporting companies to keep pace with growth, confront challenges of being creative, be more responsive and ensure competitiveness. STPF would help integrate the best practices through an Enterprise and Entrepreneur Development Programme, which would leverage other programs of entrepreneurial skill development, involving the private sector and donors more actively. To support this program, the Ministry of Commerce would set up an Enterprise and Entrepreneur Fund (EEF) for enhancing the firm management capabilities in ten sectors chosen to push Pakistan higher on the sophistication ladder.
4. Domestic Commerce Reform and Development
Promotion of Domestic Commerce as a policy matter needs a major shift where supply and demand mechanisms would support entrepreneur development, consumer protection alongwith protection of domestic industries and facilitating domestic commerce to effectively contribute to value-addition, sophistication and economic growth. The Domestic Commerce Wing, set up at the Ministry of Commerce has identified the following key areas for the reform and development of Domestic Commerce:
Retail and wholesale trade, which is the front end of Domestic Commerce
Storage and warehousing
The Transport industry, which links the whole supply chain
The overall regulatory environment, including the extent of the policy related trade distortions and the level of subsidies and incentives, which impact on the overall level of competitiveness and potential for growth
Promotion of modern business practices such as standardisation of quality, weights and measures and adoption of modern accountancy, record keeping and insurance services
Modernising of those taxation practices which act as a barrier for the promotion of Domestic Commerce
Improving the contract enforcement and repudiation issues, which distort the business environment in a variety of ways leading firms to depend on short term contracts and spot deals, forcing them into backward or forward integration, restricting businesses to fewer buyers and/or suppliers, making them rely on family labour, and forcing businesses to divide rather than grow
Promotion of copyright protection and intellectual property rights
Promoting small businesses access to formal sector financial institutions
Development of tertiary services for developing firm level capacity vis-a-vis modernising management practices, skill development and business process improvement
Avoid patronising the undocumented informal sector at the cost of formal sector
Many of the above issues are being attended by different government agencies. The Ministry of Commerce would leverage their activities and work to strengthen these individual reform and development efforts alongside the efforts to enhance the export competitiveness of Pakistan through holistic Domestic Commerce Reform and Development Programme. This would be a mix of analytical work, initiation and coordination of policy interventions and initiatives, to reform and develop the Domestic Commerce and monitor the different indicators of the performance of Domestic Commerce.
5. Product and Market Diversification
Export diversification is widely recognised as a positive trade policy objective in sustaining economic growth. Diversification makes countries less vulnerable to adverse terms of trade shocks by stabilising export revenues, making it easier to channelise positive terms of trade into growth, knowledge spillovers, and increasing returns to scale. Many developing countries have pursued product diversification as a deliberate growth strategy to insulate themselves from the sharp and unexpected changes in their terms of trade and by extension to stabilise domestic income and employment. They have placed greater emphasis on producing manufactures as well as securing new markets for their products. There are many forms of diversification which include:
Expanding the range of markets into which existing products are sold (geographical diversification)
Up-grading quality of existing products including agriculture exports and widening the base of exports
Taking advantage of opportunities to expand exports of services
All three turn out to be potentially very important whereas in the case
of Pakistan, they have largely remained unexploited.
A review of Pakistan's export profile would reveal that Pakistan's exports are confined to seven major markets in seven core categories. There is an urgent need to undertake aggressive strategy to expand and deepen our markets and broaden the narrow base of our exports. The Strategic Trade Policy Framework aims at developing coherent, comprehensive initiatives to realise the twin objectives of product and market diversification. To increase the share of non-traditional products in the export product range of Pakistan, it has been decided to continue Cluster Development Programs announced in the previous year's Trade Policy.
6. Making Trade Work for the Sustainable
Development in Pakistan
The objective of the enhancement of export competitiveness is to make
exports an engine of growth. It is equally important to ensure that this growth does not come at the cost of environment, exploitation of marginalised sections in the society or SMEs. The strategies of competitiveness enhancement need to be closely aligned with the legitimate concerns of sustainable development so that the future generations could also benefit from the fruits of export enhancement. The STPF seeks to contribute to the sustainable development in Pakistan through the following means:
6.1 Making Trade Reduce Poverty
The government is aware of the need to address the possible negative distributional aspects of globalisation, manifesting in the form of unemployment, wage decrease of unskilled labour, informalisation of labour, etc. Ignoring these factors could reduce the benefits of globalisation and unleash protectionist sentiments and resentment against the free market regime. To strengthen the role of Strategic Trade Policy Framework as a tool of sustainable development, we would align it closely with the recently approved Social Protection Policy of Pakistan, as better social protection policies and stable labour markets are characterised by more investments by the industry on labour skilling and better labour productivity.
The Ministry is aware that the protection and promotion of Geographical Indication (GI) products is also an effective way to link international trade with poverty reduction as most of the GI products in Pakistan are made by cottage industry or poor, rural households. The Ministry would expedite the promulgation of GI Law and allocate sufficient resources to assist the producer organisations to benefit from opportunities in the international market.
6.2 Consolidating Gender Sensitive Trade Policies
It is recognised world over that women have exceptional multi-tasking skills, endurance, dexterity and creativity. It is becoming increasingly important to create and maintain diversity at workplace. The economy can draw immense benefits if these innate skills can be suitably harnessed and mobilised, leading to the empowerment of women. At present, there are a number of initiatives underway to increase women's role in Pakistan's economy. Trade Policy 2009-12, which has been designed as gender sensitive trade policy, seeks to leverage many such initiatives. We recognise that trade policies affect men and women differently, as more often than not, women are constrained by structural gender inequalities such as low skill level, weak ability to negotiate wages or work conditions, etc.
In Pakistan, women are present more in lower-skilled and low-paying sectors, especially in the textile and garment industries. With the increasing trend of female higher education, it is important that women are represented more at the managerial, supervisory and high-skill levels. Though women have started playing a larger role in Pakistan's export sector than ever before, yet we are far from other Muslim countries such as Malaysia and Bangladesh, who have tremendously benefited from the diverse and creative expertise of women in sectors such as garments, shoes, jewellery, electronics, horticulture, handicrafts and in services sectors.
While implementing Strategic Trade Policy Framework, the government would take a number of gender sensitive actions to enhance the positive contribution of Pakistani women in Pakistan's international trade, such as special incentives to encourage women in export-oriented services sector, i.e. designing, cultural industries, skill development programmes in women intensive export sectors, access to credit for women-managed SMEs in export sectors, protection and promotion of women intensive GI products, increasing the participation of women in international exhibitions and delegations and steps to encourage independent and good quality gender-oriented research and analysis on how to enhance women's trade capabilities and to study the impact of gender-based-barriers to market access and economic costs of gender inequality and the consequent trade-offs.
6.3 Promoting SMEs Exports
The Ministry of Commerce recognises the fact that large firms and conglomerates play an important part in developing new products and markets as they can produce at sufficiently large scale with high quality. Scaling is becoming very important in order to meet the requirements of large buyers and the government would work with the private sector to enable the firms for scaling up their capabilities. However, in a country like Pakistan, with such a large number of SMEs, there is a need to devise policies and programs aiming at the integration of SMEs into global value chains.
In the context of Medium Term Development Framework (MTDF) 2005-10 of the Government of Pakistan, which stressed upon strategic shift of government's assistance to infrastructure development and establishing Common Facility Centers in order to enhance the productivity and exports of SME sector, many projects are under way to increase the global competitiveness of SME sector such as the establishment of Agro Food Processing Facilities (AFP) at Multan, Gujranwala Business Center (GBC), Sialkot Business & Commerce
Centre (SBCC), Sports Industries Development Centre (SIDC) Sialkot and Women Business Incubation Center (WBIC), Lahore. A few sector-specific development companies have also been established by the Ministry of Industries that aim at upgrading production capabilities, i.e. Pakistan Dairy Development Company, Pakistan Gems and Jewellery Development Company, Pakistan Stone Development Company and Furniture Sector Development Company. There is a need to leverage the growth competitiveness activities of these companies with the activities and interventions being initiated through the STPF so that an improved performance by these sectors can increase the manufactured value added in Pakistan.
The Ministry of Commerce fully supports the objectives of National SME Policy (2007) and would join hands with SMEDA's Policy & Project Implementation, Monitoring & Evaluation Unit (PPMIU), to make it a success. We have included many initiatives aimed at helping the SME exporters directly and indirectly. One such measure is the earmarking of significant funds from Export Investment Support Fund (EISF) for a new generation of SMEs driven by efficiency and innovation, in line with our declared focus on 'export competitiveness of Pakistan' through SMEs. We hope that with a right mix of policies and incentives, SMEs can become the main tools of 'value-addition' and 'sophistication' in Pakistan.
6.4 Greening of the Export Sector
Being aware of the importance of the greening of the economy in the coming days, the Ministry of Commerce would leverage the linkages between technology up-gradation/replacement and greening of manufacturing in Pakistan by supporting the energy efficient and carbon neutral technologies and equipments in high value sectors. A Green Technologies Fund is being set up to give a big boost to technology based competitiveness in the manufacturing sector for exports, which would incentivise the usage of energy efficient and environment friendly equipment through tax and credit incentives with the help of ENERCON and other stakeholders. According to an estimate, the energy efficiency of the boilers being used by our industry can be reduced by 30%, thereby reducing the cost of production significantly. Service providers for conversion of boilers are available but are reluctant to come to Pakistan. To encourage the conversion of boilers for increasing efficiency, the government would underwrite the agreements between the service providers and the industry.