Muhammad Asad Tahir Bhawana

Trade and investment integration plays a pivotal role in driving Pakistan's productivity growth, which is crucial for achieving sustainable economic development. To effectively enhance productivity, Pakistan must adopt new reforms that facilitate its integration into the global marketplace, reports WealthPK quoting a World Bank research. According to the research, the economies that embrace global markets are better able to allocate resources and talent and enable firms to learn and improve at a faster pace. The research finds notable similarities when comparing the economic structure of Vietnam in the 1990s with that of Pakistan.

Both countries relied on exporting textiles, agricultural products, and minerals. However, Vietnam has since expanded its economic activities to include sectors such as electronics, computers, and semiconductors, resulting in significant productivity gains. Further, Vietnam effectively capitalized on global integration by attracting prominent multinational corporations (MNCs) that leveraged the advantages of low local wages. In return, these MNCs brought managerial expertise and technological advancements, leading to improved productivity and job creation within both multinational companies and domestic Vietnamese firms. Notably, companies like Samsung, when establishing operations in Vietnam in 2008, relied heavily on foreign suppliers.

Similarly, Pakistan can achieve substantial growth in productivity by embracing trade and investment integration within the global marketplace, similar to the successful model demonstrated by Vietnam. This necessitates attracting foreign investment, facilitating knowledge transfer, and diversifying economic sectors to unlock the full potential of Pakistan's productivity and promote long-term economic prosperity. However, trade and investment integration within the global marketplace has had mixed effects on Pakistan's productivity growth, unlike Vietnam. While exporters in Pakistan are more productive than domestic-oriented firms, the export orientation of firms in the country has been declining.

The ratio of exports to GDP and the percentage of exporters among publicly listed firms have decreased over the past two decades. High import duties have hindered productivity, sales, and wages by limiting access to superior inputs and technologies. Import duties on intermediates have been increasing, contrary to global trends, and duty drawbacks have been ineffective. According to the research, the foreign firms in Pakistan are significantly more productive than the domestic ones, mainly due to acquisitions and learning from foreign ownership. However, there is limited evidence of horizontal spillovers, where domestic firms competing with multinationals do not benefit. Instead, vertical spillovers occur when FDI in upstream services sectors enhances the productivity of downstream firms.

However, attracting FDI has been challenging for Pakistan. Overall, various learning platforms, including learning by exporting, importing, and interacting with multinational firms, have shrunk in Pakistan. To accelerate productivity and economic growth in Pakistan, three key policy actions are proposed. Firstly, encourage foreign direct investment (FDI) in sectors that improve efficiency by enacting the Investment Policy 2013 into law, replacing the Protectionist Investment Act of 1976. Secondly, actively promote exports by automating duty drawbacks, facilitating access to global-priced intermediates, supporting skills development, and assisting smaller firms in accessing markets. Finally, reduce import barriers, particularly on intermediates, and eliminate import duty exemptions for non-exporting firms to create fiscal space.

Credit: INP-WealthPk