Shahid Sattar and Sarim Karim

Pakistan is currently in difficult circumstances, grappling with deindustrialization and widespread unemployment. The country’s inflation rate at 36.4% has forced millions of families into subsistence conditions. Shockingly, 22% of the population now lives below the national poverty line, with 16.7% lacking access to education, electricity, sanitation, and water. The solution to these crises has historically been export-led development, which is pivotal for poverty alleviation, employment generation, and balancing the fiscal deficit.

However exports have not been given priority in Pakistan due to an unfounded fear of income inequality associated with trade liberalization. Protectionist policies wreak havoc on Pakistan’s export sector, generating cost burdens and inefficiencies which have led to an artificial loss of competitiveness and closures. This fear of income inequality disregards the fact that income equality alone cannot address the ongoing macroeconomic crisis. Pakistan cannot hope to achieve equitable growth or stable macroeconomic conditions unless priority is given to export-led growth.

When measuring inequality, institutions use the Gini index. The index ranges from 0 which implies perfect equality, and 1 which implies perfect inequality. Pakistan has a Gini index of 29.6, meaning that the wealthiest 10% of Pakistani households are responsible for 29.6% of relative consumption. At first glance, Pakistan appears relatively equal compared to its Asian peers. Bangladesh’s Gini coefficient stands at 32.4, India’s is at 35.7, and the South Asian average is 33.6. However if deindustrialization continues, this Gini Index score will become further unsustainable, as Pakistan’s shared prosperity has been decreasing since 2005, indicating that the poorest 40% are receiving fewer gains from economic growth.

To discuss the role of inequality in the context of development, Kuznets’ Curves help to outline long term trends. These suggest that inequality initially grows as a nation industrializes, due to the influx of cheap labour via rural to urban migration and capital investment. However, as labour becomes more organized, human capital expands, and incomes rise, inequality begins to decrease. Therefore, much of the fear-mongering centred around trade exacerbating inequality fails to account for two facts. First, deindustrialization would have worse outcomes for the working class. Pakistan’s current trajectory places it on the path of degrowth, employment loss, and a current accounts crisis that will hurt the entirety of its population but especially its rural and urban poor. Secondly, an unequal distribution of gains from trade can be mitigated using redistribution policies, expanding social safety nets, and increasing skill development. However these policy outcomes are harder to achieve without the revenue and current account balancing that exports provide.

Many of Pakistan’s protectionist policies are implicitly a consequence of this fear of inequality. World Bank data shows that customs duties on final and intermediate goods hinder capital intensity in production. Upstream duties have consistently increased since 2012 indicating a desire to maintain wages in labour intensive downstream sectors. The simultaneous imposition of duties on raw materials, which represent a cumulative 19% including a 7% customs duty on polyester staple fibre and a 12% anti-dumping duty, drive up production costs and render exporters uncompetitive. The first half of the decade witnessed some customs duties decrease, which led to growth in both the textile and apparel industries. The growth in these sectors outpaced other industries in the same period, but these gains were quickly stymied by a rise in regulatory duties post-2014. Currently, Pakistan fails to harness the potential of a growing export sector.

An investigation in 2016 on trade and inequality in Pakistan sheds light on the significant role of textiles. The study highlights that increased textile trade particularly benefits lower-income households. There are several reasons for this. Firstly, because textiles employ a substantial portion of non-farm, low skill labour, accounting for 28% of the workforce. Secondly, the textile value chain encompasses both rural non-farm and urban low-skill labour, thereby compensating for reduced agricultural earnings resulting from price reductions due to liberalization (Khan et al., 2016). Thirdly, this characteristic of the industry also ensures that restrictions on mobility do not impede equitable distribution of gains from increased textile exports. Lastly, textiles exhibit greater  labour intensity than other manufactures like processed food, resulting in a more balanced distribution of earnings in favour of labour over capital (Khan et al., 2016). Therefore, it is evident that textiles hold the most potential for equitable growth as it provides employment in urban areas as well as income to cotton pickers (a largely female labour force) in the rural areas of Pakistan.

A general assessment of trade liberalization highlights three channels for equitable growth:

1. Trade facilitates technology transfers and innovation, leading to increased productivity. This in turn fosters skill development and higher wages for labour as it adapts to innovative processes.
2. Exports produce foreign exchange earnings that can finance imports and service foreign debt. This frees up fiscal capacity and lowers consumption costs.
3.  Increased employment and economic diversification enhance an economy’s resilience to exogenous shocks.

In summary, trade provides valuable tools to an economy to address its challenges.

Empirical research on the short-term link between trade openness and inequality is inconclusive especially among countries reliant on import tariffs for revenue. A 2020 investigation by the World Bank found that in 45 out of 54 countries, households benefited from trade, particularly due to lower food prices. Since food is the major source of expenditure for poor households, this is pertinent to Pakistan’s current cost of living crisis. Nine countries were identified as losing from trade, but this was due to overreliance on tariff revenue that was lost upon liberalization. In the short-run for 37 countries, the richest households (the top 20% income earners) gained more from liberalization than the poorest households (the bottom 20%). Kuznet’s curves explain this observation in inequality as a short-term impact for countries which are reliant on import tariffs. However, even these results exhibited strong heterogeneity. In the case of Pakistan for instance, the study found its lower-income population to be one of the largest beneficiaries of agricultural tariff liberalization. These gains occur because of two main factors: lower food prices and the role of agricultural goods as inputs for other industries. The reduction in food prices benefits households, as mentioned earlier. Additionally, since agricultural goods are used as inputs in various industries, the decrease in input prices for those industries has a multiplier effect. This multiplier effect leads to significant gains to the economy and particularly urban labour and labour involved in cotton picking.

Finally, it would help to also challenge the mainstream arguments that support the idea that trade openness leads to income inequality. The United Nations Conference on Trade and Development (UNCTAD) in 2019 summarized two channels through which trade contributes to inequality: the ‘race to the bottom’ and geographical clustering. The first argument suggests that countries compete by offering cheap goods, achieved through reducing wages, weakening labor rights, and relaxing regulations. However, the extent of the ‘race to the bottom’ depends on a nation’s ability to use foreign investment and trade-driven growth to improve workforce skills. Successful export-led developers like South Korea have transformed from impoverished societies to mass-consumption societies with dedicated poverty alleviation strategies. The second argument highlights that trade can lead to uneven geographical development, favoring specific sectors and creating clusters of industries. This means that certain segments of the population, typically rural communities, may not have access to higher incomes associated with employment in export industries. However, this issue can be addressed by improving infrastructure to better connect rural areas with industrial centers. Additionally, investment in small-scale handicraft enterprises, which employ significant rural non-farm labor, can enable them to contribute to exports as well.

Analysis of Pakistan’s peculiar economic circumstances suggests that protectionism actually leads to increased inequality. Pakistan is currently grappling with a cost of living crisis stemming from currency devaluation, rising import prices, and disrupted supply chains. Import tariffs incentivize rent-seeking behavior among inefficient firms that lack competition. These firms can maintain artificially high prices since consumers bear the burden of their inefficiencies. Another frequently overlooked aspect is the gender bias associated with protectionism. A 2019 study conducted by the World Bank, which analyzed data from 54 countries including Pakistan, revealed that protectionist policies disproportionately disadvantage women. Women tend to spend a higher share of their budget on agricultural products compared to men. Female labour also tends to derive a smaller share of income from agriculture compared to men. Therefore protectionism increases both the cost gap and wage gap between men and women. This further exacerbates inequality between female-headed and male-headed households, as men benefit more from income gains associated with protectionist measures. Additionally, there is a gender bias in the cost of living, commonly referred to as the ‘pink tax,’ where products marketed towards women are often priced higher than those targeted at men. When tariffs raise prices and diminish incomes, women bear a disproportionate burden during the cost of living crisis.

Income inequality is a complex and multifaceted phenomenon with many determinants that are difficult to isolate. An empirical investigation by the University of Karachi in 2015 also shared these conclusions. However, they did report a significant relationship between social spending and inequality. As social spending increased, Pakistan saw a decrease in income inequality. Export-led development can provide the fiscal revenue, current account balance, and macroeconomic stability necessary to embark on such projects. Without priority given to exports, Pakistan’s most vulnerable will remain subject to the dire conditions of the present stalemate of premature deindustrialization, failure to gain from export-led growth, and declining standard of living.

In conclusion, Pakistan stands at a critical juncture grappling with deindustrialization, unemployment, and a balance of payments crisis. The unfounded fear of inequality associated with trade liberalization persists, and it is the working class who suffer because of it. Trade openness offers opportunities for poverty alleviation, employment generation, and fiscal stability. To address income inequality effectively, Pakistan must realign its resources to empower export-led growth. By doing so, Pakistan can overcome its economic crisis, create inclusive growth, and improve the living standards of its most vulnerable populations. Failure to prioritize exports will perpetuate inequality, impeding progress toward a more equitable and prosperous future for the nation. It is crucial for Pakistan to embrace trade as a tool for achieving sustainable and inclusive development and end its reliance on protectionism.

Dr. Gohar Ejaz

Textile exports for April,23 clocked in at $1.24 billion, a staggering $500 million less than the previous year’s exports for April,22 and a colossal $1 billion per month short of the capability due to enhanced capacity. It is disheartening to see that over the same time period, our competing countries such as Bangladesh, Sri Lanka and Vietnam posted impressive growth ranging from 10-30% in textile exports over the last year, while we struggle to keep up with our previous years’ exports. Exogenous factors i.e., demand and external market forces, cannot be blamed for our downfall as the decline is entirely the consequence of our shortsighted decisions and failure to follow through on the proven policies such as of providing a level playing field on energy tariffs.

The impressive surge in Pakistan’s textile exports, a remarkable 56%, $19.5 billion in 2022 from $12.5 billion in 2020 is largely attributed to the strong policy support through regionally competitive energy tariffs (RCET). The industry’s enhanced competitiveness empowered it to invest a further $5 billion in expansion and new projects, effectively boosting export capacity by $5-6 billion per annum. These milestones placed Pakistan firmly on track to achieving its target of $25 billion in textile exports in 2023. However, the import restrictions and unfortunate withdrawal of RCET has left the industry reeling. The momentum is lost and investments are at risk of going to waste. The ramifications of such a decision are far-reaching and disastrous, with severe economic costs, loss of confidence, and social unrest stemming from the surge in unemployment.

Figure 1 Textile Exports for FY 22 and FY 23.     *Provisional

In accordance with our nation’s historical metaphor of the timeless game of snakes and ladders, it appears that the predicted event outlined in the article THE SNAKE BITES ONCE AGAIN – ENERGY, has indeed come true. The government has rescinded their prior commitment to provide competitive energy tariff to our country’s export sectors, which were to extricate us from the grip of twin deficits through export-driven expansion. This decision is distressing as it may suggest that the government has relinquished their resolve to pursue the sole viable strategy for managing our Balance of Payment (BoP). This has sent shockwaves throughout the economy, leaving essential export sectors precariously vulnerable and driving the country towards rapid deindustrialization.

Pakistan’s economic growth was on the rise and was climbing the ladder with the implementation of the Regional Competitive Energy Tariff (RCET). The promising tariff structure offered the country’s vital export sectors competitive energy rates, serving as a beacon of hope for a brighter future. The initial tariff rates of 7 cents/kWh for electricity and $6/MMBtu for gas were highly competitive and proved to be instrumental in driving the country’s export-led growth. As the tariff climbed to Rs.19.99/kWh and $9/MMBtu for electricity and RLNG/gas, respectively, it still remained marginally competitive. However, the sudden complete withdrawal of RCET has dealt a fatal blow to Pakistan’s economy, leaving its export industry in shambles with the recent hike in electricity and RLNG/gas prices, from Rs.19.99/kWh to over Rs.40/kWh and $9/MMBtu to over $13/MMBtu, respectively. This has made the industry uncompetitive in both local and international markets. Punjab industry in particular, with energy costs four times that of Sindh, seems to have been sacrificed at the altar of short sightedness and expediency. As a result, the available orders are now being shifted to cheaper alternatives, both domestically and internationally.

The withdrawal of this tariff will undoubtedly lead to further economic deterioration, including unemployment, lower exports, and bankruptcy. Due to closure or partial operation of the total installed capacity which has already resulted in significant unemployment of more than 10 million. The rise in unemployment has had a profound impact on the nation’s youth, who account for 65% of the overall population. They have become the ultimate collateral damage, with their aspirations and dreams dashed by the dismal wasteland of high joblessness and uncertain prospects.

Pakistan’s dependence on exports for foreign exchange has always been a challenging task, and with the withdrawal of RCET, this reliance has become even more tenuous. The current situation implies that replacing exports with mere remittances and loans is an impossible feat, which could permanently damage the Pakistani economy. The government must realize that growth-led export policies such as RCET can lead to increased exports and higher revenues for the industry against foreign loans with high-interest rates of 7% – 8%. It’s worth noting that the total cost of regionally competitive energy tariff (RCET), if the differential is treated as the subsidy/cost is 2.67%, making it the most efficient and sustainable way of funding foreign exchange requirements.

The issue of Pakistan’s economy teetering on the brink of a severe financial crisis is not new. The question at hand is how to execute policies effectively to ameliorate long-standing disadvantages and secure the future of the nation. The reintroduction of RCET will undoubtedly be a game-changer, providing an immediate boost to the struggling economy by lowering energy tariffs and keeping foreign investors engaged. However, a sustainable long-term solution is also required to secure the future of the country.

In order to find a sustainable, long-term solution, the structural issues and inefficiencies within Pakistan’s energy sector must be addressed. These issues and inefficiencies greatly impact affordability, and it is crucial that the state relinquish control of business operations to private investors and innovators. CTBCM, is one step in the right direction, however, it is being hampered by bureaucratic interference and unnecessary restrictions. Government has to loosen its grip on business, instead, what the nation needs are B2B deals that are free from government intervention and meddling. This will aid in restoring competitiveness, benefiting both the industry and the state in breaking the vicious cycle of circular debt, which currently stands at Rs. 4 trillion for electricity, as per the Power Division’s statement to the standing committee of national assembly and Rs. 2 trillion for gas/RLNG. It is imperative for the state to acknowledge that running businesses, particularly in the energy sector, is beyond its realm of expertise. Therefore, it is high time that the state relinquishes control and grant the private sector the opportunity to take the reins for a long-term and sustainable solution. Only then can we hope to see the innovative and efficient practices of the private sector take hold and bring about the financial stability and affordability in the sector.

The crux of the matter does not solely lie in policy formulation, but rather in the effective execution of policies. The Textile Policy 2025 serves as an example of this, as it was developed after rigorous deliberation and consultations but has yet to be implemented. The non-implementation of the Textile Policy 2025 implies that the business environment in Pakistan is not conducive to the growth of both existing and new investors. Emphasizing the implementation of policies can have a tangible impact on driving sustainable development and spurring economic growth, leading to significant improvements in Pakistan’s textile sector and exports within the next four years.

It is an undeniable fact that Pakistan has consistently fallen behind when competing countries have experienced economic take-offs. The reasons for this disparity are numerous, including a lack of long-term vision and implementation of policies, compounded by erratic energy prices and availability. Additionally, policies have been abruptly withdrawn time and again, causing the industry to veer off its path of export-led growth. To achieve sustained progress, it is imperative that Pakistan focuses on augmenting export earnings by implementing long-term policies while simultaneously reducing state intervention in the business arena. This approach represents the most sustainable and pragmatic means of overcoming Pakistan’s current account deficit and economic stagnation.

We hope that the decision makers take heed and reverse the decline through decisive measures in support of creating a focused export culture in the country.