The Trade Dilemma: Export Promotion vs. Import Substitution
In the intricate landscape of Pakistan’s economic strategies, a compelling debate persists regarding the most effective foreign trade approach: export promotion or import substitution. Miftah Ismail, a former finance minister, provides valuable insights into this crucial discussion, shedding light on the complexities that have hindered Pakistan’s ability to adopt a clear and effective trade strategy.
Understanding Import Substitution
Import substitution, a strategy employed by various countries, involves substituting imported goods with domestically produced alternatives. Ismail illustrates this with the example of the automobile industry in the 1980s. The government, aiming to protect domestic manufacturers, imposed higher duties on imported cars while reducing duties on components. However, three decades later, this protectionist approach has resulted in a small and inefficient local market with limited global competitiveness.
While import substitution has certain advantages, such as the development of a vibrant engineering and vendor industry and job creation, it has its downsides. The need to import various components and the lack of significant exports from protected industries contribute to a drain on foreign exchange reserves.
Challenges of Simultaneous Pursuit
The real challenge arises when a country attempts to pursue both import substitution and export promotion simultaneously. Ismail argues that this dual strategy increases the overall cost of doing business for manufacturers, rendering the industry neither competitive in exports nor in substituting imports. The impact is evident across various sectors, including air conditioners, shampoos, candies, and other goods.
Export Promotion: A Path to Growth
Export promotion, in contrast, focuses on making manufacturers more profitable when selling to foreign customers than local ones. Ismail highlights the success of East Asian countries that have effectively utilized export promotion strategies to achieve impressive economic growth. Despite Pakistan offering similar incentives, the country has struggled to boost exports significantly.
Overcoming Obstacles to Export Growth
While acknowledging various challenges, such as unreliable energy provision, currency fluctuations, and law and order issues, Ismail emphasizes the need for a relentless focus on exports. To achieve this, he suggests a shift in the tax structure, converting the 10% supertax on all companies to zero for those with increasing export shares. Additionally, there is a call for large business houses to diversify into non-textile export businesses, coupled with incentives for new factories generating a substantial portion of their sales from exports.
In conclusion, Ismail advocates for a determined and unwavering commitment to export-oriented policies, urging Pakistan to diversify its industries and align its tax structure with the goal of fostering export growth.
Frequently Asked Questions
Q: What is import substitution?
A: Import substitution is a trade strategy where a country seeks to replace imported goods with domestically produced alternatives.
Q: What is the downside of import substitution?
A: While it fosters a vibrant local industry and job creation, import substitution often leads to a drain on foreign exchange reserves and limited global competitiveness.
Q: How does export promotion differ?
A: Export promotion focuses on making manufacturers more profitable when selling to foreign customers than local ones, using policies like cheap credit and lower taxes.
Q: What challenges hinder Pakistan’s export growth?
A: Challenges include unreliable energy provision, currency fluctuations, law and order issues, and the simultaneous pursuit of import substitution and export promotion.
Q: What measures does Ismail suggest for export growth?
A: Ismail recommends converting the 10% supertax to zero for companies increasing export shares, encouraging large business houses to diversify into non-textile exports, and incentivizing new factories with significant export sales.