Global Financial Crisis and its Impact on Textile Industry in Pakistan.
This study investigates the global financial crisis and its impact on textile industry in Pakistan. It examines the nature and application of WTO and identifies its operative tariff and non-tariff instruments. By doing so, it intends to trace out the place of Pakistan in the world market in comparison to its competitors. The study concludes that the pattern of trade preferences and WTO grants do not necessarily guarantee success in the export performance of the recipients. Finally, the study highlights two very important features of Pakistan's exports i.e., high concentration both country and commodity-wise and projected a fierce competition due to trade liberalization under the WTO. These changes would carry both, immense potential opportunities and serious threats for Pakistan in the years to come. The study suggested that augmented competitiveness of firms would be the key to success. The truism holds that it is the firm, not the country, to compete in the changing international trading environment.
This calls for the adoption of a properly designed strategy by the government and firms with a clear vision, hope, motivation and passion. So, government should provide friendly investment/production and exporting environment, encouraging firms to compete on the internal and external grounds. And firms need to create access, absorb, and adapt new technologies to compete world market.
Key words: Global Financial, Crisis, Textile, Industry
The IPP of urea was not estimated as it was not imported in the country in bulk quantity during the study period. The IPP of DAP and Potash was prepared on the basis of f.o.b. price (ex-USA) and by considering all handling, transportation, marketing charges on the port on the way to farmer's fields. In the calculation of social parity prices, shadow exchange rate (SER) was utilized instead of official exchange rate (OER). The tradable inputs which are not measured at import parity prices, all are weighted by SER to express their opportunity cost. In the past, cotton production and marketing was subjected to many public policy interventions. The Cotton Export Corporation was phased out and cotton economy was freed in the 1990's. With the advent of trade liberalization, most of interventions have declined.
The support price policy is notional and the Trading Corporation of Pakistan (TCP) is kept as third buyer in order to avoid price crash due to cartelization of powerful syndicates especially during the bumper crop, but the TCP works as a sleeping buyer.
The results of static analysis showed that farmers are earning more profit at world price of cotton than at domestic price of cotton. It was concluded that cotton crop was under-priced in the local market and farmers are in a cost-price squeeze situation. The farmers were paying almost the world prices and no support or subsidy was provided to cotton growers for inputs. The study showed that Pakistan has comparative advantage in cotton production and can well compete in open market. The dynamic analysis was carried out to estimate the competitiveness of cotton in the ensuing free trade era. Here the cotton budget at economic prices was estimated including risk prices of cotton and fertilizers instead of average world prices. These risk prices were generated through normal distribution of time series world prices of cotton and other critical inputs over the past fifteen years. The simulation results provided the economic revenue and tradable cost for the first year of free trade i.e. 2004-05.
For further four years (up to 2008) projections were made based on this first result, by adding in the risk price as error term for each year. The risk analysis at future risk price for five years showed that Pakistan does have the potential to compete in the free trade cotton market. The existing comparative advantage in cotton production will be maintained by the country. Pakistan can further reap the benefits of free trade by reducing the cost of production or by increasing productivity per unit of resources. The quality of a lot of cotton is damaged in the fields during the picking of produce. The obsolete ginning machines deteriorate the micron air length of fiber. The quality of cotton may be improved through "clean picking" and "better ginning" practices.
Although restriction of import is contrary to free trade, yet its import during bumper cotton crop could crash prices received by farmers. Thus import should be regulated by increasing the LC margin by improving marketing efficiency and qualifying the quality standards of produce set by the WTO. The importance of cotton can hardly be over emphasized in the economy of Pakistan. Pakistan is one of the ancient homes of cultivated cotton, 4th largest producer of cotton, the 3rd largest exporter of raw cotton and a leading exporter of yarn in the world. Pakistan is, by and large, a mono-crop economy as cotton contributes nearly 10 per cent in the agriculture GDP and a source of 60 per cent foreign exchange earnings. The value addition through cotton is 8.2 per cent in agriculture and 2 per cent in the GDP. Cotton is not only an export-earning crop but also provides raw material to local textile industry.
A profound investment in the form of over1000 ginning factories, over 400, textile mills heavily depends upon cotton. The area under cotton has increased from 2.836 million hectares in 1991-92 to 2.989 million hectares in 2003-04 showing a growth rate of 0.43 per cent over the period. The production jumped from 1.1 million bales in the year 1947 to 12.8 million bales in 1991-92. Since then cotton production is swinging between 8 million bales to 11.2 million bales with an annual average of 9.5 million bales. The global economic scenario is set for change under the free trade regime. Pakistan had signed the WTO and has entered in free trade era with the dawn of year 2005. The WTO had set many clauses under its various agreements like the Agreement on Agriculture (AOA), the Trade Related Intellectual Property Rights (TRIPS) and Sanitary and Phyto Sanitary (SPS) etc.
Cotton along with its products is the biggest foreign exchange earner for Pakistan and is more likely to be affected through WTO regulations. This requires a profound change in the economic policies to maintain a stable share of raw cotton and its product in world market in coming scenario.
In view of the importance of this silver fiber in the economy of Pakistan, authors conducted a study to estimate its competitiveness and comparative advantage in both current and future scenario. In the static analysis, the cost of production (COP) data of cotton were collected from Agricultural Prices Commission (APCom) for the three year period from 2000-01 to 2002-03. The average financial budget of cotton was developed using the three year average of COP data and market prices of seed cotton. The social budget of cotton was developed using the economic prices of cotton and inputs. The economic or export parity price(EPP) of cotton was estimated by taking the three year average price of CIF North-Europe cotton as Pakistan exports most of cotton to this region. From the fertilizers the import parity price (IPP) of DAP and Murate of Potash were estimated.
The aim of this research is summed up in its title. It intends to look into the trade implications for Pakistan posed by the WTO. The process of globalisation is one of the most important characteristic aspects of worldwide economic development. Globalisation has had a direct and profound influence on the economies of members of WTO as well as non-member states.
Since 1947, the different agreements on Cotton and clothing have been developed successfully with the two most important notions of economic integration, i.e., deepening and widening. The agreement with ATC (Agreement on Cotton and Clothing) has shown a remarkable dynamism in both of these areas. It has gradually extended its field of activity and intensified its involvement in already existing GATT rules. It has been successful in integrating its goods, services, and capital markets by creating a single market. Since the first agreement on Cotton and Clothing i.e. GATT, some other agreements like MFA, LTA, and STA have also been practiced. Although most of the agreements were developed to protect the Cotton sector of developed countries, they also have great importance in Cotton history. WTO is the modern shape of GATT 1947 which has come a long way since then.
EU is the biggest economic bloc in the world economy today and it is the largest trading partner of Pakistan, accounting for around one third of the country's total trade. This makes it, as a block, the most prominent trading partner of the country. The widening aspects of EU from EU15 to EU25 have raised doubts about the future of Pakistan's trade with the enlarged market of EU25. Hence, this study on one hand is about the impact of WTO on Cotton sector of Pakistan and on the other hand it devoted to the exploration of trade implications confronted by Pakistan due to the enlargement of EU from EU15 to EU25.
After removal of quotas and tariffs due to implementation of WTO rules, the economies of different countries will be affected positively and negatively according to their potential. How has this globalisation affected Pakistan's export flows to the enlarged market? Has the enlargement resulted in any trade diversion of imports from Pakistan? What are the possible long-term dynamic trade implications of globalisation for Pakistan's exports to the world Cotton market? The study intends to explore these implications and to provide empirical evidences. The study will also appraise the EU's external trade regime and enquire if it has caused any trade diversion from Pakistan in favour of its competitor developing countries having more 'special and preferential' trading arrangements with the EU25 at the cost of Pakistan.
Table 1.1: Growth Rates of GDP and its Components
###Agriculture###Mining and###Manufacturing###sector###GDP %
Source: Economic Survey of Pakistan, Various Issues
Note: services include construction, electricity and gas, trade, transport, finance and insurance, ownership and dwelling, public administration and defence and 'other' services.
It seems that the frequent changes in government policies arising from the changes in government these years affected the performance of the economy adversely. Among others, not only weather unpredictability, pests, disease, and other natural disasters harm crops production but also inconsistent agriculture policies of government made it worse. Due to such a considerable share of agriculture in the economy, agriculture production is highly correlated to Pakistan's overall economic performance (Ali and Bari, 2000). When the agriculture sector has performed well, the GDP has been elevated and vice versa. Agriculture sector supplies raw material for the Cotton sector as well for sugar mill. Agriculture is not only important for its contribution to GDP but due to its forward linkage effect. However, at the aggregate level the performance of the economy seems not to be so bleak. During the period under study the economy grew on average greater than 5% as the data reflects.
Even today, the agricultural sector is the major contributor in the economy accounting for 25% of the GDP, absorbing more than half of country's total labour force and providing more than 70 % of country's foreign exchange earnings.
Similarly, Table 1.2 shows the composition of country's GDP and the share of major sectors in its composition. As discussed above, the agriculture sector provides a lion's share in the composition of GDP accounting for more than 25 % of total GDP. While the share of industrial sectors is around 18 %, the services sectors account for 53 % in 2005. However, the examination of data reflects the declining share of the agriculture in the country's GDP, while the share of industry seems to be stagnant. On the other hand, the services sectors are gaining the losing share of the agricultural sector.
Table 1.2: Distribution of Sectoral Share in GDP (%age)
Source: Economic Survey of Pakistan, Various Issues
On the basis of the above facts, we may conclude that Pakistan's development experience has been remarkable. Its economic record measured both in terms of growth rates and increase in per capita income despite a quadruple increase in population shows encouraging trends. A good structural transformation in the structure of the economy has taken place from the predominantly agrarian to a more diversified production structure. The country's integration with the international economy has been fairly rapid and the positive effects of adoption of liberalization and deregulation policies have been poring in.
1.3 The Evolution of Economic Development Policies of Pakistan
In the early years, country's economic policy was shaped according to the immediate needs of the economy. Key aspects of economic policy were expansion of industrial base, establishment of institution, infrastructure building and provide extra protection to infant industries. But the excessive protection to industry severely harmed market economy by distorted economic incentives for both agriculture and industrial sectors. Moreover, the policy regime was branded by an excessive dependence on economic controls in the form of industrial licensing, administered prices and other regulations.
During the first half of 1950s, government adapted pro-industrial policy and neglected the agriculture sector. Subsequently, low growth rate of agriculture not only exposed the flaws of economic policy but shortage of food emerged. In the later half of 1950s government began to pay more attention on the development of agriculture sector to rectify these problems. Government announced a thorough strategy for development of agriculture sector in 1956.The key points of new policy were to provide fertilizer at subsidies rate, to distribute better seeds, pest control scheme, and control of salinity and water-logging. However, these policies were not properly implemented due to change of priorities in first five years plan (1955-60) and political instability.
Strict price and profit controls policy in the form of administered price and controlled profit was implemented in the early 1960s but government soon realized that this policy is weakening the incentives to expand production. To promote industrial growth government constructed number of policies like maintaining an over-valued exchange rate to guarantee the cheap availability of capital goods, and by keeping prices of agriculture inputs below to international market prices to ensure handiness of economical domestic inputs to industrial sector. Furthermore, policy of import controls and tariffs, tax holidays, and availability of loans at low rates and introduction of Export Bonus Scheme1, which subsidized manufactured goods exports through a system of vouchers (Kemal, 1978), were introduced to help industrialization drive.
The liberalization began with trade between high-income countries and spread gradually to capital flows (Quiros, 2004). Bhagwati defines globalisation as an economic integration, trade, movement of capital, and the inter-weaving of national economies. Also it is defined as, the coordination of economic trade, fiscal and monetary policies among countries (IMF). If not globalization then the question is: are trade sanctions the way to do it? If we want the solution then this is not the way to go because if you start doing it through trade sanctions, you immediately put up people's backs. It's very difficult for poor countries to throw stones at big countries. So it becomes asymmetric and, therefore, people resent it, particularly at this time when the United States has achieved hyper- power status, has gone into the war in Iraq.
For us to take up these attitudes saying that we are going to impose something on you in the developing world, when we ourselves are flawed on other dimensions just does not make sense.
There are also broader cultural, political and environmental dimensions of globalisation that are not covered here. The dictionary definition is a great deal drier. Globalisation is the "process enabling financial and investment markets to operate internationally, largely as a result of deregulation and improved communications" (Collins) or - from the US - to "make worldwide in scope or application" (Webster). The financial markets, however, are where the story begins. (Jeffery, 2002)
After 1950s, the roots of globalisation were found in a firm attack on the barriers starting from the movement of goods, services, and capital to the free flow of individuals.
Although Wolf is a major supporter of economic integration but he does not consider economic liberalisation as enough. He considers that poor nations are often unsuccessful economies but the developed country can play an important role in promoting prosperity. Moreover he considers security of property rights and the rule of law very important because in their absence economic integration cannot bring prosperity. Not only good economic policies and open markets but also good governance and a credible, predictable, transparent, and consistent institutional framework are necessary for market economy, both over time and across activities. The state exists to serve its citizens and is duty-bound to protect them from harm, including from itself. We will only have more and better globalisation if we have better states (The Complete Review).
Does freer trade help or does it harm? These are the kinds of issues which we economists discuss. Should we be pushing for this or that kind of reform or is it really deformed? But there is a sway of social issues like that which we economists do actually consider. And so a lot of people on the anti-globalisation side really feel that these are the issues which worry us as citizens and as human beings. So they may concede in many cases that globalisation is increasing the size of the pie and that, as far as increasing prosperity is concerned, it is fine. But when it comes to all the issues that really matter to us citizens, what I have just generally called social implications, globalisation is a malign force, not a benign force at all (IMF).
We also have to be very careful about the downsides of globalisation, says Bhagwati. The real problem is buying off or compensating or helping workers to adjust to import competition. The advanced countries have been doing it ever since Kennedy's time. Every trade act has had trade adjustment assistance programs and so on. But the poor countries that are just beginning to liberalize do not have any adjustment assistance programs. That's where the leaders of the poor countries simply cannot hack it. So who's going to finance adjustment programs in many countries? And that's where according to Bhagwati he has been arguing in particular for many years that the World Bank could be of assistance. Trade liberalization is not always associated with an external payments problem, but it's good to have more assistance in case there's a balance of payments implication.
Although the cotton sector showed a reasonable performance in all sectors of Cotton and Clothing but in 1998 it suddenly fell down due to two major reasons, first the domestic crop in Pakistan was badly affected by curl virus and weather. More over Pakistan was still depending on cotton fibre instead of MMF (man made fibre), which increased the problem. Secondly due to experiment of atomic explosion, certain countries posed sanctions on Pakistan especially USA which was a major importer of Pakistan. More over Pakistan was still depending on old importers instead of looking for new markets. Moreover progress in value added goods were not impressive.
Due to poor performance during 1998 government learned the lesson and encourage the industry for MMF. In 1998 industry was using 18% MMF of total cotton fibre consumption while it increased to 22% in 1999. More over duty on certain inputs was reduced. In 1999 the cotton industry showed a better performance. There were three reasons for this. One was that due to reduction of quota, cotton export of Pakistan increased. Secondly, product differentiation and shift towards more value added things increased the total volume of exports. Another very important factor which helped the cotton industry to move faster was the new investment in the cotton industry. Although most of the investment was made to upgrade the existing technology but new machinery was also imported. As a result the cotton machinery imports have risen by 218 per cent in 1999-2000 (see figure 5.4). Although this investment did not replace all of the old machinery with advanced but still it is a good sign for the sector.
If we look at the table 5.7, we will come to know that due to better technology, there is an impressive progress in all sectors of this industry. The picture becomes clearer if we look at the figure 5.6 and table 5.8 which show the correlation between investment and performance. The matrix of table 5.8 shows positive correlation between investment and overall performance. More investment in new technology leads better performance. The most important thing during this period was that all of the investment was made in value added goods (APTMA).
Table 5.8: Correlation Matrix: Overall Exports Vs. Investment
Again 2003-04 cotton crop of Pakistan was hit by drought but due to shift of the cotton sector towards value added and product differentiation it only affected the export of raw cotton. The data presented in table 5.7 and figure 5.7 indicate that the overall performance of the industry is very good and except few categories (which are lesser value added) industry showed a better performance.
The above discussion indicates that the exports of the cotton industry are directly correlated with cotton production, product differentiation and technology (for more details see tables of correlation in appendix 1). If the industry is product differentiated it has more choices to export more products. With advance technology the cost of production decreases along with improvement in quality. More over better cotton crop guarantees the availability of input at home which results into better performance. Although industry is trying to rely on MMF, but due to easy availability of cheap cotton major portion of industry still depend on local cotton.
Cotton and clothing industry of Pakistan has come around full circle since early seventies and is gearing to take up hostile competition for not only enhancing its position into the top ten cotton and clothing exporters in the world but holding its world share. Nevertheless, there are many domestic variables that would need to be secured before actualisation of the prospective that exists.
Following factors by APTMA and common observation are endorsed.
i) Stability of policies
ii) Polyester authorized under DTRE2
iii) Free trade of cotton
iv) Programme of cleaner cotton
v) Enhancement in staple length of cotton
vi) Enlarged market access
vii) Diminishing interest rate viii) Steady exchange rate policy
Although Pakistan is unable to reap the fruit of WTO as yet, but it has a strong presence in the Cotton trade. Now Pakistan is trying to get a place in top ten exporters of Cotton and top twenty exporters of clothing. For this purpose, during 2005 and 2006, government has announced to build three industrial cities in Faisalabad, Lahore and Karachi. These clusters will not only provide raw material and primary goods easily but it would also be a good source of information for the other regions. Secondly it would be an easy way for exporters and it will save their cost.
Due to government policies and network of APTMA, it seems that Pakistan soon will be able to compete with large exporters like China, India and Turkey.
5.3 Trade Implications for Pakistan's Cotton Sector
The Cotton industry of Pakistan can be classified into Cotton Industry, Chemical/ Man-Made Fibre, Woven Cotton Industry and Cotton Made-ups and Clothing Industry. Although wool Cotton industry is also significant but Pakistani woollen Cotton is not much developed. Pakistan only exports animal wool and a very small portion of blankets, although this sector is growing very fast since 1993 (250% per annum) but still it is insignificant to discuss here. Pakistan's entry into the WTO will affect these sectors to different extent. In this section we will discuss the structure of these industries, their contribution in the total exports and further opportunities for Pakistan. We will also try to find out the effect of WTO on these industries.
5.3.1 The Cotton Industry/Cotton Fibre Industry
Cotton Fibres can be divided into three basic types according to their source:
1. Cotton Fibre
2. Man Made Fibre
In the last ten years the per cent share of cotton has shrunk from 48% to 39% in the total world fibre consumption. Man-made fibres that include polyester, acrylic, nylon, rayon and viscose have taken more than 58% of the total share, while cotton fibre is reduced to 38%. Polyester has by far the largest share within the man-made-fibres, which more than 80% (GOP 2000). Although the share of cotton reduced with the passage of time, but cotton production and yields have increased dramatically over the last century3. In 1834, estimates of total global production were 340,000 tons. By the end of the 19th century, they had risen almost tenfold to 3 million tons and by 1924-25 to 4.4 million tons (of which 93 per cent were produced by five countries: the US, India (including present day Pakistan and Bangladesh), China, Egypt and Brazil. Global output in the 1990s has varied between 18-21million tons - a fourfold increase over the last half-century.
Three quarters of this increase is due to increased yields, which have risen from an average of 200 to close to 600 kilograms per hectare (Banuri 1998.p.15)
As non-food crop, cotton is considered the largest revenue earning crop in the world. It provides directly or indirectly some or all of the cash income of over 250 million people worldwide, including almost 7 per cent of the available labour force in developing countries. These activities are becoming highly concentrated over time; today, 77 per cent of global cotton output and 73 per cent of the cotton crop areas are accounted for by China, the US, India, Pakistan, and the Central Asian Republics. Cotton cultivation covers nearly 33 million hectares, equivalent to about 2.5% of all cultivable land, in 82 countries. Cotton constitutes approximately half the total Cotton fibre and possibly the largest industry in the world (APTMA).
Cotton played very important role in the development of Pakistan Domestic Cotton Industry - being the major export commodity. It is the major agricultural crop in Pakistan. A bigger crop means not only a larger volume of export (both raw and processed products), but also a subsidy to the Cotton sector, leading to higher aggregate demand, higher employment, larger fiscal inflows, less pressure on the balance of payments, and thus less exposure to the dictates of international financial organizations. Not surprisingly, government policy has generally been used to maintain a stable and often relatively low domestic price of cotton, especially since 1986-87 (see figure 5.8 below and table in annex) through the imposition of export duties, in order to support domestic industry.
Shortly after the independence of Pakistan in 1947, it started to develop economic relations with other economies. Since the very beginning it started transforming its economy from agrarian to industrial. Joining major trade agreements, it proved its seriousness in trade. Due to very large agriculture sector with cotton being a major crop it rapidly developed its Cotton sector. Despite the poor management and weak policies, the economy continued to grow at a reasonable rate. Moreover different kinds of economic restrictions also affected the performance of Cotton sector of Pakistan. General Agreement on Tariffs and Trade (GATT) 1947, Long Term Agreement (LTA) and Short Term Agreement (STA), (as discussed in chapter 3 and 5) added the problems of Pakistan Cotton sector. Due to these agreements Pakistan would never have been able to utilise its Cotton resources. This under utilisation of resources and quota system blocked the path of modernisation for Cotton sector.
Now after the implementation of WTO, the major challenge Pakistan is facing is lack of modern technology and cost of production. This cost of production is also indirectly related to technology.
The study intends to analyse whether the WTO - as many other members produce and export almost the same product mix as produced and exported by Pakistan in the world market - have posed or will pose any threat to Pakistan's trade expansion in the enlarged market or on the contrary, the enlarged market with its dynamic effects will facilitate Pakistan to expand trade through the various trade diversion effects; and consequently swelling its market share. The main thrust of the study was to concentrate on the widening aspect.
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Muhammad Bachal Jamali and Dr Waseemuddin
*Associate Professor, Department of Commerce, Shah Abdul Latif University, Khairpur, **Head, Department of Humanities, Greenwich University, Karachi, 1This Bonus Voucher often carried a high premium in the market as were automatically issued against the voucher. More than 80% of the local export subsidies import licenses were accounted for this scheme., 2The Duty and Tax Remission on Export (DTRE) Rules allow the import or local procurement of all input goods needed for export production, without payment of customs duty, central excise duty, advance income tax and sales tax. Such duty-free imports or local procurement are available to both direct and indirect exporters. The indirect exporters are those who provide input goods or services to direct exporters for the purpose of export production
3Two-thirds by weight of the cotton plant consists of Cottonseeds, which contain valuable nutrients (18-25 per cent fat and 29-34 per cent proteins), and are used as cattle feed or in the production of cooking oil. Average to moderate cotton yields of 1,500 kilograms per hectare of 'seed cotton' (i.e. including both seeds and lint) produce not only 500 kilograms of lint, but also 1000 kilograms of cotton seeds, which contain the same caloric content as a normal harvest (in Southern countries) of 600 kilogram of cereal from the same area. However, this creates some confusion over yield figures, which can refer to lint cotton (i.e. without seeds) or seed cotton (i.e. lint plus seeds). 1,500 kilograms per hectare is high if it refers to lint cotton, but moderate if it refers to seed cotton. Official documents typically refer to lint cotton yields, but some influential writings (e.g. Murray 1994) have used seed cotton yields without saying so explicitly.
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|Publication:||Journal of Business Strategies (Karachi)|
|Article Type:||Company overview|
|Date:||Dec 31, 2011|
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