Shahid Sattar & Eman Ahmed
Things are on the upswing for Pakistan’s economy. The government’s efforts have proved to be instrumental in not only salvaging the exports of Pakistan, but also in achieving record levels of growth and stability in a particularly challenging time. After 21 quarters of deficits, the Current Account is finally in surplus, indicating that the country’s trade balance and remittances are fortunately in the green. Furthermore, the export-oriented sectors of Pakistan have shown extraordinary growth and exceeded targets, outperforming regional players. In September 2020, there was 11.3% surge in textile exports, leading to the impressive export volume of $3,469.5 million in July-September (FY2020-21). Remittances rose by 31% year-on-year, marking the 4th consecutive month that remittances have remained above $2 billion. Similar growth trajectories have been noted in the valuable sectors of automobiles, motorbikes and cement.
As noted in the latest Profitability Report, earnings of the KSE-100 index achieved an unprecedented high during September ’20, rising 38% year-on-year, the biggest yearly jump in its history. KSE-100 listed companies are enjoying a record boom period despite the difficulties presented by COVID-19, with notable growth in every commercial sector.
Moving forward, it is, however, important to note how the world economy has ventured far ahead of agriculture/textile-led growth towards technology, innovation and the services sector. This leaves Pakistan with a significant amount of catching up to do. The country needs a turnaround in the highly valued cotton production sector, a crucial aspect of the textile industry. The introduction of proper managerial and scientific methods in the cotton sector is already under way to restore cotton to its former glory in the near future.
Granted, the export of labour (i.e. remittances) offers a helping hand to the economy, but it is primarily a function of poor employment/business opportunities in Pakistan. The nature of the job market in Pakistan has perpetuated a trend of brain drain, which is not slowing down anytime soon. Our country illogically neglects its own first-rate talent - as is evidenced by our shining diaspora worldwide - and gives preferential treatment to donors to take on the task of development. This has led to the major chunk of employment in Pakistan being informal in nature, while formal employment appears to be contracting and our best minds flee the country to seek better prospects.
The country must be equipped to provide adequate jobs to the youth, and mitigate the culture of informality and intermediary products. We must prepare our youth to innovate rather than to fit into the existing system, and thereby facilitate movement into higher-value economic areas in the face of rising global competition. Encouraging entrepreneurship and a focus on higher value production is essential. It is only possible with a culture of perpetuating and supporting the innovative entrepreneurs and businesses rather than interest groups, lobbies and bureaucracy, that we can create a healthy, vibrant job market. This calls for small business and industrial loans to be made available to fresh technical graduates, to encourage the establishment of innovation start-ups and a knowledge-based economy. Should we be able to do, this we will truly reap the youth dividend.
This brings us to the nature of Pakistan’s business climate: overregulation, high energy costs and bureaucratic procedures which stifle budding small businesses and entrepreneurs from the get-go. The state has failed to widen the tax net, targeting salaried and lower-income groups relentlessly. Without quality education and training, individuals find themselves and their families unable to escape the cycle of poverty, generation after generation. Therefore, informal employment becomes an escape from the suffocating procedures of the formal industry, and we see a substantial amount of outsourcing to these informal employees to get work done.
The research paper on Informal Employment by Tahir & Tahir investigates how formal employment, declining tariff rate, sectoral growth rate and direct taxes affect informal employment. They emphasize how globalization has made the informal sector a periphery of the world economy; the core is exploitative of cheap labour, whereby it re-appropriates economic value. Formal firms outsource the labour-intensive part of the production process to informal firms, as this is an effective way to avoid costly government regulations. For formal sector firms, it is a cost-effective strategy, with the informal sector being a dynamic subset of the economy that complements formal sector growth. Furthermore, many declare the informal sector as casual work available for avoiding excessive state regulation and unrealistic production standards that increase the cost of doing business.
While externalities significantly hamper the formal sector, the informal sector starts growing in periods of external shock. Informal workers rise and fall with the fate of formal sector due to its linkages with formal sector industry, and its growth depends on production technology and the elasticity of substitution between the two. Cicek and Elgin have found that weak regulatory enforcement, low GDP growth and increasing tax burden in developing countries increase informal sector employment. Persistent capital accumulation in the periphery and the semi-periphery of the world economy enables the core to exploit cheap labour and re-appropriate economic value through trade and investment. Trade liberalization intensifies competition and provides greater demand internationally for domestically produced inputs in the informal sector.
Even so, more competitive exports do not guarantee economic well-being for the poor. Comparative analyses show that rising apparel exports may have corresponded to rising wages and employment in larger Asian countries, but have resulted in falling employment in the case of Sri Lanka. Furthermore, global trends also have a significant impact on textile workers’ earnings. Wages have predictably risen in countries that adapted to market changes, and fallen in those that failed to adapt. Thus, efforts to develop the skills of workers must be aligned with research on the fluctuations in product value, as well as with technical upgradation, before the two-pronged objective of more jobs accompanying higher exports can be sustainable.
Rather than outsourcing the labour-intensive parts to informal firms, job training and capacity building must be adapted to the context of the required task, whereby it can produce a high level of returns even at the lowest tiers of production. For instance, cotton crop has great potential in terms of poverty eradication, as it requires minimal skills. The task of cotton picking primarily employs underprivileged women, who are overlooked in other areas of industrial workforce development in Pakistan. Worker earnings correspond to the volume of cotton picked, so it can be seen as a rewarding occupation where even the slightest amount of training can go a long way in ensuring a better and cleaner crop. This will be beneficial for Pakistan’s textile industry, and will help maintain Pakistan’s export growth, which has notably been the fastest in the region since March, according to Bloomberg.
Along with education reform, the tax system needs significant improvements, as the present system of indirect taxes allows money from the poor to end up in the pockets of the rich. Pakistan’s indirect taxes have consistently been higher than direct taxes. This tends to skew the economy to the disadvantage of the less privileged classes and make the country tax-uncompetitive as well as increasing the cost of doing business compared to the global market. Furthermore, well-to-do businessmen are able to avoid payment of due share of taxes, owing to power and political clout, thereby increasing the burden on the less privileged.
The demand for the diverse range of products of the textile sector is rather skewed in Pakistan, and this is also an outcome of the substantial proportion of underprivileged citizens. Figures reveal that 24% of Pakistan’s population lives below the national poverty line; which includes 31% in rural areas and 13% in urban areas. This has a significant impact on domestic demand. These individuals have limited access to basic necessities, such as food, water and sanitation. Education and healthcare are even further out of reach, and without education they have no chance to move up the ladder. Almost half of the population lives at a wage below $2/day, rendering the purchase of finished garments and apparel infrequent. It can be concluded that around two to three articles of finished apparel would be purchased by these individuals throughout the course of a year, leading to the dismal level of domestic demand and the rather frail and unsophisticated domestic market.
Growth is essential, but policymakers should aim to achieve it sustainably through productivity reforms and investments in human capital. A long-term solution to improve formal sector job growth would require skill development programmes, efficient worker allocation, catering to Pakistan’s unique market demands and adapting to the ever-changing global dynamics. These will not only tackle the aforementioned problems at the grassroots level, but will address the country’s unique context in order to develop a viable business environment that attracts investments. Subsequently, efforts to employ a larger segment of the population towards the task of textile sector productivity would prove invaluable in strengthening Pakistan’s upward trajectory in export growth. Enabling employment and exports to increase side by side will lead to improvements in a number of economic indicators.
Training and capacity building must be adapted to the context of the required tasks, whereby they can produce a high level of returns even at the lowest tiers of production. The world is now in the knowledge-economy phase, as seen through changes in top companies and exporting players in recent years, while Pakistanis is still industrializing. The industrial economy must be strengthened via policy support, improved efficiency and rationalized tariffs, so that Pakistan can advance in to knowledge-based economic growth. To conclude, in order to accelerate growth and employment we need to develop incentives to retain our first-rate talent, capitalize on our own human resources and empower our youth to shape the policy landscape of Pakistan, as they have immense talent which is yet to be utilized.