Khalid Naseem on the right way to solve Pakistan’s economic problems.
Devaluing the rupee every four to five years is not the right approach to solve Pakistan’s current account deficit problem. The most recent example was last year when the rupee was devalued against the dollar by about 32%. This was deemed necessary by our economic managers as a measure to address the whopping trade deficit of $15.86 billion in July-April 2018 (Pakistan Economic Survey 2019). So far, the devaluation has had no impact on the growth of exports in dollars. Instead of devaluation, Pakistan needs to increase its exports exponentially. The question is ‘how’ and the answer lies in identifying and building on Pakistan’s competitive advantage; in other words – ‘why’ the world should buy from us.
Just as businesses must have competitive advantages to succeed, so do nations. Harvard Professor Michael Porter has developed an analytical framework that greatly helps in identifying a nation’s competitive advantage. He calls this framework a ‘diamond’ which has four corners. They are: a company’s strategy, structure and rivalry; related and supporting industries; factor conditions, and demand conditions. Influencing these corners are two external factors: chance and government action. The forces, pressures and opportunities in each diamond interact with each other and create an environment with both favourable and unfavourable sets of conditions. A viable strategy would identify the favourable conditions, devise a broad policy statement and suggest coherent action.
The need for Pakistan is to carefully assess ‘where we are’, identify our strengths and how can we build on them. To improve our competitive advantage, a sequence of events needs to happen – and we must follow that sequence. The first driver of competitiveness is the endowment, geographic location, natural resources and population characteristics; but they can only take us so far. We have to build on them.
Dubai traditionally was a player in exporting pearls. It built on this strength and became a free port in 1901. Building on this success, Sheikh Rashid bin Saeed Al Maktoum envisioned Dubai as the world’s most frequently visited tourist spot at a time when it was still a small oil exporting nation. By 2018, Dubai was the world’s fourth most visited city, growing at 10.7% per annum. This was the result of the addition of many attractions to a region that had few sites worth visiting; they included the world’s tallest building, largest mall and largest park. The plan now is to follow a 10X strategy, whereby Dubai will have far more exciting attractions than the best tourist destinations in the world.
Another example is China. Disposing of the world’s largest population, China had an edge in lower labour costs. China built on this strength to achieve a cost advantage in most industries by lowering the cost of inputs through Special Economic Zones (SEZs) where everything required to manufacture products for a particular industry was available in proximity to that industry cluster. China also turned to cheaper sources of power, such as coal, hydro, solar and wind and set up large industrial units in public-private partnerships to capitalise on economies of scale. As a result, China was able to sell products at a cost no other country could match.
Competitiveness at the national level means productivity – the value of output produced by a unit of labour or the capital used. Productivity depends on the quality of the output and the efficiency with which it is produced. Higher productivity in the majority of traded sectors of an economy determines its competitive advantage. We should identify the areas where Pakistan provides a favourable base for businesses that compete internationally. Companies develop competitive advantages through innovation in the broadest sense such as new ways of doing business, adopting ideas that are not necessarily new, finding better means to compete, putting existing factors of production to new use, and serving markets that were earlier ignored. Porter’s ‘diamond’ model will help us explore this.
1. Factor the Conditions
Pakistan is world’s 10th largest labour market, fifth most populous country, fifth largest producer of cotton, fourth most intelligent country, fourth biggest freelance market and fourth largest producer of milk. It also has the 20th largest internet user base, and one of world’s lowest cost of living index. Pakistan occupies a geopolitically important location at the crossroads of South Asia, the Middle East and Central Asia. Its tourist attractions include mangroves in the south, Himalayan hill stations in the north-east, Buddhist ruins in Takht-i-Bahi and Taxila, and several mountain peaks standing at over 7,000 metres. Its network of motorway and highways can be counted among the region’s best road infrastructures. Pakistan’s youth bulge provides a potential demographic dividend and a challenge in terms of providing adequate services and employment. The duality of our education system with English and Urdu medium schools favours students who can afford expensive education in the former, giving them the opportunity to pursue successful careers. However, they are not the top talent; they are there solely because they have the means. More than 80% of students from Urdu medium schools are left out of the race. This means that the best of the best are not getting into institutions of higher learning and that most of these students find employment as skilled labourers or small traders; the majority of them have high IQ levels, giving them the ability to excel at what they do.
2. Demand Conditions
Demand conditions provide advantages by forcing companies to respond to challenges. Evolving local tastes and a large lower income segment puts pressure on companies to remain competitive by continuously improving their products or lowering their costs of production.
3. Strategy, Structure and Rivalry
Most of Pakistan’s businesses are owned by large groups that have generally diversified into unrelated businesses such as chemicals, financial services, textiles, hospitality, IT and retail. Because they are into unrelated businesses and therefore lack focus and commitment in key areas, the pace of innovation has been slow, making them less competitive in world markets.
4. Related and Supporting Industries
Pakistan has a large industrial base in textiles, leather tanning, mining, media, video production, telecom, hospitality, transportation, sugar and flour, all of which contribute towards tradable sectors of the economy.
We need to build on these strengths. We have a large youth population with high IQ levels and a closer look shows that our major exports come from industries that employ a high proportion of skilled labour and use local raw material. Our national competitive advantage lies in ‘differentiation parity with low cost advantage’ and in this regard, we should be matching the standards of the best international players operating in those segments and at the same time offer a low cost advantage.
To upgrade the quality of output of our labour-intensive sectors, we need regional clusters of businesses sharing unique properties. The density of interconnected organisations is the key to building competitiveness within a cluster. When companies engaged in interrelated businesses are located in proximity to each other, they facilitate mutual interaction, learn from each other and gain deeper insights about end customers and develop innovative approaches in improving competitiveness. An example could be a leather products cluster in the Kasur region where the leather tanneries are located. The cluster should have all the inputs providers for leather tanning and value-added manufacturing located there. Similar clusters in other traded economy sectors should be established.
Economies grow by building on strengths and moving into related areas. Pakistani skilled labour has made its mark in the Middle East. However, there are still markets with unmet demand for skilled labour in other markets and we need to encourage our labour force to explore opportunities in those markets. There is a need to set up institutions imparting vocational training with a compulsory course in spoken English and help in placement services.
We should encourage young people from Urdu medium schools to find jobs in the healthcare, hospitality and sales and customer services sectors. There is a large vacuum in IT and a huge opportunity for young people in terms of freelancing and foreign placements in areas such as SEO, graphic design, digital marketing, social media management and data analytics. These jobs are currently going in bulk to India, the Philippines and other nationality holders.
The point is we must stick to a competitive strategy of ‘differentiation parity, cost advantage’ for the next 15 to 20 years, before venturing into high-value, high-tech sectors.
Disclaimer: This article was written before the coronavirus epidemic.
Khalid Naseem is Head of Strategy, Firebolt63. firstname.lastname@example.org